unique. innovative. solutions.
2021
A N N U A L R E P O R T
Dear Fellow Shareholders,
We recently passed the two-year anniversary of when
the World Health Organization first characterized
COVID-19 as a pandemic. We optimistically believed
things would be back to normal in a relatively short
timeframe, but things have been anything but normal
since. We are very proud that we were able to adapt
quickly to continue to deliver dependable and
responsive service to our customers and support
the businesses and nonprofit organizations in our
communities.
Over the last two years, the Bank participated in
the U.S. Small Business Administration
(“SBA”)
Paycheck Protection Program (“PPP”) to provide
near-term relief to small businesses and nonprofit
organizations impacted by COVID-19. In total, we
funded $77.7 million in PPP loans. The great majority
of these loans have been forgiven by the SBA in
accordance with the terms of the program, and we
expect most of the remaining PPP borrowers to seek
full or partial forgiveness of their loans. Under the
CARES Act and related bank regulatory guidance,
we were also able to provide short-term modifications
of loans, such as full and partial payment deferrals.
The quarter-end high
such deferrals was
$132.1 million at June 30, 2020. At December 31, 2021,
no loans remained on active deferral.
for
relationships with
In March 2021, we opened our 15th office in Issaquah,
Washington and shifted
focus to growing our
customer base and deepening relationships within
our existing markets. Our small footprint, technology-
centered offices serve as “billboards” for the Bank in
their targeted market and provide a local presence
for our experienced bankers as they develop and
nurture
the businesses and
individuals in their communities. This strategy has
proven successful both in attracting new customers
and in diversifying our deposit mix. In 2021, we grew
total deposits by more than $60 million to $1.16 billion,
including a $26.5 million increase in noninterest-
bearing demand deposits. We lowered our cost of
deposits by over 50% and increased our net interest
margin, while most of our competitors saw theirs
decrease. We also reduced our reliance on higher
cost retail certificates of deposits and eliminated
reliance on brokered certificates of deposit as a
source of funding.
We made progress against many of the headwinds
to growing our loan portfolio last year, including PPP
loan forgiveness, loan payoffs, and general market
uncertainty, increasing total loans outstanding by
$2.1 million to close the year at $1.12 billion. Our asset
quality remained superb with no nonperforming
assets at year end. We continue to grow our one-to-
four family portfolio with an emphasis on investor,
foreign national and jumbo mortgages. In 2022, we
expanded our offering
third-party
mortgage products such as conventional, FHA, VA
and USDA mortgages, as well as first time home buyer
program options.
include
to
We continued to return capital to shareholders in
2021, distributing $4.1 million in cash dividends and
repurchasing nearly 705,000 shares of our common
stock, or approximately 7.2% of shares outstanding at
the beginning of 2021, at an average price of $16.11
per share. The combined total represents 126% of net
income returned to shareholders in 2021. Book value
per share increased to $17.30 from $16.05 during the
year, and the Bank’s year-end Tier 1 leverage ratio
and total capital ratio were 10.3% and 15.5%,
respectively. The Bank remains “well-capitalized” in
accordance with regulatory standards.
innovative
We are fortunate to have some of the most talented
and motivated employees in their respective fields on
our team. Their incredible hard work and dedication
to providing unique,
solutions and
personalized service to our customers is key to our
success. We are also partners in our communities,
supporting numerous local nonprofit organizations
primarily focused in the areas of financial literacy,
education, poverty, and housing.
In 2021, our
employees collectively contributed more than 1,000
volunteer hours, an average of over 7 hours per
employee, toward these efforts. We are also pleased
to report that the Bank achieved an “outstanding”
rating in 2021 for its Community Reinvestment Act
performance in meeting the credit needs in our
communities, including lower- and moderate-income
neighborhoods.
investment and
In August 2021, Cindy L. Runger joined our Board of
Directors. An accomplished business executive and
lawyer with years of experience with global financial
institutions, as well as relevant expertise in corporate
strategy,
risk management,
regulatory compliance, and cross-cultural relations.
insights and a diverse
Cindy brings valuable
perspective to the Company and the Bank. She also
has over 25 years of active engagement in nonprofit
leadership and community-based organizations.
Following her appointment, women comprise 50% of
the independent directors on our Board of Directors.
As we define our “new normal,” we are adapting to
new ways of working, remain committed to providing
unique, innovative solutions to our customers and
investing in our communities, while achieving our
long-term goals with a priority of delivering value to
you, our shareholders.
As always, thank you for your investment and
continued loyalty.
Sincerely,
Ralph C. Sabin
Chairman
Joseph W. Kiley III
President and
Chief Executive Officer
unique. innovative. solutions.
2021 Form 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2021
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-33652
FIRST FINANCIAL NORTHWEST, INC.
(Exact name of registrant as specified in its charter)
Washington
(State or other jurisdiction of incorporation or organization)
26-0610707
(I.R.S. Employer Identification Number)
201 Wells Avenue South, Renton, Washington
(Address of principal executive offices)
Registrant’s telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act:
98057
(Zip Code)
(425) 255-4400
Common Stock, $0.01 par value per share
(Title of Each Class)
The Nasdaq Stock Market LLC
(Name of Each Exchange on Which Registered)
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes No X
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes No X
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes X No
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an
emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company”
in Rule 12b-2 of the Exchange Act:
Large accelerated filer
Accelerated filer
Non-accelerated filer
X
Smaller reporting company
X
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new
or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. _____
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal
control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or
issued its audit report.
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑
The aggregate market value of the Common Stock outstanding held by nonaffiliates of the Registrant based on the closing sales price of the Registrant’s
Common Stock as quoted on The Nasdaq Stock Market LLC on June 30, 2021, was $127,362,869 (8,406,790 shares at $15.15 per share). For purposes of this
calculation, common stock held only by executive officers, the employee stock ownership plan and directors of the Registrant is considered to be held by
affiliates. As of March 8, 2022, the Registrant had 9,128,460 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Registrant’s definitive Proxy Statement for the 2022 Annual Meeting of Shareholders are incorporated by reference into Part III of this
Annual Report on Form 10-K where indicated. The 2022 Proxy Statement will be filed with the U.S. Securities and Exchange Commission within 120 days
after the end of the fiscal year to which this report relates.
(This page has been left blank intentionally)
FIRST FINANCIAL NORTHWEST, INC.
2021 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Forward-Looking Statements
Internet Website
PART I.
Item 1.
Business
General
Market Area
Lending Activities
Asset Quality
Investment Activities
Deposit Activities and Other Sources of Funds
Subsidiaries and Other Activities
Competition
Human Capital
How We Are Regulated
Taxation
Executive Officers of First Financial Northwest, Inc.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4. Mine Safety Disclosures
PART II.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Item 6.
Securities
[Reserved]
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Business Strategy
Critical Accounting Policies
Comparison of Financial Condition at December 31, 2021, and December 31, 2020
Comparison of Operating Results for the Years Ended December 31, 2021, and 2020
Average Balances, Interest and Average Yields/Costs
Yields Earned and Rates Paid
Rate/Volume Analysis
Asset and Liability Management and Market Risk
Liquidity and Capital Resources
Recent Accounting Pronouncements
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
i
Page
iii
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1
2
2
13
18
21
24
24
24
25
33
34
35
47
47
48
48
48
49
49
49
51
52
54
57
62
63
64
64
67
69
69
69
121
121
122
122
PART III.
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions and Director Independence
Item 14. Principal Accounting Fees and Services
PART IV.
Item 15. Exhibits and Financial Statement Schedules
Item 16. Form 10-K Summary
Signatures
122
123
123
123
124
124
125
126
ii
Forward-Looking Statements
Certain matters discussed in this Annual Report on Form 10-K constitute forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to our financial condition, results of
operations, plans, objectives, future performance or business. Forward-looking statements are not statements of historical fact,
are based on certain assumptions and are generally identified by use of the words “believes,” “expects,” “anticipates,”
“estimates,” “forecasts,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” or similar expressions or
future or conditional verbs such as “may,” “will,” “should,” “would” and “could.” Forward-looking statements include
statements with respect to our beliefs, plans, objectives, goals, expectations, assumptions and statements about, among other
things, expectations of the business environment in which we operate, projections of future performance or financial items,
perceived opportunities in the market, potential future credit experience, and statements regarding our mission and vision.
These forward-looking statements are based upon current management expectations and may, therefore, involve risks and
uncertainties. Our actual results, performance, or achievements may differ materially from those suggested, expressed, or
implied by forward-looking statements as a result of a wide variety or range of factors including, but not limited to:
•
potential adverse impacts to economic conditions in our local market areas, other markets where the
Company has lending relationships, or other aspects of the Company’s business operations or financial markets,
generally, resulting from the ongoing novel coronavirus of 2019 (COVID-19) and any governmental or societal
responses thereto;
•
the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-
offs, that may be affected by deterioration in the housing and commercial real estate markets, and may lead to
increased losses and nonperforming assets in our loan portfolio, and may result in our allowance for loan losses not
being adequate to cover actual losses, and require us to materially increase our reserves;
•
changes in general economic conditions, either nationally or in our market areas; changes in the levels of
general interest rates, and the relative differences between short and long term interest rates, deposit interest rates, our
net interest margin and funding sources;
•
uncertainty regarding the future of the London Interbank Offered Rate ("LIBOR"), and the potential
transition away from LIBOR toward new interest rate benchmarks;
•
fluctuations in the demand for loans, the number of unsold homes and other properties and fluctuations in real
estate values in our market areas;
•
results of examinations of us by the Federal Reserve Bank of San Francisco (“FRB”) and our bank subsidiary
by the Federal Deposit Insurance Corporation (“FDIC”), the Washington State Department of Financial Institutions,
Division of Banks (“DFI”) or other regulatory authorities, including the possibility that any such regulatory authority
may initiate an enforcement action against the Company or the Bank which could require us to increase our reserve for
loan losses, write-down assets, change our regulatory capital position, affect our ability to borrow funds or maintain or
increase deposits, or impose additional requirements or restrictions on us, any of which could adversely affect our
liquidity and earnings;
•
•
•
•
our ability to pay dividends on our common stock;
our ability to attract and retain deposits;
our ability to control operating costs and expenses;
the use of estimates in determining the fair value of certain of our assets, which estimates may prove to be
incorrect and result in significant declines in valuation;
•
•
difficulties in reducing risk associated with the loans on our balance sheet;
staffing fluctuations in response to product demand or the implementation of corporate strategies that affect
our work force and potential associated charges;
•
disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our
information technology systems or on the third-party vendors who perform several of our critical processing functions;
our ability to retain key members of our senior management team; costs and effects of litigation, including
•
settlements and judgments;
•
•
our ability to implement a branch expansion strategy;
our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we
have acquired or may in the future acquire into our operations and our ability to realize related revenue synergies and
cost savings within expected time frames and any goodwill charges related thereto;
•
•
•
•
•
our ability to manage loan delinquency rates;
costs and effects of litigation, including settlements and judgments;
increased competitive pressures among financial services companies;
changes in consumer spending, borrowing and savings habits;
legislative or regulatory changes that adversely affect our business including changes in regulatory policies
and principles, including the interpretation of regulatory capital or other rules, including as a result of Basel III;
iii
•
actions;
•
•
•
•
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
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, and other risks detailed in this Form 10-K and our other reports filed with the U.S.
Securities and Exchange Commission (“SEC”).
Any of the forward-looking statements that we make in this Form 10-K and in the other public reports and statements
we make may turn out to be wrong because of the inaccurate assumptions we might make, because of the factors illustrated
above or because of other factors that we cannot foresee. Because of these and other uncertainties, our actual future results may
be materially different from those expressed in any forward‑looking statements made by or on our behalf. Therefore, these
factors should be considered in evaluating the forward‑looking statements, and undue reliance should not be placed on such
statements. We undertake no responsibility to update or revise any forward-looking statements.
As used throughout this report, the terms “Company”, “we”, “our”, or “us” refer to First Financial Northwest, Inc. and
its consolidated subsidiaries, including First Financial Northwest Bank and First Financial Diversified Corporation.
iv
Internet Website
The information contained on our website, www.ffnwb.com, is not included as a part of, or incorporated by reference
into, this Annual Report on Form 10-K. Other than an investor’s own Internet access charges, we make available free of charge
through our website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
amendments to these reports, proxy statements and other SEC filings on our investor relations page. All of our reports, proxy
statements, and other SEC filings are posted as soon as reasonably practicable after they are electronically filed with the SEC
and are also available free of charge at the SEC’s website at www.sec.gov.
v
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Item 1. Business
General
PART I
First Financial Northwest, Inc. (“First Financial Northwest” or the “Company”), a Washington corporation, was
formed on June 1, 2007, for the purpose of becoming the holding company for First Financial Northwest Bank (“the Bank”) in
connection with the Bank’s conversion from a mutual holding company structure to a stock holding company structure which
was completed on October 9, 2007. At December 31, 2021, the Company had total assets of $1.43 billion, net loans of
$1.10 billion, deposits of $1.16 billion and stockholders’ equity of $157.9 million. First Financial Northwest’s business
activities generally are limited to passive investment activities and oversight of its investment in First Financial Northwest
Bank. Accordingly, the information set forth in this report, including consolidated financial statements and related data, relates
primarily to First Financial Northwest Bank.
The Bank was organized in 1923 as a Washington state-chartered savings and loan association, converted to a federal
mutual savings and loan association in 1935 and to a Washington state-chartered mutual savings bank in 1992. In 2002, First
Savings Bank reorganized into a two-tier mutual holding company structure, became a stock savings bank, and the wholly-
owned subsidiary of First Financial of Renton, Inc. In connection with the 2002 conversion, First Savings Bank changed its
name to First Savings Bank Northwest. Subsequently, in August 2015, the Bank changed its name to First Financial Northwest
Bank to better reflect the commercial banking services it provides beyond those typically provided by a traditional savings
bank. In February 2016, the Bank officially changed its charter from a Washington chartered stock savings bank to a
Washington chartered commercial bank.
First Financial Northwest became a bank holding company, after converting from a savings and loan holding company
on March 31, 2015, and is subject to regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve
Board” or “Federal Reserve”) through the FRB. The change was consistent with First Financial Northwest Bank’s shift in focus
from a traditional savings and loan association towards a full service, commercial bank. Additionally, First Financial Northwest
Bank is examined and regulated by the DFI and by the FDIC. First Financial Northwest Bank is required to maintain reserves at
a level set by the Federal Reserve Board. The Bank is a member of the Federal Home Loan Bank (“FHLB”) of Des Moines,
which is one of the 11 regional banks in the Federal Home Loan Bank System (“FHLB System”). For additional information,
see “How We are Regulated - Regulation and Supervision of First Financial Northwest Bank - Federal Home Loan Bank
System.”
In February 2016, First Financial Northwest Bank converted its charter from a community-based savings bank to a
commercial bank as a way of better serving its customer needs. The Bank’s largest concentration of customers is in King
County, with additional concentrations in Snohomish, Pierce, and Kitsap counties, Washington. The Bank is headquartered in
Renton, in King County, where it has a full-service branch as well as a smaller branch located in a commercial development
known as “The Landing”. The Bank has additional smaller branches in King County located in Bellevue, Woodinville, Bothell,
Kent, and Kirkland, and opened a new smaller branch in Issaquah in March 2021. In Snohomish County, Washington, the Bank
has five additional smaller branches located in Mill Creek, Edmonds, Clearview, Smokey Point, and Lake Stevens. In addition,
the Bank has two Pierce County, Washington smaller branches, located in University Place and Gig Harbor. These smaller
branches are focused on efficiency through the extensive use of the latest banking technology. First Financial Northwest Bank’s
business consists of attracting deposits from the public and utilizing these funds to originate one-to-four family residential,
multifamily, commercial real estate, construction/land, business and consumer loans.
During the last two years the Bank participated in the U.S. Small Business Administration (“SBA”) Paycheck
Protection Program (“PPP”), a guaranteed unsecured loan program enacted under the CARES Act to provide near-term relief to
help small businesses impacted by COVID-19 sustain operations. The PPP ended on May 31, 2021. Under this program we
funded 723 applications totaling $77.7 million of loans in our market areas and began processing applications for loan
forgiveness in the fourth quarter of 2020. At December 31, 2021, there were 67 PPP loans outstanding totaling $10.8 million, as
compared to 372 PPP loans totaling $41.3 million at December 31, 2020.
The principal executive office of First Financial Northwest is located at 201 Wells Avenue South, Renton,
Washington, 98057; our telephone number is (425) 255-4400.
1
Market Area
We consider our primary market area to be the Puget Sound Region that consists primarily of King, Snohomish, Pierce
and, to a lesser extent, Kitsap counties. During 2021, the region experienced continued strong appreciation in residential real
estate prices. Price appreciation was strongest in areas outside the Seattle core and in less expensive areas. Price appreciation in
more expensive areas of King County such as Kirkland and Bellevue have also strengthened over 2021 due to low interest rates
and population growth. Home prices in King, Pierce, Snohomish and Kitsap counties have continued to experience price
appreciation similar to the national trend. Lower mortgage rates helped stimulate demand in 2021 with sales up compared to
2020. The number of homes listed for sale in King, Pierce, Snohomish and Kitsap counties continued to drop throughout 2021
and at year end are down from December 31, 2020. The declines range from 10% in Pierce County to a decline of 64% in King
County, and all four counties have less than one month of inventory available.
King County has the largest population of any county in the state of Washington and covers approximately 2,100
square miles. It has a population of approximately 2.27 million residents and a median household income of approximately
$95,000, according to U.S. Census estimates. King County has a diversified economic base with many nationally recognized
firms including Boeing, Microsoft, Amazon, Starbucks, Nordstrom, Costco and Paccar. According to the Washington State
Employment Security Department, the unemployment rate for King County was 3.2% at December 31, 2021, compared to 6.8%
at December 31, 2020, and the national average of 3.9% at December 31, 2021. The median sales price of a residential home in
King County for December of 2021 was $749,000, an increase of 10.8% from December 2020, according to the Northwest
Multiple Listing Service ("MLS"). Residential sales volumes increased 15.6% in 2021 compared to 2020 and inventory levels
as of December 31, 2021 were at 0.3 months according to the MLS.
Pierce County, covering approximately 1,700 square miles, has the second largest population of any county in the
state of Washington. It has approximately 921,000 residents and a median household income of approximately $72,100,
according to U.S. Census estimates. The Pierce County economy is diversified with the presence of military-related government
employment (Joint Base Lewis-McChord), transportation and shipping employment (Port of Tacoma), and aerospace-related
employment (Boeing). According to the Washington State Employment Security Department, the unemployment rate for Pierce
County was 4.1% in December 2021, compared to 7.6% at year-end 2020. The median sales price of a residential home in
Pierce County was $515,000 for December of 2021, a 19.8% increase compared to December 2020, according to the MLS.
Residential sales volumes increased by 12.3% in 2021 compared to 2020 and inventory levels as of December 31, 2021 were at
0.3 months according to the MLS.
Snohomish County has the third largest population of any county in the state of Washington and covers
approximately 2,090 square miles. It has approximately 828,000 residents and a median household income of approximately
$86,700, according to U.S. Census estimates. The economy of Snohomish County is diversified with the presence of military-
related government employment (Naval Station Everett), aerospace-related employment (Boeing), and retail trade. According to
the Washington State Employment Security Department, the unemployment rate for Snohomish County was 3.8% in December
2021 compared to 7.8% in December 2020. The median sales price of a residential home in Snohomish County was $680,000
for December of 2021, a 27.1% increase compared to December of 2020, according to the MLS. Residential sales volumes rose
by 9.4% in 2021 compared to 2020 and inventory levels as of December 31, 2021 were at 0.2 months according to the MLS.
Kitsap County has the seventh largest population of any county in the state of Washington and covers approximately
395 square miles. It has approximately 276,000 residents and a median household income of approximately $75,400, according
to U.S. Census estimates. The Kitsap County economy is diversified with the presence of military-related government
employment (Naval Base Kitsap, Puget Sound Naval Shipyard), health care, retail trade and education. According to the
Washington State Employment Security Department, the unemployment rate for Kitsap County was 3.3% in December 2021,
compared to 6.3% for December of 2020. The median sales price of a residential home was $500,000 for December of 2021, an
increase of 17.4% over December of 2020, according to the MLS. Residential sales volumes increased by 11.0% in 2021
compared to 2020 and inventory levels as of December 31, 2021 were at 0.4 months according to the MLS.
For a discussion regarding competition in our primary market area, see “- Competition” later in Item 1 of this report.
Lending Activities
General. We focus our lending activities primarily on loans secured by commercial real estate, construction/land, first
mortgages on one-to-four family residences, multifamily, and business lending. We offer a variety of secured consumer loans,
2
including savings account loans, auto loans and home equity loans that include lines of credit and second mortgage term loans.
As of December 31, 2021, our net loan portfolio totaled $1.1 billion and represented 77.4% of our total assets.
Our current loan policy generally limits the maximum amount of loans we can make to one borrower to 15% of the
Bank’s total capital and surplus, or $24.5 million at December 31, 2021. Exceptions to this policy are allowed only with the
prior approval of the Board of Directors and if the borrower exhibits financial strength or sufficient, measurable compensating
factors exist after consideration of the loan-to-value ratio, borrower’s financial condition, net worth, credit history, earnings
capacity, debt service coverage, installment obligations, and current payment history. The regulatory limit of loans we can make
to one borrower is 20% of total capital and surplus, or $32.7 million, at December 31, 2021. At this date, our single largest
lending relationship, totaled $26.2 million.
Loan Maturity and Repricing. The following table sets forth certain information at December 31, 2021, regarding
the amount of total loans in our portfolio based on their contractual terms to maturity, not including prepayments.
Within One
Year
After One Year
Through Five
Years
After Five
Years Through
Fifteen Years
(In thousands)
Beyond
Fifteen Years
Total
Real estate:
One-to-four family residential
$
8,390 $
6,976 $
20,353 $
349,397 $
Multifamily
Commercial
Construction/land
Total real estate
Business
Consumer
Total Loans
5,975
36,778
40,567
91,710
9,502
7
$
101,219 $
36,176
141,954
52,888
237,994
32,350
66,544
228,466
—
315,363
4,738
2,307
272,651 $
42,496
362,597 $
21,451
12,219
—
385,116
130,146
419,417
93,455
383,067
1,028,134
—
2
383,069 $
46,590
44,812
1,119,536
The following table sets forth the amount of total loans due after December 31, 2022, with fixed or adjustable interest
rates.
Real estate:
Fixed-Rate
Adjustable-Rate
(In thousands)
Total
One-to-four family residential
$
143,719 $
233,007 $
Multifamily
Commercial
Construction/land
Total real estate
Business
Consumer
Total Loans
38,682
163,215
39,041
384,657
18,065
36,249
85,489
219,424
13,847
551,767
19,023
8,556
376,726
124,171
382,639
52,888
936,424
37,088
44,805
$
438,971 $
579,346 $
1,018,317
3
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a
s
e
g
a
t
n
e
c
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4
One-to-Four Family Residential Lending. As of December 31, 2021, $385.1 million, or 34.4% of our total loan
portfolio consisted of loans secured by one-to-four family residences.
First Financial Northwest Bank is a traditional portfolio lender when it comes to financing residential home loans. In
2021, we originated $124.2 million and purchased $1.7 million in one-to-four family residential loans. At December 31, 2021,
$185.3 million, or 48.1% of our one-to-four family residential portfolio consisted of owner occupied loans with the remaining
$199.8 million, or 51.9% consisting of non-owner occupied loans. In addition, at December 31, 2021, $146.4 million, or 38.0%
of our one-to-four family residential loan portfolio consisted of fixed-rate loans. Substantially all of our one-to-four family
residential loans require monthly principal and interest payments.
Our fixed-rate, one-to-four family residential loans are generally originated with 15 to 30 year terms, although such
loans typically remain outstanding for substantially shorter periods, particularly in the current low interest rate environment. We
also originate hybrid loans with initial fixed-rate terms of five to ten years that convert to variable-rate which adjusts annually
thereafter. In addition, substantially all of our one-to-four family residential loans contain due-on-sale clauses that allow us to
declare the unpaid amount due and payable upon the sale of the property securing the loan. Typically, we enforce these
due‑on‑sale clauses to the extent permitted by law and as a standard course of business. The average period of time a loan is
outstanding is a function of, among other factors, the level of purchase and sale activity in the real estate market, prevailing
interest rates, and the interest rates payable on outstanding loans.
Our lending policy generally limits the maximum loan-to-value ratio on mortgage loans secured by one-to-four family
residential properties to FDIC limits. Generally, our one-to-four family loans do not exceed 80% loan-to-value based on the
lower of the purchase price or appraised value at the time of loan origination. Properties securing our one-to-four family
residential loans are appraised by independent appraisers approved by us. We require the borrowers to obtain title insurance and
if necessary, flood insurance. We generally do not require earthquake insurance due to competitive market factors.
Loans secured by rental properties represent potentially higher risk and, as a result, we adhere to more stringent
underwriting guidelines. Of primary concern in non-owner occupied real estate lending is the consistency of rental income of
the property. Payments on loans secured by rental properties depend primarily on the tenants’ continuing ability to pay rent to
the property owner, the character of the borrower or, if the property owner is unable to find a tenant, the property owner’s
ability to repay the loan without the benefit of a rental income stream. In addition, successful operation and management of
non-owner occupied properties, including property maintenance standards, may affect repayment. As a result, repayment of
such loans may be subject to adverse conditions in the real estate market or the economy. We request that borrowers and loan
guarantors, if any, provide annual financial statements, a budget factoring in a rental income cash flow analysis of the borrower
as well as the net operating income of the property, information concerning the borrower’s expertise, credit history and
profitability, and the value of the underlying property. These loans are generally secured by a first mortgage on the underlying
collateral property along with an assignment of rents and leases. If the borrower has multiple rental property loans with us, the
loans are typically not cross‑collateralized. At December 31, 2021, there were no one-to-four family loans in nonaccrual status.
Multifamily and Commercial Real Estate Lending. As of December 31, 2021, $130.1 million, or 11.6% of our total
loan portfolio was secured by multifamily and $419.4 million, or 37.5% of our loan portfolio was secured by commercial real
estate properties. Our commercial real estate loans are typically secured by retail shopping centers, office buildings, hotels or
motels, mini-storage facilities, mobile home parks, warehouses, and nursing homes. Commercial real estate and multifamily
loans are subject to similar underwriting standards and processes. These loans are viewed primarily as cash flow loans and
secondarily as loans secured by real estate.
Typically, multifamily and commercial real estate loans have higher balances, are more complex to evaluate and
monitor, and involve a greater degree of risk than one-to-four-family residential loans. In an attempt to compensate for and
mitigate this risk, these loans are generally priced at higher interest rates than one-to-four family residential loans and generally
have a maximum loan-to-value ratio of 80% of the lesser of the appraised value or purchase price. We generally require loan
guarantees by any parties with a property ownership interest of 20% or more. If the borrower is a corporation or partnership, we
generally require personal guarantees from the principals based upon a review of their personal financial statements and
individual credit reports.
5
The following table presents a breakdown of our multifamily and commercial real estate loan portfolio at
December 31, 2021, and 2020:
December 31, 2021
December 31, 2020
Amount
% of Total in
Portfolio
Amount
% of Total in
Portfolio
(Dollars in thousands)
$
$
$
$
130,146
—
130,146
138,463
90,727
64,854
32,990
20,636
17,724
12,713
41,310
419,417
100.0 % $
—
100.0 % $
125,328
11,366
136,694
91.7 %
8.3
100.0 %
33.0 % $
114,117
29.6 %
21.6
15.5
7.9
4.9
4.2
3.0
9.9
100.0 % $
84,311
69,304
33,671
28,094
17,484
12,868
25,416
385,265
22.0
18.0
8.7
7.3
4.5
3.3
6.6
100.0 %
Multifamily real estate:
Multifamily, general
Micro-unit apartments
Total multifamily
Commercial real estate:
Retail
Office
Hotel / motel
Storage
Mobile home park
Warehouse
Nursing home
Other non-residential
Total non-residential
The average loan size in our multifamily and commercial real estate loan portfolios was $904,000 and $2.0 million,
respectively, as of December 31, 2021. At this date, $46.8 million, or 35.9%, of our multifamily loans and $126.0 million, or
30.0%, of our commercial real estate loans were located outside of the Puget Sound Region. We currently target individual
multifamily and commercial real estate loans between $1.0 million and $5.0 million. The largest multifamily loan as of
December 31, 2021, was a 74-unit apartment complex with a net outstanding principal balance of $12.0 million located in King
County, Washington, which was performing in accordance with its loan repayment terms at that date. As of December 31, 2021,
the largest commercial real estate loan had a net outstanding balance of $15.5 million that was secured by a retail facility
located in King County, Washington, which was performing in accordance with its loan repayment terms at that date.
The credit risk related to multifamily and commercial real estate loans is considered to be greater than the risk related
to one-to-four family residential loans because the repayment of multifamily and commercial real estate loans typically is
dependent on the income stream from the real estate securing the loan as collateral and the successful operation of the
borrower’s business, that can be significantly affected by adverse conditions in the real estate markets or in the economy. For
example, if the cash flow from the borrower’s project is reduced due to leases not being obtained or renewed, the borrower’s
ability to repay the loan may be impaired. In addition, many of our multifamily and commercial real estate loans are not fully
amortizing and contain large balloon payments upon maturity. These balloon payments generally require the borrower to either
refinance or occasionally sell the underlying property in order to make the balloon payment.
If we foreclose on a multifamily or commercial real estate loan, our holding period for the collateral typically is longer
than for one-to-four family residential mortgage loan foreclosures because there are fewer potential purchasers of the collateral.
Our multifamily and commercial real estate loans generally have relatively large balances to single borrowers or related groups
of borrowers. Accordingly, if we make any errors in judgment in the collectability of our multifamily or commercial real estate
loans, any resulting charge-offs may be larger on a per loan basis than those incurred in our one-to-four family residential or
consumer loan portfolios. At December 31, 2021, there were no commercial real estate loans or multifamily loans on
nonaccrual status. The $2.1 million multifamily loan on nonaccrual status at December 31, 2020, was paid off in 2021 and we
did not incur a loss on this loan. There were no multifamily or commercial real estate loans past due 90 days or more and still
accruing interest at December 31, 2021. In addition, there were no multifamily or commercial real estate loans charged-off
during the years ended December 31, 2021, and 2020.
6
Construction/Land Loans. We originate construction/land loans primarily to residential builders for the construction
of single-family residences, condominiums, townhouses, multifamily properties and residential developments located in our
market area. Land loans include land non-development loans for the purchase or refinance of unimproved land held for future
residential development, improved residential lots held for speculative investment purposes or lines of credit secured by land,
and land development loans. Construction/land loans to builders generally require the borrower to have an existing relationship
with the Bank and a proven record of successful projects. At December 31, 2021, our total construction/land loans increased to
$93.5 million, or 8.4% of our total loan portfolio, from $92.2 million, or 8.3% of our total loans, at December 31, 2020. The
Company’s strategic plan projects slight growth in construction loan origination activity in 2022 in support of our loan growth.
The Bank’s lending policy sets forth the guideline that the balance of our net acquisition, development, and construction loans
and deferred fees and costs, not exceed 100% of the Bank’s total capital plus surplus. The Bank was in compliance with this
policy at December 31, 2021, with a balance equal to 59.7% of the Bank’s total capital plus surplus. Management intends to
maintain levels near below this guideline, however the uncertainty of the timing associated with construction loan draws
occasionally results in the actual concentration exceeding the guideline. There were no construction/land loans classified as
nonaccrual at either December 31, 2021 or 2020. There were no construction/land loan charge-offs during the years ended
December 31, 2021, and 2020. At December 31, 2021, the loans in process (“LIP”) balance on construction/land loans was
$43.3 million.
Following is the composition of our total construction/land loan portfolio, that are net of LIP, at the dates indicated.
All of the loans represented were performing:
Construction speculative:
One-to-four family residential
Total construction speculative
Construction permanent: (1)
Multifamily
Commercial real estate
Total construction permanent
Land:
Land development
Land non-development
Total land
Total construction/land loans
December 31,
2021
2020
(In thousands)
$
34,677 $
34,677
37,194
6,189
43,383
2,485
12,910
15,395
$
93,455 $
33,396
33,396
51,215
5,783
56,998
—
1,813
1,813
92,207
_____________
(1) Includes loans where the builder does not intend to sell the property after the construction phase is completed.
The following table includes construction/land loans by county at December 31, 2021:
County
King
Snohomish
Kitsap
Total
Loan Balance
Percent of Construction/
Land Loan Balance
(Dollars in thousands)
$
$
90,373
2,253
829
93,455
96.7 %
2.4
0.9
100.0 %
Loans to finance the construction of single-family homes, subdivisions and land loans are generally offered to builders
in our primary market areas. Loans that are termed “speculative” are those where the builder does not have, at the time of loan
origination, a signed contract with a buyer for the home or lot who has a commitment for permanent financing with either us or
another lender. The buyer may be identified either during or after the construction period, with the risk that the builder may
7
have to fund the debt service on the speculative loan along with real estate taxes and other carrying costs for the project for a
significant period of time after completion of the project until a buyer is identified. The maximum loan-to-value ratio applicable
to these loans is generally 100% of the actual cost of construction, provided that the loan-to-completed value does not exceed
80%, with approval required from the Chief Credit Officer (“CCO”) for loan-to-value ratios over 80%. In addition, a minimum
of 20% verified equity is generally also required. Verified equity refers to cash equity invested in the project. Development
plans are required from builders prior to committing to the loan. We require that builders maintain adequate title insurance and
other appropriate insurance coverage, and, if applicable, appropriate environmental data report(s) that the land is free of
hazardous or toxic waste. While maturity dates for residential construction loans are largely a function of the estimated
construction period of the project and typically do not exceed one year, land loans generally are for 12 to 18 months.
Substantially all of our residential construction loans have adjustable-rates of interest based on The Wall Street Journal prime
rate. During the term of construction, the accumulated interest on the loan is either added to the principal of the loan through an
interest reserve or billed monthly. At December 31, 2021, the LIP balance on construction/land loans included $4.4 million set
aside for interest reserves. When these loans exhaust their original reserves set up at origination, no additional reserves are
permitted unless the loan is re-analyzed and it is determined that the additional reserves are appropriate, based on the updated
analysis. Construction loan proceeds are disbursed periodically as construction progresses and as inspections by our approved
inspectors warrant. At December 31, 2021, our three largest construction/land loans consisted of multifamily construction/land
loans of $14.4 million, $8.4 million, and $6.3 million. All three loans will rollover to a permanent loan upon completion of the
construction period and all three properties are located in King County.
Certain of our residential construction loans to borrowers for one-to-four family, non-owner occupied residences are
structured to be converted to fixed-rate permanent loans at the end of the construction phase with one closing for both the
construction loan and the permanent financing. Prior to making a commitment to fund a construction loan, we require an
appraisal of the post‑construction value of the project by an independent appraiser. During the construction phase, which may
last 12 to 24 months, an approved inspector or designated Bank employee makes periodic inspections of the construction site to
certify construction has reached the stated percentage of completion. Typically, disbursements are made in monthly draws and
interest-only payments are required. At December 31, 2021, there were no loans requiring a rollover to a permanent loan with
the Bank at the completion of the construction phase.
We also make construction loans for commercial development projects. The projects include multifamily, retail, office,
warehouse, hotels and office buildings. These loans typically have an interest-only payment phase during construction and
generally convert to permanent financing when construction is complete. Disbursement of funds is at our sole discretion and is
based on the progress of construction. The Bank uses an independent third party or Bank employee to conduct monthly
inspections to certify that construction has reached the stated percentage of completion and that previous disbursements are
reflected in the degree of work performed to date. Generally, the maximum loan-to-value ratio applicable to these loans is 90%
of the actual cost of construction or 80% of the prospective value at completion. At December 31, 2021, $37.2 million and
$6.2 million of multifamily and commercial real estate construction loans, respectively, will rollover to permanent loans with
the Bank at the end of their construction period.
Land development loans are generally made to builders for preparation of a building site and do not include the
construction of buildings on the property. The maximum loan-to-value ratio for these loans is 75% based on the lower of the
purchase price or appraised value at the time of loan origination. Land non-development loans are generally for raw land where
we do not finance the cost of preparing the site for building and are subject to a maximum loan‑to‑value ratio of 65% based on
the lower of the purchase price or appraised value at the time of loan origination.
Our construction/land loans are based upon estimates of costs in relation to values associated with the completed
project. Construction/land lending involves additional risks when compared with permanent residential lending because funds
are advanced upon the collateral for the project based on an estimate of costs that will produce a future value at completion.
Because of the uncertainties inherent in estimating construction costs, time needed to complete the building phase, as well as
the market value of the completed project and the effects of governmental regulation on real property, it is relatively difficult to
evaluate accurately the total funds required to complete a project and the completed project loan-to-value ratio. Changes in the
demand for new housing, longer completion times due to supply chain issues, and higher than anticipated building costs may
cause actual results to vary significantly from those estimated. For these reasons, this type of lending also typically involves
higher loan principal amounts and is often concentrated with a small number of builders. These loans often involve the
disbursement of funds with repayment substantially dependent on the success of the ultimate project and the ability of the
borrower to sell or lease the property or obtain permanent take-out financing, rather than the ability of the borrower or
guarantor to repay principal and interest. If our appraisal of the value of a completed project proves to be overstated, we may
have inadequate security for the repayment of the loan upon completion of construction of the project and may incur a loss.
Because construction loans require active monitoring of the building process, including cost comparisons and on-site
8
inspections, these loans are more difficult and costly to monitor. Increases in market rates of interest may have a more
pronounced effect on construction loans by rapidly increasing the end-purchasers’ borrowing costs, thereby reducing the overall
demand for the project. Properties under construction are often difficult to sell and typically must be completed in order to be
successfully sold which also complicates the process of working out problem construction loans. This may require us to
advance additional funds and/or contract with another builder to complete construction. Furthermore, in the case of speculative
construction loans, there is the added risk associated with identifying an end-purchaser for the finished project. Land loans also
pose additional risk because of the lack of income being produced by the property and the potential illiquid nature of the
collateral. These risks can also be significantly influenced by supply and demand conditions.
Business Lending. Business loans (including PPP loans) totaled $46.6 million, or 4.1% of the loan portfolio at
December 31, 2021. Conventional business loans (loans other than PPP loans) are generally secured by business equipment,
accounts receivable, inventory or other property. Loan terms typically vary from one to five years. The interest rates on such
loans are either fixed-rate or adjustable-rate. The interest rates for the adjustable‑rate loans are indexed to the prime rate
published in The Wall Street Journal plus a margin. Our business lending policy includes credit file documentation and requires
analysis of the borrower’s background, capacity to repay the loan, the adequacy of the borrower’s capital and collateral, as well
as an evaluation of other conditions affecting the borrower. Analysis of the borrower’s past, present and future cash flows is
also an important aspect of our credit analysis. We generally obtain personal guarantees on our conventional business loans.
The largest conventional business loan had an outstanding balance of $18.1 million at December 31, 2021 and was performing
according to its repayment terms. At December 31, 2021, we did not have any business loans delinquent in excess of 90 days or
in nonaccrual status.
As a result of the COVID-19 pandemic, the CARES Act was enacted and authorized the SBA to temporarily guarantee
loans under a new loan program called the Paycheck Protection Program. The CAA, 2021, which was signed into law on
December 27, 2020 renewed and extended the PPP until May 31, 2021, the final expiration date for PPP lending. Beginning in
the second quarter of 2020, we began to offer PPP loans which are fully guaranteed by the SBA, to existing customers and
those in the community who have not had a banking relationship with us in the past. The SBA guarantees 100% of the PPP
loans made to eligible borrowers. The entire principal amount of the borrower's PPP loan, including any accrued interest, is
eligible to be forgiven and repaid by the SBA if the borrower meets the PPP conditions. The great majority of our SBA PPP
loans have been forgiven by the SBA in accordance with the terms of the program. We earn 1% interest on PPP loans as well as
a fee from the SBA to cover processing costs, which is amortized over the life of the loan and recognized fully at payoff or
forgiveness. The maturity date of the SBA PPP loan is either two or five years from the date of loan origination. Under this
program, as of December 31, 2021, there were 67 PPP loans outstanding totaling $10.8 million. As of December 31, 2021, a
total of 661 PPP loans totaling $66.6 million had been approved for forgiveness. The Bank expects the majority of its remaining
PPP borrowers will seek full or partial forgiveness of their loan obligations. For additional information regarding these loans,
see Item 1A. Risk Factors- “Risks Related to Our Lending- Loans originated under the SBA Paycheck Protection Program
subject us to credit, forgiveness and guarantee risk.” The Bank also originates loans under other SBA lending programs, which
are partially guaranteed by the SBA. At December 31, 2021, the Bank’s portfolio included $839,000 of these SBA loans, of
which $659,000 is guaranteed by the SBA. At that date, these SBA loans were not held for sale, however, the Company may
elect to sell off the guaranteed portion of these loans in the future.
At December 31, 2021, the Bank’s aircraft loan portfolio had an outstanding balance of $6.1 million, or 13.0% of total
business loans. These loans are collateralized by new or used, single‑engine piston aircraft to light jets for business or personal
use. Our aircraft loans will generally range in size from $250,000 to $3.0 million with the primary focus of our underwriting
guidelines on the asset value of the collateral rather than the ability of the borrower to repay the loan. The average loan size in
our aircraft loan portfolio was $553,000 at December 31, 2021, and the largest loan was $2.2 million. For additional
information regarding these loans, see Item 1A. Risk Factors- “Risks Related to Our Lending - We engage in aircraft and
classic car financing transactions, in which high-value collateral is susceptible to potential catastrophic loss. If any of these
transactions becomes nonperforming, we could suffer a loss on some or all of our value in the assets.”
Repayments of conventional business loans are often dependent on the cash flows of the borrower, which may be
unpredictable, and the collateral securing these loans may fluctuate in value. Our business loans, other than aircraft and PPP
loans, are originated primarily based on the identified cash flow of the borrower and secondarily on the underlying collateral
provided by the borrower. Credit support provided by the borrower for most of these loans and the probability of repayment is
based on the liquidation of the pledged collateral and enforcement of a personal guarantee, if any. As a result, in the case of
loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent
on the ability of the borrower to collect amounts due from its customers. The collateral securing business loans may depreciate
over time, may be difficult to appraise, or may fluctuate in value based on the success of the business.
9
Consumer Lending. We offer a limited variety of consumer loans to our customers, consisting primarily of home
equity loans and savings account loans. Generally, consumer loans have shorter terms to maturity and higher interest rates than
one‑to‑four family residential loans. Consumer loans are offered with both fixed and adjustable interest rates and with varying
terms. At December 31, 2021, consumer loans were $44.8 million, or 4.0% of the total loan portfolio.
At December 31, 2021, the largest component of the consumer loan portfolio consisted of purchased indirect consumer
loans to finance classic and collectible cars with a balance of $35.9 million, or 80.0% of the total consumer loan portfolio. Due
to the unique nature of these cars, the estimated value often does not align with listed values, therefore, approval of the loan is
based on the borrower’s ability to repay. These fixed rate loans typically have maturity periods of three to fifteen years. The
Bank intends to grow this portfolio of loans up to an internal limit of $50.0 million. Included in these loans are classic cars,
defined as a vehicle in excess of 25 years old, and collectible cars, with a retail price in excess of $150,000. At
December 31, 2021, our largest car loan was $755,000 and the average loan size was $80,000. For additional information
regarding these loans see Item 1A. Risk Factors- “Risks Related to Our Lending - We engage in aircraft and classic or
collectible car financing transactions, in which high-value collateral is susceptible to potential catastrophic loss. If any of these
transactions becomes nonperforming, we could suffer a loss on some or all of our value in the assets.”
At December 31, 2021, home equity loans, primarily home equity lines of credit totaled $8.5 million, or 18.9% of the
total consumer loan portfolio. The home equity lines of credit include $2.0 million of equity lines of credit in first lien position
and $6.4 million of second liens on residential properties. At December 31, 2021, unfunded commitments on our home equity
lines of credit totaled $15.0 million. Home equity loans are made for purposes such as the improvement of residential
properties, debt consolidation and education expenses. At origination, the loan-to-value ratio is generally 90% or less, when
taking into account both the balance of the home equity loans and the first mortgage loan. Home equity loans are originated on
a fixed-rate or adjustable-rate basis. The interest rate for the adjustable-rate second lien loans is indexed to the prime rate
published in The Wall Street Journal and may include a margin. Home equity loans generally have a 10 to 30 year term, with a
10 year draw period, and either convert to principal and interest payments with no further draws or require a balloon payment
due at maturity.
Consumer loans entail greater risk than one-to-four family residential mortgage loans, particularly in the case of
consumer loans that are unsecured or secured by rapidly depreciating assets. In these cases, any repossessed collateral for a
defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the
greater likelihood of damage, loss or depreciation. The remaining deficiency often does not warrant further collection efforts
against the borrower beyond obtaining a deficiency judgment. In addition, consumer loan collections are dependent on the
borrower’s continuing financial stability and are more likely to be adversely affected by job loss, divorce, illness or personal
bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and
insolvency laws, may limit the amount that can be recovered on these loans. Home equity lines of credit have greater credit risk
than one-to-four family residential mortgage loans because they are generally secured by mortgages subordinated to the existing
first mortgage on the property that we may or may not hold in our portfolio. We do not have private mortgage insurance
coverage on these loans. Classic car loans have greater risk than other consumer loans primarily due to their high value which
may fluctuate significantly. Adjustable-rate loans may experience a higher rate of default in a rising interest rate environment
due to the increase in payment amounts when interest rates reset higher. If current economic conditions deteriorate for our
borrowers and their home prices fall, we may also experience higher credit losses from this loan portfolio. For our home equity
loans that are in a second lien position, it is unlikely that we will be successful in recovering our entire loan principal
outstanding in the event of a default. At December 31, 2021, no consumer loans were in nonaccrual status. At that date, a
$179,000 classic auto loan was delinquent between 30-59 days. During the year ended December 31, 2021, less than $1,000 of
consumer loans were charged off. For the year ended December 31, 2020, a $2,000 unsecured line of credit was charged off.
10
Loan Solicitation and Processing. Our consumer and residential mortgage loan originations are generated through
the Bank and from time to time through outside brokers and correspondent relationships we have established with select
mortgage companies or other financial institutions. We originate multifamily, commercial real estate, construction/land and
business loans primarily using the Bank’s loan officers, with referrals coming from builders, brokers and existing customers.
Upon receipt of a loan application from a prospective borrower, we obtain a credit report and other data to verify
specific information relating to the loan applicant’s employment, income, and credit standing. All real estate loans requiring an
appraisal are done by our internal appraisal department or an independent third-party appraiser. All appraisers are approved by
us, and their credentials are reviewed annually, as is the quality of their appraisals.
We use a multi-level approval matrix which establishes lending targets and tolerance levels depending on the loan type
being approved. The matrix also sets minimum credit standards and approval limits for each of the loan types.
Lending Authority. The Directors’ Loan Committee consists of at least three members of the Board of Directors. The
Directors’ Loan Committee recommends for approval by the Board of Directors exceptions to the aggregate loan limit to one
borrower of 15% of total capital plus surplus, or $24.5 million at December 31, 2021. The Board of Directors approves
exceptions to such aggregate loan limit to one borrower up to 20% of total capital plus surplus, or $32.7 million at
December 31, 2021.
Officer Lending Authority. Individual signing authority has been delegated to two lending officers. Our Senior Credit
Approval Officer (“SCAO”) has authority from the Board of Directors to approve loans and aggregate relationships up to and
including $8.0 million. The Board of Directors has given our CCO authority to approve credit to one borrower not to exceed the
legal lending limit of 20% of total capital plus surplus.
Loan Originations, Servicing, Purchases, Sales and Repayments. For the years ended December 31, 2021, 2020,
and 2019, our total loan originations and purchases were $363.0 million, $317.9 million, and $396.8 million, respectively.
One-to-four family residential loans are generally originated in accordance with FDIC guidelines, with the exception
of our special community development loans originated to satisfy compliance with the Community Reinvestment Act. Our
loans are underwritten by designated real estate loan underwriters internally in accordance with standards as provided by our
Board-approved loan policy. We require title insurance on all loans and fire and casualty insurance on all secured loans and
home equity loans where real estate serves as collateral. Flood insurance is also required on all secured loans when the real
estate is located in a flood zone.
11
The following table shows total loans originated, purchased, repaid and other changes during the years indicated.
Year Ended December 31,
2021
2020
(In thousands)
2019
Loan originations:
Real estate:
One-to-four family residential
$
124,220 $
107,609 $
Multifamily
Commercial
Construction/land
Total real estate
Business (1)
Consumer
Total loans originated
Loan purchases and participations:
One-to-four family residential
Multifamily
Commercial
Construction/land
Business
Consumer
Total loan purchases and participations (2)
Principal repayments
Charge-offs
Loans transferred to other real estate owned (“OREO”)
Change in LIP
Change in net deferred fees, and ALLL
Net increase (decrease) in loans
$
20,976
62,552
72,825
280,573
26,029
1,852
308,454
1,665
251
32,374
—
—
20,290
54,580
27,873
33,588
62,444
231,514
59,001
5,308
295,823
1,467
—
1,208
—
—
19,390
22,065
—
—
(16,457)
(2)
—
29,746
(753)
2,879 2
8
$
(3,052)
(7,880) -
7
$
91,811
39,967
74,283
109,989
316,050
10,031
24,325
350,406
653
28
17,408
8,727
—
19,553
46,369
—
—
(3,117)
749
85,558
(342,945)
(352,460)
(308,849)
_______________
(1) Includes $25.6 million and $52.1 million in PPP loans originated during 2021 and 2020, respectively.
(2) Totals include $8.2 million, $0 and $8.4 million in loan participations during 2021, 2020 and 2019, respectively.
Loan Origination and Other Fees. In some instances, we receive loan origination fees on real estate-related products.
Loan fees generally represent a percentage of the principal amount of the loan and are paid by the borrower. The amount of fees
charged to the borrower on one-to-four family residential loans and multifamily and commercial real estate loans can range
from 0% to 2%. In addition to the 1.0% interest earned on PPP loans, the SBA paid processing fees for PPP loans of either 1%,
3%, or 5%, based on the size of the loan. Banks were not authorized to collect any fees from the loan applicants. United States
generally accepted accounting principles (“GAAP”) require that certain fees received, net of certain origination costs, be
deferred and amortized over the contractual life of the loan. Net deferred fees or costs associated with loans that are prepaid or
sold are recognized in income at the time of prepayment or sale. We had $418,000 and $1.7 million of net deferred loan fees at
December 31, 2021, and 2020, respectively.
Loan purchases generally include a premium, which is deferred and amortized into interest income with net deferred
fees over the contractual life of the loan. During 2021, total premiums of $1.6 million, or 3.4% of the purchased principal, were
paid on purchased loans. In comparison, premiums of $790,000, or 3.6% of the purchased principal were paid on purchased
loans during 2020.
One-to-four family residential and consumer loans are generally originated without a prepayment penalty. However,
the majority of our one-to-four family residential loans held in the name of an entity, and multifamily and commercial real
estate loans have prepayment penalties associated with the loans. Most of the multifamily and commercial real estate loan
originations with interest rates fixed for the first five years will adjust thereafter and have a prepayment penalty of 2% to 3% of
12
the principal balance in year one, with decreasing penalties in subsequent years. Longer initial fixed rate terms generally have
correspondingly longer prepayment penalty periods.
Asset Quality
As of December 31, 2021, we had $255,000 of loans past due 30 days or more. These loans represented 0.02% of total
loans receivable. We generally assess late fees or penalty charges on delinquent loans of up to 5.0% of the monthly payment.
The borrower is given up to a 15 day grace period from the due date to make the loan payment.
The Company actively manages delinquent loans and non performing assets by aggressively pursuing the collection of
debts and marketing saleable properties we foreclosed or repossessed, work-outs of classified assets and loan charge-offs. We
handle collection procedures internally or with the assistance of outside legal counsel. Late charges are incurred when the loan
exceeds 10 to 15 days past due depending upon the loan product. When a delinquent loan is identified, corrective action takes
place immediately. The first course of action is to determine the cause of the delinquency and seek cooperation from the
borrower in resolving the issue. Additional corrective action, if required, will vary depending on the borrower, the collateral, if
any, and whether the loan requires specific handling procedures as required by the Washington State Deed of Trust Act. If the
borrower is chronically delinquent and all reasonable means of obtaining payments have been exhausted, we will seek to
foreclose on the collateral securing the loan according to the terms of the security instrument and applicable law.
Construction/land, commercial real estate, and multifamily loans generally have larger individual loan amounts that
have a greater single impact on asset quality in the event of delinquency or default. During 2020, the CARES Act and
regulatory agencies provided guidance around the modification of loans as a result of the COVID-19 pandemic and outlined,
among other criteria, that short-term modifications made on a good faith basis to borrowers who were current as defined by the
CARES Act and related regulatory guidance prior to any relief are not troubled debt restructured loans (“TDRs”) through
January 1, 2022. Loans subject to payment forbearance under the Bank's COVID-19 loan modification program were not
reported as delinquent or as a TDR during the forbearance time period. As of December 31, 2021, there were no loans on active
deferral, compared to $45.2 million, or 4.0% of total loans outstanding at December 31, 2020. All loans that had previously
been granted modifications have returned to regular scheduled payments. We continue to monitor our loan portfolio and believe
additions to nonperforming loans, charge-offs, provisions for loan losses, and/or OREO are possible in the future, particularly if
the housing market and other economic conditions decline, including as a result of COVID-19.
Nonperforming Loans. When a loan becomes 90 days past due, we generally place the loan on nonaccrual status unless
the credit is well secured and in the process of collection. Loans may be placed on nonaccrual status prior to being 90 days past
due if there is an identified problem such as an impending foreclosure or bankruptcy or if the borrower is unable to meet their
scheduled payment obligations. At December 31, 2021, we had no nonaccrual loans, as the $2.1 million nonaccrual multifamily
loan at December 31, 2020, paid off during 2021 with no loss incurred by the Bank.
Other Real Estate Owned. Real estate acquired by us as a result of foreclosure or by deed-in-lieu of foreclosure is
classified as OREO until it is sold. When the property is acquired, it is recorded at the lower of its cost or fair market value of
the property, less selling costs. We had no OREO properties at December 31, 2021, as the $454,000 of OREO at
December 31, 2020, was sold in 2021, resulting in a $207,000 loss on sale reported on the Company’s Consolidated Income
Statement. Our special assets department’s primary focus is the prompt and effective management of our troubled,
nonperforming assets, and expediting their disposition to minimize any potential losses. During 2021 and 2020, we did not
foreclose or accept deeds-in-lieu of foreclosure on any loans. In the future, we may experience foreclosure, deed-in-lieu of
foreclosure, and short sale activity while we work with our nonperforming loan customers to minimize our loss exposure.
Because of our structure, we believe we are able to make decisions regarding offers on OREO and the real estate
underlying our nonperforming loans very quickly compared to larger institutions where decisions could take six to twelve
months. This distinction has historically worked to our benefit in reducing our nonperforming assets and disposing of OREO.
Troubled Debt Restructured Loans. We account for certain loan modifications or restructurings as TDRs. In
general, the modification or restructuring of a debt is considered a TDR if, for economic or legal reasons related to the
borrower’s financial difficulties, we grant a concession to the borrower that we would not otherwise consider. These loans are
all considered to be impaired loans. At December 31, 2021, we had $2.1 million in TDRs as compared to $3.9 million at
December 31, 2020.
The largest TDR relationship at December 31, 2021 was a $915,000 one-to-four family rental property located in
Pierce County. At December 31, 2021, there was no LIP in connection with our TDRs.
13
The following table summarizes our total TDRs:
Performing TDRs:
One-to-four family residential
Commercial real estate
Total performing TDRs
Total TDRs
December 31,
2021
2020
(In thousands)
$
$
2,107 $
—
2,107
2,107 $
2,627
1,242
3,869
3,869
Classified Assets. Federal regulations provide for the classification of lower quality loans and other assets as
substandard, doubtful or loss. An asset is considered substandard if it is inadequately protected by the current net worth and
payment capacity of the borrower or of any collateral pledged. Substandard assets include those characterized by the distinct
possibility that we will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all the
weaknesses inherent in those classified substandard with the added characteristic that the weaknesses present make collection or
liquidation in full highly questionable and improbable, on the basis of currently existing facts, conditions and values. Assets
classified as loss are those considered uncollectible and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted.
When we classify problem assets as either substandard or doubtful, we may establish a specific allowance in an
amount we deem prudent. General allowances represent loss allowances that have been established to recognize the inherent
risk associated with lending activities, but unlike specific allowances, have not been specifically allocated to particular problem
assets. When an insured institution classifies problem assets as a loss, it is required to charge-off those assets in the period in
which they are deemed uncollectible. Our determinations as to the classification of our assets and the amount of our valuation
allowances are subject to review by the FDIC and the DFI that can order the establishment of additional loss allowances or the
charge-off of specific loans against established loss reserves. Assets that do not currently expose us to sufficient risk to warrant
classification in one of the aforementioned categories but possess weaknesses are designated as special mention. At
December 31, 2021, special mention loans totaled $12.3 million including a $4.7 million office building and $6.4 million in
loans to one borrower for two rehabilitation facilities that were all downgraded during 2021. The impact to these businesses
from the COVID-19 pandemic is expected to be temporary. As vacancies are filled at the office building and patient volumes at
the rehabilitation facilities return, we believe these businesses will stabilize. At December 31, 2021, these loans were current on
their payments and were in compliance with their original loan terms.
In connection with the filing of periodic reports with the FDIC and in accordance with our loan policy, we regularly
review the problem loans in our portfolio to determine whether any loans require classification in accordance with applicable
regulations. The increase in our classified loans during the year ended December 31, 2021 was primarily the result of
$34.0 million of commercial real estate loans downgraded to substandard, partially offset by the payoff of a $2.1 million
multifamily loan that was on nonaccrual status at December 31, 2020. The downgrades included a $15.0 million hotel loan that
was previously changed to impaired status when it was downgraded to special mention in December 2020. Continued reduced
occupancy due to the COVID-19 pandemic warranted further downgrade to substandard in 2021. In addition, downgrades
included an $8.4 million office building loan, and two loans to one borrower including a $6.6 million loan secured by a hostel
business and a $4.0 million loan secured by a facility housing bowling, roller skating and restaurant operations. All substandard
loans at December 31, 2021, were classified as impaired and evaluated for a specific allowance. The impairment analysis on
these properties showed no anticipated loss on these loans.
14
Classified loans consisting solely of substandard loans, were as follows at the dates indicated:
One-to-four family residential
Multifamily
Commercial real estate
Consumer
Total classified loans
December 31,
2021
2020
(In thousands)
$
$
— $
—
34,030
179
34,209 $
527
2,104
—
—
2,631
Allowance for Loan Losses. Management recognizes that loan losses may occur over the life of a loan and that the
ALLL must be maintained at a level necessary to absorb specific losses on impaired loans and probable losses inherent in the
loan portfolio. Management reviews the adequacy of the ALLL on a quarterly basis. Our methodology for analyzing the ALLL
consists of two components: general and specific allowances. The general allowance is determined by applying factors to our
various groups of loans. Management considers factors such as charge-off history, policy and underwriting standards, the
current and expected economic conditions, the nature and volume of the loan portfolio, management’s experience level, the
level of problem loans, our loan review and grading systems, the value of underlying collateral, geographic and loan type
concentrations, and other external factors such as competition, legal, and regulatory requirements in assessing the ALLL. Loans
classified as substandard or placed on nonaccrual status are deemed to be collateral based loans. Specific allowances result
when management performs an impairment analysis on a loan when management believes that all contractual amounts of
principal and interest will not be paid as scheduled. Based on this impairment analysis, if the recorded investment in the loan is
less than the market value of the collateral less costs to sell (“market value”), a specific reserve is established in the ALLL for
the loan. The amount of the specific reserve is computed using current appraisals, listed sales prices, and other available
information less costs to complete, if any, and costs to sell the property. This analysis is inherently subjective as it relies on
estimates that are susceptible to significant revision as more information becomes available or as future events differ from
predictions. Loans classified as a TDR due to the borrower being granted a rate concession are analyzed by discounted cash
flow analysis. The amount of the specific reserve on these loans is calculated by comparing the present value of the anticipated
repayments under the restructured terms to the recorded investment in the loan.
When determining the appropriate ALLL during 2021, management took into consideration the continued impact of
the COVID-19 pandemic on such factors as the national and state unemployment rates and related trends, the expiration of
previous financial assistance provided by the government, consumer spending levels and trends, industries significantly
impacted by the COVID-19 pandemic, a review of the Bank's largest commercial loan relationships, and the Bank's COVID-19
loan modification program. See also “Allowance for Loan Losses” in Item 7. Critical Accounting Policies, and Item 8. Note 1 -
Summary of Significant Accounting Policies later in this report.
Based on this review, management decreased historical loss factors and qualitative factors for certain loan categories
during the year ended December 31, 2021, as the economic impact as a result of the COVD-19 pandemic was not as severe as
previously expected. Management will continue to closely monitor economic conditions and will work with borrowers as
necessary to assist them through this challenging economic climate. If economic conditions worsen, and if government
programs do not provide adequate relief to borrowers, it is possible the Bank's ALLL will need to increase in future periods.
Uncertainties relating to our ALLL are heightened as a result of the risks surrounding the COVID-19 pandemic as described in
further detail in Item 1A. Risk Factors- “Risks Related to Macroeconomic Conditions-The COVID-19 pandemic has impacted
the way we conduct business which may adversely impact our financial results and those of our customers. The ultimate impact
will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of
the pandemic and actions taken by governmental authorities in response to the pandemic.”
Quarterly, our Board of Directors’ Internal Asset Review Committee reviews and recommends approval of the
allowance for loan losses and any provision or recapture of provision for loan losses, and the full Board of Directors approves
the provision or recapture after considering the Committee’s recommendation. The ALLL is increased by the provision for loan
losses which is charged against current period earnings. If the analysis of our loan portfolio indicates the risk of loss is less than
the balance of the ALLL, a recapture of provision for loan losses is added to current period earnings.
For the year ended December 31, 2021, we recorded a $300,000 provision for loan losses, as compared to a
$1.9 million provision for loan losses for the year ended December 31, 2020. The provision for loan losses in 2021 was
15
primarily a result of a $2.1 million increase in net loans receivable, and a change in composition of our loan portfolio as
$30.4 million in repaid PPP loans omitted from our loan loss allowance analysis were replaced with other loans included in the
analysis, which offset the decreased historical loss factors and qualitative factors for certain loan categories discussed above. At
December 31, 2021, the $10.8 million remaining balance of PPP loans was omitted from the ALLL calculation as these loans
are fully guaranteed by the SBA and management expects that the majority of remaining PPP borrowers will seek full or partial
forgiveness of their loan obligations from the SBA within a short time frame, which will in turn reimburse the Bank for the
amount forgiven. In addition, the provision for loan losses was impacted by the $14.7 million increase during 2021 in impaired
loans evaluated for specific reserves and omitted from the general reserve calculation used to calculate the ALLL and provision
for loan losses. As noted above, our individual evaluation of our impaired loans indicated no additional specific reserve was
needed. This reduction to the general allowance was partially offset by the downgrade to special mention of $11.1 million in
loans, as discussed above, resulting in a slight increase to our ALLL. The ALLL was $15.7 million, or 1.40% of total loans at
December 31, 2021, as compared to $15.2 million, or 1.36% at December 31, 2020. The level of the ALLL is based on
estimates and the ultimate losses may vary from the estimates. Management reviews the adequacy of the ALLL on a quarterly
basis.
A loan is considered impaired when, based on current information and events, it is probable we will be unable to
collect the scheduled payments of principal or interest when due, according to the contractual terms of the loan agreement.
Factors considered by management in determining impairment include payment status, collateral value, market conditions, rent
rolls, and the borrower’s and guarantor’s, if any, financial strength. Loans that experience insignificant payment delays and
payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and
shortfalls on a case‑by‑case basis, taking into consideration all of the circumstances surrounding the loan and the borrower,
including length of the delay, the reasons for the delay, the borrower’s prior payment record and the amounts of the shortfall in
relation to the principal and interest owed. Loans are evaluated for impairment on a loan-by-loan basis. As of
December 31, 2021 and 2020, impaired loans were $36.1 million and $21.4 million, respectively. The increase in 2021 was
primarily due to $19.0 million of the $34.0 million of commercial real estate loans downgraded to substandard in 2021. The
$15.0 million hotel loan was classified as impaired prior to 2021. These increases were partially offset by the payoff in 2021 of
the $2.1 million multifamily impaired loan on nonaccrual status at December 31, 2020. At December 31, 2021, these impaired
loans were well collateralized and the Bank does not expect to incur losses on these loans.
The following table summarizes the distribution of the ALLL by loan category, at the dates indicated.
2021
December 31,
2020
2019
Loan
Balance
Allowance
by Loan
Category
Percent
of
Loans
to Total
Loans
Loan
Balance
Allowance
by Loan
Category
Percent
of
Loans
to Total
Loans
Loan
Balance
Allowance
by Loan
Category
Percent
of
Loans
to Total
Loans
Real estate:
(Dollars in thousands)
One-to-four
family residential $ 385,116 $
3,214
34.4 % $ 381,960 $
3,181
34.2 % $ 372,528 $
3,034
33.2 %
Multifamily
130,146
1,279
11.6
136,694
1,366
12.2
172,915
1,607
15.4
Commercial real
estate
419,417
6,615
37.5
385,265
6,127
34.5
395,152
4,559
35.2
Construction/land
93,455
2,064
8.3
92,207
2,189
8.3
113,665
2,222
10.1
Total real estate
1,028,134
13,172
91.8
996,126
12,863
89.2
1,054,260
11,422
93.9
Business
Consumer
Total
46,590
44,812
1,112
1,373
4.2
4.0
80,663
40,621
1,242
1,069
7.2
3.6
37,779
30,199
1,140
656
3.4
2.7
$ 1,119,536 $ 15,657
100.0 % $ 1,117,410 $ 15,174
100.0 % $ 1,122,238 $ 13,218
100.0 %
Based on its comprehensive analysis, management believes that the ALLL as of December 31, 2021 was adequate to
absorb the probable and inherent losses in the loan portfolio at that date. While we believe the estimates and assumptions used
in our determination of the adequacy of the ALLL are reasonable, there can be no assurance that such estimates and
assumptions will be proven correct in the future, or that the actual amount of future provisions will not exceed the amount of
past provisions, or that any increased provisions that may be required will not adversely impact our financial condition and
results of operations. Future additions to the ALLL may become necessary based upon changing economic conditions, the level
of problem loans, business conditions, credit concentrations, increased loan balances or changes in the underlying collateral of
16
the loan portfolio. In addition, the determination of the amount of the ALLL is subject to review by bank regulators as part of
the routine examination process that may result in the establishment of additional loss reserves or the charge-off of specific
loans against established loss reserves based upon their judgment of information available to them at the time of their
examination. A further decline in national and local economic conditions, as a result of the COVID-19 pandemic or other
factors, could result in a material increase in the allowance for loan losses and may adversely affect the Company’s financial
condition and results of operations.
The following table shows certain credit ratios at and for the periods indicated and each component of the ratio’s
calculations.
At or For the Year Ended December 31,
2020
(Dollars in thousands)
2021
2019
ALLL as a percent of total loans
ALLL at period end
Total loans outstanding
1.40 %
1.36 %
1.18 %
$ 15,657
1,119,536
$ 15,174
1,117,410
$ 13,218
1,122,238
Non-accrual loans as a percentage of total loans outstanding at period end
— %
0.19 %
0.01 %
Total non-accrual loans
Total loans outstanding
ALLL as a percent of non-accrual loans at period end
ALLL at period end
Total non-accrual loans
Net recoveries during period to average loans outstanding:
One-to-four family residential:
Net recoveries during period
Average loans receivable, net (1)
Multifamily:
Net recoveries during period
Average loans receivable, net (1)
Commercial:
Net recoveries during period
Average loans receivable, net (1)
Construction/land development:
Net recoveries during period
Average loans receivable, net (1)
Business:
Net recoveries during period
Average loans receivable, net (1)
Consumer:
Net recoveries during period
Average loans receivable, net (1)
Total loans:
Net recoveries during period
Average loans receivable, net (1)
$
—
$ 2,104
$
95
1,119,536
1,117,410
1,122,238
n/a
721.20 % 13,913.68 %
$ 15,657
$ 15,174
$ 13,218
—
2,104
95
0.05%
0.05%
0.05%
$
183
374,796
$
28
379,068
$
73
356,075
— %
— %
$
—
$
—
$
— %
45
139,298
83,825
166,672
— %
—
$
0.01 %
30
$
— %
—
$
382,341
383,807
377,120
— %
—
$
— %
—
$
— %
—
$
97,494
167,445
106,856
— %
— %
$
—
$
—
$
— %
—
63,263
68,118
34,244
— %
(0.01) %
0.26 %
$
—
$
(2)
$
53
41,580
38,626
20,400
0.02 %
— %
0.02 %
$
183
$
56
$
171
1,098,772
1,120,889
1,061,367
_______________
(1) The average loans receivable, net balances, include nonaccruing loans and deferred fees.
17
Investment Activities
General. Under Washington State law, commercial banks are permitted to invest in various types of liquid assets,
including U.S. Treasury obligations, securities of various federal agencies, certain certificates of deposit of insured banks and
savings institutions, banker’s acceptances, repurchase agreements, federal funds, commercial paper, investment grade corporate
debt securities, and obligations of states and their political sub-divisions.
The Investment, Asset/Liability Committee (“ALCO”), consisting of the Chief Executive Officer, Chief Financial
Officer, and Controller of First Financial Northwest Bank, other members of management and the Board of Directors, has the
authority and responsibility to administer our investment policy, monitor portfolio strategies, and recommend appropriate
changes to policy and strategies to the Board of Directors. On a monthly basis, management reports to the Board a summary of
investment holdings with respective market values and all purchases and sales of investment securities. The Chief Financial
Officer has the primary responsibility for the management of the investment portfolio and considers various factors when
making decisions, including the marketability, maturity, liquidity, and tax consequences of proposed investments. The maturity
structure of investments will be affected by various market conditions, including the current and anticipated slope of the yield
curve, the level of interest rates, the trend of new deposit inflows, and the anticipated demand for funds via deposit withdrawals
and loan originations and purchases.
The general objectives of the investment portfolio are to provide liquidity when loan demand is high, to assist in
maintaining earnings when loan demand is low, and to maximize earnings while satisfactorily managing risk, including credit
risk, reinvestment risk, liquidity risk and interest rate risk.
At December 31, 2021, our investment portfolio consisted principally of mortgage-backed securities, municipal bonds,
U.S. government agency obligations, and corporate bonds. From time to time, investment levels may increase or decrease
depending upon yields available on investment opportunities and management’s projected demand for funds for loan
originations, net deposit flows, and other activities. At December 31, 2021, and 2020, the Bank held three annuity contracts,
totaling $2.4 million, as held-to-maturity investments. These annuity contracts were purchased to satisfy the benefit obligation
associated with certain supplemental executive retirement plan agreements. At December 31, 2019, there were no investments
held to maturity.
Mortgage-Backed Securities. The mortgage-backed securities in our portfolio were primarily comprised of Fannie
Mae, Freddie Mac, and Ginnie Mae issued mortgage-backed securities. These issuers guarantee the timely payment of principal
and interest in the event of default. In addition, at December 31, 2021, our mortgage-backed securities included $11.3 million of
other “private label” mortgage-backed securities. The mortgage-backed securities portfolio had a weighted-average yield of
1.73% at December 31, 2021.
U.S. Government Agency Obligations. The agency securities in our portfolio were comprised of Fannie Mae,
Freddie Mac, Ginnie Mae, SBA and FHLB agency securities. These issuers guarantee the timely payment of principal and
interest in the event of default. At December 31, 2021, the portfolio of government agency securities had a weighted-average
yield of 1.00%.
The guarantees of the SBA, as a U.S. government agency and Ginnie Mae, as part of a U.S. government agency are
backed by the full faith and credit of the United States. Fannie Mae, Freddie Mac, and the Federal Home Loan Banks are U.S.
government-sponsored entities. Although their guarantees are not backed by the full faith and credit of the United States, they
may borrow from the U.S. Treasury, which has taken other steps to ensure these U.S. government-sponsored entities can fulfill
their financial obligations.
Corporate Bonds. The corporate bond portfolio is comprised of both fixed and variable rate securities issued by
various financial institutions. At December 31, 2021, the corporate bond portfolio had a weighted-average yield of 3.78%.
Municipal Bonds. The municipal bond portfolio is comprised of taxable and tax-exempt municipal bonds. The pre-tax
weighted-average yield on the municipal bond portfolio was 2.06% at December 31, 2021.
Federal Home Loan Bank Stock. As a member of the FHLB Des Moines, we are required to own capital stock. The
required amount of capital stock is based on a percentage of our previous year-end assets and our outstanding FHLB advances.
The redemption of any excess stock we hold is at the discretion of the FHLB Des Moines. During 2021, our FHLB of Des
Moines stock holdings decreased by $945,000, primarily as a result of the $25.0 million decrease in our FHLB advances during
18
2021. The carrying value of our FHLB of Des Moines stock totaled $5.5 million at December 31, 2021. During the years ended
December 31, 2021 and 2020, we received FHLB of Des Moines cash dividends of $332,000 and $320,000, respectively.
During the year ended December 31, 2021, gross proceeds from the call, maturity and sale of investments was
$20.0 million, with net realized gains of $32,000.
Management reviews investment securities on an ongoing basis for the presence of other than temporary impairment
(“OTTI”) or permanent impairment, taking into consideration current market conditions, fair value in relationship to cost, extent
and nature of the change in fair value, issuer rating changes and trends, whether management intends to sell a security or if it is
likely that we will be required to sell the security before recovery of the amortized cost basis of the investment, which may be
maturity, and other factors. For debt securities, if management intends to sell the security or it is likely that we will be required
to sell the security before recovering its cost basis, the entire impairment loss would be recognized in earnings as an OTTI. If
management does not intend to sell the security and it is not likely that we will be required to sell the security, but management
does not expect to recover the entire amortized cost basis of the security, only the portion of the impairment loss representing
credit losses would be recognized in earnings. The credit loss on a security is measured as the difference between the amortized
cost basis and the present value of the cash flows expected to be collected. Projected cash flows are discounted by the original
or current effective interest rate, depending on the nature of the security being measured for potential OTTI. The remaining
impairment related to all other factors, the difference between the present value of the cash flows expected to be collected and
fair value, is recognized as a charge to other comprehensive income (loss). Impairment losses related to all other factors are
presented as separate categories within other comprehensive income (loss). There were no losses related to OTTI at
December 31, 2021 and 2020. For additional information regarding our investments, see Note 2 of the Notes to Consolidated
Financial Statements contained in Item 8 of this report.
19
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20
Deposit Activities and Other Sources of Funds
General. Deposits and loan repayments are the major sources of our funds for lending and other investment purposes.
Scheduled loan repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are
influenced significantly by general interest rates and market conditions. Borrowings from the FHLB are used to supplement the
availability of funds from other sources and also as a source of term funds to assist in the management of interest rate risk.
Our deposit composition reflects a mixture of various deposit products. We rely on marketing activities, customer
service, and the availability of a broad range of products and services to attract and retain customer deposits.
Deposits. We offer a competitive range of deposit products within our market area, including noninterest bearing
accounts, interest-bearing demand accounts, money market accounts, statement savings accounts, and certificates of deposit.
Deposit account terms vary according to the minimum balance required, the time periods the funds must remain on deposit, and
the interest rate, among other factors. In determining the terms of our deposit accounts, we consider the development of long-
term profitable customer relationships, current market interest rates, current maturity structures, deposit mix, preferences of our
customers, and the profitability of acquiring customer deposits compared to alternative funding sources. As part of our strategy
to shift our deposit mix to lower cost funds, we continued to better align our pricing with competitors in our local market to
meet our goals. To supplement local deposits, funds are also generated as needed through national brokered certificates of
deposit. The Bank had no brokered certificates of deposits at both December 31, 2021 and 2020, as compared to $94.5 million
at December 31, 2019. Continued growth in retail deposits with our expanded branch network allowed the Bank to reduce
brokered deposits upon maturity as a source of funds. In the future, the Bank may utilize brokered deposits again to supplement
our retail deposits and assist in our interest rate risk management efforts.
The following table sets forth our total deposit activity for the years indicated.
2021
Total deposits, beginning balance
$1,093,633
Increase in retail deposits
Decrease in brokered funds
Net increase in deposits
63,841
—
63,841
Year Ended December 31,
2020
(In thousands)
$1,033,534
154,571
(94,472)
60,099
2019
$939,032
97,855
(3,353)
94,502
Total deposits, ending balance
$1,157,474
$1,093,633
$1,033,534
At December 31, 2021, deposits totaled $1.2 billion. We had $637.1 million of deposit accounts greater than the FDIC
insurance amount of $250,000, or 55.0% of our total deposits. Of this amount, $75.9 million were retail certificates of deposit.
At December 31, 2020, $543.0 million, or 49.7%, of deposit accounts were greater than $250,000. At December 31, 2021, we
held $60.6 million in public funds, of which $42.8 million exceeded $250,000. Under Washington State law, in order to
participate in the public funds program, we are required to pledge eligible securities of a minimum of 50% of the public
deposits in excess of $250,000.
21
The following table sets forth information regarding our certificates of deposit and other deposits at
December 31, 2021. Certificates of deposit are categorized by their original term.
Weighted-
Average
Interest Rate
— % N/A
N/A
0.08
0.03
0.25
N/A
N/A
Product Term
Category
Amount
(Dollars in thousands)
Noninterest bearing demand deposits
Interest-bearing demand
Savings
Money market
Certificates of deposit, retail
Three months or less
Over three through six months
Over six through twelve months
Over twelve months
0.34
—
0.18
1.50
1.25
Total certificates of deposit, retail
Percentage
of Total
Deposits
10.2 %
8.5
2.0
54.0
—
—
4.8
20.5
25.3
$ 117,751
97,907
23,146
624,543
256
60
55,768
238,043
294,127
Total deposits
$ 1,157,474
100.0 %
Certificates of Deposit. The following table sets forth the amount and remaining maturities of certificates of deposit at
December 31, 2021.
Within
One Year
After One Year
Through
Two Years
After Two
Years Through
Three Years
After Three
Years Through
Four Years
Thereafter
Total
(In thousands)
0.00 - 1.00%
1.01 - 2.00%
2.01 - 3.00%
3.01 - 4.00%
$
95,905 $
44,911 $
26,632 $
6,163 $
2,765 $
176,376
12,335
29,361
7,736
4,456
16,436
30,184
3,109
11,712
1,058
1,364
—
—
—
—
—
21,264
57,509
38,978
Total
$
145,337 $
95,987 $
42,511 $
7,527 $
2,765 $
294,127
The following table provides the uninsured portion by account of our certificates of deposit at December 31, 2021, by
their remaining maturity period.
Maturity Period
Three months or less
Over three months through six months
Over six months through twelve months
Over twelve months
Total
Certificates of Deposit
(In thousands)
$
$
5,176
9,749
23,003
37,956
75,884
22
Deposits by Type. The following table sets forth the deposit balances by the types of accounts we offered at the dates
indicated.
2021
Amount
Percent of
Total
December 31,
2020
Percent of
Total
Amount
(Dollars in thousands)
2019
Amount
Percent of
Total
$
Noninterest bearing
Interest-bearing demand
Savings
Money market
Certificates of deposit, retail:
0.00 - 1.00%
1.01 - 2.00%
2.01 - 3.00%
3.01 - 4.00%
Total certificates of deposit,
retail
Certificates of deposit, brokered
0.00 - 1.00%
1.01 - 2.00%
2.01 - 3.00%
Total certificates of deposit,
brokered
117,751
97,907
23,146
624,543
176,376
21,264
57,509
38,978
294,127
—
—
—
—
10.2 % $
8.5
2.0
54.0
15.2
1.8
4.9
3.4
25.3
—
—
—
—
91,285
108,182
19,221
465,369
93,570
86,145
180,733
49,128
409,576
—
—
—
—
8.3 % $
9.9
1.8
52,849
65,897
17,447
5.1 %
6.4
1.7
42.5
377,766
36.6
8.6
7.9
16.5
4.5
37.5
—
—
—
—
7,400
131,252
230,405
56,046
425,103
—
70,510
23,962
94,472
0.7
12.7
22.3
5.4
41.1
—
6.8
2.3
9.1
Total deposits
$ 1,157,474
100.0 % $ 1,093,633
100.0 % $ 1,033,534
100.0 %
Borrowings. Customer deposits are the primary source of funds for our lending and investment activities. We use
advances from the FHLB and to a lesser extent federal funds (“Fed Funds”) purchased to supplement our supply of lendable
funds, to meet short-term deposit withdrawal requirements and to provide longer term funding to assist in the management of
our interest rate risk by matching the duration of selected loan and investment maturities.
As a member of the FHLB, we are required to own capital stock in the FHLB and are authorized to apply for advances
on the security of that stock and certain of our mortgage loans, provided that certain creditworthiness standards have been met.
Advances are individually made under various terms pursuant to several different credit programs, each with its own interest
rate and range of maturities. Depending on the program, limitations on the amount of advances are based on the financial
condition of the member institution and the adequacy of collateral pledged to secure the credit. We maintain a credit facility
with the FHLB that provides for immediately available advances, subject to acceptable collateral. At December 31, 2021, our
remaining FHLB credit capacity was $553.1 million and outstanding advances from the FHLB totaled $95.0 million. In
addition, at December 31, 2021, we had supplemental funding sources of $84.8 million available at the FRB and $75.0 million
available between two correspondent financial institutions.
Other than our utilization of interest rate swaps, we do not currently participate in other hedging programs, stand-alone
contracts for interest rate caps or floors or other activities involving the use of off-balance sheet derivative financial
instruments, however, these options are evaluated on occasion. As of December 31, 2021, we had seven interest rate swaps with
an aggregate notional amount of $95.0 million and a fair value gain of $1.5 million as compared to six interest rate swaps with
an aggregate notional amount of $120.0 million and a fair value loss of $2.9 million at December 31, 2020. In October 2021, a
$50.0 million interest rate swap agreement matured and was partially replaced with two interest rate swap agreements with an
aggregate notional of $25.0 million that were included in the fair value loss reported at December 31, 2020. For additional
information, see Item 1A. Risk Factors -“Risks Related to Market and Interest Rate Changes - If the interest rate swaps we
entered into prove ineffective, it could result in volatility in our operating results, including potential loses, which could have a
material adverse effect on our results of operations and cash flows,” Item 7. “Management’s Discussion and Analysis of
23
Financial Condition and Results of Operations - Asset and Liability Management,” and Note 11 of the Notes to Consolidated
Financial Statements contained in Item 8 of this report.
Subsidiaries and Other Activities
First Financial Northwest, Inc. First Financial Northwest has two wholly-owned subsidiaries, First Financial
Northwest Bank and First Financial Diversified Corporation. First Financial Diversified previously held a small portfolio of
loans. Subsequent to these loans paying off in 2019, the company has had minimal activity.
First Financial Northwest Bank. First Financial Northwest Bank is a community-based commercial bank. The Bank
primarily serves the greater Puget Sound region of King and to a lesser extent, Pierce, Snohomish and Kitsap Counties,
Washington through our full-service banking office in Renton, Washington and fourteen additional branches in King, Pierce
and Snohomish Counties, Washington. We are in the business of attracting deposits from the public and utilizing those deposits
to originate loans.
Competition
The Bank operates in the highly competitive Puget Sound region of Western Washington. We face competition in
originating loans and attracting deposits within our geographic market area. The competitive environment is impacted by
changes in the regulatory environment, technology and product delivery systems as well as consolidation in the industry
creating larger, more diversified competitors. We compete by consistently delivering high-quality personal service to our
customers that results in a high level of customer satisfaction.
The Bank attracts deposits primarily through its branch office system. The competition is primarily from commercial
banks, savings institutions and credit unions in the same geographic area. Based on the most current FDIC market share data
dated June 30, 2021, the top five banks in the Seattle-Tacoma-Bellevue metropolitan statistical area (comprised of Bank of
America, JP Morgan Chase, Wells Fargo, US Bancorp and KeyBank) controlled 72% of the deposit market. In addition to the
FDIC insured competitors, credit unions, insurance companies and brokerage firms also compete for consumer deposit
relationships. The Bank’s share of aggregate deposits in the market area is less than 1%.
Our competition for loans comes principally from commercial banks, mortgage brokers, thrift institutions, credit
unions and finance companies. Several other financial institutions compete with us for banking business in our market area.
These institutions have substantially more resources than the Bank and, as a result, are able to offer a broader range of services,
such as trust departments and enhanced retail services. Among the advantages of some of these institutions are their ability to
make larger loans, initiate extensive advertising campaigns, access lower cost funding sources, and allocate their investable
assets in regions of highest yield and demand. The challenges posed by such large competitors may impact our ability to
originate loans secure low cost deposits, and establish product pricing levels that support our net interest margin goals that may
limit our future growth and earnings potential.
Human Capital
First Financial Northwest Bank continually strives to recruit the most talented, motivated employees in their respective
fields. By providing opportunities for personal and professional growth coupled with an environment that values teamwork and
work-life balance, we are able to attract and retain outstanding individuals. We pride ourselves on providing excellent benefits,
competitive salaries and the opportunity for participation in the company's long-term success.
Workforce. At December 31, 2021, we had 144 full-time employees. Our employees are not represented by any
collective bargaining group. First Financial Northwest Bank is committed to providing equality of opportunity in all aspects of
employment through a comprehensive affirmative action plan that is updated annually. As of December 31, 2021, our
workforce was 59.7% female and 40.3% male, and women held 55.4% of the Bank’s management roles. The average tenure of
mid-level officers and managers is 4.7 years and the average tenure of executive / senior level officers is 8.7 years. The
ethnicity of our workforce was 57.6% White, 24.3% Asian, 3.5% Black, 0.7% Native Hawaiian or Other Pacific Islander, 0.7%
Two or More Races, and 13.2% undisclosed.
The following chart depicts the percentage of self-identified females and minorities in our workforce at December 31,
2021, by job classification as defined by the Equal Employment Opportunity Commission (“EEOC”):
24
Job Classification
Executive / Senior level officers
Mid-level officers and managers
Professionals
Sales workers
Technicians
Administrative support
Total
Female
38.5%
59.6
46.4
57.1
—
80.5
59.7%
Minority (1)
Distribution by EEOC
Job Classification
25.0%
31.3
37.5
66.7
33.3
31.3
33.6%
9.0%
36.1
19.4
4.9
2.1
28.5
100.0%
__________
(1) Includes employees self-disclosed as Asian, Black, Native Hawaiian or Other Pacific Islander, or Two or More Races.
Benefits. The Company provides competitive comprehensive benefits to employees. The Company values the health
and well-being of its employees and strives to provide programs to support this. Benefit programs available to eligible
employees may include 401(k) savings plan, employee stock ownership plan, health and life insurance, employee assistance
program, paid holidays, paid time off, and other leave as applicable.
Board of directors. The Company’s board of directors is comprised of the Company’s Chief Executive Officer and
Chief Financial Officer and six non-employee directors. The non-employee directors are represented by 50% female and 17%
minority.
Response to COVID-19 pandemic. As an essential business, the Company responded quickly to implement
procedures to assist employees in navigating the challenging impact from the pandemic, as well as protect the safety of both
employees and customers. The Company has transitioned to a hybrid remote work model where eligible positions may arrange
with their manager to work partially or fully remote. Safety measures implemented early in the COVID-19 pandemic continue
to be followed to protect employees working on site, which included installation of protective partitions and fully equipping
locations with personal safety supplies. Employees who experienced a reduction in hours due to reduced branch operating hours
continued to receive their full pay. Additional sick time was authorized for employees impacted directly by the COVID-19
virus. The Company will continue to follow any Washington state mandates and make adjustments to support employees and
prioritize employee safety.
Training and education. The Company recognizes that the skills and knowledge of its employees are critical to the
success of the organization, and promotes training and continuing education as an ongoing function for employees. The Bank’s
compliance training program provides annual training courses to assure that all employees and officers know the rules
applicable to their jobs.
How We Are Regulated
The following is a brief description of certain laws and regulations that are applicable to First Financial Northwest and
First Financial Northwest Bank. On March 31, 2015, First Financial Northwest converted from a registered savings and loan
holding company to a bank holding company. As a bank holding company, First Financial Northwest is subject to examination
and supervision by, and is required to file certain reports with the FRB. First Financial Northwest also is subject to the rules and
regulations of the SEC under the federal securities laws. First Financial Northwest Bank, which changed its charter from a
Washington-chartered savings bank to a Washington-chartered commercial bank effective on February 11, 2016, is subject to
regulation and oversight by the DFI, the applicable provisions of Washington law and by the regulations of the DFI adopted
thereunder. First Financial Northwest Bank also is subject to regulation and examination by the FDIC, which insures its
deposits to the maximum extent permitted by law.
The laws and regulations governing us may be amended from time to time by the relevant legislative bodies and
regulators. Any such legislative action or regulatory changes in the future could adversely affect us. We cannot predict whether
any such changes may occur.
25
Regulation and Supervision of First Financial Northwest Bank
General. As a state-chartered commercial bank, First Financial Northwest Bank is subject to applicable provisions of
Washington state law and regulations of the DFI in addition to federal law and regulations of the FDIC applicable to state banks
that are not members of the Federal Reserve System. State law and regulations govern First Financial Northwest Bank’s ability
to take deposits and pay interest, to make loans on or invest in residential and other real estate, to make consumer loans, to
invest in securities, to offer various banking services to its customers and to establish branch offices. Under state law,
commercial banks in Washington also generally have all of the powers that federal commercial banks have under federal laws
and regulations. First Financial Northwest Bank is subject to periodic examination by and reporting requirements of the DFI.
Insurance of Accounts and Regulation by the FDIC. First Financial Northwest Bank’s deposits are insured up to
$250,000 per separately insured deposit ownership right or category by the Deposit Insurance Fund (“DIF”) of the FDIC. As
insurer, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of, and to require reporting
by, FDIC-insured institutions.
The FDIC assesses deposit insurance premiums quarterly on each FDIC-insured institution applied to its deposit base,
which is its average consolidated total assets minus its Tier 1 capital. No institution may pay a dividend if it is in default on its
federal deposit insurance assessment. Total base assessment rates currently range from 3 to 30 basis points subject to certain
adjustments. The FDIC has authority to increase insurance assessments, and any significant increases may have an adverse
effect on the operating expenses and results of operations of the Company. Management cannot predict what assessment rates
will be in the future. In a banking industry emergency, the FDIC may also impose a special assessment. The Bank paid
$476,000 in FDIC assessments for the year ending December 31, 2021.
As insurer, the FDIC is authorized to conduct examinations of and to require reporting by FDIC-insured institutions.
The FDIC also may prohibit any insured institution from engaging in any activity the FDIC determines by regulation or order to
pose a serious risk to the DIF. The FDIC also has the authority to take enforcement actions against banks and savings
associations. Management is not aware of any existing circumstances which would result in termination of the Bank's deposit
insurance.
Standards for Safety and Soundness. Each federal banking agency, including the FDIC, has adopted guidelines
establishing general standards relating to internal controls, information and internal audit systems; loan documentation; credit
underwriting; interest rate risk exposure; asset growth; asset quality; earnings; and compensation, fees and benefits. In general,
the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures
specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe
compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an
executive officer, employee, director, or principal shareholder. If the FDIC determines that an institution fails to meet any of
these guidelines, it may require an institution to submit to the FDIC an acceptable plan to achieve compliance. Management of
the Bank is not aware of any conditions relating to these safety and soundness standards which would require submission of a
plan of compliance.
Capital Requirements. Federally insured financial institutions, such as First Financial Northwest Bank, and their
holding companies, are required to maintain a minimum level of regulatory capital.
First Financial Northwest Bank is subject to capital regulations adopted by the FDIC, which establish minimum
required ratios for a common equity Tier 1 (“CET1”) capital to risk-based assets ratio, a Tier 1 capital to risk-based assets ratio,
a total capital to risk-based assets ratio and a Tier 1 capital to total assets leverage ratio. The capital standards require the
maintenance of the following minimum capital ratios: (i) a CET1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6%; (iii) a
total capital ratio of 8%; and (iv) a Tier 1 leverage ratio of 4%. Consolidated regulatory capital requirements identical to those
applicable to subsidiary banks generally apply to bank holding companies. However, the Federal Reserve has provided a “Small
Bank Holding Company” exception to its consolidated capital requirements, and bank holding companies with less than
$3.0 billion of consolidated assets are not subject to the consolidated holding company capital requirements unless otherwise
directed by the Federal Reserve.
The Economic Growth, Regulatory Relief and Consumer Protection Act (“EGRRCPA”), enacted in May 2018,
required the federal banking agencies, including the FDIC, to establish for institutions with assets of less than $10 billion a
“community bank leverage ratio” or “CBLR” of between 8 to 10%. Institutions with capital meeting or exceeding the ratio and
otherwise complying with the specified requirements (including off-balance sheet exposures of 25% or less of total assets and
trading assets and liabilities of 5% or less of total assets) and electing the alternative framework are considered to comply with
26
the applicable regulatory capital requirements, including the risk-based requirements. The CBLR was established at 9% Tier 1
capital to total average assets, effective January 1, 2020. A qualifying institution may opt in and out of the community bank
leverage ratio framework on its quarterly call report. An institution that temporarily ceases to meet any qualifying criteria is
provided with a two-quarter grace period to again achieve compliance. Failure to meet the qualifying criteria within the grace
period or maintain a leverage ratio of 8% or greater requires the institution to comply with the generally applicable capital
requirements. Although the Bank qualified to make this election, as of December 31, 2021, management has not elected to use
the CBLR as the Bank’s margin above the current minimum levels to be well-capitalized is greater than our margin would be
under the CBLR.
In addition to the minimum CET1, Tier 1, and total capital ratios, the capital regulations require a capital conservation
buffer consisting of additional CET1 capital greater than 2.5% of risk-weighted assets above the required minimum levels in
order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses.
To be considered “well capitalized,” a depository institution must have a Tier 1 risk-based capital ratio of at least 8%,
a total risk-based capital ratio of at least 10%, a CET1 capital ratio of at least 6.5% and a leverage ratio of at least 5%, and not
be subject to an individualized order, directive or agreement under which its primary federal banking regulator requires it to
maintain a specific capital level. As of December 31, 2021, First Financial Northwest Bank met the requirements to be “well
capitalized” and met the fully phased-in capital conservation buffer requirement.
The table below sets forth First Financial Northwest Bank’s capital position at December 31, 2021 and 2020, based on
FDIC thresholds to be well-capitalized.
Bank equity capital under GAAP
Tier 1 leverage capital
Tier 1 leverage capital requirement
Excess
Common equity tier 1
Common equity tier 1 capital requirement
Excess
Tier 1 risk-based capital
Tier 1 risk-based capital requirement
Excess
Total risk-based capital
Total risk-based capital requirement
Excess
December 31,
2021
2020
Amount
Ratio
Amount
Ratio
(Dollars in thousands)
$ 149,563
$ 140,114
$ 147,816
71,489
10.34 % $ 140,319
68,189
5.00
10.29 %
5.00
$ 76,327
5.34 % $ 72,130
5.29 %
$ 147,816
14.23 % $ 140,319
14.32 %
67,536
$ 80,280
63,705
6.50
7.73 % $ 76,614
6.50
7.82 %
$ 147,816
14.23 % $ 140,319
14.32 %
83,121
8.00
78,406
8.00
$ 64,695
6.23 % $ 61,913
6.32 %
$ 160,840
15.48 % $ 152,610
15.57 %
103,901
10.00
98,008
10.00
$ 56,939
5.48 % $ 54,602
5.57 %
The FDIC also has authority to establish individual minimum capital requirements in appropriate cases upon a
determination that an institution’s capital level is or may become inadequate in light of particular risks or circumstances.
For a complete description of First Financial Northwest Bank’s required and actual capital levels on December 31,
2021, see Note 14 of the Notes to Consolidated Financial Statements contained in Item 8 of this report.
The Financial Accounting Standards Board has adopted a new accounting standard for GAAP that will be effective for
us for our first fiscal year beginning after December 15, 2022. This standard, referred to as Current Expected Credit Loss, or
CECL, requires FDIC-insured institutions and their holding companies (banking organizations) to recognize credit losses
27
expected over the life of certain financial assets. CECL covers a broader range of assets than the current method of recognizing
credit losses and generally results in earlier recognition of credit losses. Upon adoption of CECL, a banking organization must
record a one-time adjustment to its credit loss allowances as of the beginning of the fiscal year of adoption equal to the
difference, if any, between the amount of credit loss allowances under the current methodology and the amount required under
CECL. For a banking organization, implementation of CECL is generally likely to reduce retained earnings, and to affect other
items, in a manner that reduces its regulatory capital.
The federal banking regulators (the Federal Reserve, the Office of the Comptroller of the Currency and the FDIC) have
adopted a rule that gives a banking organization the option to phase in over a three-year period the day-one adverse effects of
CECL on its regulatory capital.
Prompt Corrective Action. Federal statutes establish a supervisory framework for FDIC-insured institutions based on
five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized. An institution’s category depends upon where its capital levels are in relation to relevant capital measures.
The well-capitalized category is described above. An institution that is not well capitalized is subject to certain restrictions on
brokered deposits, including restrictions on the rates it can offer on its deposits, generally. To be considered adequately
capitalized, an institution must have the minimum capital ratios described above. Any institution which is neither well
capitalized nor adequately capitalized is considered undercapitalized. The previously referenced final rule establishing an
elective “community bank leverage ratio” regulatory capital framework provides that a qualifying institution whose capital
exceeds the community bank leverage ratio and opts to use that framework will be considered “well capitalized” for purposes of
prompt corrective action.
Undercapitalized institutions are subject to certain prompt corrective action requirements, regulatory controls and
restrictions which become more extensive as an institution becomes more severely undercapitalized. Failure by First Financial
Northwest Bank to comply with applicable capital requirements would, if unremedied, result in progressively more severe
restrictions on its activities and lead to enforcement actions, including, but not limited to, the issuance of a capital directive to
ensure the maintenance of required capital levels and, ultimately, the appointment of the FDIC as receiver or
conservator. Banking regulators will take prompt corrective action with respect to depository institutions that do not meet
minimum capital requirements. Additionally, approval of any regulatory application filed for their review may be dependent on
compliance with capital requirements.
At December 31, 2021, First Financial Northwest Bank was categorized as “well capitalized” under the prompt
corrective action regulations of the FDIC. For additional information, see Note 14 of the Notes to Consolidated Financial
Statements contained in Item 8 of this report.
Federal Home Loan Bank System. First Financial Northwest Bank is a member of the FHLB of Des Moines, one of
11 regional FHLBs that administer the home financing credit function of savings institutions. The FHLBs are subject to the
oversight of the Federal Housing Finance Agency (“FHFA”) and each FHLB serves as a reserve or central bank for its members
within its assigned region. The FHLBs are funded primarily from proceeds derived from the sale of consolidated obligations of
the FHLB System and make loans or advances to members in accordance with policies and procedures established by the Board
of Directors of the FHLB, which are subject to the oversight of the FHFA. All advances from the FHLB of Des Moines are
required to be fully secured by sufficient collateral as determined by the FHLB of Des Moines. In addition, all long-term
advances are required to provide funds for residential home financing. See “Business – Deposit Activities and Other Sources of
Funds – Borrowings.”
As a member, the Bank is required to purchase and maintain stock in the FHLB of Des Moines based on the Bank's
asset size and level of borrowings from the FHLB. At December 31, 2021, the Bank held $5.5 million in FHLB of Des Moines
stock that was in compliance with the holding requirements. The FHLB pays dividends quarterly, and First Financial Northwest
Bank received $332,000 in dividends during the year ended December 31, 2021.
The FHLBs continue to contribute to low- and moderately-priced housing programs through direct loans or interest
subsidies on advances targeted for community investment and low- and moderate-income housing projects. These contributions
have adversely affected the level of FHLB dividends paid and could continue to do so in the future. These contributions could
also have an adverse effect on the value of FHLB of Des Moines stock in the future. A reduction in value of First Financial
Northwest Bank’s FHLB of Des Moines stock may result in a decrease in net income and possibly capital.
Commercial Real Estate Lending Concentrations. The federal banking agencies have issued guidance on sound risk
management practices for concentrations in commercial real estate lending. The particular focus is on exposure to commercial
28
real estate loans that are dependent on the cash flow from the real estate held as collateral and that are likely to be sensitive to
conditions in the commercial real estate market (as opposed to real estate collateral held as a secondary source of repayment or
as an abundance of caution). The purpose of the guidance is not to limit a bank’s commercial real estate lending but to guide
banks in developing risk management practices and capital levels commensurate with the level and nature of real estate
concentrations. The guidance directs the FDIC and other federal bank regulatory agencies to focus their supervisory resources
on institutions that may have significant commercial real estate loan concentration risk. A bank that has experienced rapid
growth in commercial real estate lending, has notable exposure to a specific type of commercial real estate loan, or is
approaching or exceeding the following supervisory criteria may be identified for further supervisory analysis with respect to
real estate concentration risk:
• Total reported loans for construction, land development and other land represent 100% or more of the bank’s total
regulatory capital; or
• Total commercial real estate loans (as defined in the guidance) represent 300% or more of the bank’s total regulatory
capital and the outstanding balance of the bank’s commercial real estate loan portfolio has increased 50% or more
during the prior 36 months.
The guidance provides that the strength of an institution’s lending and risk management practices with respect to such
concentrations will be taken into account in supervisory guidance on evaluation of capital adequacy. As of December 31, 2021,
First Financial Northwest Bank’s aggregate recorded loan balances for construction, land development and land loans were
59.7% of regulatory capital. In addition, at December 31, 2021, First Financial Northwest Bank’s loans on commercial real
estate, as defined by the FDIC, were 384.0% of regulatory capital.
Activities and Investments of Insured State-Chartered Financial Institutions. Federal law generally limits the
activities and equity investments of FDIC-insured, state-chartered banks to those that are permissible for national banks. An
insured state bank is not prohibited from, among other things, (1) acquiring or retaining a majority interest in a subsidiary, (2)
investing as a limited partner in a partnership the sole purpose of which is direct or indirect investment in the acquisition,
rehabilitation or new construction of a qualified housing project, provided that such limited partnership investments may not
exceed 2% of the bank’s total assets, (3) acquiring up to 10% of the voting stock of a company that solely provides or reinsures
directors’, trustees’ and officers’ liability insurance coverage or bankers’ blanket bond group insurance coverage for insured
depository institutions and (4) acquiring or retaining the voting shares of a depository institution owned by another FDIC-
insured institution if certain requirements are met.
Under the law of Washington State, Washington chartered savings banks may exercise any of the powers of
Washington-chartered commercial banks, national banks and federally-chartered savings banks, subject to the approval of the
Director of the DFI in certain situations. In addition, Washington state-chartered commercial and savings banks may charge the
maximum interest rate allowable for loans and other extensions of credit by federally-chartered financial institutions to
Washington residents.
Environmental Issues Associated With Real Estate Lending. The Comprehensive Environmental Response,
Compensation and Liability Act (“CERCLA”) is a federal statute that generally imposes strict liability on all prior and present
“owners and operators” of sites containing hazardous waste. However, Congress acted to protect secured creditors by providing
that the term “owner and operator” excludes a person whose ownership is limited to protecting its security interest in the site.
Since the enactment of the CERCLA, this “secured creditor exemption” has been the subject of judicial interpretations that have
left open the possibility that lenders could be liable for cleanup costs on contaminated property that they hold as collateral for a
loan. To the extent that legal uncertainty exists in this area, all creditors, including First Financial Northwest Bank, that have
made loans secured by properties with potential hazardous waste contamination (such as petroleum contamination) could be
subject to liability for cleanup costs that often are substantial and can exceed the value of the collateral property.
Federal Reserve System. The Federal Reserve requires all depository institutions to maintain reserves at specified
levels against their transaction accounts, primarily checking accounts. In response to the COVID-19 pandemic, the Federal
Reserve reduced reserve requirement ratios to zero percent effective on March 26, 2020, to support lending to households and
businesses. At December 31, 2021, the Bank was in compliance with the reserve requirements in place at that time.
Affiliate Transactions. First Financial Northwest and First Financial Northwest Bank are separate and distinct legal
entities. First Financial Northwest (and any non-bank subsidiary of First Financial Northwest) is an affiliate of First Financial
Northwest Bank. Federal laws strictly limit the ability of banks to engage in certain transactions with their affiliates.
Transactions deemed to be a “covered transaction” under Section 23A of the Federal Reserve Act and between a bank and an
affiliate are limited to 10% of the bank’s capital plus surplus and, with respect to all affiliates, to an aggregate of 20% of the
29
bank’s capital plus surplus. Further, covered transactions that are loans and extensions of credit generally are required to be
secured by eligible collateral in specified amounts. Federal law also requires that covered transactions and certain other
transactions listed in Section 23B of the Federal Reserve Act between a bank and its affiliates be on terms as favorable to the
bank as transactions with nonaffiliates. For additional information, see “– Regulation and Supervision of First Financial
Northwest – Limitations on Transactions with Affiliates” below.
In addition, Sections 22(g) and (h) of the Federal Reserve Act place restrictions on loans to executive officers,
directors and principal shareholders. Under Section 22(h), loans to a director, executive officer or greater than 10% shareholder
of a bank and certain affiliated interests, generally may not exceed, together with all other outstanding loans to such person and
affiliated interests, 15% of the institution’s unimpaired capital plus surplus. Section 22(h) also requires that loans to directors,
executive officers and principal shareholders be made on terms substantially the same as offered in comparable transactions to
other persons unless the loans are made pursuant to a benefit or compensation program that (1) is widely available to employees
of the institution and (2) does not give preference to any director, executive officer or principal shareholder, or certain affiliated
interests, over other employees of the bank. Section 22(h) also requires prior board approval for certain loans. In addition, the
aggregate amount of extensions of credit by a bank to all insiders cannot exceed the bank’s unimpaired capital plus surplus.
Furthermore, Section 22(g) places additional restrictions on loans to executive officers. At December 31, 2021, First Financial
Northwest Bank was in compliance with these restrictions.
Community Reinvestment Act. First Financial Northwest Bank is subject to the provisions of the Community
Reinvestment Act of 1977 (“CRA”), which require the appropriate federal bank regulatory agency to assess a bank’s
performance under the CRA in meeting the credit needs of the community serviced by the bank, including low and moderate
income neighborhoods. The regulatory agency’s assessment of the bank’s record is made available to the public. Further, a
bank’s CRA performance must be considered in connection with a bank’s application, to among other things, establish a new
branch office that will accept deposits, relocate an existing office or merge or consolidate with, or acquire the assets or assume
the liabilities of, a federally regulated financial institution. An unsatisfactory rating may be the basis for denial of certain
applications. First Financial Northwest Bank received an “outstanding” rating during its most recent CRA examination.
Dividends. The amount of dividends payable by First Financial Northwest Bank to First Financial Northwest depends
upon First Financial Northwest Bank’s earnings and capital position, and is limited by federal and state laws, regulations and
policies. According to Washington law, First Financial Northwest Bank may not declare or pay a cash dividend on its capital
stock if it would cause its net worth to be reduced below (1) the amount required for liquidation accounts or (2) the net worth
requirements, if any, imposed by the Director of the DFI. In addition, dividends may not be declared or paid if First Financial
Northwest Bank is in default in payment of any assessments due to the FDIC. Dividends on First Financial Northwest Bank’s
capital stock may not be paid in an aggregate amount greater than the aggregate retained earnings of First Financial Northwest
Bank, without the approval of the Director of the DFI. Dividends payable by the Bank can be limited or prohibited if the Bank
does not meet the capital conservation buffer requirement.
The amount of dividends actually paid during any one period is affected by First Financial Northwest Bank’s policy of
maintaining a strong capital position. Federal law further restricts dividends payable by an institution that does not meet the
capital conservation buffer requirement and provides that no insured depository institution may pay a cash dividend if it would
cause the institution to be “undercapitalized,” as defined in the prompt corrective action regulations. Moreover, the federal bank
regulatory agencies also have the general authority to limit the dividends paid by insured banks if such payments are deemed to
constitute an unsafe and unsound practice.
Privacy Standards and Cybersecurity. The Gramm-Leach-Bliley Financial Services Modernization Act of 1999
modernized the financial services industry by establishing a comprehensive framework to permit affiliations among commercial
banks, insurance companies, securities firms and other financial service providers. Federal banking agencies, including the
FDIC, have adopted guidelines for establishing information security standards and cybersecurity programs for implementing
safeguards under the supervision of the board of directors. These guidelines, along with related regulatory materials,
increasingly focus on risk management and processes related to information technology and the use of third parties in the
provision of financial services. These regulations require First Financial Northwest Bank to disclose its privacy policy,
including informing consumers of its information sharing practices and informing consumers of their rights to opt out of certain
practices. In addition, other federal and state cybersecurity and data privacy laws and regulations may expose First Financial
Northwest Bank to risk and result in certain risk management costs. In addition, on November 18, 2021, the federal banking
agencies announced the adoption of a final rule providing for new notification requirements for banking organizations and their
service providers for significant cybersecurity incidents. Specifically, the new rule requires a banking organization to notify its
primary federal regulator as soon as possible, and no later than 36 hours after, the banking organization determines that a
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“computer-security incident” rising to the level of a “notification incident” has occurred. Notification is required for incidents
that have materially affected or are reasonably likely to materially affect the viability of a banking organization’s operations, its
ability to deliver banking products and services, or the stability of the financial sector. Service providers are required under the
rule to notify affected banking organization customers as soon as possible when the provider determines that it has experienced
a computer-security incident that has materially affected or is reasonably likely to materially affect the banking organization’s
customers for four or more hours. Compliance with the new rule is required by May 1, 2022. Non-compliance with federal or
similar state privacy and cybersecurity laws and regulations could lead to substantial regulatory imposed fines and penalties,
damages from private causes of action and/or reputational harm.
Anti-Money Laundering and Customer Identification. The Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA Patriot Act) was signed into law on
October 26, 2001. The USA PATRIOT Act and the Bank Secrecy Act requires financial institutions to develop programs to
prevent financial institutions from being used for money laundering and terrorist activities. If such activities are detected,
financial institutions are obligated to file suspicious activity reports with the U.S. Treasury’s Office of Financial Crimes
Enforcement Network. These rules require financial institutions to establish procedures for identifying and verifying the
identity of customers seeking to open new financial accounts, and, effective in 2018, the beneficial owners of accounts. Bank
regulators are directed to consider a holding company’s effectiveness in combating money laundering when ruling on Bank
Holding Company Act and Bank Merger Act applications.
Other Consumer Protection Laws and Regulations. The Dodd-Frank Act established the Consumer Financial
Protection Bureau (“CFPB”) and empowered it to exercise broad regulatory, supervisory and enforcement authority with
respect to both new and existing consumer financial protection laws. First Financial Northwest Bank is subject to consumer
protection regulations issued by the CFPB, but as a financial institution with assets of less than $10 billion, First Financial
Northwest Bank is generally subject to supervision and enforcement by the FDIC with respect to its compliance with federal
consumer financial protection laws and CFPB regulations.
First Financial Northwest Bank is subject to a broad array of federal and state consumer protection laws and
regulations that govern almost every aspect of its business relationships with consumers. While not exhaustive, these laws and
regulations include the Truth-in-Lending Act, the Truth in Savings Act, the Electronic Fund Transfer Act, the Expedited Funds
Availability Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Real Estate Settlement Procedures Act, the Home
Mortgage Disclosure Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, the Right to Financial Privacy
Act, the Home Ownership and Equity Protection Act, the Consumer Leasing Act, the Fair Credit Billing Act, the Homeowners
Protection Act, the Check Clearing for the 21st Century Act, laws governing flood insurance, laws governing consumer
protections in connection with the sale of insurance, federal and state laws prohibiting unfair and deceptive business practices
and various regulations that implement some or all of the foregoing. These laws and regulations mandate certain disclosure
requirements and regulate the manner in which financial institutions must deal with customers when taking deposits, making
loans, collecting loans and providing other services. Failure to comply with these laws and regulations can subject First
Financial Northwest Bank to various penalties, including but not limited to, enforcement actions, injunctions, fines, civil
liability, criminal penalties, punitive damages and the loss of certain contractual rights.
Regulation and Supervision of First Financial Northwest
General. First Financial Northwest, as sole shareholder of First Financial Northwest Bank, is a bank holding company
registered with the Federal Reserve. Bank holding companies are subject to comprehensive regulation by the Federal Reserve
under the Bank Holding Company Act of 1956, as amended (“BHCA”), and the regulations of the FRB. Accordingly, First
Financial Northwest is required to file semi-annual reports with the Federal Reserve and provide additional information as the
Federal Reserve may require. The Federal Reserve may examine First Financial Northwest, and any of its subsidiaries, and
charge First Financial Northwest for the cost of the examination. The Federal Reserve also has extensive enforcement authority
over bank holding companies, including, among other things, the ability to assess civil money penalties, to issue cease and
desist or removal orders and to require that a holding company divest subsidiaries (including its bank subsidiaries). In general,
enforcement actions may be initiated for violations of law and regulations and unsafe or unsound practices. First Financial
Northwest is also required to file certain reports with, and otherwise comply with the rules and regulations of the SEC.
The Bank Holding Company Act. Under the BHCA, First Financial Northwest is supervised by the Federal
Reserve. The Federal Reserve has a policy that a bank holding company is required to serve as a source of financial and
managerial strength to its subsidiary bank and may not conduct its operations in an unsafe or unsound manner. In addition, the
Dodd-Frank Act and earlier Federal Reserve policy provide that a bank holding company should serve as a source of strength to
its subsidiary bank by having the ability to provide financial assistance to its subsidiary bank during periods of financial distress
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to the bank. A bank holding company’s failure to meet its obligation to serve as a source of strength to its subsidiary bank will
generally be considered by the Federal Reserve to be an unsafe and unsound banking practice or a violation of the Federal
Reserve’s regulations or both. No regulations have yet been proposed by the Federal Reserve to implement the source of
strength provisions required by the Dodd-Frank Act. First Financial Northwest and any subsidiaries that it may control are
considered “affiliates” within the meaning of the Federal Reserve Act, and transactions between First Financial Northwest Bank
and affiliates are subject to numerous restrictions. With some exceptions, First Financial Northwest and its subsidiaries are
prohibited from tying the provision of various services, such as extensions of credit, to other services offered by First Financial
Northwest or by its affiliates.
Acquisitions. The BHCA prohibits a bank holding company, with certain exceptions, from acquiring ownership or
control of more than 5% of the voting shares of any company that is not a bank or bank holding company and from engaging in
activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries. Under the
BHCA, the Federal Reserve may approve the ownership of shares by a bank holding company in any company, the activities of
which the Federal Reserve has determined to be so closely related to the business of banking or managing or controlling banks
as to be a proper incident thereto. These activities include: operating a savings institution, mortgage company, finance
company, credit card company or factoring company; performing certain data processing operations; providing certain
investment and financial advice; underwriting and acting as an insurance agent for certain types of credit-related insurance;
leasing property on a full-payout, non-operating basis; selling money orders, travelers’ checks and U.S. Savings Bonds; real
estate and personal property appraising; providing tax planning and preparation services; and, subject to certain limitations,
providing securities brokerage services for customers. The Federal Reserve must approve the acquisition (or acquisition of
control) of a bank or other FDIC-insured depository institution by a bank holding company, and the appropriate federal banking
regulator must approve a bank’s acquisition (or acquisition of control) of another bank or other FDIC-insured institution.
Acquisition of Control of a Bank Holding Company. Under federal law, a notice or application must be submitted
to the appropriate federal banking regulator if any person (including a company), or group acting in concert, seeks to acquire
“control” of a bank holding company. An acquisition of control can occur upon the acquisition of 10% or more of the voting
stock of a bank holding company or as otherwise defined by federal regulations. In considering such a notice or application, the
Federal Reserve takes into consideration certain factors, including the financial and managerial resources of the acquirer and the
anti-trust effects of the acquisition. Any company that acquires control becomes subject to regulation as a bank holding
company. Depending on circumstances, a notice or application may be required to be filed with appropriate state banking
regulators and may be subject to their approval or non-objection.
Regulatory Capital Requirements. As discussed above, pursuant to the “Small Bank Holding Company” exception,
effective August 30, 2018, bank holding companies with less than $3 billion in consolidated assets were generally no longer
subject to the Federal Reserve’s capital regulations, which are generally the same as the capital regulations applicable to First
Financial Northwest Bank. At the time of this change, First Financial Northwest was considered “well capitalized” (as defined
for a bank holding company), with a total risk-based capital ratio of 10.0% or more and a Tier 1 risk-based capital ratio of 8.0%
or more, and was not subject to an individualized order, directive or agreement under which the Federal Reserve requires it to
maintain a specific capital level.
Restrictions on Dividends. The Federal Reserve has issued a policy statement on the payment of cash dividends by
bank holding companies which expresses its view that a bank holding company must maintain an adequate capital position and
generally should not pay cash dividends unless the company’s net income for the past year is sufficient to fully fund the cash
dividends and that the prospective rate of earnings appears consistent with the company’s capital needs, asset quality, and
overall financial condition. The Federal Reserve policy statement also indicates that it would be inappropriate for a company
experiencing serious financial problems to borrow funds to pay dividends. Under Washington corporate law, First Financial
Northwest generally may not pay dividends if after that payment it would not be able to pay its liabilities as they become due in
the usual course of business, or its total assets would be less than its total liabilities. The capital conservation buffer requirement
can also limit dividends. For additional information, see Item 1.A. “Risk Factors – Risks Related to Regulatory and Compliance
Matters-Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, or other laws and regulations could result in fines or
sanctions” in this report.
Stock Repurchases. A bank holding company, except for certain “well-capitalized” and highly rated bank holding
companies, is required to give the Federal Reserve prior written notice of any purchase or redemption of its outstanding equity
securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such
purchases or redemptions during the preceding twelve months, is equal to 10% or more of its consolidated net worth. The
Federal Reserve may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe or
unsound practice or would violate any law, regulation, Federal Reserve order or any condition imposed by, or written
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agreement with, the Federal Reserve. During the year ended December 31, 2021, First Financial Northwest repurchased
704,950 shares of its common stock.
Federal Securities Laws. First Financial Northwest’s common stock is registered with the SEC under Section 12(b)
of the Securities Exchange Act of 1934, as amended (“Exchange Act”). We are subject to information, proxy solicitation,
insider trading restrictions and other requirements under the Exchange Act.
COVID-19 Legislation. In response to the COVID-19 pandemic, Congress, through the enactment of the CARES Act
and CAA, and the federal banking agencies, though rulemaking, interpretive guidance and modifications to agency policies and
procedures, have taken a series of actions to provide national emergency economic relief measures including, among others, the
CARES Act and CAA, 2021. As the on-going COVID-19 pandemic evolves, federal and state regulatory authorities continue to
issue additional guidance with respect to COVID-19. In addition, it is possible that Congress will enact additional COVID-19
response legislation. We will continue to assess the impact of the CARES Act, CAA, 2021 and other statues, regulations and
supervisory guidance related to the COVID-19 pandemic.
Taxation
Federal Taxation
General. First Financial Northwest and First Financial Northwest Bank are subject to federal income taxation in the
same general manner as other corporations, with some exceptions discussed below. The following discussion of federal taxation
is intended only to summarize certain pertinent federal income tax matters and is not a comprehensive description of the tax
rules applicable to First Financial Northwest or First Financial Northwest Bank. The tax years still open for review by the
Internal Revenue Service are 2018 through 2021.
First Financial Northwest files a consolidated federal income tax return with First Financial Northwest Bank.
Accordingly, any cash distributions made by First Financial Northwest to its shareholders are considered to be taxable
dividends and not as a non-taxable return of capital to shareholders for federal and state tax purposes.
Method of Accounting. For federal income tax purposes, First Financial Northwest currently reports its income and
expenses on the accrual method of accounting and uses a fiscal year ending on December 31 for filing its federal income tax
return.
Net Operating Loss Carryovers. A financial institution may carryforward net operating losses indefinitely. The
Company had no net operating loss carryforwards at December 31, 2021.
Corporate Dividends-Received Deduction. First Financial Northwest may eliminate from its income dividends
received from First Financial Northwest Bank as a wholly-owned subsidiary of First Financial Northwest that files a
consolidated return with First Financial Northwest Bank. The corporate dividends-received deduction is 100%, or 80%, in the
case of dividends received from corporations with which a corporate recipient does not file a consolidated tax return, depending
on the level of stock ownership of the payer of the dividend. Corporations that own less than 20% of the stock of a corporation
distributing a dividend may deduct 70% of dividends received or accrued on their behalf.
For additional information regarding our federal income taxes, see Note 13 of the Notes to Consolidated Financial
Statements contained in Item 8 of this report.
State Taxation
First Financial Northwest and its subsidiaries are subject to a business and occupation tax imposed under Washington
state law at the rate of 1.75% of gross receipts for the Bank, as gross receipts are greater than $1.0 million, and 1.50% for its
other subsidiaries with gross receipts less than $1.0 million. In addition, various municipalities also assess business and
occupation taxes at differing rates. Interest received on loans secured by first lien mortgages or deeds of trust on residential
properties, rental income from properties, and certain investment securities are exempt from this tax. An audit by the
Washington State Department of Revenue was completed for the years 2010 through 2013, resulting in no material tax
revisions.
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Executive Officers of First Financial Northwest, Inc.
The business experience for at least the past five years for the executive officers of First Financial Northwest and its
primary subsidiary First Financial Northwest Bank is set forth below.
Joseph W. Kiley III, age 66, has served as President and Chief Executive Officer of First Financial and First Financial
Diversified since September 2013; as director of First Financial and First Financial Diversified since December 2012; and as
President, Chief Executive Officer and director of First Financial Northwest Bank since September 2012. He previously served
as President, Chief Executive Officer, and director of Frontier Bank, F.S.B., Palm Desert, California, and its holding company,
Western Community Bancshares, Inc. Mr. Kiley has over 30 years of executive experience at banks, thrifts and their holding
companies that includes, but is not limited to, serving as president, chief executive officer, chief financial officer, and director.
Mr. Kiley holds a Bachelor of Science degree in Business Administration (Accounting) from California State University,
Chico, and is a former California certified public accountant. Mr. Kiley is a member of the Renton Rotary Club, City of Renton
Mayor’s Business Executive Forum, City of Renton Mayor’s Blue Ribbon Panel, and past Chair of the Board of Directors of
the Renton Chamber of Commerce. He is the Chairman of the Board of Directors of the Washington Bankers Association. In
addition, Mr. Kiley currently serves on the Board of Directors of the Western Bankers and its Executive Committee.
Richard P. Jacobson, age 58, has served as Chief Operating Officer of First Financial Northwest Bank since July
2013, and as Chief Financial Officer of First Financial Northwest, First Financial Diversified, and the Bank since August 2013.
He was appointed as a director of First Financial, First Financial Diversified and the Bank effective September 2013. Mr.
Jacobson served as a consultant to First Financial from April 2010 to April 2012. Subsequently, he worked as a mortgage loan
originator in Palm Desert, California from July 2012 to July 2013. Previously, he had been employed by Horizon Financial
Corp. and Horizon Bank, Bellingham, Washington, for 23 years, and had served as President, Chief Executive Officer and a
director of Horizon Financial Corp. and Horizon Bank from January 2008 to January 2010. Mr. Jacobson also served as Chief
Financial Officer of Horizon Financial Corp. and Horizon Bank from March 2000 until October 2008. Between 1985 and 2008,
Mr. Jacobson served in several other positions at Horizon Financial Corp. and Horizon Bank and spent two years as a
Washington state licensed real estate appraiser from 1992 to 1994. Mr. Jacobson received his Bachelor’s degree in Business
Administration (Finance) from the University of Washington. In addition, Mr. Jacobson graduated with honors from the
American Bankers Association’s National School of Banking. Mr. Jacobson is a past president of the Whatcom County North
Rotary Club and has served on the boards of his church, the United Way, Boys and Girls Club, and Junior Achievement.
Simon Soh, age 57, was appointed Senior Vice President and Chief Credit Officer of First Financial Northwest Bank
in December 2019, a position he held on an interim basis since November 2019, and between August 2017 and December 2018.
Mr. Soh served as Senior Vice President and Chief Lending Officer from October 2012 to December 2019. From August 2010
until October 2012, Mr. Soh served as Vice President and Loan Production Manager of First Financial Northwest Bank. Prior to
that, he was First Vice President and Commercial Lending Manager at East West Bank. In 1998, Mr. Soh was a founding
member of Pacifica Bank in Bellevue, Washington that merged with United Commercial Bank in 2005, later becoming East
West Bank in 2009. Mr. Soh has over 30 years of experience in commercial banking.
Ronnie J. Clariza, age 41, was appointed Senior Vice President and Chief Risk Officer of First Financial Northwest
Bank in November 2013. Mr. Clariza previously served as Vice President and Risk Management Officer since May 2008, and
prior to that, as Assistant Vice President and Compliance Officer, as well as serving in various other compliance and internal
audit roles since he began with the Bank in 2003. Mr. Clariza is a graduate of the University of Washington where he received
his Bachelor of Arts degree in Business Administration, Finance, and is a certified regulatory Compliance Officer. Mr. Clariza
is an active member of the Enterprise Risk Management and Education Committees for the Western Bankers and Washington
Bankers Associations, respectively. He also served as a Volunteer Compliance Manager for the Seattle Children’s Hospital
Guild Association.
Dalen D. Harrison, age 62, was promoted to Chief Banking Officer of First Financial Northwest Bank in December
2019. She was appointed Senior Vice President in July 2014 and previously served as Chief Deposit Officer of First Financial
Northwest Bank from March 2014 to December 2019. Ms. Harrison served as Senior Vice President and Director of Retail
Banking at Peoples Bank in Bellingham, Washington from 2010 until 2014. Prior to that, she served as Vice President of
Rainier Pacific Bank, Tacoma, Washington, from 1994 until 2010. Ms. Harrison received a Bachelor of Arts degree in Business
Administration from Saint Mary’s College in Moraga, California. Ms. Harrison has served on the boards of Rainier Pacific
Foundation, First Place for Children, Gig Harbor Rotary Foundation, Renton Downtown Partnership, and Renton Area Youth
and Family Services.
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Christine A. Huestis, age 56, is First Vice President, Controller and Principal Accounting Officer of First Financial
Northwest and First Financial Northwest Bank. Prior to joining First Financial Northwest in October 2013, she was employed
by Realty in Motion, LLC, a holding company for several mortgage default service companies in Bellevue, Washington. From
1999 until joining First Financial Northwest, Ms. Huestis held key accounting positions at affiliated companies within Realty in
Motion, with her most recent position being that of Controller. Ms. Huestis received a Bachelor of Science degree in
Accounting from Central Washington University. She is a certified public accountant and is a member of the American Institute
of Certified Public Accountants.
Item 1A. Risk Factors.
An investment in our common stock is subject to risks inherent in our business. Before making an investment decision,
you should carefully consider the risks and uncertainties described below together with all of the other information included in
this report and our other filings with the SEC. In addition to the risks and uncertainties described below, other risks and
uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our
business, financial condition, capital levels, cash flows, liquidity, results of operations and prospects. The risks discussed
below also include forward-looking statements, and our actual results may differ substantially from those discussed in these
forward-looking statements. The market price of our common stock could decline significantly due to any of these identified or
other risks and you could lose some or all of your investment. This report is qualified in its entirety by these risk factors.
Risks Related to Macroeconomic Conditions
The COVID-19 pandemic has adversely impacted our ability to conduct business which has adversely impacted our
financial results and those of our customers. The ultimate impact will depend on future developments, which are highly
uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by
governmental authorities in response to the pandemic.
The COVID-19 pandemic continues to negatively impact economic and commercial activity and financial markets,
both globally and within the United States. In our market areas, stay-at-home orders, travel restrictions and closure of non-
essential businesses and similar orders imposed across the United States to restrict the spread of COVID-19 in 2020 resulted in
significant business and operational disruptions, including business closures, supply chain disruptions, and significant layoffs
and furloughs. Although local jurisdictions have subsequently lifted stay-at-home orders and moved to the opening of
businesses, worker shortages, vaccine and testing requirements, new variants of COVID-19 and other health and safety
recommendations have impacted the ability of businesses to return to pre-pandemic levels of activity and employment. While
the overall economy has improved, disruptions to supply chains continue and significant inflation has been seen in the market.
If these effects continue for a prolonged period or result in sustained economic stress or recession, many of the risk factors
identified in our Form 10-K could be exacerbated, including the following risks of COVID-19, any of which could have a
material, adverse effect on our business, financial condition, liquidity, and results of operations of the Company:
•
•
•
•
•
•
•
•
•
effects on key employees, including operational management personnel and those charged with preparing, monitoring
and evaluating our financial reporting and internal controls;
declines in demand for loans and other banking services and products, as well as a decline in the credit quality of our
loan portfolio, owing to the effects of COVID-19 in the markets served by us;
if the economy is unable to remain open in an efficient manner, loan delinquencies, problem assets, and foreclosures
may increase, resulting in increased charges and reduced income;
collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase;
our ALLL may increase if borrowers experience financial difficulties, which will adversely affect net income;
the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments;
as long as the Federal Reserve Board’s target federal funds rate remains near 0%, the yield on assets may decline to a
greater extent than the decline in cost of interest-bearing liabilities, reducing net interest margin and spread and
reducing net income;
higher operating costs, increased cybersecurity risks and potential loss of productivity as the result of an increase in the
number of employees working remotely;
increasing or protracted volatility in the price of the Company’s common stock, which may also impair our goodwill;
and
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•
risks to the capital markets that may impact the performance of our investment securities portfolio, as well as limit our
access to capital markets and other funding sources.
Because there have been no comparable recent global pandemics that resulted in similar global impact, we do not yet
know the full extent of COVID-19’s effects on our business, operations, or the global economy as a whole. Any future
development will be highly uncertain and cannot be predicted, including the scope and duration of the pandemic, possible
future virus variants, the effectiveness of our work-from-home arrangements, third party providers’ ability to support our
operations, and any actions taken by governmental authorities and other third parties in response to the pandemic. The uncertain
future development of this crisis could materially and adversely affect our business, operations, operating results, financial
condition, liquidity or capital levels.
Our business may be adversely affected by downturns in the national economy and in the economies in our market
areas.
Our loans are primarily to businesses and individuals in the state of Washington with 87.1% of loans to borrowers or
secured by properties located in Washington and 12.9% of loans to borrowers or secured by properties in other states. Through
our efforts to geographically diversify our loan portfolio, at December 31, 2021, our portfolio includes $144.1 million of loans
to borrowers or secured by properties located in 43 other states and Washington, D.C., including $38.7 million, or 3.5% of
loans, secured by properties or to borrowers in California. A decline in the national economy or the economies of the four
counties which we consider to be our primary market area could have a material adverse effect on our business, financial
condition, results of operations, and prospects. Weakness in the global economy has adversely affected many businesses
operating in our markets that are dependent upon international trade and it is not known how tariffs being imposed on
international trade may also affect these businesses. Changes in agreements or relationships between the United States and other
countries may also affect these businesses.
A deterioration in economic conditions in the market areas we serve, could result in the following consequences, any
of which could have a materially adverse impact on our business, financial condition and results of operations:
loan delinquencies, problem assets and foreclosures may increase;
•
• we may increase our allowance for loan losses;
•
•
demand for our products and services may decline resulting in a decrease in our total loans or assets;
collateral for loans, especially real estate, may decline in value, exposing us to increased risk of loss on existing loans,
reducing customers’ borrowing power, and reducing the value of assets and collateral associated with existing loans;
the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us; and
the amount of our low-cost or noninterest-bearing deposits may decrease and the composition of our deposits may be
adversely affected.
•
•
A decline in local economic conditions may have a greater effect on our earnings and capital than on the earnings and
capital of larger financial institutions whose real estate loan portfolios are geographically diverse. Many of the loans in our
portfolio are secured by real estate. Deterioration in the real estate markets where collateral for a mortgage loan is located could
negatively affect the borrower’s ability to repay the loan and the value of the collateral securing the loan. Real estate values are
affected by various other factors, including changes in general or regional economic conditions, governmental rules or policies
and natural disasters such as earthquakes and tornadoes. If we are required to liquidate a significant amount of collateral during
a period of reduced real estate values, our financial condition and profitability could be adversely affected.
In this regard, The Boeing Company has a significant presence in our market area and the production facility for the
737 MAX commercial jet aircraft is located in Renton. The 2019 grounding and decline in production of the 737 MAX
commercial jet aircraft (production of which was suspended entirely in January 2020), has adversely affected Boeing, its
employees and its suppliers, as well as other local businesses and their employees. Although production and new orders have
resumed, until volumes return to pre-grounding levels, there may be an adverse impact on the ability of those borrowers
impacted by the suspension of the production of the 737 MAX commercial jet to repay their existing loans to the Bank and
demand for new loans may be reduced which could adversely affect the level of our nonperforming loans, deposits, financial
condition and profitability.
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Adverse changes in the regional and general economy could reduce our growth rate, impair our ability to collect loans
and generally have a negative effect on our financial condition and results of operations.
Risks Related to Our Lending
Our construction/land loans are based upon estimates of costs and the value of the completed project.
We make construction/land loans to contractors and builders primarily to finance the construction of single and
multifamily homes, subdivisions, as well as commercial properties. We originate these loans whether or not the collateral
property underlying the loan is under contract for sale. At December 31, 2021, construction/land loans totaled $93.5 million, or
8.4% of our total loan portfolio, an increase of $1.2 million or 1.4% since December 31, 2020. At December 31, 2021,
$34.7 million were one-to-four family construction loans, $37.2 million were multifamily construction loans, and $6.2 million
were commercial construction loans. Land loans, which are loans made with land as security, totaled $15.4 million, or 1.4% of
our total loan portfolio at December 31, 2021. Land loans include land non-development loans for the purchase or refinance of
unimproved land held for future residential development, improved residential lots held for speculative investment purposes,
lines of credit secured by land, and land development loans.
Construction/land lending involves additional risks when compared with permanent residential lending because funds
are advanced upon the collateral for the project based on an estimate of costs that will produce a future value at completion. The
uncertainties inherent in estimating construction costs, as well as the market value of the completed project and the effects of
governmental regulation on real property, make it difficult to evaluate accurately the total funds required to complete a project
and the completed project loan-to-value ratio. Changes in the demand, such as for new housing and higher than anticipated
building costs, may cause actual results to vary significantly from those estimated. For these reasons, this type of lending also
typically involves higher loan principal amounts and is often concentrated with a small number of builders. A downturn in
housing, or the real estate market, could increase loan delinquencies, defaults and foreclosures, and significantly impair the
value of our collateral and our ability to sell the collateral upon foreclosure. Some of our builders have more than one loan
outstanding with us and also have residential mortgage loans for rental properties with us. Consequently, an adverse
development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss.
In addition, during the term of most of our construction loans, no payment from the borrower is required since the
accumulated interest is added to the principal of the loan through an interest reserve. As a result, these loans often involve the
disbursement of funds with repayment substantially dependent on the success of the ultimate project and the ability of the
borrower to sell or lease the property or obtain permanent take-out financing, rather than the ability of the borrower or
guarantor to repay principal and interest. If our appraisal of the value of a completed project proves to be overstated, we may
have inadequate security for the repayment of the loan upon completion of construction of the project and may incur a loss.
Because construction loans require active monitoring of the building process, including cost comparisons and on-site
inspections, these loans are more difficult and costly to monitor. Increases in market rates of interest may have a more
pronounced effect on construction loans by rapidly increasing the end-purchasers’ borrowing costs, thereby reducing the overall
demand for the project. Properties under construction are often difficult to sell and typically must be completed in order to be
successfully sold which also complicates the process of working out problem construction loans. This may require us to
advance additional funds and/or contract with another builder to complete construction. Furthermore, in the case of speculative
construction loans, there is the added risk associated with identifying an end-purchaser for the finished project. Land loans also
pose additional risk because of the lack of income being produced by the property and the potential illiquid nature of the
collateral. These risks can also be significantly impacted by supply and demand conditions.
At December 31, 2021, $37.2 million of our construction/land loans were for speculative construction loans. All of our
permanent construction loans have a take-out commitment for a permanent loan with us. At December 31, 2021, all of our
construction/land loans were classified as performing.
Our level of commercial and multifamily real estate loans may expose us to increased lending risks.
While commercial and multifamily real estate lending may potentially be more profitable than single-family residential
lending, it is generally more sensitive to regional and local economic conditions, making loss levels more difficult to predict.
Collateral evaluation and financial statement analysis in these types of loans requires a more detailed analysis at the time of
loan underwriting and on an ongoing basis. At December 31, 2021, we had $419.4 million of commercial real estate loans,
representing 37.5% of our total loan portfolio and $130.1 million of multifamily loans, representing 11.6% of our total loan
portfolio. These loans typically involve higher principal amounts than other types of loans and some of our commercial
borrowers have more than one loan outstanding with us. Consequently, an adverse development with respect to one loan or one
37
credit relationship can expose us to a significantly greater risk of loss compared to an adverse development with respect to a
one‑to‑four family residential loan. Repayment on these loans is dependent upon income generated, or expected to be
generated, by the property securing the loan in amounts sufficient to cover operating expenses and debt service that may be
adversely affected by changes in the economy or local market conditions. For example, if the cash flow from the borrower’s
project is reduced as a result of leases not being obtained or renewed, the borrower’s ability to repay the loan may be impaired.
Commercial and multifamily loans also expose a lender to greater credit risk than loans secured by one-to-four family
residential real estate because the collateral securing these loans typically cannot be sold as easily as residential real estate. In
addition, many of our commercial and multifamily real estate loans are not fully amortizing and contain large balloon payments
upon maturity. Such balloon payments may require the borrower to either sell or refinance the underlying property in order to
make the payment that may increase the risk of default or non-payment.
A secondary market for most types of commercial and multifamily real estate loans is not readily available, so we have
less opportunity to mitigate credit risk by selling part or all of our interest in these loans. As a result of these characteristics, if
we foreclose on a commercial or multifamily real estate loan, our holding period for the collateral typically is longer than for
one‑to‑four family residential loans because there are fewer potential purchasers of the collateral. Accordingly, charge-offs on
commercial real estate loans may be larger on a per loan basis than those incurred with our residential or consumer loan
portfolios.
The level of our commercial real estate loan portfolio may subject us to additional regulatory scrutiny.
The FDIC, the Federal Reserve Board and the Office of the Comptroller of the Currency have promulgated joint
guidance on sound risk management practices for financial institutions with concentrations in commercial real estate lending.
Under this guidance, a financial institution that, like us, is actively involved in commercial real estate lending should perform a
risk assessment to identify concentrations. A financial institution may have a concentration in commercial real estate lending if,
among other factors (i) total reported loans for construction, land development, and other land represent 100% or more of total
capital, or (ii) total reported loans secured by multifamily and non-farm residential properties, loans for construction, land
development and other land, and loans otherwise sensitive to the general commercial real estate market, including loans to
commercial real estate related entities, represent 300% or more of total capital. Based on the FDIC criteria, the Bank has a
concentration in commercial real estate lending as total loans for multifamily, non-farm/non-residential, construction, land
development and other land represented 384.0% of total capital at December 31, 2021. The particular focus of the guidance is
on exposure to commercial real estate loans that are dependent on the cash flow from the real estate held as collateral and that
are likely to be at greater risk to conditions in the commercial real estate market (as opposed to real estate collateral held as a
secondary source of repayment or as an abundance of caution). The purpose of the guidance is to guide banks in developing risk
management practices and capital levels commensurate with the level and nature of real estate concentrations. The guidance
states that management should employ heightened risk management practices including board and management oversight and
strategic planning, development of underwriting standards, risk assessment and monitoring through market analysis and stress
testing. While we believe we have implemented policies and procedures with respect to our commercial real estate lending
consistent with this guidance, bank regulators could require us to implement additional policies and procedures consistent with
their interpretation of the guidance that may result in additional costs to us.
Expansion of our business loans may expose the Company to greater risk of loss.
The Company’s strategic plan includes growth in originations of business loans that are collateralized by non-real
estate assets. Our business loans are primarily made based on the cash flow of the borrower and secondarily on the underlying
collateral provided by the borrower. The borrowers’ cash flow may prove to be unpredictable, and collateral securing these
loans may fluctuate in value. Most often, this collateral is accounts receivable, inventory, or equipment. In the case of loans
secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the
ability of the borrower to collect amounts due from its customers. Other collateral securing loans may depreciate over time, may
be difficult to appraise, may be illiquid and may fluctuate in value based on the success of the business. Further, the borrowers’
ability to repay these loans may be impacted more from general economic conditions as compared to real estate secured loans.
Our non-owner occupied real estate loans may expose us to increased credit risk.
At December 31, 2021, $199.8 million, or 51.9% of our one-to-four family residential loan portfolio and 17.8% of our
total loan portfolio, consisted of loans secured by non-owner occupied residential properties. Loans secured by non-owner
occupied properties generally expose a lender to greater risk of non-payment and loss than loans secured by owner occupied
properties because repayment of such loans depend primarily on the tenant’s continuing ability to pay rent to the property
owner, who is our borrower, or, if the property owner is unable to find a tenant, the property owner’s ability to repay the loan
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without the benefit of a rental income stream. In addition, the physical condition of non-owner occupied properties is often
below that of owner occupied properties due to lenient property maintenance standards that negatively impact the value of the
collateral properties. Furthermore, some of our non-owner occupied residential loan borrowers have more than one loan
outstanding with us. At December 31, 2021, we had 116 non-owner occupied residential loan relationships with an outstanding
balance over $500,000 and an aggregate balance of $166.9 million. Consequently, an adverse development with respect to one
credit relationship may expose us to a greater risk of loss compared to an adverse development with respect to an owner
occupied residential mortgage loan.
Our business may be adversely affected by credit risk associated with residential property.
At December 31, 2021, $385.1 million, or 34.4% of our total loan portfolio, was secured by first liens on one‑to‑four
family residential loans. In addition, at December 31, 2021, our home equity lines of credit totaled $8.5 million. A significant
portion of our one‑to‑four family residential real estate loan portfolio consists of jumbo loans that do not conform to secondary
market mortgage requirements, and therefore are not immediately salable to Fannie Mae or Freddie Mac because such loans
exceed the maximum balance allowable for sale (generally $647,000 to $891,000 for single‑family homes in our primary
market areas in 2022). Jumbo one‑to‑four family residential loans may expose us to increased risk because of their larger
balances, and because they cannot be immediately sold to government sponsored enterprises.
In addition, one-to-four family residential loans are generally sensitive to regional and local economic conditions that
significantly impact the ability of borrowers to meet their loan payment obligations, making loss levels difficult to predict. A
decline in residential real estate values resulting from a downturn in the housing market may reduce the value of the real estate
collateral securing these types of loans and increase our risk of loss if borrowers default on their loans. Recessionary conditions
or declines in the volume of real estate sales and/or the sales prices coupled with elevated unemployment rates may result in
higher than expected loan delinquencies or problem assets, and a decline in demand for our products and services. These
potential negative events may cause us to incur losses, adversely affect our capital and liquidity and damage our financial
condition and business operations.
To meet our growth objectives we may originate or purchase loans outside of our market area which could affect the
level of our net interest margin and nonperforming loans.
In order to achieve our desired loan portfolio growth, we have and may continue to opportunistically originate or
purchase loans outside of our market area either individually, through participations, or in bulk or “pools”. We perform certain
due diligence procedures and may re-underwrite these loans to our underwriting standards prior to purchase, and anticipate
acquiring loans subject to customary limited indemnities, however, we may be exposed to a greater risk of loss as we acquire
loans of a type or in geographic areas where management may not have substantial prior experience and which may be more
difficult for us to monitor. Further, when determining the purchase price we are willing to pay to acquire loans, management
will make certain assumptions about, among other things, how borrowers will prepay their loans, the real estate market and our
ability to collect loans successfully and, if necessary, to dispose of any real estate that may be acquired through foreclosure. To
the extent that our underlying assumptions prove to be inaccurate or the basis for those assumptions change (such as an
unanticipated decline in the real estate market), the purchase price paid may prove to have been excessive, resulting in a lower
yield or a loss of some or all of the loan principal. For example, if we purchase “pools” of loans at a premium and some of the
loans are prepaid before we anticipate, we will earn less interest income on the acquired loans than expected. Our success in
increasing our loan portfolio through loan purchases will depend on our ability to price the loans properly and on general
economic conditions in the geographic areas where the underlying properties or collateral for the loans acquired are located.
Inaccurate estimates or declines in economic conditions or real estate values in the markets where we purchase loans could
significantly adversely affect the level of our nonperforming loans and our results of operations. At December 31, 2021, our
loan portfolio included $90.2 million, or 8.1% of total loans, located in counties within Washington State that are outside of our
primary market area. In addition, our portfolio included $144.1 million, or 12.9% of total loans, in loans located outside of
Washington State.
If the lead institutions on our loan participation agreements do not keep us informed about the changes in credit quality
on the underlying loans in a timely manner, we could be subject to misstatement in our ALLL, or possibly losses on
these loans.
The lead institution in our participation agreements is responsible for obtaining necessary credit information related to
the underlying loans in these agreements. If there is credit deterioration on the loans in these agreements that results in a
downgrade, and this information is not provided to us in a timely manner, we will not have the loans appropriately graded,
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which will result in an understatement of our ALLL. If the credit downgrade was significant, and our ALLL was not adequate,
we could incur a loss on these loans.
We engage in aircraft, classic and collectible car financing transactions, in which high-value collateral is susceptible to
potential catastrophic loss. Consequently, if any of these transactions becomes nonperforming, we could suffer a loss on
some or all of our value in the assets.
Because our primary focus for aircraft loans is on the asset value of the collateral, the collectability of these loans
ultimately may be dependent on the value of the underlying collateral. Aircraft values have from time to time experienced sharp
decreases due to a number of factors including, but not limited to, the availability of used aircraft, decreases in passenger and
air cargo demand, increases in fuel costs, government regulation and the comparative value of newly manufactured similar
aircraft. Classic and collectible car values are similarly affected by availability and demand, however, due to the unique nature
of these cars, the estimated value often does not align with listed values, therefore, approval of the loan is based on the
borrower’s ability to repay. An aircraft, classic or collectible car as collateral also presents unique risks because of its high-
value and being susceptible to rapid movement across different locations and potential catastrophic loss. Although the loan
documentation for these transactions will include insurance covenants and other provisions to protect us against risk of loss,
there can be no assurance that the insurance proceeds would be sufficient to ensure our full recovery of the loan. Moreover, a
relatively small number of nonperforming loans could have a significant negative impact on the value of our loan portfolio. If
we are required to liquidate a significant amount of aircraft or classic car collateral during a period of reduced values, our
financial condition and profitability could be adversely affected. At December 31, 2021, our loan portfolio included
$35.9 million in classic and collectible car loans and $6.1 million in aircraft loans.
Our ALLL may prove to be insufficient to absorb losses in our loan portfolio. Future additions to our ALLL, as well as
charge-offs in excess of reserves, will reduce our earnings.
Our business depends on the creditworthiness of our customers. As with most financial institutions, we maintain an
ALLL to reflect potential defaults and nonperformance, which represents management's best estimate of probable incurred
losses inherent in the loan portfolio. The determination of the appropriate level of the ALLL inherently involves a high degree
of subjectivity and requires us to make various assumptions and judgments about the collectability of our loan portfolio,
including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the
repayment of many of our loans. In determining the amount of the ALLL, we review our loans and the loss and delinquency
experience and evaluate economic conditions and make significant estimates of current credit risks and future trends, all of
which may undergo material changes. If our estimates are incorrect, the ALLL may not be sufficient to cover losses inherent in
our loan portfolio, resulting in the need for increases in our provision for loan losses which is charged against income.
Deterioration in economic conditions, including as a result of COVID-19, new information regarding existing loans,
identification of additional problem loans or relationships, and other factors, both within and outside of our control, may
increase our loan charge‑offs and/or may otherwise require an increase in the ALLL. Management also recognizes that
significant new growth in loan portfolios, new loan products and the refinancing of existing loans can result in portfolios
comprised of unseasoned loans that may not perform in a historical or projected manner and will increase the risk that our
allowance may be insufficient to absorb losses without significant additional provisions. In addition, bank regulatory agencies
periodically review our allowance for loan losses and may require an increase in the provision for possible loan losses or the
recognition of further loan charge‑offs based on their judgment about information available to them at the time of their
examination. Any increases in the provision for loan losses will result in a decrease in net income and may have a material
adverse effect on our financial condition, results of operations, and capital.
In addition, the Financial Accounting Standards Board has adopted a new accounting standard referred to as Current
Expected Credit Loss, or CECL, which will require financial institutions to determine periodic estimates of lifetime expected
credit losses on loans, and recognize the expected credit losses as allowances for credit losses. This will change the current
method of providing allowances for credit losses only when they have been incurred and are probable, which may require us to
increase our allowance for loan losses, and may greatly increase the types of data we would need to collect and review to
determine the appropriate level of the allowance for credit losses. This accounting pronouncement is expected to be applicable
to us for our first fiscal year after December 15, 2022. We are evaluating the impact the CECL accounting model will have on
our accounting, but expect to recognize a one-time cumulative-effect adjustment to the allowance for loan losses as of the
beginning of the first reporting period in which the new standard is effective. We cannot yet determine the magnitude of any
such one-time cumulative adjustment or of the overall impact of the new standard on our financial condition or results of
operations. The federal banking regulators, including the Federal Reserve and the FDIC, have adopted a rule that gives a
banking organization the option to phase in over a three-year period the day-one adverse effects of CECL on its regulatory
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capital. For more on this new accounting standard, see Note 1 of the Notes to Consolidated Financial Statements contained in
Item 8 of this report.
Risks Related to Market and Interest Rate Changes
Our results of operations, liquidity and cash flows are subject to interest rate risk.
Our earnings and cash flows are largely dependent upon our net interest income. Interest rates are highly sensitive
to many factors that are beyond our control, including general economic conditions and policies of various governmental and
regulatory agencies and, in particular, the Federal Reserve. In March 2020, in response to the COVID-19 pandemic, the Federal
Open Market Committee (“FOMC”) of the Federal Reserve reduced the targeted federal funds rate 150 basis points to a range
of 0.00% to 0.25%. The reduction in the targeted federal funds rate has resulted in a decline in overall interest rates which has
negatively impacted our net interest income. However, the FOMC has recently indicated it expects to increase rates starting in
2022, by implementing three one quarter point increases. If the FOMC increases the targeted federal funds rates, overall interest
rates will likely rise, which will positively impact our net interest income but may negatively impact both the housing market by
reducing refinancing activity and new home purchases and the U.S. economy. In addition, deflationary pressures, while
possibly lowering our operational costs, could have a significant negative effect on our borrowers, especially our business
borrowers, and the values of collateral securing loans which could negatively affect our financial performance.
We principally manage interest rate risk by managing the volume and mix of our earning assets and funding liabilities.
Changes in monetary policy, including changes in interest rates, could influence not only the interest we receive on loans and
investments and the amount of interest we pay on deposits and borrowings, but these changes could also affect (i) our ability to
originate and/or sell loans and obtain deposits, (ii) the fair value of our financial assets and liabilities, which could negatively
impact shareholders’ equity, and our ability to realize gains from the sale of such assets, (iii) our ability to obtain and retain
deposits in competition with other available investment alternatives, (iv) the ability of our borrowers to repay adjustable or
variable rate loans, and (v) the average duration of our investment securities portfolio and other interest-earning assets. In a
changing interest rate environment, we may not be able to manage this risk effectively. If we are unable to manage interest rate
risk effectively, our business, financial condition and results of operations could be materially affected.
Changes in interest rates could also have a negative impact on our results of operations by reducing the ability of
borrowers to repay their current loan obligations or by reducing our margins and profitability. Our net interest margin is the
difference between the yield we earn on our assets and the interest rate we pay for deposits and our other sources of funding.
Changes in interest rates—up or down—could adversely affect our net interest margin and, as a result, our net interest income.
Although the yield we earn on our assets and our funding costs tend to move in the same direction in response to changes in
interest rates, one can rise or fall faster than the other, causing our net interest margin to expand or contract. Our liabilities tend
to be shorter in duration than our assets, so they may adjust faster in response to changes in interest rates. As a result, when
interest rates increase, the yield we earn on our assets may not rise as fast as our funding costs, causing our net interest margin
to contract until the asset yields catch up. Changes in the slope of the “yield curve”—or the spread between short-term and
long-term interest rates—could also reduce our net interest margin. Normally, the yield curve is upward sloping, meaning short-
term rates are lower than long-term rates. Because our liabilities tend to be shorter in duration than our assets, when the yield
curve flattens or even inverts, we could experience pressure on our net interest margin as our cost of funds increases relative to
the yield we can earn on our assets. Also, interest rate decreases can lead to increased prepayments of loans and mortgage-
backed securities as borrowers refinance their loans to reduce borrowing costs. Under these circumstances, we are subject to
reinvestment risk as we may have to redeploy such repayment proceeds into lower yielding investments, which would likely
hurt our income.
A sustained increase in market interest rates could adversely affect our earnings. As is the case with many banks our
emphasis on increasing core deposits has resulted in an increasing percentage of our deposits being comprised of deposits
bearing no or a relatively low rate of interest and having a shorter duration than our assets. We would incur a higher cost of
funds to retain these deposits in a rising interest rate environment. If the interest rates paid on deposits and other borrowings
increase at a faster rate than the interest rates received on loans and other investments, our net interest income, and therefore
earnings, could be adversely affected.
In addition, a portion of our adjustable-rate loans have interest rate floors below which the loan’s contractual interest
rate may not adjust. At December 31, 2021, 57.2% of our net loans were comprised of adjustable-rate loans. At that date,
$444.0 million, or 69.3%, of these loans with an average interest rate of 4.27% were at their floor interest rate. The inability of
our loans to adjust downward can contribute to increased income in periods of declining interest rates, although this result is
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subject to the risks that borrowers may refinance these loans during periods of declining interest rates. Also, when loans are at
their respective floor, which is above the fully-indexed rate, there is a further risk that our interest income may not increase as
rapidly as our cost of funds during periods of increasing interest rates and could have a material adverse effect on our results of
operations.
Changes in interest rates also affect the value of our interest-earning assets and in particular our securities portfolio.
Generally, the fair value of fixed-rate securities fluctuates inversely with changes in interest rates. Unrealized gains and losses
on securities available for sale are reported as a separate component of equity, net of tax. Decreases in the fair value of
securities available for sale resulting from increases in interest rates could have an adverse effect on stockholders’ equity.
Although management believes it has implemented effective asset and liability management strategies to reduce the
potential effects of changes in interest rates on our results of operations, any substantial, unexpected, prolonged change in
market interest rates could have a material adverse effect on our financial condition, liquidity and results of operations. Also,
our interest rate risk modeling techniques and assumptions may not fully predict or capture the impact of actual interest rate
changes on our balance sheet or projected operating results. For further discussion of how changes in interest rates could impact
us, see Part II, Item 7A. “Quantitative and Qualitative Disclosures About Market Risk" for additional information about our
interest rate risk management.
If interest rate swaps we entered into prove ineffective, it could result in volatility in our operating results, including
potential losses, which could have a material adverse effect on our results of operations and cash flows.
We are exposed to the effects of interest rate changes as a result of the borrowings we use to maintain liquidity and
fund our expansion and operations. To limit the impact of interest rate changes on earnings, prepayment penalties and cash
flows and to lower overall borrowing costs while taking into account variable interest rate risk, we may borrow at fixed rates or
variable rates depending upon prevailing market conditions. We may also enter into derivative financial instruments such as
interest rate swaps in order to mitigate our interest rate risk on a related financial instrument.
Our interest rate contracts expose us to:
•
•
•
•
•
basis or spread risk, which is the risk of loss associated with variations in the spread between the interest rate contract
and the hedged item;
credit or counter-party risk, which is the risk of the insolvency or other inability of another party to the transaction to
perform its obligations;
interest rate risk;
volatility risk, which is the risk that the expected uncertainty relating to the price of the underlying asset differs from
what is anticipated; and
liquidity risk.
If we suffer losses on our interest rate contracts, our business, financial condition and prospects may be negatively
affected, and our net income will decline.
We record the swaps at fair value and designate them as an effective cash flow hedge under Accounting Standards
Codification (“ASC”) 815, Derivatives and Hedging. Each quarter, we measure hedge effectiveness using the “hypothetical
derivative method” and record in earnings any gains or losses resulting from hedge ineffectiveness. The hedge provided by our
swaps could prove to be ineffective for a number of reasons, including early retirement of the debt, as is allowed under the debt,
or in the event the counterparty to the interest rate swaps were determined to not be creditworthy. Any determination that the
hedge created by the swaps was ineffective could have a material adverse effect on our results of operations and cash flows and
result in volatility in our operating results. In addition, any changes in relevant accounting standards relating to the swaps,
especially ASC 815, Derivatives and Hedging, could materially increase earnings volatility.
As of December 31, 2021, we had interest rate swaps outstanding with an aggregate notional amount of $95.0 million.
At December 31, 2021, the fair value of our interest rate swaps was a $1.5 million gain. For additional information, see
“Management’s Discussion and Analysis of Financial Condition and Results of Operations - Asset and Liability Management”.
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We may incur losses on our securities portfolio as a result of changes in interest rates.
Factors beyond our control can significantly influence the fair value of securities in our portfolio and can cause
potential adverse changes to the fair value of these securities. These factors include, but are not limited to, rating agency actions
in respect of the securities, defaults by, or other adverse events affecting, the issuer or with respect to the underlying securities,
and changes in market interest rates and continued instability in the capital markets. Any of these factors, among others, could
cause other-than-temporary impairments and realized and/or unrealized losses in future periods and declines in other
comprehensive income, which could have a material effect on our business, financial condition and results of operations. The
process for determining whether impairment of a security is other-than-temporary usually requires complex, subjective
judgments about the future financial performance and liquidity of the issuer and any collateral underlying the security to assess
the probability of receiving all contractual principal and interest payments on the security. There can be no assurance that the
declines in market value will not result in other-than-temporary impairments of these assets, and would lead to accounting
charges that could have a material adverse effect on our net income and capital levels. For the year ended December 31, 2021,
we did not incur any other-than-temporary impairments on our securities portfolio.
Risks Related to our Business Strategy
Our branching strategy may cause our expenses to increase faster than revenues.
During 2021, we opened one new branch office in Issaquah, Washington. Our current business strategy includes
continued similar branch expansion in areas to enhance our market presence. These offices are much smaller than traditional
bank branch offices, utilizing the improved technology available with our core data processor. This allows us to maintain
management’s focus on efficiency, while working to expand the Bank’s presence into new markets. The success of our
expansion strategy into new markets, however, is contingent upon numerous factors, such as our ability to select suitable
locations, assess each market’s competitive environment, secure managerial resources, hire and retain qualified personnel and
implement effective marketing strategies. The opening of new offices may not increase the volume of our loans and deposits as
quickly or to the degree that we hope, and opening new offices will increase our operating expenses. On average, de novo
branches do not become profitable until three to four years after opening. We currently expect to lease rather than own any
additional branch properties. Further, the projected time line and the estimated dollar amounts involved in opening de novo
branches could differ significantly from actual results. The success of our acquired branches is dependent on retention of
existing customers’ deposits as well as expanding our market presence in these locations. We may not successfully manage the
costs and implementation risks associated with our branching strategy. Accordingly, any new branch may negatively impact our
earnings for some period of time until the branch reaches certain economies of scale. Finally, there is a risk that our new
branches will not be successful even after they have been established or acquired.
Risks Related to Regulatory and Compliance Matters
Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, or other laws and regulations could result in fines or
sanctions.
The USA PATRIOT Act and Bank Secrecy Acts and related regulations require financial institutions to develop
programs to prevent financial institutions from being used for money laundering and terrorist activities. Failure to comply with
these regulations could result in fines or sanctions. During the last few years, several banking institutions have received large
fines for non-compliance with these laws and regulations. While we have developed policies and procedures designed to assist
in compliance with these laws and regulations, no assurance can be given that these policies and procedures will be effective in
preventing violations of these laws and regulations. If our policies and procedures are deemed deficient, we would be subject to
liability, including fines and regulatory actions, which may include restrictions on our ability to pay dividends and the denial of
regulatory approvals to proceed with certain aspects of our business plan, including acquisitions. Failure to maintain and
implement adequate programs to combat money laundering and terrorist financing could also have serious reputational
consequences for us. Any of these results could have a material adverse effect on our business, financial condition, results of
operations and growth prospects.
If our enterprise risk management framework is not effective at mitigating risk and loss to us, we could suffer
unexpected losses and our results of operations could be materially adversely affected.
Our enterprise risk management framework seeks to achieve an appropriate balance between risk and return, which is
critical to optimizing stockholder value. We have established processes and procedures intended to identify, measure, monitor,
report, analyze and control the types of risk to which we are subject. These risks include liquidity risk, credit risk, market risk,
interest rate risk, operational risk, legal and compliance risk, and reputational risk, among others. We also maintain a
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compliance program designed to identify, measure, assess, and report on our adherence to applicable laws, policies and
procedures. While we assess and improve these programs on an ongoing basis, there can be no assurance that our risk
management or compliance programs, along with other related controls, will effectively mitigate all risk and limit losses in our
business. However, as with any risk management framework, there are inherent limitations to our risk management strategies as
there may exist, or develop in the future, risks that we have not appropriately anticipated or identified. If our risk management
framework proves ineffective, we could suffer unexpected losses and our business financial condition and results of operations
could be materially adversely affected.
Risks Related to Cybersecurity, Data and Fraud
We are subject to certain risks in connection with our use of technology.
Our security measures may not be sufficient to mitigate the risk of a cyber-attack. Communications and information
systems are essential to the conduct of our business, as we use such systems to manage our customer relationships, our general
ledger and virtually all other aspects of our business. Our operations rely on the secure processing, storage, and transmission of
confidential and other information in our computer systems and networks. Although we take protective measures and endeavor
to modify them as circumstances warrant, the security of our computer systems, software, and networks may be vulnerable to
breaches, fraudulent or unauthorized access, denial or degradation of service attacks, misuse, computer viruses, malware or
other malicious code and cyber-attacks that could have a security impact. If one or more of these events occur, this could
jeopardize our or our customers’ confidential and other information processed and stored in, and transmitted through, our
computer systems and networks, or otherwise cause interruptions or malfunctions in our operations or the operations of our
customers or counterparties. We may be required to expend significant additional resources to modify our protective measures
or to investigate and remediate vulnerabilities or other exposures, and we may be subject to litigation and financial losses that
are either not insured against or not fully covered through any insurance maintained by us. We could also suffer significant
reputational damage.
Security breaches in our internet banking activities could further expose us to possible liability and damage our
reputation. Increases in criminal activity levels and sophistication, advances in computer capabilities, new discoveries,
vulnerabilities in third party technologies (including browsers and operating systems), or other developments could result in a
compromise or breach of the technology, processes and controls that we use to prevent fraudulent transactions and to protect
data about us, our customers and underlying transactions. Any compromise of our security also could deter customers from
using our internet banking services that involve the transmission of confidential information. We rely on standard internet
security systems to provide the security and authentication necessary to effect secure transmission of data. Although we have
developed and continue to invest in systems and processes that are designed to detect and prevent security breaches and cyber-
attacks and periodically test our security, these precautions may not protect our systems from compromises or breaches of our
security measures, and could result in losses to us or our customers, our loss of business and/or customers, damage to our
reputation, the incurrence of additional expenses, disruption to our business, our inability to grow our online services or other
businesses, additional regulatory scrutiny or penalties, or our exposure to civil litigation and possible financial liability, any of
which could have a material adverse effect on our business, financial condition and results of operations.
Our security measures may not protect us from system failures or interruptions. While we have established policies
and procedures to prevent or limit the impact of systems failures and interruptions, there can be no assurance that such events
will not occur or that they will be adequately addressed if they do. In addition, we outsource certain aspects of our data
processing and other operational functions to certain third-party providers. While we select third-party vendors carefully, we do
not control their actions. If our third-party providers encounter difficulties, including those resulting from breakdowns or other
disruptions in communication services provided by a vendor, failure of a vendor to handle current or higher transaction
volumes, cyber-attacks and security breaches, or if we otherwise have difficulty in communicating with them, our ability to
adequately process and account for transactions could be affected, and our ability to deliver products and services to our
customers and otherwise conduct business operations could be adversely impacted. Replacing these third-party vendors could
also entail significant delay and expense. Threats to information security also exist in the processing of customer information
through various other vendors and their personnel.
We cannot assure you that such breaches, failures or interruptions will not occur or, if they do occur, that they will be
adequately addressed by us or the third parties on which we rely. We may not be insured against all types of losses as a result of
third party failures and insurance coverage may be inadequate to cover all losses resulting from breaches, system failures or
other disruptions. If any of our third-party service providers experience financial, operational or technological difficulties, or if
there is any other disruption in our relationships with them, we may be required to identify alternative sources of such services,
and we cannot assure you that we could negotiate terms that are as favorable to us, or could obtain services with similar
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functionality as found in our existing systems without the need to expend substantial resources, if at all. Further, the occurrence
of any systems failure or interruption could damage our reputation and result in a loss of customers and business, could subject
us to additional regulatory scrutiny, or could expose us to legal liability. Any of these occurrences could have a material adverse
effect on our financial condition and results of operations.
The board of directors oversees the risk management process including the risk of cybersecurity and engages with
management on cybersecurity issues.
We are subject to certain risks in connection with our data management or aggregation.
We are reliant on our ability to manage data and our ability to aggregate data in an accurate and timely manner to
ensure effective risk reporting and management. Our ability to manage data and aggregate data may be limited by the
effectiveness of our policies, programs, processes and practices that govern how data is acquired, validated, stored, protected
and processed. While we continuously update our policies, programs, processes and practices, many of our data management
and aggregation processes are manual and subject to human error or system failure. Failure to manage data effectively and to
aggregate data in an accurate and timely manner may limit our ability to manage current and emerging risks, as well as to
manage changing business needs.
Our business may be adversely affected by an increasing prevalence of fraud and other financial crimes.
As a bank, we are susceptible to fraudulent activity that may be committed against us or our customers which may
result in financial losses or increased costs to us or our customers, disclosure or misuse of our information or our customer’s
information, misappropriation of assets, privacy breaches against our customers, litigation, or damage to our reputation. Such
fraudulent activity may take many forms, including check fraud, electronic fraud, wire fraud, phishing, social engineering and
other dishonest acts. Nationally, reported incidents of fraud and other financial crimes have increased. We have also
experienced losses due to apparent fraud and other financial crimes. While we have policies and procedures designed to prevent
such losses, there can be no assurance that such losses will not occur.
Risks related to our Business and Industry Generally
We rely on other companies to provide key components of our business infrastructure.
We rely on numerous external vendors to provide us with products and services necessary to maintain our day-to-day
operations. Accordingly, our operations are exposed to risk that these vendors will not perform in accordance with the
contracted arrangements under service level agreements. The failure of an external vendor to perform in accordance with the
contracted arrangements under service level agreements because of changes in the vendor's organizational structure, financial
condition, support for existing products and services or strategic focus or for any other reason, could be disruptive to our
operations, which in turn could have a material negative impact on our financial condition and results of operations. We also
could be adversely affected to the extent a service agreement is not renewed by the third-party vendor or is renewed on terms
less favorable to us. Additionally, the bank regulatory agencies expect financial institutions to be responsible for all aspects of
their vendors’ performance, including aspects which they delegate to third parties.
We will be required to transition from the use of the London Interbank Offered Rate ("LIBOR") in the future.
We have certain FHLB advances, loans, interest rate swaps and investment securities, indexed to LIBOR to calculate
the interest rate. The continued availability of the LIBOR index is not guaranteed after 2021 and by June 2023, LIBOR is
scheduled to be eliminated entirely. We cannot predict whether and to what extent banks will continue to provide LIBOR
submissions to the administrator of LIBOR or whether any additional reforms to LIBOR may be enacted. At this time, no
consensus exists as to what rate or rates may become acceptable alternatives to LIBOR (with the exception of overnight
repurchase agreements, which are expected to be based on the Secured Overnight Financing Rate, or SOFR). Uncertainty as to
the nature of alternative reference rates and as to potential changes or other reforms to LIBOR may adversely affect LIBOR
rates and the value of LIBOR-based loans, and to a lesser extent securities in our portfolio, and may impact the availability and
cost of hedging instruments and borrowings. The language in our LIBOR-based contracts and financial instruments has
developed over time and may have various events that trigger when a successor rate to the designated rate would be selected. If
a trigger is satisfied, contracts and financial instruments may give the calculation agent discretion over the substitute index or
indices for the calculation of interest rates to be selected. The implementation of a substitute index or indices for the calculation
of interest rates under our loan agreements with our borrowers or our existing borrowings may result in our incurring significant
expenses in effecting the transition, may result in reduced loan balances if borrowers do not accept the substitute index or
45
indices, and may result in disputes or litigation with customers and creditors over the appropriateness or comparability to
LIBOR of the substitute index or indices, which could have an adverse effect on our results of operations.
Ineffective liquidity management could adversely affect our financial results and condition.
Effective liquidity management is essential to our business. We require sufficient liquidity to meet customer loan
requests, customer deposit maturities and withdrawals, payments on our debt obligations as they come due and other cash
commitments under both normal operating conditions and other unpredictable circumstances, including events causing industry
or general financial market stress. An inability to raise funds through deposits, borrowings, the sale of loans or investment
securities and other sources could have a substantial negative effect on our liquidity. We rely on customer deposits and at times,
borrowings from the FHLB of Des Moines and certain other wholesale funding sources to fund our operations. Deposit flows
and the prepayment of loans and mortgage-related securities are strongly influenced by such external factors as the direction of
interest rates, whether actual or perceived, and the competition for deposits and loans in the markets we serve. Further, changes
to the FHLB of Des Moines's underwriting guidelines for wholesale borrowings or lending policies may limit or restrict our
ability to borrow, and could therefore have a significant adverse impact on our liquidity. Although we have historically been
able to replace maturing deposits and borrowings if desired, we may not be able to replace such funds in the future if, among
other things, our financial condition, the financial condition of the FHLB of Des Moines, or market conditions change. Our
access to funding sources in amounts adequate to finance our activities or on terms which are acceptable could be impaired by
factors that affect us specifically or the financial services industry or economy in general, such as a disruption in the financial
markets or negative views and expectations about the prospects for the financial services industry or deterioration in credit
markets. Additional factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our
business activity as a result of a downturn in the markets in which our loans are concentrated, negative operating results, or
adverse regulatory action against us. Any decline in available funding in amounts adequate to finance our activities or on terms
which are acceptable could adversely impact our ability to originate loans, invest in securities, meet our expenses, or fulfill
obligations such as repaying our borrowings or meeting deposit withdrawal demands, any of which could, in turn, have a
material adverse effect on our business, financial condition and results of operations.
Our growth or future losses may require us to raise additional capital in the future, but that capital may not be available
when it is needed, or the cost of that capital may be very high.
We are required by federal regulatory authorities to maintain adequate levels of capital to support our operations. At
some point, we may need to raise additional capital to support our growth or replenish future losses. Our ability to raise
additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside our control, and on
our financial condition and performance. Accordingly, we cannot make assurances that we will be able to raise additional
capital if needed on terms that are acceptable to us, or at all. If we cannot raise additional capital when needed, our ability to
further expand our operations could be materially impaired and our financial condition and liquidity could be materially and
adversely affected. In addition, any additional capital we obtain may result in the dilution of the interests of existing holders of
our common stock. Further, if we are unable to raise additional capital when required by our bank regulators, we may be subject
to adverse regulatory action.
We are dependent on key personnel and the loss of one or more of those key personnel may materially and adversely
affect our prospects.
Competition for qualified employees and personnel in the banking industry is intense and there are a limited number of
qualified persons with knowledge of, and experience in, the community banking industry where First Financial Northwest Bank
conducts its business. The process of recruiting personnel with the combination of skills and attributes required to carry out our
strategies is often lengthy. Our success depends to a significant degree upon our ability to attract and retain qualified
management, loan origination, finance, administrative, marketing, and technical personnel and upon the continued contributions
of our management and personnel. In particular, our success has been and continues to be highly dependent upon the abilities of
key executives, including our President, and certain other employees. In addition, our success has been and continues to be
highly dependent upon the services of our directors, many of whom are at or nearing retirement age, and we may not be able to
identify and attract suitable candidates to replace such directors.
46
We participate in a multiple employer defined benefit pension plan for the benefit of our employees. If we were to
withdraw from this plan, or if Pentegra, the multiple employer defined benefit pension plan sponsor, requires us to
make additional contributions, we could incur a substantial expense in connection with the withdrawal or the request
for additional contributions.
We participate in the Pentegra Defined Benefit Plan for Financial Institutions, a multiple employer pension plan for the
benefit of our employees. Effective March 31, 2013, we did not allow additional employees to participate in this plan. On
March 31, 2013, we froze the future accrual of benefits under this plan with respect to those participating employees. In
connection with our decision to freeze our benefit accruals under the plan, and since then, we considered withdrawing from the
plan.
The actual expense that would be incurred in connection with a withdrawal from the plan is primarily dependent upon
the timing of the withdrawal, the total value of the plan’s assets at the time of withdrawal, general market interest rates at that
time, expenses imposed on withdrawal, and other conditions imposed by Pentegra as set forth in the plan. If we choose to
withdraw from the plan in the future, we could incur a substantial expense in connection with the withdrawal.
Even if we do not withdraw from the plan, Pentegra, as sponsor of the plan, may request that we make an additional
contribution to the plan, in addition to contributions that we are regularly required to make, or obtain a letter of credit in favor
of the plan, if our financial condition worsens to the point that it triggers certain criteria set out in the plan. If we fail to make
the contribution or obtain the requested letter of credit, then we may be forced to withdraw from the plan and establish a
separate, single employer defined benefit plan that we anticipate would be underfunded to a similar extent as under the multiple
employer plan.
We rely on dividends from the Bank for substantially all of our revenue at the holding company level.
We are an entity separate and distinct from our principal subsidiary, First Financial Northwest Bank, and derive
substantially all of our revenue at the holding company level in the form of dividends from that subsidiary. Accordingly, we
are, and will be, dependent upon dividends from the Bank to pay the principal of and interest on our indebtedness, to satisfy our
other cash needs and to pay dividends on our common stock. First Financial Northwest Bank’s ability to pay dividends is
subject to its ability to earn net income and to meet certain regulatory requirements, including the capital conservation buffer
requirement. In the event the Bank is unable to pay dividends to us, we may not be able to pay dividends on our common stock
or continue our stock repurchases. Also, our right to participate in a distribution of assets upon a subsidiary’s liquidation or
reorganization is subject to the prior claims of the subsidiary’s creditors.
If we fail to meet the expectations of our stakeholders with respect to our environmental, social and governance (“ESG”)
practices, including those relating to sustainability, it may have an adverse effect on our reputation and results of
operation.
Our reputation may also be negatively impacted by our diversity, equity and inclusion (“DEI”) efforts if they fall short
of expectations. In addition, various private third-party organizations have developed ratings processes for evaluating
companies on their approach to ESG and DEI matters. These ratings may be used by some investors to assist with their
investment and voting decisions. Any unfavorable ratings may lead to reputational damage and negative sentiment among our
investors and other stakeholders. These factors could impair our working relationships with government agencies, regulators,
investors, expose us to litigation and regulatory action, negatively affect our ability to attract and retain customers and
employees, significantly harm our stock price and ability to raise capital, and adversely affect our results of operations.
Item 1B. Unresolved Staff Comments
First Financial Northwest has not received any written comments from the SEC regarding its periodic or current
reports under the Securities Exchange Act of 1934, as amended.
Item 2. Properties
The corporate office for First Financial Northwest and First Financial Northwest Bank is located at 201 Wells Avenue
South, Renton, Washington and is owned by us. The Bank’s full service retail operation is also at this location. In addition, the
Bank owns a retail office located at 17424 SR 9, Snohomish, Washington. At December 31, 2021, the Bank had thirteen leased
locations in Washington currently in operation: Mill Creek, Edmonds, “The Landing” in Renton, Bellevue, Bothell,
Woodinville, Smokey Point, Lake Stevens, Kent, Kirkland, University Place, Gig Harbor, and Issaquah. The lending division
47
operations of First Financial Northwest Bank are at our owned location at 207 Wells Avenue South, Renton, Washington. This
location is also the site for the operations of First Financial Northwest’s wholly-owned subsidiary, First Financial Diversified.
The lease terms for our properties are for an initial term of three to five years with the option to extend for additional three to
five year periods. In the opinion of management, all properties are adequately covered by insurance, are in a good state of repair
and are appropriately designed for their present and future use. For additional information on our lease commitments, see Note
10- “Leases” of the Notes to Consolidated Financial Statements in Item 8 of this report.
Item 3. Legal Proceedings
From time to time, we are involved as plaintiff or defendant in various legal actions arising in the normal course of
business. As of December 31, 2021, we were not involved in any significant litigation and do not anticipate incurring any
material liability as a result of any such litigation.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Our common stock is traded on The Nasdaq Stock Market LLC’s Global Select Market (“NASDAQ”), under the
symbol “FFNW.” As of December 31, 2021, there were 9.1 million shares of common stock issued and outstanding and we had
484 shareholders of record, excluding persons or entities that hold stock in nominee or “street name” accounts with brokers.
Our cash dividend payout policy is reviewed regularly by management and the Board of Directors. As of December 31, 2021,
our board of directors had declared 35 consecutive quarterly cash dividends on our common stock. Any dividends declared and
paid in the future would depend upon a number of factors, including capital requirements, our financial condition and results of
operations, tax considerations, statutory and regulatory limitations, and general economic conditions. No assurances can be
given that any dividends will be paid or that, if paid, will not be reduced or eliminated in future periods. Our future payment of
dividends may depend, in part, upon receipt of dividends from the Bank, which are restricted by federal regulations.
Stock Repurchases
The Company’s Board of Directors authorized a stock repurchase plan that began on February 1, 2021 and expired on
August 13, 2021. The plan authorized the repurchase of up to 486,000 shares of the Company’s common stock. At the
expiration of the plan, the Company had repurchased 268,286 shares authorized at an average price of $14.97 per share.
In addition, the Company’s Board of Directors authorized on August 16, 2021, a stock repurchase plan that
commenced on August 16, 2021 and expired on February 15, 2022. The plan authorized the repurchase of up to 476,000 shares
of the Company’s common stock. At the expiration of this plan, the Company had repurchased 459,732 shares at an average
price of $16.83 per share.
The following table represents the share repurchased during the fourth quarter ended December 31, 2021.
Period
October 1 - October 31, 2021
November 1 - November 30, 2021
December 1 - December 31, 2021
Total
Total Number of
Shares
Purchased
Average
Price Paid
per Share
Total Number of
Shares
Purchased as
Part of Plan
Maximum
Number of
Shares that May
be Repurchased
Under the Plan
— $
—
349,677
42,645
392,322
16.88
16.87
16.88
—
349,677
42,645
392,322
431,658
81,981
39,336
39,336
On February 11, 2022, the Company’s Board of Directors authorized the repurchase of up to 5.0% of the Company’s
outstanding common stock, or approximately 455,000 shares beginning no earlier than February 18, 2022, and expiring no later
48
than August 17, 2022. The Company will purchase the shares from time to time in the open market or through privately
negotiated transactions depending on market conditions and other corporate considerations.
Equity Compensation Plan Information
The equity compensation plan information presented under subparagraph (d) in Part III, Item 12 of this report is
incorporated herein by reference.
Item 6. Reserved
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This discussion and analysis reviews our consolidated financial statements and other relevant statistical data for the
years ending December 31, 2021 and 2020, and is intended to enhance your understanding of our financial condition and results
of operations. The information in this section has been derived from the Consolidated Financial Statements and footnotes
thereto that appear in Item 8 of this Form 10-K. The information contained in this section should be read in conjunction with
these Consolidated Financial Statements and footnotes and the business and financial information provided in this Form 10-K.
Unless otherwise indicated, the financial information presented in this section reflects the consolidated financial condition and
results of operations of First Financial Northwest and its subsidiaries. For a discussion and review of our consolidated financial
statements and other relevant statistical data for the years ending December 31, 2020 and 2019 see “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Form 10-K for the fiscal
year ended December 31, 2020.
Overview
First Financial Northwest Bank is a wholly-owned subsidiary of First Financial Northwest and, as such, comprises
substantially all of the activity for First Financial Northwest. First Financial Northwest Bank was a community-based savings
bank until February 4, 2016, when the Bank converted to a Washington state chartered commercial bank reflecting the
commercial banking services it now provides to its customers. The Bank primarily serves King, Snohomish, Pierce and Kitsap
counties, Washington through its full-service banking office and headquarters in Renton, Washington, as well as seven retail
branches in King County, Washington, five retail branches in Snohomish County, Washington, and two retail branches in
Pierce County, Washington at December 31, 2021. The Bank purchased four of these branches in 2017 and acquired
$74.7 million in deposits (the “Branch Acquisition”). The Branch Acquisition expanded our retail footprint and provided an
opportunity to extend our unique brand of community banking into those communities.
The Bank’s business consists predominantly of attracting deposits from the general public, combined with borrowing
from the FHLB of Des Moines and raising funds in the wholesale market, then utilizing these funds to originate one-to-four
family residential, multifamily, commercial real estate, construction/land, business, and consumer loans. The Bank’s strategic
initiatives seek to diversify our loan portfolio and broaden growth opportunities with our current risk tolerance levels and asset/
liability objectives. Our business strategy emphasizes commercial real estate, construction, one-to-four family residential, and
multifamily lending. During 2021, loan originations, refinances and purchases moderately outpaced repayments of loans,
resulting in a small increase of $2.9 million to net loans receivable with ending balances of $1.10 billion at December 31, 2021,
and 2020. Originations of construction/land loans were $72.8 million in 2021 as compared to $62.4 million in 2020, resulting in
this portfolio increasing to $93.5 million at December 31, 2021, as compared to $92.2 million at December 31, 2020. We
anticipate that construction/land lending will continue to be a strong element of our total loan portfolio in future periods. We
will continue to take a disciplined approach in our construction/land lending by concentrating our efforts on residential loans to
builders known to us, including multifamily loans to developers with proven success in this type of construction. These loans
typically mature in 12 to 24 months and funding is usually not fully disbursed at origination, therefore the impact to net loans
receivable is generally minimal in the short term.
We have also geographically expanded our loan portfolio through loan purchases or loan participations of commercial
and multifamily real estate loans, as well as consumer classic car loans, that are outside of our primary market area. Through
our efforts to geographically diversify our loan portfolio with direct loan originations, loan participations, or loan purchases, our
portfolio includes $144.1 million of loans to borrowers or secured by properties located in 43 other states, plus Washington,
D.C., with the largest concentrations at December 31, 2021, in California, Oregon, Texas, Florida, and Alabama of
$38.7 million, $12.1 million, $10.8 million, $9.2 million and $8.1 million, respectively.
49
The Bank has also created an SBA department, and has affiliated with an SBA partner to process our SBA loans while
the Bank retains the credit decisions. This enables us to be active in lending to small businesses until our volumes are high
enough to support the investment in necessary infrastructure. When volumes support our becoming an SBA preferred lender,
we will apply for that status which would provide the Bank with delegated loan approval as well as closing and most servicing
and liquidation authority, enabling the Bank to make loan decisions more rapidly. In addition, the Bank plans to increase
originations of the business loan portfolio, which may include business lines of credit, business term loans or equipment
financing. In conjunction with the growth of business loans, the Bank seeks to service these customers with their business
deposits as well.
Net income for the year ended December 31, 2021, was $12.2 million, or $1.29 per diluted share, compared to
$8.6 million, or $0.88 per diluted share, for the year ended December 31, 2020. The primary contributor to this increase was a
$4.5 million increase in net interest income as our decrease in interest expense exceeded the decrease in interest income. In
addition, the provision for loan losses in 2021 decreased $1.6 million to $300,000 as compared to 2020 primarily as a result of a
$2.1 million increase in net loans receivable, changes in the composition of our loan portfolio and decreased historical loss
factors and qualitative factors for certain loan categories as the expected economic impact as a result of the COVID-19
pandemic to the credit quality of our loan portfolio has diminished this year. For the year ended December 31, 2020, we had a
provision of $1.9 million, primarily the result of the downgrade in the loan risk ratings of $61.0 million of loans, primarily
loans receiving an additional COVID-19 related payment deferral under the CARES Act combined with increases in probable
loan losses for all loan categories in response to the economic disruption caused by the COVID-19 pandemic, with higher
potential impact allocated to commercial real estate and construction/land portfolios. Partially offsetting these improvements,
noninterest income decreased $580,000 and noninterest expenses increased $854,000.
Our primary source of revenue is interest income, which is the income that we earn on our loans and investments.
Interest expense is the interest that we pay on our deposits and borrowings. Net interest income is the difference between
interest income and interest expense. Changes in levels of interest rates affect interest income and interest expense differently
and, thus, impacts our net interest income. First Financial Northwest Bank is currently slightly asset-sensitive, meaning our
interest-earning assets reprice at a faster rate than our interest-bearing liabilities. 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 market rates, and the payoff of all brokered certificates of
deposit in 2020. Loan yields in 2021 were impacted favorably as a result of recognition of unamortized deferred fee income on
PPP loans forgiven and repaid by the SBA. If market interest rates remain near historic lows, the Company expects continued
downward pressure on loan yields. Further, because the length of the COVID-19 pandemic and the efficacy of the extraordinary
measures put in place to address its economic consequences are unknown, until the pandemic subsides, the Company’s net
interest income and net interest margin may be adversely affected in the near term, if not longer.
An offset to net interest income is the provision for loan losses, or the recapture of the provision for loan losses, that is
required to establish the ALLL at a level that adequately provides for probable losses inherent in our loan portfolio. As our loan
portfolio increases, or due to an increase for probable losses inherent in our loan portfolio, our ALLL may increase, resulting in
a decrease to net interest income after the provision. Improvements in loan risk ratings, increases in property values, or receipt
of recoveries of amounts previously charged off may partially or fully offset any required increase to ALLL due to loan growth
or an increase in probable loan losses.
Noninterest income is generated from various loan or deposit fees, increases in the cash surrender value of bank owned
life insurance (“BOLI”), and revenue earned on our wealth management services. This income is increased or partially offset by
any net gain or loss on sales of investment securities. Our noninterest income decreased $580,000 during the year ended
December 31, 2021, as compared to 2020, primarily attributable to a $682,000 decrease in loan related fees.
Our noninterest expenses consist primarily of salaries and employee benefits, professional fees, regulatory
assessments, occupancy and equipment, and other general and administrative expenses. Salaries and employee benefits consist
primarily of the salaries and wages paid to our employees, payroll taxes, expenses for retirement, and other employee benefits.
OREO-related expenses consist primarily of maintenance and costs of utilities for the OREO inventory, market valuation
adjustments, build-out expenses, gains and losses from OREO sales, legal fees, real estate taxes, and insurance related to the
properties included in the OREO inventory. Professional fees include legal services, auditing and accounting services, computer
support services, and other professional services in support of strategic plans. Occupancy and equipment expenses, which are
the fixed and variable costs of buildings and equipment, consist primarily of lease expenses, real estate taxes, depreciation
expenses, maintenance, and costs of utilities. Also included in noninterest expense are changes to the Company’s unfunded
commitment reserve which are reflected in general and administrative expenses. This unfunded commitment reserve expense
can vary significantly each quarter, based on the amount believed by management to be sufficient to absorb estimated probable
50
losses related to unfunded credit facilities, and reflects changes in the amounts that the Company has committed to fund but has
not yet disbursed. Our noninterest expenses increased $854,000 during the year ended December 31, 2021, as compared to
2020. The increase was primarily attributable to a $320,000 increase in occupancy and equipment, a $202,000 increase in other
noninterest expenses, a $200,000 increase in OREO, and a $198,000 increase in salaries and employee benefits, partially offset
by a $130,000 decrease in data processing expense.
COVID-19 Related Information
In response to the COVID-19 pandemic, the Bank is committed to providing assistance to its customers. Under the
CARES Act, the Bank provided certain short-term loan modifications. In addition, the Bank participated in the Paycheck
Protection Program (“PPP”) as a lender. Some of the PPP loans we originated were for our existing customers, however we also
provided PPP loans to those in our community who have not had a banking relationship with us in the past. The initial deadline
for PPP loan applications to the SBA was August 8, 2020. Under this program, we funded 462 applications totaling
$52.1 million of loans in our market areas and began processing applications for loan forgiveness in the fourth quarter of 2020.
The CAA, 2021 renewed and extended the PPP, which ended on May 31, 2021. Under the second round of PPP funding, the
Bank originated 261 PPP loans with an aggregate balance of $25.6 million. As of December 31, 2021, there were 67 PPP loans
outstanding totaling $10.8 million as compared to 372 PPP loans totaling $41.3 million at December 31, 2020. The SBA
released a simplified forgiveness process for PPP loans of $150,000 or less. At December 31, 2021, 39 PPP loans have an
outstanding balance of $150,000 or less, totaling $2.0 million, or 18.3% of PPP loans outstanding. Of these PPP loans, 24 loans
totaling $484,000, 4.5% of PPP loans, have a balance of $50,000 or less. We will also continue working with our customers to
assist them with accessing other borrowing options, including SBA and other government sponsored lending programs, as
appropriate.
The CARES Act and related bank regulatory guidance provided that short-term modifications of loans as a result of
the COVID-19 pandemic, made on a good faith basis to borrowers who were current as defined under the CARES Act prior to
any relief, are not TDRs. This includes short-term modifications (e.g. generally up to 6 months) such as payment deferrals, fee
waivers, extensions of repayment terms, or other delays in payment that are insignificant. To qualify as an eligible loan under
the CARES Act, as amended by the CAA, 2021, a loan modification must be (1) related to the COVID-19 pandemic; (2)
executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020,
and January 1, 2022. The primary method of relief granted by the Company was to allow the borrower to defer their loan
payments for three to six months. Certain borrowers were allowed to pay interest only or have payment deferrals for periods
longer than six months depending upon their specific circumstances. Deferred principal and interest amounts were added as a
balloon payment due at the original maturity date or payoff of the loan. At December 31, 2021, the Bank had no loans still in
deferral status and all loans that previously received loan modifications were current on their loan payments.
Business Strategy
Our long-term business strategy is to operate and grow First Financial Northwest Bank as a well-capitalized and
profitable community bank, offering one-to-four family residential, commercial and multifamily, construction/land, consumer
and business loans along with a diversified array of deposit and other products and services to individuals and businesses in our
market areas. We intend to accomplish this strategy by leveraging our established name and franchise, capital strength, and loan
production capability by:
•
•
•
Capitalizing on our intimate knowledge of our local communities to serve the convenience and needs of customers,
and delivering a consistent, high-quality level of professional service;
Offering competitive deposit rates and developing customer relationships to diversify our deposit mix, growing lower
cost deposits, attracting new customers, and expanding our footprint in the geographical area we serve;
Utilizing wholesale funding sources, including but not limited to FHLB advances and acquiring deposits in the
national brokered certificate of deposit market, to assist with funding needs and interest rate risk management efforts,
as needed;
• Managing our loan portfolio to minimize concentration risk and diversify the types of loans within the portfolio;
• Managing credit risk to minimize the risk of loss and interest rate risk to optimize our net interest margin; and
•
Improving profitability through disciplined pricing, expense control and balance sheet management, while continuing
to provide excellent customer service.
51
Critical Accounting Policies
Critical accounting policies are those that involve significant judgments and assumptions by management and that
have, or could have, a material impact on our income or the carrying value of our assets. The following are our critical
accounting policies.
Allowance for Loan Losses. Management recognizes that loan losses may occur over the life of a loan and that the
ALLL must be maintained at a level necessary to absorb specific losses on impaired loans and probable losses inherent in the
loan portfolio. Our methodology for analyzing the ALLL consists of two components: general and specific allowances. The
general allowance is determined by applying factors to our various groups of loans. Management considers factors such as
charge-off history, policy and underwriting standards, the current and expected economic conditions, the nature and volume of
the loan portfolio, management’s experience level, the level of problem loans, our loan review and grading systems, the value
of underlying collateral, geographic and loan type concentrations, and other external factors such as competition, legal, and
regulatory requirements in assessing the ALLL. Loans classified as substandard or placed on nonaccrual status are deemed to be
collateral based loans. Specific allowances result when management performs an impairment analysis on a loan when
management believes that all contractual amounts of principal and interest will not be paid as scheduled. Based on this
impairment analysis, if the recorded investment in the loan is less than the market value of the collateral less costs to sell
(“market value”), a specific reserve is established in the ALLL for the loan. The amount of the specific reserve is computed
using current appraisals, listed sales prices, and other available information less costs to complete, if any, and costs to sell the
property. This analysis is inherently subjective as it relies on estimates that are susceptible to significant revision as more
information becomes available or as future events differ from predictions. Loans classified as a TDR due to the borrower being
granted a rate concession analyzed by discounted cash flow analysis. The amount of the specific reserve on these loans is
calculated by comparing the present value of the anticipated repayments under the restructured terms to the recorded investment
in the loan.
Our Board of Directors’ Internal Asset Review Committee reviews and recommends for approval the allowance for
loan losses on a quarterly basis, and any related provision or recapture of provision for loan losses, and the full Board of
Directors approves the provision or recapture after considering the Committee’s recommendations. The allowance is increased
by the provision for loan losses which is charged against current period earnings. When analysis of the loan portfolio warrants,
the allowance is decreased and a recapture of provision of loan losses is included in current period earnings.
We believe that the ALLL is a critical accounting estimate because it is highly susceptible to change from
period‑to‑period requiring management to make assumptions about probable losses inherent in the loan portfolio. The impact of
an unexpected large loss could deplete the allowance and potentially require increased provisions to replenish the allowance,
thereby reducing earnings. For additional information see Item 1A. “Risk Factors – Risks Related to Our Lending - Our
allowance for loan losses may prove to be insufficient to absorb losses in our loan portfolio,” in this Form 10-K.
Valuation of OREO. Real estate properties acquired through foreclosure or by deed-in-lieu of foreclosure are
recorded at fair value less estimated costs to sell. Fair value is generally determined by management based on a number of
factors, including third-party appraisals of fair value in an orderly sale. Accordingly, the valuation of OREO is subject to
significant external and internal judgment. If the carrying value of the loan at the date a property is transferred into OREO
exceeds the fair value less estimated costs to sell, the excess is charged to the ALLL. Management periodically reviews OREO
values to determine whether the property continues to be carried at the lower of its recorded book value or fair value, net of
estimated costs to sell. Any further decreases in the value of OREO are considered valuation adjustments and are charged to
noninterest expense in the Consolidated Income Statements. Expenses and income from the maintenance and operations and
any gains or losses from the sales of OREO are included in noninterest expense.
Deferred Taxes. Deferred tax assets arise from a variety of sources, the most significant being expenses recognized in
our financial statements but disallowed in the tax return until the associated cash flow occurs, and write-downs in the value of
assets for financial statement purposes that are not deductible for tax purposes until the asset is sold or deemed worthless.
When warranted, we record a valuation allowance to reduce our deferred tax assets to the amount that can be
recognized in line with the relevant accounting standards. The level of deferred tax asset recognition is influenced by
management’s assessment of our historic and future profitability profile. At each balance sheet date, existing assessments are
reviewed and, if necessary, revised to reflect changed circumstances. In a situation where income is less than projected or recent
losses have been incurred, the relevant accounting standards require convincing evidence that there will be sufficient future tax
52
capacity. For additional information regarding our deferred taxes, see Note 13 of the Notes to Consolidated Financial
Statements contained in Item 8.
Other-Than-Temporary Impairments on the Market Value of Investments. Declines in the fair value of
available‑for‑sale or held-to-maturity investments below their cost that is deemed to be other-than-temporary results in a
reduction in the carrying amount of such investments to their fair value. A charge to earnings and an establishment of a new
cost basis for the investment is made. Unrealized investment losses are evaluated at least quarterly to determine whether such
declines should be considered other-than-temporary and therefore be subject to immediate loss recognition. Although these
evaluations involve significant judgment, an unrealized loss in the fair value of a debt security is generally deemed to be
temporary when the fair value of the investment security is below the carrying value primarily due to changes in interest rates
and there has not been significant deterioration in the financial condition of the issuer. Other factors that may be considered in
determining whether a decline in the value of a debt security is other-than-temporary include ratings by recognized rating
agencies; the extent and duration of an unrealized loss position; actions of commercial banks or other lenders relative to the
continued extension of credit facilities to the issuer of the security; the financial condition, capital strength and near-term
prospects of the issuer and recommendations of investment advisers or market analysts. Therefore, deterioration of market
conditions could result in impairment losses recognized within the investment portfolio.
Fair Value. Financial Accounting Standards Board (“FASB”) ASC 820, Fair Value Measurements and Disclosures,
establishes a hierarchical disclosure framework associated with the level of pricing observability utilized in measuring financial
instruments at fair value. The degree of judgment utilized in measuring the fair value of financial instruments generally
correlates to the level of pricing observability. Financial instruments with readily available active quoted prices or for which fair
value can be measured from actively quoted prices generally will have a higher degree of pricing observability and a lesser
degree of judgment utilized in measuring fair value. Conversely, financial instruments rarely traded or not quoted will generally
have little or no pricing observability and a higher degree of judgment utilized in measuring fair value. Pricing observability is
impacted by a number of factors, including the type of financial instrument, whether the financial instrument is new to the
market and not yet established and the characteristics specific to the transaction. See Note 6 of the Notes to Consolidated
Financial Statements contained in Item 8 for additional information about the level of pricing transparency associated with
financial instruments carried at fair value.
Derivatives and Hedge Accounting. The Bank recognizes its interest rate swaps as cash flow hedge derivative
instruments, and as such, reports the net fair value as an asset or liability. Fair value is based on dealer quotes, pricing models,
discounted cash flow methodologies or similar techniques for which the determination of fair value may require significant
management judgment or estimation. The derivatives are marked to their fair value through other comprehensive income. The
net gain or loss on derivatives is reclassified into earnings in the same income statement line item that is used to present the
earnings effect of hedged items.
Intangible Assets. The Company incurred goodwill and a core deposit intangible asset “(CDI”) through the Branch
Acquisition during 2017. These assets were booked at fair value at the time of the acquisition. Goodwill is evaluated annually
for impairment, with any impairment recognized as noninterest expense. The CDI is amortized into noninterest expense.
53
Comparison of Financial Condition at December 31, 2021 and December 31, 2020
Assets. The following table details the changes in the composition of our assets at December 31, 2021 from
December 31, 2020.
Balance at
December 31,
2021
Balance at
December 31,
2020
Change from
December 31,
2020
Percentage
Change
(Dollars in thousands)
Cash on hand and in banks $
7,246 $
7,995 $
Interest-earning deposits
Investments available-for-sale, at fair value
Investments held-to-maturity, at amortized cost
Loans receivable, net
FHLB stock, at cost
Accrued interest receivable
Deferred tax assets, net
OREO
Premises and equipment, net
BOLI
Prepaid expenses and other assets
Right of use asset (“ROU”), net
Goodwill
Core deposit intangible, net
Total assets
66,145
168,948
2,432
1,103,461
5,465
5,285
850
—
22,440
35,210
3,628
3,646
889
684
72,494
127,551
2,418
1,100,582
6,410
5,508
1,641
454
22,579
33,034
1,643
3,647
889
824
$
1,426,329 $
1,387,669 $
(749)
(6,349)
41,397
14
2,879
(945)
(223)
(791)
(454)
(139)
2,176
1,985
(1)
—
(140)
38,660
(9.4) %
(8.8)
32.5
0.6
0.3
(14.7)
(4.0)
(48.2)
(100.0)
(0.6)
6.6
120.8
—
—
(17.0)
2.8 %
The $38.7 million increase in total assets during 2021 was primarily a result of $63.8 million of deposit growth
providing excess liquidity invested in investments available-for-sale. Additional factors in our asset growth are described
below.
Interest-earning deposits with banks. Our interest-earning deposits with banks, consisting primarily of funds held at
the Federal Reserve Bank of San Francisco, decreased by $6.3 million to $66.1 million at December 31, 2021 from
December 31, 2020. During 2021, a portion of our cash surplus held at the Federal Reserve was reinvested into higher earning
assets. We monitor the balance of these funds daily in relation to our expected funding needs.
Investments available-for-sale. During 2021, investments available-for-sale increased $41.4 million, or 32.5%, as
excess liquidity generated by retail deposit growth was reinvested into higher yielding available-for-sale securities. During the
year ended December 31, 2021, we purchased $37.3 million of fixed rate securities and $43.1 million of variable rate securities,
with an average yield of 1.58%. Purchases included $34.7 million of mortgage-backed securities, $21.1 million of municipal
securities, $12.7 million of U.S. government agency securities, and $12.0 million of corporate bonds. These purchases were
partially offset by $20.0 million in proceeds from sales, calls and maturities of securities with an average yield of 2.06%,
generating a net gain of $32,000. In addition to the purchase and sale activity, we received principal repayments of
$20.0 million on our investments available-for-sale during 2021.
The effective duration of our securities portfolio increased to 3.54% at December 31, 2021 as compared to 2.55% at
December 31, 2020. Effective duration measures the anticipated percentage change in the value of an investment (or portfolio)
in the event of a 100 basis point change in market yields. Since the Bank’s portfolio includes securities with embedded options
(including call options on bonds and prepayment options on mortgage-backed securities), management believes that effective
duration is an appropriate metric to use as a tool when analyzing the Bank’s investment securities portfolio, as effective
duration incorporates assumptions relating to such embedded options, including changes in cash flow assumptions as interest
rates change.
54
Loans receivable. Net loans receivable increased by $2.9 million during 2021 to $1.10 billion. During the year ended
December 31, 2021, commercial real estate loans increased $34.2 million, one-to-four family loans increased $3.2 million, and
construction/land loans increased $1.2 million. In addition, consumer loans increased $4.2 million as the Bank continued to
increase its portfolio of classic or collectible car loans. Partially offsetting these increases, business loans decreased $34.1
million, primarily due to a $30.4 million decrease in PPP loans and $4.7 million decrease in aircraft loans. In addition,
multifamily loans decreased $6.5 million.
During 2021, we supplemented our loan originations and participations by purchasing $46.4 million in loans, at an
average premium of 3.4%. Loans purchased included $20.3 million of performing classic or collectible car loans and
$1.7 million of one-to-four family loans. In addition, a pool of 12 loans was purchased, totaling $24.4 million of loans secured
by commercial real estate in nine other states, further supporting our efforts to geographically diversify our loan portfolio with
loans meeting our investment and credit quality objectives.
At December 31, 2021, the Bank had no nonaccrual loans as the $2.1 million nonperforming loan included at
December 31, 2020, was paid off in the second quarter of 2021. Included in the payoff settlement were $288,000 in past due
interest and $106,000 in late charges, both reported in interest income. In addition, $84,000 of legal fees were reimbursed to the
Bank. Nonperforming loans as a percent of our total loans decreased to 0.0% at December 31, 2021, from 0.19% at December
31, 2020. Adversely classified loans, defined as substandard or below, increased to $34.2 million at December 31, 2021, from
$2.6 million at December 31, 2020. These impaired loans have certain weaknesses as a result of ongoing negative impact from
the COVID-19 pandemic to the businesses operating in the underlying collateral. The Bank is monitoring these loans closely
and does not expect to incur any loss.
The following table presents a breakdown of our nonperforming assets:
Nonperforming loans:
Multifamily
Total nonperforming loans
OREO
Total nonperforming assets
December 31,
2021
2020
Amount of
Change
Percent of
Change
(Dollars in thousands)
$
$
— $
2,104 $
—
—
2,104
454
(2,104)
(2,104)
(454)
(100.0) %
(100.0)
(100.0)
— $
2,558 $
(2,558)
(100.0) %
We continued to focus on reducing our nonperforming assets through loan work outs or pursuing foreclosure. The
Bank had no foregone interest during the year ended December 31, 2021, as the payoff of the $2.1 million loan during 2021
included all past due interest. There was no LIP related to nonperforming loans at December 31, 2021 or 2020. During 2021,
two properties that comprised our $454,000 OREO balance at December 31, 2020, were sold, resulting in a loss on sale of
$207,000. We did not foreclose on any properties during either 2021 or 2020. The level of our nonperforming assets reflects the
modest risk profile of our loan portfolio and our commitment to promptly identify any problem loans and take prompt actions to
turn nonperforming assets into performing assets.
Allowance for loan and lease losses. We believe that we use the best information available to establish the ALLL,
and that the ALLL as of December 31, 2021 was adequate to absorb the probable and inherent losses in the loan portfolio at that
date. While we believe the estimates and assumptions used in our determination of the adequacy of the allowance are
reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the
actual amount of future provisions will not exceed the amount of past provisions, or that any increased provisions that may be
required will not adversely impact our financial condition and results of operations. Future additions to the allowance may
become necessary based upon changing economic conditions, the level of problem loans, business conditions, credit
concentrations, increased loan balances, or changes in the underlying collateral of the loan portfolio. In addition, the
determination of the amount of our ALLL is subject to review by bank regulators as part of the routine examination process that
may result in the establishment of additional loss reserves or the charge-off of specific loans against established loss reserves
based upon their judgment of information available to them at the time of their examination. Uncertainties relating to our ALLL
are heightened as a result of the risks related to the COVID-19 pandemic.
55
The ALLL was $15.7 million, or 1.40% of total loans receivable at December 31, 2021, as compared to $15.2 million,
or 1.36% of total loans receivable at December 31, 2020. The following table details activity and information related to the
ALLL for the years ended December 31, 2021 and 2020.
ALLL balance at beginning of year
Provision for loan losses
Charge-offs
Recoveries
ALLL balance at end of year
ALLL as a percent of total loans
ALLL as a percent of nonperforming loans
Total nonperforming loans
Nonperforming loans as a percent of total loans
Total loans receivable
Total loans originated
At or For the Years Ended
December 31,
2021
2020
(Dollars in thousands)
15,174
300
$
—
183
13,218
1,900
(2)
58
15,657
$
15,174
1.40 %
— %
—
— %
1,119,536
308,454
$
$
1.36 %
721.17 %
2,104
0.19 %
1,117,410
295,823
$
$
$
$
Intangible assets. As a result of our Branch Acquisition in 2017, the Bank recognized goodwill of $889,000 and a
CDI of $1.3 million. Goodwill was calculated as the excess purchase price of the branches over the fair value of the assets
acquired and liabilities assumed at August 25, 2017. The Company performed an impairment analysis at December 31, 2021,
and determined that no impairment of goodwill and CDI existed. However, if adverse economic conditions or the decrease in
the Company’s stock price and market capitalization as a result of the COVID-19 pandemic were to be deemed sustained rather
than temporary, it may significantly affect the fair value of our goodwill.
The CDI was provided by a third-party valuation service and represents the fair value of the customer relationships
that provide a low-cost source of funding. The analysis was performed on the acquired noninterest-bearing checking, interest-
bearing checking, savings, and money market accounts. The initial ratio of CDI to the acquired balances of core deposits was
2.23%. This amount will amortize into noninterest expense on an accelerated basis over ten years and had a balance of
$684,000 at December 31, 2021.
Deposits. During the year ended December 31, 2021, deposits increased $63.8 million from December 31, 2020.
Details of deposit balances and their concentrations are as follows:
December 31,
2021
2020
(Dollars in thousands)
Noninterest-bearing demand
deposits
$
Interest-bearing demand
Savings
Money market
Certificates of deposit, retail
117,751
97,907
23,146
624,543
294,127
10.2 % $
8.5
2.0
54.0
25.3
91,285
108,182
19,221
465,369
409,576
8.3 %
9.9
1.8
42.6
37.4
Total deposits
$
1,157,474
100.0 % $
1,093,633
100.0 %
The $63.8 million growth in retail deposits during 2021 was primarily the result of organic deposit growth as we
continued to focus on core deposit growth. Money market accounts grew by $159.2 million, due in part to a portion of our retail
certificate of deposit customers opting for money market accounts compared to the other options available to them at the
maturity of their certificate of deposit. Noninterest-bearing demand accounts grew by $26.5 million due primarily to growth in
business checking accounts, and interest-bearing demand accounts decreased by $10.3 million. Partially offsetting this growth,
56
retail certificates of deposit decreased $115.4 million as continued growth in money market accounts allowed us to reduce our
dependence on the higher priced certificates of deposit in an effort to improve our cost of funds and overall deposit mix by
becoming less reliant on certificates of deposit.
During 2021, retail deposit balances met our funding needs, therefore we did not need to utilize brokered certificates of
deposit. While brokered certificates of deposit may carry a higher cost than our retail certificates, the Bank may utilize this
source of funding in the future due to the enhanced call features on some of these deposits that assists us in our efforts to
manage our cost of funds and our interest rate risk profile.
At December 31, 2021 and December 31, 2020, we held $60.6 million and $59.2 million in public funds, respectively,
of which $21.9 million were retail certificates of deposit. These funds were secured at December 31, 2021 with the Washington
State Public Deposit Protection Commission by $23.1 million in pledged investment securities.
Advances. We use advances from the FHLB as an alternative funding source to manage interest rate risk and to
leverage our balance sheet. Total FHLB advances at December 31, 2021 were $95.0 million as compared to $120.0 million at
December 31, 2020. At December 31, 2021, our FHLB advances consisted of $35.0 million of fixed-rate three-month advances
that renew quarterly, and $60.0 million of fixed-rate one-month advances that renew monthly, that are utilized in cash flow
hedge agreements, as described below. At December 31, 2021, the Bank did not hold any purchased Fed Funds. The availability
of overnight FHLB advances provides us flexibility to adjust the level of our borrowings as our funding needs change
consistent with our asset/liability objectives. Our average borrowings during 2021 were $115.5 million. At December 31, 2021,
all of our FHLB advances were due to mature in less than two months.
Cash Flow Hedge. To assist in managing interest rate risk, the Bank entered into seven interest rate swap agreements
with qualified institutions designated as cash flow hedge instruments. The agreements have an aggregate notional amount of
$95.0 million, with individual notional amounts ranging from $10.0 million to $15.0 million, a weighted-average remaining
term of 4.9 years and a weighted-average fixed rate of 1.05%. The remaining maturity of these agreements is from 22 months to
eight years. On October 25, 2021, a $50.0 million notional swap with a fixed rate of 1.34% matured and was partially replaced
with two previously contracted forward-starting interest rate swap agreements of $15.0 million and $10.0 million, effective on
that date. These swaps had an original weighted-average term of 7.4 years and a weighted-average fixed rate of 0.80%.
Under the terms of the interest rate swap agreements, the Bank pays a fixed interest rate and in return receives an
interest payment based on the corresponding LIBOR index, which resets quarterly or monthly, depending on the hedge term.
Concurrently, the Bank borrowed a fixed rate FHLB advance that will be renewed quarterly or monthly, as designated by the
hedge agreement, at the fixed interest rate at that time. Effectiveness of the interest rate swap is evaluated quarterly with any
ineffectiveness recognized as a gain or a loss on the income statement in noninterest income. A change in the fair value of the
cash flow hedge created by the interest rate swap agreements is recognized as an other asset or other liability on the balance
sheet with the tax-effected portion of the change included in other comprehensive income. At December 31, 2021, we
recognized a $1.5 million fair value asset as a result of the increase in market value of the interest rate swap agreements.
The Bank has confirmed our adherence to the International Swaps and Derivatives Association (“ISDA”) 2020 LIBOR
Fallbacks Protocol (“Protocol”) to prepare for the cessation of LIBOR by June 30, 2023. The Protocol provides a mechanism
for parties to bilaterally amend their existing derivatives transactions to incorporate ISDA’s fallback terms, providing for a clear
transition from LIBOR to SOFR.
Stockholders’ Equity. Total stockholders’ equity increased to $157.9 million at December 31, 2021, from
$156.3 million at December 31, 2020. Increases to stockholders’ equity for the year ended December 31, 2021, included
$12.2 million of net income and $2.4 million in net stock-based compensation. In addition, improvements in the fair value of
our derivatives and available-for-sale investments resulted in $2.1 million in other comprehensive income. The exercise of
stock options resulted in the issuance of 41,000 shares of common stock and a $344,000 increase to additional paid-in capital.
These increases were partially offset by an $11.4 million decrease to additional paid-in-capital from the repurchase and
retirement of 704,950 shares at an average price of $16.11 per share. In addition, shareholder cash dividends of $0.44 per share
were paid during 2021, reducing retained earnings by $4.1 million.
Comparison of Operating Results for the Years Ended December 31, 2021 and December 31, 2020
Net Interest Income. Net interest income in 2021 was $45.0 million, a $4.5 million or 11.1% increase from
$40.5 million in 2020, due primarily to a $6.8 million decrease in interest expense partially offset by a $2.3 million decrease in
57
interest income. Interest income decreased during the year ended December 31, 2021, primarily as a result of the decrease in
average yield on interest-earning assets to 4.01% for the year ended December 31, 2021 from 4.36% for the year ended
December 31, 2020, as the ongoing historically low interest rate environment continues to put downward pressure on asset
yields. Average interest-earning assets increased $55.5 million, partially funded by a $18.9 million increase in average interest-
bearing liabilities. The average cost of these funds decreased to 0.78% for the year ended December 31, 2021 from 1.41% for
the year ended December 31, 2020, primarily as a result of the low interest rate environment and an improvement in the
Company’s deposit mix as the average balance of our higher cost certificate of deposit declined by $88.0 million. Average
balances in lower cost money market accounts, interest-bearing demand and statement savings accounts increased by $130.1
million, $13.8 million and $3.3 million, respectively. In addition, average balances in noninterest-bearing accounts increased by
$37.1 million. The resulting impact was an improvement in our net interest margin to 3.35% for the year ended
December 31, 2021, from 3.15% for the year ended December 31, 2020. For more information, see “Asset and Liability
Management and Market Risk.”
The following table compares average interest-earning asset balances, associated yields, and resulting changes in
interest and dividend income for the years ended December 31, 2021 and 2020:
Year Ended December 31,
2021
2020
Average
Balance
Yield
Average
Balance
Yield
Change in
Interest and
Dividend Income
Loans receivable, net
Investments available-for-sale
Investments held-to-maturity
Interest-earning deposits
FHLB stock
Total interest-earning assets
$
$
1,098,772
173,691
2,419
60,482
6,271
1,341,635
(Dollars in thousands)
1,120,889
131,272
2,312
25,108
6,600
1,286,181
4.57 % $
1.84
0.99
0.12
5.29
4.01 % $
4.69 % $
2.42
0.99
0.21
4.85
4.36 % $
(2,376)
27
1
20
12
(2,316)
During the year ended December 31, 2021, the $2.4 million decrease in loan interest income reflects decreases in both
the average yield and balance of loans. The average loan yield decreased to 4.57% from 4.69% and the average balance of loans
receivable decreased $22.1 million for the year ended December 31, 2021, as compared to the year ended December 31, 2020,
primarily due to PPP loan repayments. Yields on loans continue to decline as loans are originated or refinanced at lower rates or
adjust downward in this continued low interest rate environment, however, prepayments of PPP loans and amounts forgiven by
the SBA had a favorable increase to the loan yield for the year ended December 31, 2021, due to recognition of $2.0 million of
unamortized fees and costs. At December 31, 2021, the balance of net deferred loan fees relating to PPP loans to be recognized
in future periods totaled $258,000.
Interest income from investments available-for-sale was stable with a $27,000 increase during 2021, as a $42.4 million
increase in the average balance of these investments compensated for the reduction in average yield to 1.84% from 2.42% for
the prior year. Over half of our investment portfolio was comprised of variable rate securities which repriced during the
continued low interest rate environment during 2021.
Interest income on interest-earning deposits increased $20,000 during the year ended December 31, 2021, as a result of
a $35.4 million increase in the average balance of these deposits, partially offset by a reduction in their yield to 0.12% for the
year ended December 31, 2021, from 0.21% for the year ended December 31, 2020.
58
The following table details average balances, cost of funds and the resulting increase in interest expense for the years
ended December 31, 2021 and 2020:
Year Ended December 31,
2021
2020
Average
Balance
Cost
Average
Balance
Cost
(Dollars in thousands)
Change in
Interest
Expense
$
106,684
21,715
545,306
342,147
—
115,466
$ 1,131,318
0.08 % $
0.03
0.29
1.61
92,839
18,369
415,190
430,179
30,492
—
1.39
125,392
0.78 % $ 1,112,461
0.31 % $
0.08
0.84
2.20
2.38
1.31
1.41 % $
(202)
(9)
(1,896)
(3,955)
(727)
(37)
(6,826)
Interest-bearing demand accounts
Savings accounts
Money market accounts
Certificates of deposit, retail
Certificates of deposit, brokered
FHLB advances and other borrowings
Total interest-bearing liabilities
Interest expense decreased $6.8 million to $8.8 million for the year ended December 31, 2021 from $15.6 million for
the year ended December 31, 2020. The decrease in interest expense during 2021 was primarily a result of the decrease in the
average cost of interest-bearing deposits to 0.71% for the year ended December 31, 2021, as compared to 1.42% for the year
ended December 31, 2020. In addition, although the average balance of our interest-bearing deposits increased $28.8 million
during 2021, the growth in lower cost deposits, primarily money market accounts, allowed us to reduce our reliance on higher
cost retail certificates of deposit and reduce our overall interest expense
Money market interest expense decreased by $1.9 million as a result of a 55 basis point decrease in the average cost of
these funds partially offset by a $130.1 million increase in the average balance. The cost of retail certificates of deposit
decreased by 59 basis points as maturing deposits repriced down in the continued low interest rate environment.
Our FHLB advances are all short-term and matched to fixed rate interest rate swap agreements, resulting in a
relatively stable average cost of these funds of 1.39% and 1.31% for the years ended December 31, 2021, and 2020,
respectively. This slight increase in average cost was offset by the repayment of $25.0 million in FHLB advances in October
2021 as a result of a corresponding reduction in related interest rate swap agreements, resulting in a $37,000 decrease in total
interest expense for borrowings.
Provision for Loan Losses. Our provision for loan losses was $300,000 for the year ended December 31, 2021,
compared to $1.9 million for the year ended December 31, 2020. This provision, combined with recoveries of $183,000,
resulted in a $483,000 increase in the ALLL to total loans to 1.40% at December 31, 2021, from 1.36% at December 31, 2020.
The provision for loan losses in 2021 was primarily a result of a $2.1 million increase in net loans receivable, and a change in
the composition of our loan portfolio as $30.4 million in repaid PPP loans omitted from our loan loss allowance analysis were
replaced with other loans included in the analysis, offsetting the impact from decreased historical loss factors and qualitative
factors for certain loan categories as the expected economic impact as a result of the COVD-19 pandemic to the credit quality of
our loan portfolio has diminished this year. At December 31, 2021, the $10.8 million balance of PPP loans was omitted from
the ALLL calculation as these loans are fully guaranteed by the SBA and management expects that the majority of remaining
PPP borrowers will seek full or partial forgiveness of their loan obligations from the SBA within a short time frame, which will
in turn reimburse the Bank for the amount forgiven. In addition, the provision for loan losses was impacted by the $31.6 million
increase in substandard loans and the $14.7 million increase in impaired loans during 2021 evaluated for specific reserves and
omitted from the general reserve calculations used to calculate the ALLL and provision for loan losses. As noted above, our
individual evaluation of our impaired loans indicated no additional specific reserve was needed.
In comparison, for the year ended December 31, 2020, we had a provision of $1.9 million, primarily the result of the
downgrade in the loan risk ratings of $61.0 million of loans, primarily loans receiving an additional COVID-19 related payment
deferral under the CARES Act combined with increases in probable loan losses for all loan categories in response to the
economic disruption caused by the COVID-19 pandemic, with higher potential impact allocated to commercial real estate and
construction/land portfolios.
59
Noninterest Income. Noninterest income decreased $580,000 to $3.9 million for the year ended December 31, 2021
from $4.4 million for the year ended December 31, 2020. The following table provides a detailed analysis of the changes in the
components of noninterest income:
Year Ended
December 31, 2021
Change from
December 31, 2020
Percentage
Change
Gain on sale of investments, net
BOLI change in cash surrender value
Wealth management revenue
Deposit related fees
Loan related fees
Other
$
(Dollars in thousands)
(54)
32 $
1,107
494
872
1,265
92
125
(169)
117
(682)
83
(580)
(62.8) %
12.7
(25.5)
15.5
(35.0)
922.2
(13.1) %
Total noninterest income
$
3,862 $
The largest change to our noninterest income was the $682,000 decrease on loan related fees for the year ended
December 31, 2021, primarily due to a $430,000 decrease in fees on loan interest rate swap agreements. The Bank has an
interest rate swap program for commercial loan customers, under which the customer participates in an interest rate swap with a
third-party institution for which the Bank receives a fee that is recognized at the time the loan is originated. Due to the reduced
customer demand for these interest rate swaps, there were no new agreements originated in 2021. In addition, fees collected on
the early payoff of certain loans decreased $215,000 during the year ended December 31, 2021.
Wealth management revenue decreased by $169,000 in 2021, primarily as a result of reduced sales staff during much
of 2021 and timing differences in revenue recognition. This line of business assists the Bank with providing options to our
customers to more fully support their financial needs. Total assets managed by our wealth management division increased to
$112.7 million at December 31, 2021, from $88.0 million at December 31, 2020.
In addition, sales of investment securities during the year ended December 31, 2021, resulted in a gain of $32,000. In
comparison, sales of investments for the year ended December 31, 2020, resulted in an $86,000 gain. Partially offsetting these
decreases, deposit related fees of $872,000 were recorded for the year ended December 31, 2021, a $117,000 increase over the
prior year, primarily from debit card related service fees reflecting increased usage as the economy improves in our markets. In
addition, our BOLI noninterest income increased $125,000 for the year ended December 31, 2021, primarily due to $161,000 in
death benefits proceeds. The $1.1 million of noninterest BOLI income also included the net increase in cash surrender value of
these policies, which assists in offsetting expenses for employee benefits.
Noninterest Expense. Noninterest expense increased $854,000 to $33.4 million for the year ended December 31,
2021 from $32.5 million for the year ended December 31, 2020. The following table provides a detailed analysis of the changes
in the components of noninterest expense:
Year Ended
December 31, 2021
Change from
December 31, 2020
Percentage
Change
(Dollars in thousands)
Salaries and employee benefits
$
20,237 $
Occupancy and equipment
Professional fees
Data processing
OREO related expenses, net
Regulatory assessments
Insurance and bond premiums
Marketing
Other general and administrative
4,557
1,899
2,692
209
456
451
154
2,712
Total noninterest expense
$
33,367 $
198
320
192
(130)
200
(91)
6
(43)
202
854
1.0 %
7.6
11.2
(4.6)
2,222.2
(16.6)
1.3
(21.8)
8.0
2.6 %
60
The primary contributor to the increase in noninterest expense for the year ended December 31, 2021, was a $320,000
increase in occupancy and equipment expense. Lease expense increased $125,000 primarily due to our most recent branch
opening in March 2021 and two branches opened late in 2020. In addition, depreciation expense increased $115,000 and
facilities and equipment maintenance increased $102,000 as a result of maintenance and improvements at branch locations.
Salary and employee benefits increased by $198,000 to $20.2 million due in part to a $779,000 net increase in stock
based compensation as a result of the increase in common stock priced used to calculate the expense for ESOP shares allocated
to employees for 2021 and restricted stock awards granted during the year. Partially offsetting this increase, salaries,
commissions and employee incentives decreased $555,000 for the year ended December 31, 2021, reflecting a decrease in
staffing.
Further contributing to the increase in noninterest expense for the year ended December 31, 2021, professional fees
increased $192,000. The primary factor was a $319,000 increase in other professional services as we outsourced recruiting and
other services. Partially offsetting this increase, legal fees decreased $129,000, primarily due to the receipt of $84,000 of
reimbursed legal fees at the payoff of a $2.1 million nonaccrual loan.
The sale of two OREO properties during 2021 resulted in a $207,000 loss on sale included in noninterest expense, a
$200,000 increase as compared to the year ended December 31, 2020.
Partially offsetting
the year ended
December 31, 2021, as additional expense was incurred during 2020 in support of a new online banking platform. In addition,
regulatory assessments decreased $91,000, primarily due to the change in composition of our loan portfolio, as PPP loans are
excluded from our asset base for calculation of our FDIC assessment.
increases, data processing expense decreased $130,000
these
for
Federal Income Tax Expense. We recorded a $2.9 million federal income tax provision for 2021, compared to
$1.9 million for 2020. The increase in federal income tax provision for 2021 was primarily the result of a $4.7 million increase
in pretax net income.
61
Average Balances, Interest and Average Yields/Cost
The following table presents information regarding average balances of assets and liabilities as well as interest income
from average interest-earning assets and interest expense on average interest-bearing liabilities, resultant yields, interest rate
spreads, net interest margins and the ratio of average interest-earning assets to average interest-bearing liabilities. Average
balances have been calculated using the average daily balances during the period. Interest and dividends are not reported on a
tax equivalent basis.
Year Ended December 31,
2021
Interest
and
Dividends
Average
Balance (1)
Yield/
Cost
Average
Balance (1)
2020
Interest
and
Dividends
Yield/
Cost
Average
Balance (1)
2019
Interest
and
Dividends
Yield/
Cost
(Dollars in thousands)
$ 1,098,772 $ 50,170
4.57 % $ 1,120,889 $ 52,546
4.69 % $ 1,061,367
$ 54,636
5.15 %
149,349
2,741
1.84
121,850
2,937
2.41
131,671
4,118
3.13
Interest-earnings assets:
Loans receivable, net
Investments available-for-sale,
taxable
Investments available-for-sale,
non-taxable
Investments held-to-maturity
Interest-earning deposits
FHLB stock
24,342
2,419
60,482
6,271
459
24
72
332
Total interest-earning assets
1,341,635
53,798
Noninterest earning assets
79,841
Total average assets
$ 1,421,476
Interest-bearing liabilities:
Interest-bearing demand accounts $ 106,684 $
Savings accounts
Money market accounts
Certificates of deposit, retail
Certificates of deposit, brokered
21,715
545,306
342,147
—
90
6
1,601
5,519
—
Total deposits
1,015,852
7,216
Advances from the FHLB and
other borrowings
115,466
Total interest-bearing liabilities
1,131,318
1,603
8,819
Noninterest bearing liabilities
Average equity
130,117
160,041
Total average liabilities and equity
$ 1,421,476
1.89
0.99
0.12
5.29
4.01
9,422
2,312
25,108
6,600
236
23
52
320
1,286,181
56,114
2.50
0.99
0.21
4.85
4.36
75,423
$ 1,361,604
7,683
—
13,634
6,684
211
—
293
362
1,221,039
59,620
73,125
$ 1,294,164
2.75
—
2.15
5.42
4.88
0.08 % $
92,839 $
292
0.31 % $ 50,519
$
0.03
0.29
1.61
—
0.71
1.39
0.78
18,369
415,190
430,179
30,492
15
3,497
9,474
727
987,069
14,005
125,392
1,640
1,112,461
15,645
93,556
155,587
$ 1,361,604
0.08
0.84
2.20
2.38
1.42
1.31
1.41
21,920
329,008
410,992
134,045
946,484
129,899
1,076,383
63,689
154,092
$ 1,294,164
108
29
5,027
9,549
3,283
17,996
2,716
20,712
0.21 %
0.13
1.53
2.32
2.45
1.90
2.09
1.92
Net interest income
$ 44,979
$ 40,469
$ 38,908
Net interest margin
Ratio of average interest-
earning assets to average
interest-bearing liabilities
3.35 %
3.15 %
3.19 %
118.59 %
115.62 %
113.44 %
________________
(1) The average loans receivable, net balances include nonaccruing loans and deferred fees.
62
Yields Earned and Rates Paid
The following table presents the weighted-average yields earned on our assets and the weighted-average interest rates
paid on our liabilities, together with the net yield on interest-earning assets and liabilities, for the dates indicated.
Yield on interest-earning assets:
Loans receivable, net
Investments available-for-sale, taxable
Investments available-for-sale, non taxable
Investments held-to-maturity
Interest-earning deposits
FHLB stock
Total interest-earning assets
Rate paid on interest-bearing liabilities:
Interest-bearing demand accounts
Savings accounts
Money market accounts
Certificates of deposit, retail
Certificates of deposit, brokered
Total interest-bearing deposits
Advances from the FHLB and other borrowings
Total interest-bearing liabilities
Interest rate spread
Net interest margin
Weighted Average
Yield at
December 31, 2021
Net Yield
Year Ended December 31,
2021
2020
2019
4.21 %
1.96
4.57 %
1.84
4.69 %
2.41
5.15 %
3.13
1.91
0.99
0.13
4.85
3.72
0.08
0.03
0.25
1.25
—
0.51
1.26
0.57
3.15
n/a
1.89
0.99
0.12
5.29
4.01
0.08
0.03
0.29
1.61
—
0.71
1.39
0.78
3.23
3.35
2.50
0.99
0.21
4.85
4.36
0.31
0.08
0.84
2.20
2.38
1.42
1.31
1.41
2.95
3.15
2.75
n/a
2.15
5.42
4.88
0.21
0.13
1.53
2.32
2.45
1.90
2.09
1.92
2.96
3.19
63
Rate/Volume Analysis
The following table presents the effects of changing rates and volumes on our net interest income. Information is
provided with respect to: (1) effects on interest income attributable to changes in volume (changes in volume multiplied by
prior rate); and (2) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume).
Changes in rate/volume are allocated proportionately to the changes in rate and volume.
Year Ended December 31, 2021
Compared to December 31, 2020
Change in Interest
Year Ended December 31, 2020
Compared to December 31, 2019
Change in Interest
2021
2020
Rate
Volume
Total
Rate
Volume
Total
(In thousands)
$
(1,339) $
(859)
(1,037) $
663
(2,376) $
(196)
(5,154) $
(874)
3,064 $
(307)
(2,090)
(1,181)
(151)
—
(53)
28
(2,374)
374
1
73
(16)
58
223
1
20
12
(23)
23
(488)
(37)
48
—
247
(5)
25
23
(241)
(42)
(2,316)
(6,553)
3,047
(3,506)
(246)
(12)
44
3
(202)
(9)
94
(9)
(2,992)
1,096
(1,896)
(2,847)
(2,016)
(1,939)
(3,955)
(521)
90
(5)
1,317
446
184
(14)
(1,530)
(75)
(727)
(727)
(20)
(2,536)
(2,556)
—
93
Interest-earning assets:
Loans receivable, net
Investments available-for-sale, taxable
Investments available-for-sale, non
taxable
Investments held-to-maturity
Interest-earning deposits
FHLB stock
Net change in interest income
Interest-bearing liabilities:
Interest-bearing demand accounts
Savings accounts
Money market accounts
Certificates of deposit, retail
Certificates of deposit, brokered
Advances from FHLB and other
borrowings
Net change in interest expense
(5,173)
(1,653)
(6,826)
(4,285)
(130)
(37)
(982)
(94)
(782)
(1,076)
(5,067)
Net change in net interest income
$
2,799 $
1,711 $
4,510 $
(2,268) $
3,829 $
1,561
Asset and Liability Management and Market Risk
General. Our Board of Directors has approved an asset/liability management policy to guide management in
maximizing interest rate spread by managing the differences in terms between interest-earning assets and interest-bearing
liabilities while maintaining acceptable levels of liquidity, capital adequacy, interest rate risk, credit risk, and profitability. The
policy established an Investment, Asset/Liability Committee (“ALCO”) comprised of certain members of senior management
and the Board of Directors. The Committee’s purpose is to communicate, coordinate and manage our asset/liability position
consistent with our business plan and Board-approved policies. The ALCO meets quarterly to review various areas including:
•
•
•
•
•
•
•
economic conditions;
interest rate outlook;
asset/liability mix;
interest rate risk sensitivity;
current market opportunities to promote specific products;
historical financial results;
projected financial results; and
64
•
capital position.
The Committee also reviews current and projected liquidity needs. As part of its procedures, the Committee regularly
reviews interest rate risk by forecasting the impact that changes in interest rates may have on net interest income and the market
value of portfolio equity, which is defined as the net present value of an institution’s existing assets, liabilities and off-balance
sheet instruments and evaluating such impacts against the maximum potential change in the market value of portfolio equity
that is authorized by the Board of Directors.
Our Risk When Interest Rates Change. The rates of interest we earn on assets and pay on liabilities generally are
established contractually for a period of time. Market interest rates change over time. Our loans generally have longer
maturities than our deposits. Accordingly, our results of operations, like those of other financial institutions, are impacted by
changes in interest rates and the interest rate sensitivity of our assets and liabilities. The risk associated with changes in interest
rates and our ability to adapt to these changes is known as interest rate risk and is our most significant market risk.
We have utilized the following strategies in our efforts to manage interest rate risk:
•
•
•
•
•
•
we are originating shorter term, higher yielding loans, whenever possible;
we have attempted, where possible, to increase balances of non-maturity deposits with less rate sensitivity;
we have invested in securities with relatively short average lives, generally less than eight years;
we have added adjustable-rate loans to our loan portfolio;
we may utilize brokered certificates of deposit with a call option as a funding source; and
we have utilized interest rate swaps to effectively fix the rate on $95.0 million of FHLB advances.
How We Measure the Risk of Interest Rate Changes. We monitor our interest rate sensitivity on a quarterly basis
by measuring the impact of changes to net interest income in multiple rate environments. Management retains the services of a
third-party consultant with over 30 years of experience in asset-liability management to assist in its interest rate risk and asset-
liability management. Management uses various assumptions to evaluate the sensitivity of our operations to changes in interest
rates. Although management believes these assumptions are reasonable, the interest rate sensitivity of our assets and liabilities
on net interest income and the market value of portfolio equity could vary substantially if different assumptions were used or
actual results differ from these assumptions. Although certain assets and liabilities may have similar maturities or periods of
repricing, they may react differently to changes in market interest rates. The interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types of assets and liabilities
lag behind changes in market interest rates. Non-uniform changes and fluctuations in market interest rates across various
maturities will also affect the results presented. In addition, certain assets, such as adjustable-rate mortgage loans, have features
which restrict changes in interest rates on a short-term basis and over the life of the asset. Further, a portion of our adjustable-
rate loans have interest rate floors below which the loan’s contractual interest rate may not adjust. Approximately 57.2% of our
net loans were adjustable-rate loans at December 31, 2021. At that date, $444.0 million, or 69.3%, of these loans with a
weighted-average interest rate of 4.27% were at their floor interest rate. A portion of these loans are set to reprice at defined
time intervals. Adjustable rate loans that are based on prime rate plus a specified margin recalculate each time the prime rate
changes. When the floor rate is above a prime rate based loan’s fully indexed rate, the Bank will not receive the benefit of an
increasing market rates until prime rate increases enough where the fully indexed rate exceeds the loans floor rate. At
December 31, 2021, the Bank’s net loans receivable included $117.0 million of prime based loans, of which $104.4 million
were at a floor rate that exceeded their fully indexed rate.
65
The following table shows the rate increase that would need to occur on these loans before the Bank receives the
benefit of a floating rate:
December 31, 2021
(in thousands)
$
0 - 25 bps
26 - 50 bps
51 - 75 bps
76 - 100 bps
101 - 150 bps
151 - 200 bps
> 200 bps
7,991
16,260
12,608
38,620
22,305
1,368
5,247
$
104,399
The inability of our loans to adjust downward can contribute to increased income in periods of declining interest rates.
However, when loans are at their floors, there is a further risk that our interest income may not increase as rapidly as our cost of
funds during periods of increasing interest rates. Further, in the event of a significant change in interest rates, prepayment and
early withdrawal levels would likely deviate from those assumed. Finally, the ability of many borrowers to service their debt
may decrease in the event of an interest rate increase. We consider all these factors in monitoring our interest rate exposure.
The assumptions we use are based upon a combination of proprietary and market data that reflect historical results and
current market conditions. These assumptions relate to interest rates, prepayments, deposit decay rates and the market value of
certain assets under the various interest rate scenarios. We use market data to determine prepayments and maturities of loans,
investments and borrowings and use our own assumptions on deposit decay rates except for time deposits. Time deposits are
modeled to reprice to market rates upon their stated maturities. We also assume that non-maturity deposits can be maintained
with rate adjustments not directly proportionate to the change in market interest rates, based upon our historical deposit decay
rates, which are substantially lower than market decay rates. We have observed in the past that our deposit accounts during
changing rate environments have relatively lower volatility and less than market rate changes. When interest rates rise, we do
not have to raise interest rates proportionately on less rate sensitive accounts to retain these deposits. These assumptions are
based upon our analysis of our customer base, competitive factors, and historical experience.
Our income simulation model examines changes in net interest income in scenarios where interest rates were assumed
to remain at their base level, instantaneously increase by 100, 200 and 300 basis points or decline immediately by 100 basis
points. A decline by 200 and 300 basis points is not reported as the current targeted federal funds rate is between 0.00% and
0.25%.
The following table illustrates the estimated change in our net interest income over the next 12 months from
December 31, 2021, that would occur in the event of an immediate change in interest rates equally across all maturities, with no
effect given to any steps that we might take to counter the effect of that interest rate movement. The net interest income in an up
100 basis point move would decline slightly in year one and increase under larger immediate increases in interest rates. The
slight decline would be due to the level of adjustable-rate loans that are currently at their floor rate. The $444.0 million of loans
at their floor rate would not experience the full impact of a 100 basis point increase in rates because the fully-indexed rate is
below the floor rate that is currently in effect for many of these loans.
Interest Rate Simulation Impact on Net Interest Income
for the year ended December 31, 2021
Net Interest
Income
Basis Point Change in Rates
% Change
(Dollars in thousands)
$
+300
+200
+100
Base
(100)
45,388
44,971
44,612
44,749
44,069
1.43 %
0.50
(0.31)
—
(1.52)
66
The following table illustrates the change in our net portfolio value (“NPV”) at December 31, 2021 that would occur in
the event of an immediate change in interest rates equally across all maturities, with no effect given to any steps that we might
take to counter the effect of that interest rate movement.
Basis Point
Change in Rates (1)
Amount
Net Portfolio Value (2)
$ Change (3)
Net Portfolio as % of Portfolio Value of Assets
% Change
NPV Ratio (4)
% Change (5)
Market Value
of Assets (6)
(Dollars in thousands)
+300
+200
+100
Base
(100)
$
191,829 $
(10,861)
(5.36) %
14.38 %
(0.76) % $
1,334,248
195,731
200,751
202,690
194,151
(6,959)
(1,939)
—
(8,539)
(3.43)
(0.96)
—
(4.21)
14.34
14.35
14.16
13.30
(0.49)
(0.14)
—
(0.60)
1,364,984
1,398,640
1,431,182
1,459,271
__________
(1) No rates in the model are allowed to go below zero. Given the relatively low level of market interest rates, a calculation for
a decrease of greater than 100 basis points has not been prepared.
(2) The net portfolio value is the difference between the present value of the discounted cash flows of assets and liabilities and
represents the market value of the Company’s equity for any given interest rate scenario. Net portfolio value is useful for
determining, on a market value basis, how equity changes in response to various interest rate scenarios. Large changes in
net portfolio value reflect increased interest rate sensitivity and generally more volatile earnings streams.
(3) The increase or decrease in the estimated net portfolio value at the indicated interest rates compared to the net portfolio
value assuming no change in interest rates.
(4) Net portfolio value divided by the market value of assets.
(5) The increase or decrease in the net portfolio value divided by the market value of assets.
(6) The market value of assets represents the value of assets under the various interest rate scenarios and reflects the sensitivity
of those assets to interest rate changes.
The net interest income and net portfolio value tables presented above are predicated upon a stable balance sheet with
no growth or change in asset or liability mix. In addition, the net portfolio value is based upon the present value of discounted
cash flows using our estimates of current replacement rates to discount the cash flows. The effects of changes in interest rates in
the net interest income table are based upon a cash flow simulation of our existing assets and liabilities and assuming that
delinquency rates would not change as a result of changes in interest rates, although there can be no assurance that this will be
the case. Delinquency rates may change when interest rates change as a result of changes in the loan portfolio mix, underwriting
conditions, loan terms or changes in economic conditions that have a delayed effect on the portfolio. Even if interest rates
change in the designated amounts, there can be no assurance that our assets and liabilities would perform as assumed. Also, a
change in U.S. Treasury rates in the designated amounts accompanied by a change in the shape of the Treasury yield curve
would cause changes to the net portfolio value and net interest income other than those indicated above.
Liquidity and Capital Resources
We are required to have enough cash flow in order to maintain sufficient liquidity to ensure a safe and sound
operation. We maintain cash flows above the minimum level believed to be adequate to meet the requirements of normal
operations, including potential deposit outflows. On a daily basis, we review and update cash flow projections to ensure that
adequate liquidity is maintained.
Our primary sources of funds are customer deposits, scheduled loan and investment repayments, including interest
payments, maturing loans and investment securities, and advances from the FHLB. These funds, together with equity, are used
to fund loans, acquire investment securities and other assets, and fund continuing operations. While maturities and the
scheduled amortization of loans are a predictable source of funds, deposit flows and mortgage prepayments are greatly
influenced by the level of interest rates, economic conditions and competition. We believe that our current liquidity position,
and our forecasted operating results are sufficient to fund all of our existing commitments.
Liquidity management is both a daily and long-term function of business management. Excess liquidity is generally
invested in short-term investments such as overnight deposits or agency or mortgage-backed securities. On a longer term basis,
we maintain a strategy of investing in various lending products as described in greater detail under Item 1. “Business – Lending
Activities.” At December 31, 2021, the undisbursed portion of construction LIP totaled $43.4 million and unused lines of credit
67
were $34.0 million. We use our sources of funds primarily to meet ongoing commitments, to pay maturing certificates of
deposit and withdrawals on other deposit accounts, to fund loan commitments, and to maintain our portfolio of investment
securities. Certificates of deposit scheduled to mature in one year or less at December 31, 2021, totaled $145.3 million.
Management’s policy is to maintain deposit rates at levels that are competitive with other local financial institutions. Based on
historical experience, we believe that a significant portion of maturing certificates of deposit will remain with First Financial
Northwest Bank. As further funding sources, we had the ability at December 31, 2021 to borrow an additional $327.5 million
from the FHLB, based on our collateral capacity, $84.8 million from the FRB, and $75.0 million from unused lines of credit
with other financial institutions to meet commitments and for liquidity purposes. See the Consolidated Statements of Cash
Flows in Item 8 of this report for further details on our cash flow activities.
We measure our liquidity based on our ability to fund our assets and to meet liability obligations when they come due.
Liquidity (and funding) risk occurs when funds cannot be raised at reasonable prices, or in a reasonable time frame, to meet our
normal or unanticipated obligations. We regularly monitor the mix between our assets and our liabilities to manage our liquidity
and funding requirements.
Our primary source of funds is our retail deposits. When retail deposits are not sufficient to provide the funds for our
assets, or if other sources are available with more favorable rates or structure, we use alternative funding sources. These sources
include, but are not limited to, advances from the FHLB, wholesale funding, brokered deposits, federal funds purchased, and
dealer repurchase agreements, as well as other short-term alternatives. We may also liquidate assets to meet our funding needs.
On a monthly basis, we estimate our liquidity sources and needs for the next twelve months. Also, we determine
funding concentrations and our need for sources of funds other than deposits. This information is used by our Asset/Liability
Management Committee in forecasting funding needs and investing opportunities.
We incur capital expenditures on an ongoing basis to expand and improve our product offerings, enhance and
modernize our technology infrastructure, and to introduce new technology-based products to compete effectively in our
markets. We evaluate capital expenditure projects based on a variety of factors, including expected strategic impacts (such as
forecasted impact on revenue growth, productivity, expenses, service levels and customer retention) and our expected return on
investment. The amount of capital investment is influenced by, among other things, current and projected demand for our
services and products, cash flow generated by operating activities, cash required for other purposes and regulatory
considerations.
Based on our current capital allocation objectives, during fiscal 2022 we expect cash expenditures of $1.3 million for
capital investment in property, plant and equipment. In addition, we currently expect to continue our current practice of paying
quarterly cash dividends on our common stock subject to our Board of Directors' discretion to modify or terminate this practice
at any time and for any reason without prior notice. Our current quarterly common stock dividend rate is $0.12 per share, as
approved by our Board of Directors, which we believe is a dividend rate per share which enables us to balance our multiple
objectives of managing and investing in the Bank, and returning a substantial portion of our cash to our shareholders. Assuming
continued payment during 2022 at this rate of $0.12 per share, our average total dividend paid each quarter would be
approximately $1.1 million, based on the number of our current outstanding shares (which assumes no increases or decreases in
the number of shares, except in connection with the anticipated vesting of currently outstanding equity awards).
For the fiscal year ending December 31, 2022, we project that our fixed commitments will include (i) $840,000 of
operating lease payments and (ii) other future obligations and accrued expenses of $12.2 million. At December 31, 2021, our
$95.0 million in FHLB borrowings are all short-term and tied to interest rate swap agreements and are expected to be renewed
as they mature during 2022. We believe that our liquid assets combined with the available lines of credit provide adequate
liquidity to meet our current financial obligations for at least the next 12 months.
Our total stockholders’ equity was $157.9 million at December 31, 2021. Consistent with our goal to operate a sound
and profitable financial organization we will actively seek to maintain the Bank as a “well capitalized” institution in accordance
with regulatory standards. As of December 31, 2021, First Financial Northwest Bank exceeded all regulatory capital
requirements. Regulatory capital ratios for First Financial Northwest Bank were as follows as of December 31, 2021: Total
capital to risk-weighted assets was 15.48%; Tier 1 capital and Common equity tier 1 capital to risk-weighted assets was
14.23%; and Tier 1 capital to total assets was 10.34%. At December 31, 2021, First Financial Northwest Bank met the financial
ratios to be considered well-capitalized under the regulatory guidelines. See Item 1. “Business – How We Are Regulated –
Regulation and Supervision of First Financial Northwest Bank – Capital Requirements.”
68
The Accumulated Other Comprehensive Income (“AOCI”) component of capital includes a variety of items, including
the value of our available-for-sale investment securities portfolio and the value of our derivative instruments, net of tax. We
model various interest rate scenarios that could impact these elements of AOCI and believe that we have sufficient capital to
withstand the estimated potential fluctuations in a variety of interest rate environments.
Recent Accounting Pronouncements
See Note 1 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information contained under Item 7. “Management’s Discussion and Analysis of Financial Condition and Results
of Operations – Asset and Liability Management and Market Risk” of this Form 10-K is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm (Moss Adams LLP, Everett, Washington, PCAOB
ID: 659)
Consolidated Balance Sheets as of December 31, 2021, and 2020
Consolidated Income Statements for the Years Ended December 31, 2021, and 2020
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2021, and 2020
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2021, and 2020
Consolidated Statements of Cash Flows for the Years Ended December 31, 2021, and 2020
Notes to Consolidated Financial Statements
Page
70
72
73
74
75
76
78
69
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of
First Financial Northwest, Inc. and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of First Financial Northwest, Inc.
and Subsidiaries’ (the “Company”) as of December 31, 2021 and 2020, the related consolidated
statements of income, comprehensive income, stockholders’ equity, and cash flows for the years then
ended, and the related notes (collectively referred to as the “consolidated financial statements”). In
our opinion, the consolidated financial statements present fairly, in all material respects, the
consolidated financial position of the Company as of December 31, 2021 and 2020, and the
consolidated results of its operations and its cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on the Company’s consolidated financial statements based on
our audits. We are a public accounting firm registered with the Public Company Accounting Oversight
Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement, whether due to error or fraud. The Company is
not required to have, nor were we engaged to perform, an audit of its internal control over financial
reporting in accordance with the standards of the PCAOB. As part of our audit we are required to
obtain an understanding of internal control over financial reporting but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control over financial reporting
in accordance with the standards of the PCAOB. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the
consolidated financial statements, whether due to error or fraud, and performing procedures to
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the
amounts and disclosures in the consolidated financial statements. Our audit also included evaluating
the accounting principles used and significant estimates made by management, as well as evaluating
the overall presentation of the consolidated financial statements. We believe that our audit provides a
reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the
consolidated financial statements that was communicated or required to be communicated to the
audit committee and that (1) relates to accounts or disclosures that are material to the consolidated
financial statements and (2) involved our especially challenging, subjective, or complex judgments.
The communication of critical audit matters does not alter in any way our opinion on the consolidated
financial statements, taken as a whole, and we are not, by communicating the critical audit matter
below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to
which it relates.
70
Allowance for Loan Losses
As described in Notes 1 and 3 to the consolidated financial statements, the Company’s allowance for
loan losses balance was $15.7 million at December 31, 2021. The allowance for loan losses is
maintained to provide for specific losses on impaired loans and probable losses inherent in the loan
portfolio. It is based upon the Company’s analysis of the factors underlying the quality of the loan
portfolio. These factors include, among others, charge-off history, current economic conditions,
borrowers’ ability to repay, the regulatory environment, competition, geographic and loan type
concentrations, policy underwriting standards, nature and volume of the loan portfolio, management’s
experience level, loan review and loan grading, and the value of underlying collateral.
We identified management’s risk ratings of loans and the estimation of qualitative factors, both of
which are used in the overall allowance for loan losses calculation, as a critical audit matter. The
Company uses credit quality indicators, including internally determined risk ratings, to classify loans
into pools and to estimate inherent loss rates for each of the loan pools, which are used in the
calculation of the allowance for loan losses. Determination of the risk ratings is inherently subjective
and involves significant management judgement. The qualitative factors are used to estimate
probable losses that are not captured in the historical loss rates and are based on management’s
evaluation of available internal and external data and involves significant management judgement.
Auditing management’s judgments regarding the determination of risk ratings and qualitative factors
applied to the allowance for loan losses involved a high degree of subjectivity.
The primary procedures we performed to address this critical audit matter included:
Obtained an understanding of the design and implementation of internal controls over the
accuracy of risk ratings of loans and the determination of the qualitative factors used in the
allowance for loan loss calculation.
Tested a risk-based, targeted selection of loans to gain substantive evidence that the Company is
appropriately risk rating these loans in accordance with its policies, and that the risk ratings for
the loans are reasonable based on the current facts and circumstances.
Obtained management’s analysis and supporting documentation related to the qualitative factors
and testing whether the qualitative factors used in the calculation of the allowance for loan losses
are supported by the supporting documentation provided by management.
Tested the appropriateness of the methodology and assumptions used in the calculation of the
allowance for loan losses, evaluating the completeness and accuracy of the data used in the
calculation, application of the risk ratings determined by management and used in the calculation,
application of the qualitative factors determined by management and used in the calculation, and
recalculation of the allowance for loan losses balance.
Everett, Washington
March 11, 2022
We have served as the Company’s auditor since 2009.
71
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands, except share data)
Assets
Cash on hand and in banks
Interest-earning deposits with banks
Investments available-for-sale, at fair value
Investments held-to-maturity, at amortized cost
Loans receivable, net of allowance of $15,657 and $15,174
Federal Home Loan Bank (“FHLB”) stock, at cost
Accrued interest receivable
Deferred tax assets, net
Other real estate owned (“OREO”)
Premises and equipment, net
Bank owned life insurance (“BOLI”)
Prepaid expenses and other assets
Right of use asset (“ROU”), net
Goodwill
Core deposit intangible, net
Total assets
Liabilities and Stockholders’ Equity
Deposits
Noninterest-bearing deposits
Interest-bearing deposits
Total deposits
FHLB advances
Advance payments from borrowers for taxes and insurance
Lease liability, net
Accrued interest payable
Other liabilities
Total liabilities
Stockholders’ Equity
Commitments and contingencies (Note 15)
Preferred stock, $0.01 par value; authorized 10,000,000 shares, no shares issued or outstanding
Common stock, $0.01 par value; authorized 90,000,000 shares; issued and outstanding
9,125,759 shares at December 31, 2021, and 9,736,875 shares at December 31, 2020
Additional paid-in capital
Retained earnings, substantially restricted
Accumulated other comprehensive income (loss), net of tax
Unearned Employee Stock Ownership Plan (“ESOP”) shares
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes to consolidated financial statements.
72
December 31,
2021
2020
$
7,246 $
66,145
7,995
72,494
168,948
2,432
1,103,461
127,551
2,418
1,100,582
5,465
5,285
850
—
22,440
35,210
3,628
3,646
889
684
6,410
5,508
1,641
454
22,579
33,034
1,643
3,647
889
824
$ 1,426,329 $ 1,387,669
$
117,751 $
91,285
1,039,723
1,002,348
1,157,474
95,000
1,093,633
120,000
2,909
3,805
112
2,498
3,783
211
9,150
1,268,450
11,242
1,231,367
—
91
72,298
86,162
174
(846)
—
97
82,095
78,003
(1,918)
(1,975)
157,879 $
156,302
$
$ 1,426,329 $ 1,387,669
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
Consolidated Income Statements
(Dollars in thousands, except share data)
Interest income
Loans, including fees
Investments available-for-sale
Investments held-to-maturity
Interest-earning deposits
Dividends on FHLB stock
Total interest income
Interest expense
Deposits
FHLB advances and other borrowings
Total interest expense
Net interest income
Provision for loan losses
Year Ended December 31,
2021
2020
$
$
$
50,170 $
3,200
52,546
3,173
24
72
23
52
332
53,798 $
320
56,114
7,216
1,603
8,819 $
44,979
300
14,005
1,640
15,645
40,469
1,900
Net interest income after provision for loan losses
$
44,679 $
38,569
Noninterest income
Net gain on sale of investments
BOLI income
Wealth management revenue, net
Deposit related fees
Loan related fees
Other
Total noninterest income
Noninterest expense
Salaries and employee benefits
Occupancy and equipment
Professional fees
Data processing
OREO related expenses, net
Regulatory assessments
Insurance and bond premiums
Marketing
Other general and administrative
Total noninterest expense
Income before provision for federal income taxes
Federal income tax provision
Net income
Basic earnings per common share
Diluted earnings per common share
Basic weighted average number of common shares outstanding
Diluted weighted average number of common shares outstanding
See accompanying notes to consolidated financial statements.
73
32
1,107
494
872
1,265
92
3,862 $
$
86
982
663
755
1,947
9
4,442
20,237
20,039
4,557
1,899
2,692
209
456
451
154
2,712
$
33,367 $
$
$
$
15,174
2,925
12,249 $
1.31 $
1.29 $
9,340,997
9,454,495
4,237
1,707
2,822
9
547
445
197
2,510
32,513
10,498
1,942
8,556
0.88
0.88
9,734,493
9,758,644
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(In thousands)
Net income
Other comprehensive income (loss), net of tax:
Year Ended December 31,
2021
2020
(In thousands)
12,249 $
8,556
$
Unrealized holding (losses) gains on available-for-sale securities
(1,636)
2,645
Tax effect
Reclassification adjustment for net gains realized in income
Tax effect
Gains (losses) on cash flow hedges
Tax effect
Other comprehensive income (loss), net of tax
Total comprehensive income
343
(32)
7
4,316
(906)
2,092 $
14,341 $
(556)
(86)
18
(3,251)
683
(547)
8,009
$
$
See accompanying notes to consolidated financial statements.
74
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75
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses
Loss on sale of OREO property, net
Net amortization of premiums and discounts on investments
Gain on sale of investments available-for-sale
Depreciation of premises and equipment
Loss on disposal of premises and equipment
Deferred federal income taxes
Allocation of ESOP shares
Stock compensation expense
BOLI income
Annuity income
Changes in operating assets and liabilities:
(Increase) decrease in prepaid expenses and other assets
Decrease in right of use asset
Increase (decrease) in advance payments from borrowers for taxes and insurance
Decrease (increase) in accrued interest receivable
Decrease in lease liability
Decrease in accrued interest payable
Increase (decrease) in other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Proceeds from sales and call of investments
Principal repayments on investments
Purchases of investments available-for-sale
Purchases of investments held-to-maturity
Net (increase) decrease in loans receivable
Proceeds from sales of OREO properties
Purchases of premises and equipment
Sale of FHLB stock
Proceeds from BOLI death benefit settlement
Purchase of BOLI
Net cash (used by) provided by investing activities
Year Ended December 31,
2021
2020
$
12,249 $
8,556
300
207
1,100
(32)
2,158
1
235
1,696
708
(1,107)
(24)
(354)
759
411
223
(736)
(99)
743
18,438
20,042
20,028
(84,203)
—
(3,179)
247
1,900
—
767
(86)
2,170
—
5
1,200
427
(982)
(43)
291
678
(423)
(1,370)
(612)
(74)
(430)
11,974
12,082
12,809
(13,963)
(2,375)
5,980
—
(2,020)
(2,283)
945
1,086
(2,155)
599
—
(70)
(49,209)
12,779
continued
76
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
Cash flows from financing activities:
Net increase in deposits
Advances from the FHLB
Repayments of advances from the FHLB
Proceeds from stock options exercises
Net share settlement of stock awards
Repurchase and retirement of common stock
Dividends paid
Net cash provided by financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest
Federal income taxes
Noncash transactions:
Change in unrealized gain on investments available-for-sale
Change in unrealized losses on cash flow hedge
Initial recognition of right-of-use asset for new leases
Initial recognition of lease liability for new leases
See accompanying notes to consolidated financial statements.
Year Ended December 31,
2021
2020
$
$
$
$
63,841
25,000
(50,000)
344
(38)
(11,384)
(4,090)
60,099
267,000
(284,700)
—
(73)
(5,706)
(3,874)
23,673 $
32,746
(7,098) $
80,489
73,391 $
57,499
22,990
80,489
8,918 $
3,190
15,720
1,655
(1,668)
4,316
758
758
2,559
(3,251)
2,116
2,116
77
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies
Nature of Operations and Principles of Consolidation
First Financial Northwest, Inc. (“First Financial Northwest”), a Washington corporation, was formed on June 1, 2007
for the purpose of becoming the holding company for First Financial Northwest Bank (“the Bank”) in connection with the
conversion from a mutual holding company structure to a stock holding company structure completed on October 9, 2007. First
Financial Northwest’s business activities generally are limited to passive investment activities and oversight of its investment in
First Financial Northwest Bank. Accordingly, the information presented in the consolidated financial statements and related
data, relates primarily to First Financial Northwest Bank. First Financial Northwest converted from a savings and loan holding
company to a bank holding company in 2015 and is subject to regulation by the Board of Governors of the Federal Reserve
Bank of San Francisco (“FRB”). First Financial Northwest Bank is regulated by the Federal Deposit Insurance Corporation
(“FDIC”) and the Washington State Department of Financial Institutions (“DFI”).
First Financial Northwest Bank was organized in 1923 as a Washington state-chartered savings and loan association,
converted to a federal mutual savings and loan association in 1935, and converted to a Washington state-chartered mutual
savings bank in 1992. In 2002, First Financial Northwest Bank reorganized into a two-tier mutual holding company structure,
became a stock savings bank and became the wholly-owned subsidiary of First Financial of Renton, Inc. In connection with the
mutual to stock conversion in 2007, the Bank changed its name to First Savings Bank Northwest. In August 2015, the Bank
changed its name to First Financial Northwest Bank to support the expansion of focus to being more than a traditional “savings”
bank. In February 2016, the Bank changed its charter from a Washington chartered stock savings bank to a Washington
chartered commercial bank.
First Financial Northwest Bank is a community-based commercial bank primarily serving King and Snohomish
Counties, and to a lesser extent, Pierce and Kitsap Counties, Washington. In King County, the headquarters and full-service
banking office, as well as one branch office, are located in Renton. Additional King County branch offices are located in
Bellevue, Woodinville, Bothell, Kent, Kirkland and Issaquah. In Snohomish County, five additional branch offices serve Mill
Creek, Edmonds, Clearview, Smokey Point, and Lake Stevens. In Pierce County, two branch offices serve Gig Harbor and
University Place. First Financial Northwest Bank’s business consists of attracting deposits from the public and utilizing these
deposits to originate one-to-four family residential, multifamily, commercial real estate, construction/land, business and
consumer loans.
The accompanying consolidated financial statements include the accounts of First Financial Northwest and its
wholly‑owned subsidiaries First Financial Northwest Bank and First Financial Diversified Corporation (collectively, “the
Company”). All significant intercompany balances and transactions between First Financial Northwest and its subsidiaries have
been eliminated in consolidation.
Basis of Presentation and Use of Estimates
The accounting and reporting policies of First Financial Northwest and its subsidiaries conform to U.S. generally
accepted accounting principles (“GAAP”). In preparing the consolidated financial statements, management makes estimates and
assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial
statements and the disclosures provided. Actual results could differ from these estimates. Material estimates particularly subject
to change include the allowance for loan and lease losses (“ALLL”), other real estate owned (“OREO”), deferred tax assets and
the fair values of financial instruments.
Subsequent Events
The Company has evaluated events and transactions subsequent to December 31, 2021 for potential recognition or
disclosure.
78
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash on hand and in banks, interest-bearing
deposits and federal funds sold all with maturities of three months or less.
The Company is required to maintain an average reserve balance with the FRB or maintain such reserve balance in the
form of cash. Effective March 26, 2020 the Federal Reserve lowered the reserve ratios on transaction accounts maintained at a
depository institution to zero percent. There was no required reserve balance at December 31, 2021 and 2020.
Investments
Investments in debt securities are classified into one of three categories: (1) held-to-maturity, (2) available-for-sale, or
(3) trading. At December 31, 2021 and 2020, we had held-to-maturity and available-for-sale, but no trading securities.
Investments are categorized as held-to-maturity when we have the positive intent and ability to hold them to maturity.
Held-to-maturity investments are reported at fair value, which is the amortized cost.
Investments are classified as available-for-sale if the Company intends to hold the securities for an indefinite period of
time, but not necessarily to maturity. Investments available-for-sale are reported at fair value. Unrealized holding gains and
losses on investments available-for-sale are excluded from earnings and are reported in other comprehensive income (loss), net
of applicable taxes. Gains and losses on sales are recorded on the trade date and determined using the specific identification
method. Amortization or accretion of purchase premiums and discounts are included in investment income using the level-yield
method over the remaining period to contractual maturity. Dividend or interest income is recognized when it is earned.
The estimated fair value of investments is based on quoted market prices for investments traded in active markets or
dealer quotes. Mortgage-backed investments represent participation interest in pools of first mortgage loans originated and
serviced by the issuers of the investments.
Management makes an assessment to determine whether there have been any events or economic circumstances to
indicate that a security on which there is an unrealized loss is impaired on an other-than-temporary basis. Management
considers many factors including the severity and duration of the impairment, recent events specific to the issuer or industry,
and for debt securities, external credit ratings and recent downgrades. Securities on which there is an unrealized loss that is
deemed to be an other-than-temporary impairment (“OTTI”) are written down to fair value. For equity securities, the write-
down is recorded as a realized loss in noninterest income in the Consolidated Income Statements. For debt securities, if
management intends to sell the security or it is likely that management will be required to sell the security before recovering its
cost basis, the entire impairment loss would be recognized in earnings as an OTTI. If management does not intend to sell the
security and it is not likely that management will be required to sell the security but management does not expect to recover the
entire amortized cost basis of the security, only the portion of the impairment loss representing credit losses would be
recognized in earnings. The credit loss on a security is measured as the difference between the amortized cost basis and the
present value of the cash flows expected to be collected. Projected cash flows are discounted by the original or current effective
interest rate depending on the nature of the security being measured for potential OTTI. The remaining impairment related to all
other factors, the difference between the present value of the cash flows expected to be collected and fair value, is recognized as
a charge to other comprehensive income (“OCI”). Impairment losses related to all other factors are presented as separate
categories within OCI.
Loans Receivable
Loans are recorded at their outstanding principal balance adjusted for charge-offs, the ALLL and net deferred fees or
costs. Interest on loans is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs,
are deferred and recognized in interest income using the level-yield method without anticipating prepayments.
The accrual of interest on loans is discontinued at the time the loan is 90 days delinquent unless the loan is well
secured and in the process of collection. Consumer and other loans are typically managed in the same manner. In all cases,
loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is doubtful. The Company
did not designate loans with payment deferrals granted due to the COVID-19 pandemic as delinquent in accordance with
79
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
provisions of The Coronavirus Aid, Relief, and Economic Security Act of 2020 (the “CARES Act”) and the Consolidated
Appropriations Act, 2021 (the “CAA, 2021”) and related regulatory guidance.
All interest accrued but not collected on loans that are placed on nonaccrual is reversed against interest income. Loans
are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments
are reasonably assured. In order to return a nonaccrual loan to accrual status, each loan is evaluated on a case-by-case basis. We
evaluate the borrower’s financial condition to ensure that future loan payments are reasonably assured. We also take into
consideration the borrower’s willingness and ability to make the loan payments and historical repayment performance. We
require the borrower to make the loan payments consistently for a period of at least six months as agreed to under the terms of
any modified loan agreement before we will consider reclassifying the loan to accrual status.
Impaired Loans
A loan is considered impaired when, based on current information and events, it is probable that the Company will be
unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan
agreement. Factors considered by management in determining impairment include payment status, collateral value, market
conditions, rent rolls and the financial strength of the borrower(s) and guarantor(s), if any. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and the borrowers, including the length of the delay, the reasons for
the delay, the borrower’s prior payment history and the amount of the shortfall in relation to the principal and interest owed.
Impairment is measured by the fair value method on a loan-by-loan basis.
When a loan is identified as impaired, its impairment is measured using the present value of expected future cash
flows, discounted at the loan’s effective interest rate, except when the sole (remaining) source of repayment for the loan is the
operation or liquidation of the collateral. In these cases, the Company uses an observable market price or current fair value of
the collateral, less certain completion costs and closing costs when foreclosure is probable, instead of discounted cash flows.
The Company obtains annual updated appraisals for impaired collateral dependent loans that exceed $1.0 million. In addition,
the Company may order appraisals on properties not included within these guidelines when there are extenuating circumstances
where the Company is not otherwise able to determine the fair value of the property. Appraised values may be discounted based
on management’s historical knowledge, changes in market conditions from the time of valuation and/or management’s
expertise and knowledge of the borrower. If management determines that the value of the impaired loan is less than the
recorded investment in the loan, an impairment is recognized through an allowance estimate or a charge-off to the ALLL.
Troubled Debt Restructurings
Certain loan modifications or restructurings are accounted for as troubled debt restructurings (“TDR”). In general, the
modification or restructuring of a debt is considered a TDR if, for economic or legal reasons related to the borrower’s financial
difficulties, a concession is granted to the borrower that the Company would not otherwise consider. Examples of these
modifications or restructurings include advancement of maturity date, accepting interest only payments for a period of time, or
granting an interest rate concession for a period of time. The impaired portion of the loan with an interest rate concession and/or
interest-only payments for a specific period of time are calculated based on the present value of expected future cash flows
discounted at the loan’s effective interest rate. The effective interest rate is the rate of return implicit on the original loan. This
impaired amount reduces the ALLL and a valuation allowance is established to reduce the loan balance. As loan payments are
received in future periods, the ALLL entry is reversed and the valuation allowance is reduced utilizing the level-yield method
over the modification period. A loan that is determined to be classified as a TDR is generally reported as a TDR until the loan is
paid in full or otherwise settled, sold, or charged-off. The Company elected to apply the temporary relief under the CARES Act
and related regulatory guidance to certain eligible short-term modifications, past due loans, and modifications. Qualifying loan
modifications were not classified as TDR for accounting or disclosure purposes until 180 days following a loan's initial
modification under the CARES Act and related regulatory guidance at which time those loans were classified as a TDR.
80
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Allowance for Loan and Lease Losses
The allowance for loan and lease losses (“ALLL”) is a valuation allowance for probable incurred credit losses. Losses
are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Any
subsequent recoveries are credited to the allowance.
The ALLL is evaluated on a regular basis by management and is based upon management’s periodic review of the
collectability of the loans and factors such as the nature and volume of the loan portfolio, historical loss considerations, adverse
situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic
conditions. The evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more
information becomes available. Additional analysis was completed on the ALLL during 2021 and 2020 based on the
significance of loan modifications in accordance with the CARES Act and regulatory guidance.
While management uses available information to recognize losses on loans, future additions to the allowance may be
necessary based on changes in economic conditions or changes to the credit quality of the loan portfolio. In addition, various
regulatory agencies, as an integral part of their examination process, periodically review the Company’s ALLL. Such agencies
may require management to make adjustments to the allowance based on their judgments about information available to them at
the time of their examination.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and
amortization are computed using the straight-line method over the estimated useful lives of the assets. The estimated useful
lives used to compute depreciation and amortization is 15 to 40 years for buildings and building improvements, and is three to
seven years for furniture, fixtures, and equipment. Leasehold improvements are amortized over the life of the lease.
Management reviews buildings, improvements and equipment for impairment on an annual basis or whenever events or
changes in the circumstances indicate that the undiscounted cash flows for the property are less than its carrying value. If
identified, an impairment loss is recognized through a charge to earnings based on the fair value of the property.
Federal Home Loan Bank Stock
As a member of the Federal Home Loan Bank System, the Bank is required to maintain a minimum level of
investment in the Federal Home Loan Bank of Des Moines (“FHLB”) stock, based on specified percentages of total assets and
the Bank’s outstanding FHLB advances. Ownership of FHLB stock is restricted to the FHLB and member institutions. The
Bank’s investment in FHLB stock is carried at par value ($100 per share), which reasonably approximates its fair value.
Transfer of Financial Assets
Transfers of an entire financial asset, a group of entire financial assets, or participating interest in an entire financial
asset are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to
be surrendered when (1) the assets have been isolated from the Bank, (2) the transferee obtains the right (free of conditions that
constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Bank does not maintain
effective control over the transferred assets through an agreement to repurchase them before their maturity.
Other Real Estate Owned
OREO consists principally of properties acquired through foreclosure and is originally stated at estimated market value
less selling costs. Losses arising from the acquisition of property, in full or partial satisfaction of loans, are charged to the
ALLL.
Subsequent to the transfer of foreclosed assets held for sale, the assets are recorded at the lower of cost or fair value
(less estimated costs to sell), based on periodic evaluations. Subsequent write-downs in value are charged to noninterest
expense. Generally, legal and professional fees associated with foreclosures are expensed as incurred. Costs incurred to improve
property prior to sale are capitalized; however, in no event are recorded costs allowed to exceed estimated fair value.
Subsequent gains, losses, or expenses recognized on the sale of these properties are included in noninterest expense. The
81
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
amounts that will ultimately be recovered from foreclosed assets may differ substantially from the carrying value of the assets
because of future market factors beyond management’s control.
Bank-Owned Life Insurance
The Company has purchased life insurance on certain key executives and officers. Bank-owned life insurance
(“BOLI”) is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash
surrender value adjusted for other charges or other amounts due that are probable at settlement. Increases to the cash surrender
value are recorded as noninterest income and partially offset expenses for employee benefits. Certain BOLI contracts contain
endorsement split-dollar life agreements. In these circumstances, the Bank accrues a reserve liability and related compensation
expense for the expected future benefit payout.
Loan Commitments and Related Financial Instruments
Financial instruments include off-balance sheet credit instruments, such as unused lines of credit and commercial
letters of credit issued to meet customer financing needs. The face amount of these items represents the exposure to loss before
considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.
Reserve for Unfunded Commitments
Management maintains a reserve for unfunded commitments to absorb probable losses associated with our off-balance
sheet commitments to lend funds such as unused lines of credit and the undisbursed portion of construction loans. Management
determines the adequacy of the reserve based on reviews of individual exposures, current economic conditions, and other
relevant factors. The reserve is based on estimates and ultimate losses may vary from the current estimates. The reserve is
evaluated on a regular basis and necessary adjustments are reported in earnings during the period in which they become known.
The reserve for unfunded commitments is included in the other liabilities section of the consolidated balance sheets.
Stock-Based Compensation
Compensation cost is recognized for stock options and restricted stock awards, based on the fair value of these awards
at the grant date. A Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of the
Company’s common stock at the grant date is used for restricted stock awards. Compensation cost is recognized over the
required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is
recognized on a straight-line basis over the requisite service period for the entire award.
Federal Income Taxes
The Company files a consolidated Federal income tax return and records its provision for income taxes under the asset
and liability method. Deferred taxes result from temporary differences in the recognition of certain income and expense
amounts between the Company’s financial statements and its tax return. The principal items giving rise to these differences
include net operating losses, valuation adjustments on foreclosed properties, and allowance for credit losses. Deferred tax assets
and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are
adjusted through the provision for income taxes. Valuation allowances are established to reduce the net carrying amount of
deferred tax assets if it is determined to be more likely than not that all or some portion of the potential deferred tax asset will
not be realized. The Company’s policy is to recognize interest and penalties associated with income tax matters in income tax
expense.
Employee Stock Ownership Plan
The cost of shares issued to the Employee Stock Ownership Plan (“ESOP”), but not yet allocated to participants, is
shown as a reduction of stockholders’ equity. Compensation expense is based on the market price of shares as they are
committed to be released to participant accounts. Dividends on allocated ESOP shares reduce retained earnings; dividends on
unearned ESOP shares reduce debt and accrued interest.
82
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Earnings Per Share
Nonvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are
participating securities and are included in the computation of earnings per share (“EPS”) pursuant to the two-class method. The
two-class method is an earnings allocation formula that determines EPS for each class of common stock and participating
security according to dividends declared or accumulated and participation rights in undistributed earnings. Certain shares of the
Company’s nonvested restricted stock awards qualify as participating securities.
Net income is allocated between the common stock and participating securities pursuant to the two-class method,
based on their rights to receive dividends, participate in earnings or absorb losses. Basic earnings per common share is
computed by dividing net earnings available to common shareholders by the weighted average number of common shares
outstanding during the period, excluding participating nonvested restricted shares. As ESOP shares are committed to be
released, they are included in the outstanding shares used in the basic EPS calculation.
Diluted earnings per share is computed in a similar manner, except that first the denominator is increased to include
the number of additional shares that would have been outstanding if potentially dilutive shares, excluding the participating
securities, were issued using the treasury stock method. For all periods presented, stock options and certain restricted stock
awards are potentially dilutive non-participating instruments issued by the Company.
Undistributed losses are not allocated to the nonvested share-based payment awards (the participating securities) under
the two-class method as the holders are not contractually obligated to share in the losses of the Company.
Comprehensive Income
Comprehensive income consists of net income and unrealized gains and losses on investments available-for-sale and
derivatives, which are also recognized as separate components of equity, net of tax.
Advertising Expenses
Advertising costs are generally expensed as incurred and are not material.
Fair Value of Financial Instruments
Fair values of financial instruments are estimated using relevant market information and other assumptions, as more
fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding
interest rates, credit risk, prepayments and other factors, especially in the absence of broad markets for particular items.
Changes in assumptions or in market conditions could significantly affect the estimates.
Segment Information
The Company’s activities are considered to be a single industry segment for financial reporting purposes. The
Company is engaged in the business of attracting deposits from the general public and providing lending services. Substantially
all income is derived from a diverse base of investments and commercial, construction, mortgage, and consumer lending
activities.
Reclassification
Certain amounts in the consolidated financial statements for prior years have been reclassified to conform to the
current consolidated financial statement presentation. The results of the reclassifications are not considered material and have
no effect on previously reported net income or stockholders’ equity.
Derivatives
The Company designates certain interest rate swap agreements as a cash flow hedge, and as such, reports the net fair
value as an asset or liability. The hedge is utilized to mitigate the risk of variability in future interest payments. The fair value of
83
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the cash flow hedge is based on dealer quotes, pricing models, discounted cash flow methodologies or similar techniques for
which the determination of fair value may require significant management judgment or estimation. The derivative is marked to
its fair value, with the change in fair value recorded as other comprehensive income or loss. The gain or loss on the derivative is
reclassified into earnings in the same income statement line item that is used to present the earnings effect of the hedged item.
Goodwill
Goodwill is recorded from a business combination as the difference in purchase price and fair value of the assets
acquired and liabilities assumed. Goodwill has an indefinite useful life, and as such, is not amortized. The Company performs a
goodwill impairment analysis on an annual basis as of December 31. Additionally, the Company performs an impairment
analysis as needed when circumstances indicate impairment potentially exists. Any impairment will be recorded as a noninterest
expense and corresponding reduction in intangible asset on the consolidated financial statements.
Core Deposit Intangible
A core deposit intangible (“CDI”) asset is recognized from the assumption of core deposit liabilities in connection with
the acquisition of four branches from Opus Bank, a California state-chartered commercial bank (the “Branch Acquisition”). The
asset was valued by a third party and is amortized into noninterest expense over ten years. The CDI is evaluated for impairment
annually with any additional decline recorded as a noninterest expense on the Consolidated Income Statement.
Recent Accounting Pronouncements Adopted in 2021
In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update
(“ASU”) No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. 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 (Subtopic
310-20). ASU 2020-08 clarifies that the Company should reevaluate whether a callable debt security is within the scope of
paragraph 310-20-35-33 for each reporting period. The Company adopted this ASU in January 2021 with no material impact on
its consolidated financial statements.
In August 2021, the FASB issued ASU 2021-06, Presentation of Financial Statements (Topic 205), Financial Services
—Depository and Lending (Topic 942), and Financial Services—Investment Companies (Topic 946). This ASU outlines the
changes in the presentation of information on the balance sheet due to SEC Regulation S-X. This rule was put into place to
better identify various items and whether they should appear on the face of the balance sheet or the accompanying notes. The
Company adopted ASU 2021-06 in the fourth quarter of 2021 with no material impact on the Company’s consolidated financial
statements.
Recently Issued Accounting Pronouncements
ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326) as amended by ASU 2018-19, ASU 2019-04 and
ASU 2019-05, was originally issued in June 2016. 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
84
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
beginning of the first reporting period in which the ASU is adopted. This ASU is effective for smaller reporting companies,
such as the Company, for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years,
with early adoption permitted. The Company is evaluating its current expected loss methodology on the loan and investment
portfolios to identify the necessary modifications in accordance with this standard and expects a change in the processes and
procedures to calculate the ALLL, including changes in assumptions and estimates to consider expected credit losses over the
life of the loan versus the current accounting practice that utilizes the incurred loss model. A valuation adjustment to the ALLL
or investment portfolio that is identified in this process will be reflected as a one-time adjustment in equity rather than earnings.
ASU 2019-05 issued in April 2019 further provides that entities that have certain financial instruments measured at amortized
cost that has credit losses, to irrevocably elect the fair value option in Subtopic 825-10, upon adoption of Topic 326. The fair
value option applies to available-for-sale debt securities. This ASU is effective upon adoption of ASU 2016-13, and should be
applied on a modified-retrospective basis as a cumulative-effect adjustment to the opening balance of retained earnings in the
statement of financial condition as of the adoption date. The Company is in the process of compiling historical and industry
data that will be used to calculate expected credit losses on the loan portfolio to ensure that it is fully compliant with the ASU at
the adoption date and is evaluating the potential impact adoption of this ASU will have on its consolidated financial statements.
The Company intends to adopt ASU 2016-13 in the first quarter of 2023, and as a result, the ALLL may increase. Until the
evaluation is complete, however, the magnitude of the increase will not be known.
In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848). This ASU applies to
contracts, hedging relationships and other transactions that reference LIBOR or other rate references expected to be
discontinued because of reference rate reform. The amendments in this ASU are elective and apply to all entities that have
derivative instruments that use an interest rate that will be modified by reference rate reform. This ASU provides
implementation guidance to clarify that certain optional expedients and exceptions in Topic 848 may be applied to derivative
instruments. This ASU may be elected on a full retrospective basis for any interim period subsequent to March 12, 2020, or on
a prospective basis to new modifications from any date subsequent to the date of issuance. As of December 31, 2021, the
Company’s derivative instruments continued to use LIBOR as the basis for interest-rate swap calculations. The Company is
evaluating the optional election of this ASU for the transition from LIBOR to a new reference rate.
Note 2 - Investments
The following tables summarize the amortized cost and fair value of investments available-for-sale at
December 31, 2021 and 2020, and the corresponding amounts of gross unrealized gains and losses.
Mortgage-backed investments:
Fannie Mae
Freddie Mac
Ginnie Mae
Other
Municipal bonds
U.S. Government agencies
Corporate bonds
Amortized
Cost
December 31, 2021
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(In thousands)
Fair Value
$
12,920 $
146 $
(88) $
13,039
23,728
11,278
36,078
41,711
29,997
115
105
47
677
61
505
(330)
(146)
(61)
(289)
(338)
(207)
12,978
12,824
23,687
11,264
36,466
41,434
30,295
$
168,751 $
1,656 $
(1,459) $
168,948
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FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Mortgage-backed investments:
Fannie Mae
Freddie Mac
Ginnie Mae
Other
Municipal bonds
U.S. Government agencies
Corporate bonds
Amortized
Cost
December 31, 2020
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(In thousands)
Fair Value
$
12,797 $
491 $
4,116
16,513
10,691
16,483
41,084
200
617
100
963
88
24,001
125,685 $
$
221
2,680 $
— $
—
(3)
(62)
—
(537)
(212)
(814) $
13,288
4,316
17,127
10,729
17,446
40,635
24,010
127,551
There were $2.4 million of investments classified as held-to-maturity at both December 31, 2021, and 2020. In January
2020, the Bank purchased three annuity contracts to be held long-term to satisfy the benefit obligation associated with certain
supplemental executive retirement plan agreements. The annuities are reported at amortized cost as investments held-to-
maturity on the Company’s consolidated balance sheet. The amortized cost includes increases from interest income.
The amortized cost and estimated fair value of investments available-for-sale at December 31, 2021, by expected
maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties. Investments not due at a single maturity date, primarily
mortgage‑backed investments, are shown separately.
Due within one year
Due after one year through five years
Due after five years through ten years
Due after ten years
Mortgage-backed investments
December 31, 2021
Amortized
Cost
Fair Value
(In thousands)
$
399 $
8,547
27,501
71,339
107,786
60,965
404
8,592
27,784
71,415
108,195
60,753
$
168,751 $
168,948
Under Washington State law, in order to participate in the public funds program the Company is required to pledge
eligible securities as collateral in an amount equal to 50% of the public deposits held. Investments with a carrying value of
$23.1 million and $23.4 million were pledged as collateral for public deposits at December 31, 2021, and 2020, respectively,
both of which exceeded the minimum collateral requirements established by the Washington Public Deposit Protection
Commission. At both December 31, 2021, and 2020, there were no investments pledged as collateral for FHLB advances.
86
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Sales and other redemptions of available-for-sale investments were as follows:
Proceeds
Gross gains
Gross losses
Year Ended December 31,
2021
2020
$
(In thousands)
20,042 $
104
(72)
12,082
189
(103)
The following tables summarize the aggregate fair value and gross unrealized loss by length of time those investments
have been continuously in an unrealized loss position at December 31, 2021 and 2020.
Mortgage-backed investments:
Fannie Mae
Freddie Mac
Ginnie Mae
Other
Municipal bonds
U.S. Government agencies
Corporate bonds
Mortgage-backed investments:
Fannie Mae
Freddie Mac
Ginnie Mae
Other
Municipal bonds
U.S. Government agencies
Corporate bonds
Less Than 12 Months
December 31, 2021
12 Months or Longer
Total
Fair Value
Unrealized
Loss
Fair Value
Unrealized
Loss
Fair Value
Unrealized
Loss
(In thousands)
$
$
6,279 $
4,709
18,539
4,815
18,805
10,123
985
64,255 $
(88) $
(233)
(146)
(61)
(264)
(34)
(15)
(841) $
— $
3,214
—
—
1,059
21,682
3,809
29,764 $
— $
(97)
—
—
(25)
(304)
(192)
(618) $
Less Than 12 Months
December 31, 2020
12 Months or Longer
6,279 $
7,923
18,539
4,815
19,864
31,805
4,794
94,019 $
Total
(88)
(330)
(146)
(61)
(289)
(338)
(207)
(1,459)
Fair Value
Unrealized
Loss
Fair Value
Unrealized
Loss
Fair Value
Unrealized
Loss
(In thousands)
$
— $
—
—
—
—
1,716
—
— $
—
—
—
—
— $
—
1,311
5,942
—
(11)
30,991
—
5,794
— $
—
(3)
(62)
—
(526)
(212)
— $
—
1,311
5,942
—
32,707
5,794
$
1,716 $
(11) $
44,038 $
(803) $
45,754 $
—
—
(3)
(62)
—
(537)
(212)
(814)
At December 31, 2021, and 2020, the Company had 51 and 20 securities, respectively, with a gross unrealized loss
position. Management reviewed the financial condition of the entities underlying the securities at both December 31, 2021, and
December 31, 2020, and determined that no OTTI was required. Management believes that, while actual fluctuation in
unrealized losses will occur over the life of an investment security, the temporary impairment on the investment securities that
were in an unrealized loss position at December 31, 2021 and 2020, will be incrementally relieved as the individual investment
securities approach their respective contractual maturity dates. The unrealized losses relate principally to the general change in
interest rate and illiquidity, and not credit quality. As management does not intend to sell the security, and it is likely that it will
not be required to sell the security before its anticipated recovery, no declines are deemed to be other-than-temporary.
87
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Loans Receivable
Loans receivable net of loans in process (“LIP”) at December 31, 2021, and 2020 are summarized as follows:
One-to-four family residential:
Permanent owner occupied
Permanent non-owner occupied
Multifamily
Commercial real estate
Construction/land: (1)
One-to-four family residential
Multifamily
Commercial
Land
Business
Consumer
Total loans
Less:
Deferred loan fees, net (2)
ALLL
Loans receivable, net
December 31,
2021
2020
(In thousands)
$
185,320 $
199,796
385,116
206,323
175,637
381,960
130,146
136,694
419,417
385,265
34,677
37,194
6,189
15,395
93,455
46,590
44,812
1,119,536
418
15,657
33,396
51,215
5,783
1,813
92,207
80,663
40,621
1,117,410
1,654
15,174
$
1,103,461 $
1,100,582
____________
(1) Included in the construction/land category are “rollover” loans, which are loans that will convert upon completion of the
construction period to permanent loans. At that time, the loans will be classified according to the underlying collateral. In
addition, raw land or buildable lots, where the Company does not intend to finance the construction are included in the
construction/land category. At December 31, 2021, the Company classified $37.2 million of multifamily loans, $12.9 million
of commercial land loans and $6.2 million of commercial real estate loans as construction/land loans to facilitate the review
of the composition of its loan portfolio. At December 31, 2020, $51.2 million of multifamily loans, $1.8 million of
commercial land loans, and $5.8 million of commercial real estate loans were reclassified to the construction/land category.
(2) Deferred loan fees, net, include $3.3 million of unamortized loan purchase premiums.
At both December 31, 2021, and 2020, there were no loans classified as held for sale.
Concentrations of credit. Most of the Bank’s lending activity occurs within the state of Washington. The primary
market areas include King and to a lesser extent Pierce, Snohomish and Kitsap counties. At December 31, 2021, the Company’s
loan portfolio consists of one-to-four family residential loans which comprised 34.4%, commercial real estate and multifamily
loans were 37.5% and 11.6%, respectively, and construction/land loans were 8.4% of the total loan portfolio. Consumer and
business loans accounted for the remaining 8.1% of the loan portfolio. During the years ended December 31, 2021, and 2020,
the Bank participated in the U.S. Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”), a guaranteed
unsecured loan program enacted under the CARES Act to provide near-term relief to help small businesses impacted by
88
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COVID-19 sustain operations. Forgiveness payments received from the SBA reduced the balance of PPP loans included in
commercial business loans to $10.8 million at December 31, 2021, all of which is fully guaranteed by the SBA. The Bank
expects that the majority of remaining PPP borrowers will seek full or partial forgiveness of their loan obligations in accordance
with the CARES Act. The Company’s five largest borrowing relationships had an aggregate total of $106.6 million at
December 31, 2021, representing 9.5% of total loans receivable.
The Company originates both adjustable and fixed interest rate loans. The composition of loans receivable at
December 31, 2021, and 2020, was as follows:
Fixed Rate
Adjustable Rate
December 31, 2021
Term to Maturity
Principal
Balance
(In thousands)
Term to Rate Adjustment
Principal
Balance
Due within one year
After one year through three years
$
39,712 Due within one year
50,504 After one year through three years
After three years through five years
92,824 After three years through five years
After five years through ten years
Thereafter
118,310 After five years through ten years
177,333 Thereafter
$
478,683
Fixed Rate
Adjustable Rate
December 31, 2020
Term to Maturity
Principal
Balance
(In thousands)
Term to Rate Adjustment
Due within one year
$
30,627 Due within one year
After one year through three years
After three years through five years
After five years through ten years
Thereafter
92,301 After one year through three years
106,298 After three years through five years
107,788 After five years through ten years
205,232 Thereafter
542,246
$
$
$
$
$
284,631
74,706
177,607
103,909
—
640,853
Principal
Balance
294,220
82,153
98,296
100,495
—
575,164
Our adjustable-rate loans are tied to various indexes, including LIBOR, the prime rate as published in The Wall Street
Journal, and the FHLB. Certain adjustable‑rate loans have interest rate adjustment limitations and are generally indexed to the
FHLB Long-Term Bullet advance rates published by the FHLB. Future market factors may affect the correlation of the interest
rate adjustment with the rates paid on short‑term deposits that have been primarily utilized to fund these loans.
Credit Quality Indicators. The Company assigns a risk rating to all credit exposures based on the risk rating system
designed to define the basic characteristics and identified risk elements of each credit extension. The Company utilizes a
nine‑point risk rating system. A description of the general characteristics of the risk grades is as follows:
•
•
Grades 1 through 5: These grades are considered to be “pass” credits. These include assets where there is virtually no
credit risk, such as cash secured loans with funds on deposit with the Bank. Pass credits also include credits that are on
the Company’s watch list (grade 5), where the borrower exhibits potential weaknesses, which may, if not checked or
corrected, negatively affect the borrower’s financial capacity and threaten their ability to fulfill debt obligations in the
future.
Grade 6: These credits, classified as ”special mention”, possess weaknesses that deserve management’s close attention.
Special mention assets do not expose the Company to sufficient risk to warrant adverse classification in the
89
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
substandard, doubtful or loss categories. If left uncorrected, these potential weaknesses may result in deterioration in
the Company’s credit position at a future date.
•
•
•
Grade 7: These credits, classified as “substandard”, present a distinct possibility that the Company will sustain some
loss if the deficiencies are not corrected. These credits have well defined weaknesses which jeopardize the orderly
liquidation of the debt and are inadequately protected by the current net worth and payment capacity of the borrower or
of any collateral pledged.
Grade 8: These credits are classified as “doubtful” have well defined weaknesses which make the full collection or
liquidation of the loan highly questionable and improbable. This classification is used where significant risk exposures
are perceived but the exact amount of the loss cannot yet be determined due to pending events.
Grade 9: Assets classified as “loss” are considered uncollectible and cannot be justified as a viable asset for the
Company. There is little or no prospect of near term recovery and no realistic strengthening action of significance is
pending.
As of both December 31, 2021, and 2020, the Company had no loans rated as doubtful or loss. The following tables
represent a summary of loans at December 31, 2021, and 2020 by type and risk category:
One-to-
Four
Family
Residential Multifamily
December 31, 2021
Commercial
Real Estate
Construction/
Land
(In thousands)
Business
Consumer
Total
Risk Rating:
Pass, grade 1-4
Pass, grade 5
(watch)
Special mention
Substandard
$ 383,276 $
126,149 $
351,241 $
91,202 $ 46,590 $
44,379 $ 1,042,837
911
929
—
3,997
—
—
23,019
11,127
34,030
2,253
—
—
—
—
—
33
221
179
30,213
12,277
34,209
Total
$ 385,116 $
130,146 $
419,417 $
93,455 $ 46,590 $
44,812 $ 1,119,536
One-to-
Four
Family
Residential Multifamily
December 31, 2020
Commercial
Real Estate
Construction /
Land
(In thousands)
Business
Consumer
Total
Risk Rating:
Pass, grade 1-4
Pass, grade 5
(watch)
Special mention
Substandard
$ 376,918 $
132,243 $
316,955 $
89,957 $
80,208 $
40,477 $ 1,036,758
3,914
601
527
2,347
—
2,104
52,375
15,935
—
2,250
—
—
455
—
—
144
—
—
61,485
16,536
2,631
Total
$ 381,960 $
136,694 $
385,265 $
92,207 $
80,663 $
40,621 $ 1,117,410
ALLL. When the Company classifies problem assets as either substandard or doubtful, pursuant to Federal regulations,
or identifies a loan where it is uncertain if the Bank will be able to collect all amounts due according to the contractual terms of
the loan, it may establish a specific reserve in an amount deemed prudent to address the risk specifically. 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
90
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
period in which they are deemed uncollectible. The determination as to the classification of the Company’s assets and the
amount of valuation allowances is subject to review by bank regulators, who can require the establishment of additional loss
allowances.
Loan grades are used by the Company to identify and track potential problem loans which do not rise to the levels
described for substandard, doubtful, or loss. The grades for watch and special mention are assigned to loans which have been
criticized based upon known characteristics such as periodic payment delinquency or stale financial information from the
borrower and/or guarantors. Loans identified as criticized (watch and special mention) or classified (substandard, doubtful or
loss) are subject to problem loan reporting every three months.
The following tables summarize changes in the ALLL and loan portfolio by type of loan and reserve method for the
periods indicated. The analysis of pooled loans excluded PPP loans as the Bank expects the majority of PPP borrowers will
seek full or partial forgiveness of their loan obligations in accordance with the CARES Act.
At or For the Year Ended December 31, 2021
One-to-
Four
Family
Commercial
Residential Multifamily
Real Estate
Construction/
Land
(In thousands)
Business Consumer
Total
ALLL:
Beginning balance
$
3,181 $
1,366 $
6,127 $
2,189 $
1,242 $
1,069 $ 15,174
Charge-offs
Recoveries
(Recapture)
provision
Ending balance
General reserve
Specific reserve
Loans:
Total Loans
—
183
—
—
—
—
—
—
—
—
—
—
(150)
(87)
488
(125)
(130)
304
—
183
300
3,214 $
1,279 $
6,615 $
2,064 $
1,112 $
1,373 $ 15,657
3,194 $
1,279 $
6,615 $
2,064 $
1,112 $
1,373 $ 15,637
20
—
—
—
—
—
20
$
$
$ 385,116 $
130,146 $
419,417 $
93,455 $ 46,590 $ 44,812 $ 1,119,536
130,146
$ 383,009
Loans collectively
evaluated for
impairment (1) (3)
Loans individually
evaluated for
impairment (2)
____________
(1) Loans collectively evaluated for general reserves.
(2) Loans individually evaluated for specific reserves.
(3) PPP loans totaling $10.8 million were excluded from the collectively evaluated pool when calculating the ALLL as payment
on these loans is guaranteed by the SBA.
1,083,399
385,387
93,455
34,030
44,812
36,137
46,590
2,107
—
—
—
—
91
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At or For the Year Ended December 31, 2020
One-to-
Four
Family
Residential Multifamily
Commercial
Real Estate
Construction/
Land
(In thousands)
Business Consumer
Total
$
$
$
3,034 $
—
28
1,607 $
—
—
4,559 $
—
30
2,222 $
—
—
1,140 $
—
—
656 $ 13,218
(2)
58
(2)
—
119
3,181 $
(241)
1,366 $
1,538
6,127 $
(33)
2,189 $
102
1,242 $
415
1,900
1,069 $ 15,174
3,173 $
8
1,366 $
—
6,127 $
—
2,189 $
—
1,242 $
—
1,069 $ 15,166
8
—
$ 381,960 $
136,694 $
385,265 $
92,207 $ 80,663 $ 40,621 $ 1,117,410
ALLL:
Beginning balance
Charge-offs
Recoveries
(Recapture)
provision
Ending balance
General reserve
Specific reserve
Loans:
Total Loans
134,590
$ 379,333
Loans collectively
evaluated for
impairment (1) (3)
Loans individually
evaluated for
impairment (2)
_____________
(1) Loans collectively evaluated for general reserves.
(2) Loans individually evaluated for specific reserves.
(3) PPP loans totaling $41.3 million were excluded from the collectively evaluated pool when calculating the ALLL as payment
on these loans is guaranteed by the SBA.
1,096,010
368,596
92,207
16,669
40,621
21,400
80,663
2,104
2,627
—
—
—
92
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Past Due Loans. At December 31, 2021, total past due loans comprised 0.02% of total loans as compared to 0.24% at
December 31, 2020.
The following tables represent a summary at December 31, 2021, and 2020, of the aging of loans by type:
Loans Past Due as of December 31, 2021
30-59 Days
60-89 Days
90 Days
and
Greater
Total
Current
Total
Loans (1)
(In thousands)
Real estate:
One-to-four family residential:
Owner occupied
Non-owner occupied
Multifamily
Commercial real estate
Construction/land
$
— $
—
—
—
—
—
76
179
255 $
— $
—
—
—
—
—
—
—
— $
— $
—
—
—
—
—
—
—
— $
— $ 185,320 $ 185,320
199,796
—
130,146
—
419,417
—
93,455
—
1,028,134
—
46,590
76
44,812
179
255 $ 1,119,281 $ 1,119,536
199,796
130,146
419,417
93,455
1,028,134
46,514
44,633
Total real estate
Business
Consumer
Total
_________________________
(1) There were no loans 90 days past due and still accruing interest at December 31, 2021.
Loans Past Due as of December 31, 2020
$
30-59 Days
60-89 Days
90 Days
and
Greater
Total
Current
Total
Loans (1)
(In thousands)
Real estate:
One-to-four family residential:
Owner occupied
Non-owner occupied
Multifamily
Commercial real estate
Construction/land
$
77 $
159
—
—
—
236
275
38
549 $
— $
—
—
—
—
—
—
—
— $
— $
—
2,104
—
—
2,104
—
—
2,104 $
77 $ 206,246 $ 206,323
175,637
159
175,478
136,694
2,104
134,590
385,265
—
385,265
92,207
—
92,207
996,126
2,340
993,786
80,663
275
80,388
40,621
38
40,583
2,653 $ 1,114,757 $ 1,117,410
Total real estate
Business
Consumer
Total
________________________
(1) There were no loans 90 days past due and still accruing interest at December 31, 2020.
$
93
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Nonaccrual Loans. The following table is a summary of nonaccrual loans at December 31, 2021, and 2020, by type of
loan:
Multifamily
Total nonaccrual loans
December 31,
2021
2020
(In thousands)
— $
— $
2,104
2,104
$
$
During 2021, the $2.1 million nonaccrual loan at December 31, 2020, paid off, resulting in no nonaccrual loans at
December 31, 2021. The payoff of this loan included all past due interest, and as a result the Company had no foregone interest
on nonaccrual loans for the year ended December 31, 2021, as compared to $82,000 of foregone interest for the year ended
December 31, 2020.
The following tables summarize the loan portfolio at December 31, 2021, and 2020, by type and payment activity:
December 31, 2021
One-to-Four
Family
Residential Multifamily
Commercial
Real Estate
Construction /
Land
(In thousands)
Business
Consumer
Total
Performing (1)
Nonperforming
Total
$
385,116 $
130,146 $
419,417 $
93,455 $
46,590 $
44,812 $ 1,119,536
—
385,116 $
—
130,146 $
—
419,417 $
$
—
93,455 $
—
46,590 $
—
—
44,812 $ 1,119,536
____________
(1) There were $185.3 million of owner-occupied one-to-four family residential loans and $199.8 million of non-owner
occupied one-to-four family residential loans classified as performing.
One-to-Four
Family
Residential Multifamily
December 31, 2020
Commercial
Real Estate
Construction/
Land
(In thousands)
Business
Consumer
Total
Performing (1)
Nonperforming (2)
Total
$
381,960 $
—
134,590 $
2,104
385,265 $
—
92,207 $
—
80,663 $
—
40,621 $ 1,115,306
—
2,104
$
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. The loan portfolio is constantly being monitored by management for delinquent loans and changes in
the financial condition of each borrower. When an issue is identified with a borrower and it is determined that the loan needs to
be classified as nonperforming and/or impaired, an evaluation of the collateral is performed prior to the end of the financial
reporting period and, if necessary, an appraisal is ordered in accordance with the Company’s appraisal policy guidelines. Based
on this evaluation, any additional provision for loan loss or charge-offs that may be needed is recorded prior to the end of the
financial reporting period.
At both December 31, 2021, and 2020, there were no commitments to advance funds related to impaired loans.
94
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables present a summary of loans individually evaluated for impairment at December 31, 2021, and
2020, by the type of loan:
Recorded
Investment (1)
At December 31, 2021
Unpaid Principal
Balance (2)
(In thousands)
Related Allowance
$
178 $
185 $
915
34,030
35,123
494
520
1,014
915
34,030
35,130
541
520
1,061
672
1,435
34,030
36,137 $
726
1,435
34,030
36,191 $
$
—
—
—
—
19
1
20
19
1
—
20
Loans with no related allowance:
One-to-four family residential:
Owner occupied
Non-owner occupied
Commercial real estate
Total
Loans with an allowance:
One-to-four family residential:
Owner occupied
Non-owner occupied
Total
Total impaired loans:
One-to-four family residential:
Owner occupied
Non-owner occupied
Commercial real estate
Total
_________________
(1) Represents the loan balance less charge-offs.
(2) Contractual loan principal balance.
95
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Recorded
Investment (1)
At December 31, 2020
Unpaid Principal
Balance (2)
(In thousands)
Related
Allowance
$
274 $
365 $
1,031
2,104
16,669
20,078
502
820
1,322
776
1,851
2,104
1,031
2,104
16,669
20,169
549
820
1,369
914
1,851
2,104
$
16,669
21,400 $
16,669
21,538 $
—
—
—
—
—
6
2
8
6
2
—
—
8
Loans with no related allowance:
One-to-four family residential:
Owner occupied
Non-owner occupied
Multifamily
Commercial real estate
Total
Loans with an allowance:
One-to-four family residential:
Owner occupied
Non-owner occupied
Total
Total impaired loans:
One-to-four family residential:
Owner occupied
Non-owner occupied
Multifamily
Commercial real estate
Total
_____________
(1) Represents the loan balance less charge-offs.
(2) Contractual loan principal balance.
96
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents a summary of the average recorded investment in impaired loans, and interest income
recognized on impaired loans for the years ended December 31, 2021 and 2020, by the type of loan:
Loans with no related allowance:
One-to-four family residential:
Owner occupied
Non-owner occupied
Multifamily
Commercial real estate
Construction/land
Total
Loans with an allowance:
One-to-four family residential:
Owner occupied
Non-owner occupied
Total
Total impaired loans:
One-to-four family residential:
Owner occupied
Non-owner occupied
Multifamily
Commercial real estate
Construction/land
Total
Year Ended December 31,
2021
2020
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
(In thousands)
$
217 $
947
12 $
62
828
23,994
—
25,986
—
1,329
—
1,403
380 $
1,207
2,104
10,568
5,635
19,894
498
756
1,254
715
1,703
828
31
37
68
43
99
—
503
1,206
1,709
883
2,413
2,104
23,994
—
27,240 $
$
1,329
—
1,471 $
10,568
5,635
21,603 $
18
69
186
684
—
957
9
52
61
27
121
186
684
—
1,018
97
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Troubled Debt Restructurings. The following is a summary of information pertaining to TDRs:
Performing TDRs
Nonaccrual TDRs
Total TDRs
December 31,
2021
2020
(In thousands)
2,107 $
—
2,107 $
3,869
—
3,869
$
$
The accrual status of a loan may change after it has been classified as a TDR. Management considers the following in
determining the accrual status of restructured loans: (1) if the loan was on accrual status prior to the restructuring, the borrower
has demonstrated performance under the previous terms, and a credit evaluation shows the borrower’s capacity to continue to
perform under the restructured terms (both principal and interest payments), the loan will remain on accrual at the time of the
restructuring; (2) if the loan was on nonaccrual status before the restructuring, and the Company’s credit evaluation shows the
borrower’s capacity to meet the restructured terms, the loan would remain as nonaccrual for a minimum of six months until the
borrower has demonstrated a reasonable period of sustained repayment performance (thereby providing reasonable assurance as
to the ultimate collection of principal and interest in full under the modified terms).
The following table presents for the periods indicated TDRs and their recorded investment prior to the modification
and after the modification:
Year Ended December 31,
2021
2020
Pre-
Modification
Outstanding
Recorded
Investment
Post-
Modification
Outstanding
Recorded
Investment
Pre-
Modification
Outstanding
Recorded
Investment
Post-
Modification
Outstanding
Recorded
Investment
Number
of Loans
Number
of Loans
(Dollars in thousands)
— $
— $
3
1
1,353
1,241
4 $
2,594 $
—
1,353
1,241
2,594
— $
—
1
— $
—
1,249
1 $
1,249 $
—
—
1,249
1,249
TDRs that occurred during the period:
One-to-four family residential:
Principal and interest with interest rate
concession
Advancement of maturity date
Commercial real estate:
Advancement of maturity date
Total
The CARES Act, signed into law on March 27, 2020, provided guidance around the modification of loans as a result
of the COVID-19 pandemic, which outlined, among other criteria, that short-term modifications made on a good faith basis to
borrowers who were current as defined under the CARES Act prior to any relief, are not TDRs. This includes short-term (e.g.
generally up to six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other
delays in payment that are insignificant. To qualify as an eligible loan under the CARES Act, as amended by the CAA, 2021, a
loan modification must be (1) related to the COVID-19 pandemic; (2) executed on a loan that was not more than 30 days past
due as of December 31, 2019; and (3) executed between March 1, 2020, and January 1, 2022. At December 31, 2021, the
Company had no loans that were on active short-term deferrals under the CARES Act and related regulatory guidance. Loan
modifications made in accordance with the CARES Act are still subject to an impairment evaluation.
At December 31, 2021 and 2020, the Company had no commitments to extend additional credit to borrowers whose
loan terms have been modified in a TDR. All TDRs are also classified as impaired loans and are included in the loans
individually evaluated for impairment in the calculation of the ALLL.
98
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
There were no charge-offs to the ALLL for the years ended December 31, 2021 and 2020, related to TDRs. For the
years ended December 31, 2021 and 2020, there were no payment defaults on loans modified as TDRs within the previous 12
months.
At both December 31, 2021, and 2020, the Bank had no loans outstanding with executive officers or directors.
Note 4 - Other Real Estate Owned
The following table is a summary of OREO activity for the periods indicated:
Balance at beginning of year
Net proceeds from sale of OREO
Loss on sale of OREO
Balance at end of year
Year Ended December 31,
2021
2020
(In thousands)
$
$
454 $
(247)
(207)
— $
454
—
—
454
During the year ended December 31, 2021, the two commercial properties comprising the $454,000 balance of OREO
at December 31, 2020, were sold, resulting in a loss on sale of $207,000 that was included in OREO related expenses, net, on
the Company’s Consolidated Income Statements. Prior to the sale, there were no market value adjustments taken on the
properties in OREO.
At December 31, 2021, there were no mortgage loans secured by residential real estate in the process of foreclosure.
Note 5 - Premises and Equipment
Premises and equipment consisted of the following at December 31, 2021, and 2020:
Land
Buildings and improvements
Leasehold improvements
Furniture and fixtures
Equipment
Computer hardware and software
Less accumulated depreciation and amortization
Construction in process
Total premises and equipment, net
December 31,
2021
2020
(In thousands)
$
2,226 $
21,617
5,946
3,751
2,323
3,771
39,634
(17,194)
—
2,226
20,213
5,273
3,737
2,110
3,703
37,262
(15,168)
485
$
22,440 $
22,579
Depreciation and amortization expense was $2.2 million for the years ended December 31, 2021 and 2020.
Note 6 - Fair Value of Financial Instruments
The Company measures the fair value of financial instruments for reporting in accordance with Accounting Standards
Codification (“ASC”) Topic 820, Fair Value Measurements. Fair values of assets or liabilities are based on estimates of the exit
price, which is the price that would be received to sell an asset or paid to transfer a liability. When available, observable market
transactions or market information is used. The fair value estimate of loans receivable was based on similar techniques, with the
99
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
addition of current origination spreads, liquidity premiums, or credit adjustments. The fair value of nonperforming loans is
based on the underlying value of the collateral.
The Company determines the fair values of its financial instruments based on the fair value hierarchy which requires
an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair values.
Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect its estimate for
market assumptions.
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.
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.
100
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tables below present the balances of assets and liabilities measured at fair value on a recurring basis (there were no
transfers between Level 1, Level 2 and Level 3 recurring measurements during the periods presented):
December 31, 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)
Available-for-sale investments:
Mortgage-backed investments:
Fannie Mae
Freddie Mac
Ginnie Mae
Other
Municipal bonds
U.S. Government agencies
Corporate bonds
Total available-for-sale investments $
$
$
$
Derivative fair value asset
Total
Available-for-sale investments:
Mortgage-backed investments:
Fannie Mae
Freddie Mac
Ginnie Mae
Other
Municipal bonds
U.S. Government agencies
Corporate bonds
Total available-for-sale investments
Liabilities:
$
12,978 $
12,824
— $
744
12,978 $
12,080
23,687
11,264
36,466
41,434
30,295
168,948 $
1,491 $
170,439 $
—
3,023
—
—
—
3,767 $
— $
3,767 $
23,687
8,241
36,466
41,434
30,295
165,181 $
1,491 $
166,672 $
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)
13,288 $
4,316
17,127
10,729
17,446
40,635
24,010
127,551
— $
—
—
—
—
—
—
—
13,288 $
4,316
17,127
10,729
17,446
40,635
24,010
127,551 $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
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.
101
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tables below present the balances of assets and liabilities measured at fair value on a nonrecurring basis at
December 31, 2021, and 2020.
December 31, 2021
Quoted Prices
in
Active Markets
for Identical
Assets (Level 1)
Significant
Other
Observable
Inputs (Level 2)
Significant
Unobservable
Inputs
(Level 3)
Fair Value
Measurements
Impaired loans (included in loans receivable, net)(1)
OREO
Total
$
$
36,118 $
—
36,118 $
(In thousands)
— $
—
— $
— $
—
— $
36,118
—
36,118
_______________
(1) Total value of impaired loans is net of $20,000 of specific reserves on performing TDRs.
December 31, 2020
Quoted Prices
in
Active Markets
for Identical
Assets (Level 1)
Significant
Other
Observable
Inputs (Level 2)
Significant
Unobservable
Inputs
(Level 3)
Fair Value
Measurements
Impaired loans (included in loans receivable, net)(1)
OREO
Total
$
$
21,392 $
454
21,846 $
(In thousands)
— $
—
— $
— $
—
— $
21,392
454
21,846
________________
(1) Total value of impaired loans is net of $8,000 of specific reserves on performing TDRs.
The following tables present quantitative information about Level 3 fair value measurements for financial assets
measured at fair value on a nonrecurring basis at December 31, 2021 and 2020.
Fair
Value
Valuation
Technique(s)
December 31, 2021
Unobservable Input(s)
(Dollars in thousands)
Impaired Loans (1)
_______________
(1) Total value of impaired loans is net of $20,000 of specific reserves on performing TDRs.
$ 36,118 Market approach
Appraised value of collateral discounted by
expected selling costs
Range
(Weighted Average
Change in Fair
Value)
0.0% (0.00%)
102
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair
Value
Valuation
Technique(s)
December 31, 2020
Unobservable Input(s)
(Dollars in thousands)
Range
(Weighted Average
Change in Fair
Value)
Impaired Loans (1)
$ 21,392 Market approach
Appraised value of collateral discounted by
expected selling costs
0.0% (0.00%)
OREO
$
454 Market approach
Estimated selling price less selling costs
0.0% (0.00%)
________________
(1) Total value of impaired loans is net of $8,000 of specific reserves on performing TDRs.
The fair value calculation of the Company’s financial instruments attempts to incorporate market conditions at a
specific point in time. The underlying assumptions are generally subjective and involve uncertainties. Therefore, these fair
value estimates are not intended to represent the underlying value of the Company as a whole.
The carrying amounts and estimated fair values of financial instruments at December 31, 2021, and 2020, were as
follows:
Financial Assets:
December 31, 2021
Fair Value Measurements Using:
Carrying Value
Estimated
Fair Value
Level 1
(In thousands)
Level 2
Level 3
Cash on hand and in banks
$
7,246 $
7,246 $
7,246 $
— $
Interest-earning deposits
Investments available-for-sale
Investments held-to-maturity
Loans receivable, net
FHLB stock
Accrued interest receivable
Derivative fair value asset
Financial Liabilities:
Deposits
Certificates of deposit, retail
Advances from the FHLB
Accrued interest payable
66,145
168,948
2,432
66,145
168,948
2,432
1,103,461
1,109,887
5,465
5,285
1,491
66,145
3,767
—
—
—
—
—
—
165,181
2,432
5,465
5,285
1,491
—
1,109,887
863,347
295,929
95,003
112
863,347
—
—
—
—
295,929
95,003
112
—
—
—
—
—
—
—
—
—
—
—
5,465
5,285
1,491
863,347
294,127
95,000
112
103
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
Fair Value Measurements Using:
Carrying Value
Estimated
Fair Value
Level 1
(In thousands)
Level 2
Level 3
Financial Assets:
Cash on hand and in banks
$
7,995 $
7,995 $
7,995 $
— $
Interest-earning deposits
Investments available-for-sale
Investments held-to-maturity
Loans receivable, net
FHLB stock
Accrued interest receivable
Financial Liabilities:
Deposits
Certificates of deposit, retail
Advances from the FHLB
Accrued interest payable
Derivative fair value liability
72,494
127,551
2,418
1,100,582
6,410
5,508
684,057
409,576
120,000
211
2,825
72,494
127,551
2,418
1,101,559
6,410
5,508
684,057
418,118
120,006
211
2,825
72,494
—
—
—
—
—
684,057
—
—
—
—
—
127,551
2,418
—
6,410
5,508
—
418,118
120,006
211
2,825
—
—
—
—
1,101,559
—
—
—
—
—
—
—
Fair value estimates are based on existing balance sheet financial instruments without attempting to estimate the value
of anticipated future business. The fair value has not been estimated for assets and liabilities that are not considered financial
instruments.
Note 7 - Accrued Interest Receivable
Accrued interest receivable consisted of the following at December 31, 2021 and 2020:
Loans receivable
Investments
December 31,
2021
2020
(In thousands)
$
$
4,634 $
651
5,285 $
5,031
477
5,508
104
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Deposits
Deposit accounts consisted of the following at December 31, 2021 and 2020:
Noninterest-bearing
Interest-bearing demand
Savings
Money market
Certificates of deposit, retail (1)
December 31,
2021
2020
(In thousands)
$
$
117,751 $
97,907
23,146
624,543
294,127
1,157,474 $
91,285
108,182
19,221
465,369
409,576
1,093,633
_______________
(1) Shown net of $3,000 and $12,000 unamortized purchase accounting adjustment on December 31, 2021, and 2020,
respectively.
At December 31, 2021, scheduled maturities of certificates of deposit were as follows:
December 31,
2022
2023
2024
2025
2026
Amount
(In thousands)
145,337
95,987
42,511
7,527
2,765
294,127
$
$
Deposits included public funds of $60.6 million and $59.2 million at December 31, 2021 and 2020, respectively.
Certificates of deposit equal to or exceeding the FDIC insured amount of $250,000 included in deposits at
December 31, 2021, and 2020, were $77.4 million and $135.6 million, respectively. Interest expense on certificates of deposit
equal to or exceeding $250,000 totaled $1.2 million and $3.0 million for the years ended December 31, 2021 and 2020,
respectively.
Included in total deposits are accounts of $2.2 million and $2.1 million at December 31, 2021, and 2020, respectively,
which are controlled by related parties.
Interest expense on deposits for the periods indicated was as follows:
Interest-bearing demand
Savings
Money market
Certificates of deposit, retail
Certificates of deposit, brokered
105
Year Ended December 31,
2021
2020
(In thousands)
90 $
6
1,601
5,519
—
7,216 $
292
15
3,497
9,474
727
14,005
$
$
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 - Other Borrowings
The Bank maintained credit facilities with the FHLB at December 31, 2021, and 2020, totaling $648.1 million and
$614.4 million, respectively. At December 31, 2021, the credit facility was collateralized by $223.0 million of single-family
residential mortgages, $145.4 million of commercial real estate loans, and $54.1 million of multifamily loans under a blanket
lien arrangement. At December 31, 2020, the credit facility was collateralized by $255.5 million of single-family residential
mortgages, $196.2 million of commercial real estate loans, and $72.1 million of multifamily loans under a blanket lien
arrangement. The Bank also had $84.8 million of unused line-of-credit facilities with the FRB and $75.0 million with other
financial institutions at December 31, 2021, with interest payable at the then stated rate.
Summary information related to FHLB advances and other borrowings during the years ended December 31, 2021,
and 2020 consisted of the following:
Year ended December 31,
2021
2020
(Dollars in thousands)
Maximum borrowing outstanding at any month end
$
120,000
$
Average borrowing outstanding during year
Balance outstanding at end of year
Average rate paid during the year
Weighted-average rate paid at end of year
115,466
95,000
1.39 %
1.26
160,000
125,392
120,000
1.31 %
1.40
At December 31, 2021, all $95.0 million of FHLB advances were due to mature in 2022.
Note 10 - Leases
The Company follows ASC topic 842, Leases, recognizing ROU assets and lease liabilities on the Company’s
consolidated balance sheets. At December 31, 2021, the Company had thirteen operating leases for retail branch locations. The
remaining initial lease terms range from 13 months to 9.1 years, with most leases carrying optional extensions of three to five
years. The Company will include optional lease term extensions in the ROU assets and lease liabilities when management
believes it is reasonably certain that the term extension will be exercised, and will be determined based on indicators that the
Company would have an economic incentive to extend the lease. Short term leases, having a term of one year or less, are
expensed in the period of the lease. To calculate the present value of future lease payments, the Company uses the incremental
borrowing rate, which is equal to the FHLB advance rate at the time of the lease inception, or at January 1, 2019, for leases in
place at that date.
The minimum monthly lease payments are generally based on square footage of the leased premises, with escalating
minimum rent over the lease term. At December 31, 2021, the Company was committed to paying $69,000 per month in
minimum monthly lease payments. The minimum monthly lease payment over the initial lease term, including any free rent
period, was used to calculate the ROU and lease liability. The Company’s current leases do not include any non-lease
components.
Total lease expense included in the Company’s consolidated income statement includes the amortized lease expense
under ASC topic 842, Leases, combined with variable lease expenses for maintenance or other expenses as defined in the
individual lease agreements. The Company’s consolidated balance sheet includes the ROU and lease liability. The following
table includes details on these items at and for the years ended December 31, 2021, and 2020.
106
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
December 31, 2020
Lease expense, year-to-date
$
ROU
Lease liability
Weighted average remaining term (in years)
Weighted average discount rate
(in thousands)
1,061
$
3,646
3,805
6.26
1.91 %
936
3,647
3,783
7.23
2.10 %
The following table provides a reconciliation between the undiscounted minimum lease payments at December 31,
2021 and the discounted lease liability at that date:
Due through one year
Due after one year through two years
Due after two years through three years
Due after three years through four years
Due after four years through five years
Due after five years
Total minimum lease payments
Less: present value discount
Lease liability
$
$
December 31, 2021
(in thousands)
839
723
622
526
332
1,003
4,045
240
3,805
Note 11 - Derivatives
The Company uses derivative financial instruments in the form of interest rate swap agreements, which are designated
as cash flow hedges, to manage the risk of changes in future cash flows due to interest rate fluctuations. At December 31, 2021,
the hedged items have a total notional amount of $95.0 million, and consist of rolling one-month or three-month FHLB
advances that are renewed at the fixed interest rate at each renewal date. The hedging instruments have four to eight year terms,
with remaining terms ranging from 1.8 years to 7.8 years, and stipulate that the counterparty will pay the Company interest at
one-month or three-month LIBOR and the Company will pay a weighted-average fixed interest of 1.05% on the notional
amount of $10.0 million to $15.0 million. The Company pays or receives the net interest amount quarterly based on the
respective hedge agreement and includes this amount as part of interest expense on borrowings 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 as compared to the one-month or three-month LIBOR interest received from the counterparty. At December 31, 2021,
the $1.5 million net fair value gain of the cash flow hedges was reported with other assets. The tax effected amount of
$1.2 million was included in Accumulated Other Comprehensive Income. There were no amounts recorded in the Consolidated
Income Statements for the years ended December 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.
The following table presents the fair value of derivative instruments as of December 31, 2021 and 2020:
107
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheet
Location
Fair Value at
December 31, 2021
(In thousands)
Fair Value at
December 31, 2020
Interest rate swaps on FHLB debt designated as cash
flow hedges
Other assets (other
liabilities)
$
1,491 $
(2,825)
The following table presents the net unrealized gains (losses) on derivative instruments, net of tax, included on the
Consolidated Statements of Comprehensive Income for the years ended December 31, 2021 and 2020:
Location
Other
Comprehensive
Income
2021 Amount of
Gain Recognized In
OCI, net of tax
(In thousands)
2020 Amount of
Loss Recognized In
OCI, net of tax
$
3,410 $
(2,568)
Interest rate swaps on FHLB debt designated as cash
flow hedge
Note 12 - Benefit Plans
Multi-employer Pension Plans
The Company participates in the Pentegra Defined Benefit Plan for Financial Institutions (“The Pentegra DB Plan”), a
tax-qualified defined-benefit pension plan that covers substantially all employees after one year of continuous employment.
Pension benefits vest over a period of five years of credited service. The Pentegra DB Plan’s Employer Identification Number is
13-5645888 and the Plan Number is 333. The Pentegra DB Plan operates as a multi-employer plan for accounting purposes and
as a multiple-employer plan under the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code.
There are no collective bargaining agreements in place that require contributions to the Pentegra DB Plan.
The Pentegra DB Plan is a single plan under Internal Revenue Code Section 413(c) and, as a result, all of the assets
stand behind all of the liabilities. Accordingly, under the Pentegra DB Plan, contributions made by a participating employer
may be used to provide benefits to participants of other participating employers.
As of March 31, 2013, the Pentegra DB Plan was frozen, eliminating all future benefit accruals for employees. Each
employee’s accrued benefit was determined as of March 31, 2013.
The funding target is the present value of all benefits that have accrued as of the first day of the current plan year
(July 1). Because interest rates used to calculate the present value of all benefits (5.56% for 2021 and 5.35% for 2020) is
significantly higher than current market rates, the funding target does not represent the Company’s actual liability upon
withdrawal from participation in the Pentegra DB Plan, which is significantly larger than the funding target. The table below
presents the funded status (market value of plan assets divided by funding target) of the plan as of July 1:
2021
2020
Source
First Financial Northwest’s Plan(1)
_________________
(1) Market value of plan assets reflects any contributions received through June 30, 2021, or 2020, respectively.
Valuation Report
111.2 %
Valuation Report
101.7 %
Total contributions made to the Pentegra DB Plan, as reported on Pentegra’s Form 5500 for the plan year ending
June 30, 2020, were $253.2 million and $138.3 million for both the plan years ended June 30, 2020 and June 30, 2019,
respectively. The Company’s contributions to the Pentegra DB Plan are not more than 5% of the total contributions to the
Pentegra DB Plan for the plan year ending June 30, 2020. The Company’s policy is to fund pension costs as accrued.
108
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Total contributions by the Company during the years ended December 31, 2021 and 2020 were:
2021
Date Paid
Amount
11/18/2021
Total
$
$
Supplemental Executive Retirement Plan
(In thousands)
207
207
Date Paid
12/8/2020
Total
2020
$
$
Amount
171
171
The Company has entered into post-employment agreements with certain key officers to provide supplemental
retirement benefits. The Company recorded $175,000 and $235,000 of compensation expense for the years ended December 31,
2021, and 2020, respectively. At December 31, 2021, a $922,000 liability was included in other liabilities on the Company’s
consolidated balance sheet in support of the expected current and future benefit payments on these agreements. In addition, in
January 2020, the Company purchased three annuity contracts, totaling $2.4 million, to satisfy the benefit obligation associated
with certain supplemental executive retirement plan agreements.
401(k) Plan
The Company has a savings plan under Section 401(k) of the Internal Revenue Code, covering substantially all
employees after 60 days of continuous employment. Under the plan, employee contributions up to 6% will be matched 50% by
the Company. Such matching becomes vested over a period of five years of credited service. Employees may make investments
in various stock, money market, or fixed income plans. The Company contributed $319,000 and $266,000 to the plan for the
years ended December 31, 2021, and 2020, respectively.
Employee Stock Ownership Plan
The Company provides an ESOP for the benefit of substantially all employees. The ESOP borrowed $16.9 million
from First Financial Northwest and used those funds to acquire 1,692,800 shares of First Financial Northwest’s stock at the
time of the initial public offering at a price of $10.00 per share. The loan matures on October 8, 2022 and has a fixed interest
rate of 4.88%.
Shares purchased by the ESOP with the loan proceeds are held in a suspense account and are allocated to ESOP
participants on a pro rata basis as principal and interest payments are made by the ESOP to First Financial Northwest. The loan
is secured by shares purchased with the loan proceeds and will be repaid by the ESOP with funds from the Company’s
discretionary contributions to the ESOP and earnings on the ESOP assets. Annual principal and interest payments of
$1.6 million were made by the ESOP during 2021, and 2020.
As shares are committed to be released from collateral, the Company reports compensation expense equal to the daily
average market prices of the shares and the shares become outstanding for EPS computations. The compensation expense is
accrued throughout the year.
A summary of key transactions for the ESOP for the years ended December 31, follows:
ESOP contribution expense
Dividends on unallocated ESOP shares used to reduce ESOP contribution
2021
2020
(In thousands)
1,696 $
87
1,200
124
$
109
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Shares held by the ESOP at December 31, 2021 and 2020, are as follows:
Allocated shares
Unallocated shares
Total ESOP shares
Fair value of unallocated shares
Stock-Based Compensation
December 31,
2021
2020
(Dollars in thousands, except share data)
1,495,307
197,493
1,608,160
84,640
1,692,800
$
1,369 $
1,692,800
2,251
In June 2016, First Financial Northwest’s shareholders approved the First Financial Northwest, Inc. 2016 Equity
Incentive Plan (“2016 Plan”). This plan provides for the granting of incentive stock options (“ISO”), non-qualified stock
options (“NQSO”), restricted stock and restricted stock units. The 2016 Plan expires in June 2026. The 2016 Plan established
1,400,000 shares available to grant with a maximum of 400,000 of these shares available to grant as restricted stock awards.
Each share issued as a restricted stock award counts as two shares towards the total shares available to be awarded.
As a result of the approval of the 2016 Plan, the First Financial Northwest, Inc. 2008 Equity Incentive Plan (“2008
Plan”) was frozen and no additional awards will be made. Restricted stock awards and stock options that were granted under the
2008 Plan are vested and available for exercise, subject to the 2008 Plan provisions. At December 31, 2021, there were
1,060,922 total shares available for grant under the 2016 Plan, including 230,461 shares available to be granted as restricted
stock.
Under the 2016 Plan, the vesting date for each option award or restricted stock award is determined by an award
committee and specified in the award agreement. In the case of restricted stock awards granted in lieu of cash payments of
directors’ fees, the grant date is used as the vesting date.
Total compensation expense for the 2016 Plan for the year ended December 31, 2021, was $708,000. The final
compensation expense for the 2008 Plan and the total compensation for the 2016 Plan for the year ended December 31, 2020,
was $427,000. The related income tax benefit was $149,000 and $90,000 for the years ended December 31, 2021, and 2020,
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. At December 31, 2021, the 272,000 shares available for exercise were
previously granted under the 2008 Plan and are fully vested. Stock options have a contractual period of ten years. Any
unexercised stock options will expire ten years after the grant date, or sooner in the event of the award recipient’s death,
disability or termination of service with the Company.
Under the 2016 Plan, the exercise price and vesting period for stock options are determined by the award committee
and specified in the award agreement, however, the exercise price shall not be less than the fair market value of a share as of the
grant date. Any unexercised stock option will expire 10 years after the award date or sooner in the event of the award recipient’s
death, disability, retirement, or termination of service.
A cashless exercise of vested stock options may occur by the option holder surrendering the number of options valued
at the current stock price at the time of exercise to cover the total cost to exercise. The surrendered options are canceled and are
unavailable for reissue.
The fair value of each option award is estimated on the grant date using a Black-Scholes model that uses the
assumptions noted in the table below. The dividend yield is based on the current quarterly dividend in effect at the time of the
grant. Historical employment data is used to estimate the forfeiture rate. The historical volatility of the Company’s stock price
over a specified period of time is used for the expected volatility assumption. First Financial Northwest bases the risk-free
110
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
interest rate on the U.S. Treasury Constant Maturity Indices in effect on the date of the grant. First Financial Northwest elected
to use the “simplified” method permitted by the U.S. Securities and Exchange Commission to calculate the expected term. This
method uses the vesting term of an option along with the contractual term, setting the expected life at the midpoint.
There were no stock options granted in 2021 or 2020.
A summary of the Company’s stock option plan awards activity for the year ended December 31, 2021 follows:
Outstanding at January 1, 2021
Exercised
Outstanding at December 31, 2021
Expected to vest assuming a 3% forfeiture rate over
the vesting term
Exercisable at December 31, 2021
Weighted-
Average
Exercise Price
10.34
Shares
313,000 $
(41,000)
272,000
272,000
272,000
8.41
10.63
10.63
10.63
Weighted-
Average
Remaining
Contractual
Term in Years
Aggregate
Intrinsic
Value
$
397,890
2.13 $
306,300
1,507,300
2.13
2.13
1,507,300
1,507,300
As of December 31, 2021, there was no unrecognized compensation cost related to nonvested stock options.
Restricted Stock Awards
A summary of changes in nonvested restricted stock awards for the year ended December 31, 2021, follows:
Nonvested Shares
Shares
Weighted Average
Grant Date
Fair Value
Nonvested at December 31, 2020
Granted
Vested
Nonvested at December 31, 2021
Expected to vest assuming a 3% forfeiture rate over the vesting term
16,228
55,673
(27,475)
44,426
43,093
13.61
14.25
14.63
13.78
13.78
As of December 31, 2021, there was $109,000 of total unrecognized compensation costs related to nonvested shares
granted as restricted stock awards. The cost is expected to be recognized over the remaining weighted-average vesting period of
two months. The total fair value of shares vested during the years ended December 31, 2021, and 2020 were $402,000 and
$437,000, respectively.
111
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13 - Federal Income Taxes
The components of income tax expense for the years indicated are as follows:
Current
Deferred
Total income tax expense
Year Ended December 31,
2021
2020
$
$
(In thousands)
2,690 $
235
2,925 $
A reconciliation of the tax provision based on the statutory corporate rate of 21% for the year ended
December 31, 2021, and 2020, on pretax income is as follows:
Income tax expense at statutory rate
Income tax effect of:
Tax exempt interest, net
BOLI income, net
Other, net
Total income tax expense
Year Ended December 31,
2021
2020
$
$
(In thousands)
3,187 $
(54)
(229)
21
2,925 $
1,937
5
1,942
2,205
(23)
(200)
(40)
1,942
112
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The deferred tax assets and liabilities, included in the accompanying consolidated balance sheets, consisted of the
following at the dates indicated:
Deferred tax assets:
ALLL
Reserve for unfunded commitments
Deferred compensation
Net unrealized loss on derivative cash flow hedge
Reserve for uncollected interest
Employee benefit plans
OREO market value adjustments
Accrued expenses
Core deposit intangible
Expenses to facilitate branch acquisition
Split dollar life insurance
Lease liability
Total deferred tax assets
Deferred tax liabilities:
FHLB stock dividends
Loan origination fees and costs
Net unrealized gain on derivative cash flow hedge
Net unrealized gain on investments available for sale
Fixed assets
Goodwill
Right of use asset
Other, net
Total deferred tax liabilities
Deferred tax assets, net
December 31,
2021
2020
(In thousands)
$
3,288 $
3,187
59
194
—
—
385
—
114
53
20
87
799
4,999
3
1,098
312
42
1,818
54
766
56
$
$
4,149 $
850 $
74
309
594
45
424
10
141
42
22
78
794
5,720
4
1,031
—
392
1,785
42
766
59
4,079
1,641
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences
between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date. These calculations are based on many complex
factors including estimates of the timing of reversals of temporary differences, the interpretation of federal income tax laws, and
a determination of the differences between the tax and the financial reporting basis of assets and liabilities. Actual results could
differ significantly from the estimates and interpretations used in determining the current and deferred income tax assets and
liabilities.
At December 31, 2021 and 2020, the Company had no net operating loss carryforward.
As a result of the bad debt deductions taken in years prior to 1988, retained earnings includes accumulated earnings of
approximately $4.5 million, on which federal income taxes have not been provided. If, in the future, this portion of retained
earnings is used for any purpose other than to absorb losses on loans or on property acquired through foreclosure, federal
113
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
income taxes may be imposed at the then-prevailing corporate tax rates. The Bank does not contemplate that such amounts will
be used for any purpose that would create a federal income tax liability; therefore no provision has been made.
Under GAAP, a valuation allowance is required to be recognized if it is “more likely than not” that a portion of the
deferred tax asset will not be realized. In order to support a conclusion that a valuation allowance is not needed, management
evaluates both positive and negative evidence under the “more likely than not” standard. The weight given to the potential
effect of negative and positive evidence should be commensurate with the extent to which the strength of the evidence can be
objectively verified. As of December 31, 2021, it was determined the full deferred tax asset would be realized in future periods
and a valuation allowance would not be necessary.
The CARES Act, among other things, permits net operating loss (“NOL”) carryovers and carrybacks to offset 100% of
taxable income for taxable years beginning before 2021. In addition, the CARES Act allows NOLs incurred in 2018, 2019, and
2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. The
Company evaluated the impact of the CARES Act and determined that none of the changes would result in a material income
tax benefit to the Company. In addition, the Company has determined that neither the enactment of the CAA, 2021, nor changes
to income tax laws or regulations in other jurisdictions have a significant impact on income taxes.
The Company had no unrecognized tax benefits at December 31, 2021 or 2020, and recognized no interest or tax
penalties. The Company has filed U.S. federal income tax returns. Income tax returns filed are subject to examination by the
U.S. federal, state, and local income tax authorities. While no income tax returns are currently being examined, the Company is
no longer subject to tax examination by tax authorities for years prior to 2018.
Note 14 - Regulatory Capital Requirements
Under Federal regulations, pre-conversion retained earnings are restricted for the protection of pre-conversion
depositors.
The Company is a bank holding company under the supervision of the Federal Reserve Bank of San Francisco. Bank
holding companies are subject to capital adequacy requirements of the Board of Governors of the Federal Reserve System (the
“Federal Reserve”) under the Bank Holding Company Act of 1956, as amended, and the regulations of the Federal Reserve
Board, except that, pursuant to the Economic Growth, Regulatory Relief and Consumer Protection Act, effective
August 30, 2018, a bank holding company with consolidated assets of less than $3 billion is generally not subject to the Federal
Reserve’s capital regulations, which parallel the FDIC’s capital regulations. The Bank is a federally insured institution and
thereby is subject to the capital requirements established by the FDIC. Failure to meet minimum capital requirements can
initiate certain mandatory and, possibly, additional discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Bank must meet specific capital regulations that involve quantitative measures of their assets,
liabilities, and certain off balance sheet items as calculated under regulatory accounting practices, and until August 30, 2018,
First Financial Northwest was subject to similar capital regulations. The Company was not subject to regulatory requirements
for bank holding companies at December 31, 2021, and 2020, as its assets were less than the $3.0 billion threshold.
The capital amounts and classifications are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum
amounts and ratios (set forth in the table that follows) of total and Tier 1 capital to risk-weighted assets (as defined in the
regulations) and of Tier 1 capital to average assets.
As of December 31, 2021, according to the most recent notification from the FDIC, the Bank was categorized as
well‑capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since the
notification that management believes have changed the Bank’s category.
114
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
First Financial Northwest Bank’s actual capital amounts and ratios at December 31, 2021, and 2020, are presented in the
following table.
Actual
Amount
Ratio
For Capital Adequacy
Purposes
Amount
Ratio
(Dollars in thousands)
To be Well Capitalized
Under Prompt Corrective
Action Provisions
Amount
Ratio
December 31, 2021:
Total risk-based capital
$
160,840
15.48 % $
83,121
8.00 % $
103,901
10.00 %
Tier 1 risk-based capital
147,816
14.23
62,340
6.00
83,121
8.00
Common equity tier 1
capital (“CET1”)
147,816
14.23
46,755
4.50
67,536
6.50
Tier 1 leverage capital
147,816
10.34
57,191
4.00
71,489
5.00
December 31, 2020:
Total risk-based capital
$
152,610
15.57 % $
78,406
8.00 % $
98,008
10.00 %
Tier 1 risk-based capital
140,319
14.32
58,805
6.00
78,406
8.00
Common equity tier 1
capital (“CET1”)
140,319
14.32
44,103
4.50
63,705
6.50
Tier 1 leverage capital
140,319
10.29
54,551
4.00
68,189
5.00
In addition to the minimum CET1, Tier 1, total capital and leverage ratios, the Bank must maintain a capital
conservation buffer consisting of additional CET1 capital greater than 2.5% of risk-weighted assets above the required
minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary
bonuses based on percentages of eligible retained income that could be utilized for such actions. As of December 31, 2021, the
Bank’s capital conservation buffer was 7.48%.
Note 15 - Commitments and Contingencies
Financial Instruments with Off-Balance-Sheet Risk. In the normal course of business, the Company makes loan
commitments, typically unfunded loans and unused lines of credit, to accommodate the financial needs of its customers. These
arrangements have credit risk essentially the same as that involved in extending loans to customers and are subject to the
Company’s normal credit policies, including collateral requirements, where appropriate. Commitments to extend credit are
agreements to lend to customers in accordance with predetermined contractual provisions. These commitments are for specific
periods or, may contain termination clauses and may require the payment of a fee. The total amounts of unused commitments
do not necessarily represent future credit exposure or cash requirements, in that commitments can expire without being drawn
upon. Unfunded commitments to originate loans or extend credit totaled $77.4 million at December 31, 2021, and $100.6
million at December 31, 2020.
Lease Commitments. First Financial Northwest Bank has entered into lease commitments for its branches located in
Mill Creek, Edmonds, Renton, Bellevue, Woodinville, Smokey Point, Lake Stevens, Bothell, Kent, Kirkland, University Place,
Gig Harbor, and Issaquah, all in Washington. For more information on the Company’s lease commitments, see Note 10 -
Leases.
115
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Legal Proceedings. The Company and its subsidiaries are from time to time defendants in and are threatened with
various legal proceedings arising from their regular business activities. Management, after consulting with legal counsel, is of
the opinion that the ultimate liability, if any, resulting from these pending or threatened actions and proceedings will not have a
material effect on the consolidated financial statements of the Company.
Employment Contracts and Severance Agreements. The Company has change in control severance agreements with
key officers that offer specified terms of salary coverage. In addition, the Company has employment contracts with certain
executives that include specified terms of salary coverage as a result of involuntary termination due to change in control or
other circumstances.
Note 16 - Parent Company Only Financial Statements
Presented below are the condensed balance sheets, income statements and statements of cash flows for First Financial
Northwest.
FIRST FINANCIAL NORTHWEST, INC.
Condensed Balance Sheets
Assets
Cash and cash equivalents
Interest-bearing deposits
Investment in subsidiaries
Receivable from subsidiaries
Deferred tax assets, net
Other assets
Total assets
Liabilities and Stockholders’ Equity
Liabilities:
Payable to subsidiaries
Other liabilities
Total liabilities
Stockholders’ equity
Total liabilities and stockholders’ equity
December 31,
2021
2020
(In thousands)
$
74 $
6,887
150,822
363
2
25
82
14,346
141,376
689
2
28
$
158,173 $
156,523
$
170 $
124
294
64
157
221
157,879
$
158,173 $
156,302
156,523
116
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST FINANCIAL NORTHWEST, INC.
Condensed Income Statements
Operating income:
Interest income:
Interest-bearing deposits with banks
Total operating income
Operating expenses:
Other expenses
Total operating expenses
Loss before benefit for federal income taxes and equity in undistributed
earnings of subsidiaries
Federal income tax benefit
Loss before equity in undistributed loss of subsidiaries
Equity in undistributed earnings of subsidiaries
Net income
Year Ended December 31,
2021
2020
(In thousands)
$
15 $
15
56
56
1,721
1,721
(1,706)
(376)
(1,330)
13,579
$
12,249 $
1,648
1,648
(1,592)
(360)
(1,232)
9,788
8,556
117
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST FINANCIAL NORTHWEST, INC.
Condensed Statements of Cash Flows
Year Ended December 31,
2021
2020
(In thousands)
$
12,249 $
8,556
(13,579)
6,708
(9,788)
4,888
25
—
(37)
106
3
(33)
5,442
1,492
1,492
344
767
(38)
(11,384)
(4,090)
(14,401)
(7,467)
14,428
$
6,961 $
24
(4)
9
(64)
18
(28)
3,611
1,421
1,421
—
358
(73)
(5,706)
(3,874)
(9,295)
(4,263)
18,691
14,428
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash from operating
activities:
Equity in undistributed earnings of subsidiaries
Dividends received from subsidiary
ESOP, stock options, and restricted stock compensation
Change in deferred tax liability, net
Change in receivables from subsidiaries
Change in payables to subsidiaries
Change in other assets
Changes in other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
ESOP loan repayment
Net cash provided in investing activities
Cash flows from financing activities:
Proceeds from exercise of stock options
Proceeds for vested awards
Net share settlement of stock awards
Repurchase and retirement of common stock
Dividends paid
Net cash used by financing activities
Net decrease in cash
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
118
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17 - Earnings Per Share
The following table presents a reconciliation of the components used to compute basic and diluted EPS for the periods
indicated.
Year Ended December 31,
2020
2021
Net income
Earnings allocated to participating securities
Earnings allocated to common shareholders
Basic weighted-average common shares outstanding
Dilutive effect of stock options
Dilutive effect of restricted stock grants
Diluted weighted-average common shares outstanding
Basic earnings per share
Diluted earnings per share
(Dollars in thousands, except share data)
8,556
$
(14)
8,542
12,249 $
(58)
12,191 $
$
9,340,997
95,584
17,914
9,454,495
9,734,493
20,460
3,691
9,758,644
$
$
1.31 $
1.29 $
0.88
0.88
Potential dilutive shares are excluded from the computation of EPS if their effect is anti-dilutive. For the year ended
December 31, 2021, there were no options to purchase shares of common stock that were omitted from the computation of
diluted earnings per share because their effect would be anti-dilutive. For the year ended December 31, 2020, options to
purchase additional 203,000 shares of common stock were not included in the computation of diluted EPS as the incremental
shares under the treasury stock method of calculation resulted in them being antidilutive.
Note 18 - Revenue Recognition
In accordance with Topic 606, revenues are recognized when goods or services are transferred to the customer in
exchange for the consideration the Company expects to be entitled to receive. To determine the appropriate recognition of
revenue for transactions within the scope of Topic 606, the Company performs the following five steps: (i) identify the
contract(s) with the customer; (ii) identify the separate performance obligations in the contract; (iii) determine the transaction
price; (iv) allocate the transaction price to the separate performance obligations in the contract; and (v) recognize revenue when
the entity satisfies a performance obligation. A contract may not exist if there are doubts as to collectability of the amounts the
Company is entitled to in exchange for the goods or services transferred. If a contract is determined to be within the scope of
Topic 606, the Company recognizes revenue as it satisfies a performance obligation. The largest portion of the Company’s
revenue is from net interest income which is not within the scope of Topic 606.
119
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Disaggregation of Revenue
The following table includes the Company’s noninterest income disaggregated by type of service for the years ended
December 31, 2021 and 2020:
Gain on sales of investment securities (1)
BOLI income (1)
Wealth management revenue
Deposit servicing fees
Deposit card and ATM fees
Loan servicing fees
Loan interest swap servicing fees
Other
Total noninterest income
____________
(1) Not in scope of Topic 606
Year Ended December 31,
2021
2020
$
(In thousands)
32 $
1,107
494
289
583
1,265
—
92
$
3,862 $
86
982
663
277
478
1,517
430
9
4,442
For the year ended December 31, 2021, substantially all of the Company’s revenues under the scope of Topic 606 are
for performance obligations satisfied at a specified date.
Revenues recognized within scope of Topic 606
Wealth management revenue: Our wealth management revenue consists of commissions received on the investment portfolio
managed by Bank personnel but held by a third party. Commissions are earned on brokerage services and advisory services
based on contract terms at the onset of a new customer’s investment agreement or quarterly for ongoing services. Commissions
are paid by the third party to the Bank when the performance obligation has been completed by both entities.
Deposit related fees: Fees are earned on our deposit accounts for various products or services performed for our customers.
Fees include business account fees, non-sufficient fund fees, stop payment fees, wire services, safe deposit box, and others.
These fees are recognized on a daily, monthly or annual basis, depending on the type of service.
Debit card and ATM fees: Fees are earned when a debit card issued by the Bank is used or when other bank’s customers use our
ATM services. Revenue is recognized at the time the fees are collected from the customer’s account or remitted by the VISA
interchange network.
Loan related fees: Noninterest fee income is earned on our loans for servicing or annual fees on certain loan types. Fees are also
earned on the prepayment of certain loans, and are recognized at the time the loan is paid off.
Loan interest swap fees: For loans participating in an interest rate swap agreement, servicing fees are earned at the onset of the
agreement and are not contingent on any future performance or term length of the loan itself. The performance obligation is
satisfied by entering into the contract and receipt of the fees from the counterparty.
Other: Fees earned on other services, such as merchant services or occasional non-recurring type services, are recognized at the
time of the event or the applicable billing cycle.
Contract Balances
At December 31, 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.
120
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 19 - Subsequent Events
On February 18, 2022, the Company began repurchasing shares of common stock under the repurchase plan approved
by the Company’s Board of Directors on February 11, 2022, authorizing the repurchase of approximately 455,000 shares of the
Company’s common stock.
Subsequent to December 31, 2021, the Company repurchased 23,068 shares pursuant to the prior repurchase plan that
expired February 15, 2022, at an average price of $17.00 per share. Total shares of common stock repurchased under the plan
that expired February 15, 2022, were 459,732 at an average price of $16.83 per share.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
(i) Disclosure Controls and Procedures.
An evaluation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act
of 1934, as amended (the “Exchange Act”) was carried out as of December 31, 2021 under the supervision and with the
participation of our Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”), and several other members of our
senior management. The CEO (Principal Executive Officer) and CFO (Principal Financial Officer) concluded that, as of
December 31, 2021, First Financial Northwest’s disclosure controls and procedures were effective in ensuring that information
we are required to disclose in the reports we file or submit under the Exchange Act is (1) recorded, processed, summarized, and
reported within the time periods specified in the SEC’s rules and forms, and (2) accumulated and communicated to First
Financial Northwest management, including its CEO and CFO, as appropriate to allow timely decisions regarding required
disclosure, specified in the SEC’s rules and forms.
(a) Management’s report on internal control over financial reporting.
First Financial Northwest’s management is responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934. First Financial Northwest’s internal
control system is designed to provide reasonable assurance to our management and the Board of Directors regarding the
preparation and fair presentation of published financial statements for external purposes in accordance with generally accepted
accounting principles.
This process includes policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions of First Financial Northwest; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of First Financial Northwest are being made only in accordance with authorizations of
management and directors of First Financial Northwest; and (iii) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of First Financial Northwest’s assets that could have a material effect
on the financial statements. A control procedure, no matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Also, because of the inherent limitations in all control
procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within
the Company have been detected. Additionally, in designing disclosure controls and procedures, our management was required
to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of
any disclosure controls and procedures is also based in part upon certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. As a
result of these inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Furthermore, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become
inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
121
First Financial Northwest’s management assessed the effectiveness of First Financial Northwest’s internal control over
financial reporting as of December 31, 2021. In making this assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013
Framework). Based on that assessment, First Financial Northwest’s management believes that, as of December 31, 2021, First
Financial Northwest’s internal control over financial reporting is effective based on those criteria.
Moss Adams LLP, an independent registered public accounting firm, has audited the Company’s consolidated
financial statements as of December 31, 2021, which is included in Item 8. Financial Statements and Supplementary Data.
(b) Attestation report of the registered public accounting firm.
The “Report of Independent Registered Public Accounting Firm” included in Item 8 of this Annual Report on Form
10‑K is incorporated herein by reference.
(c) Changes in internal control over financial reporting.
There were no significant changes in First Financial Northwest’s internal control over financial reporting during First
Financial Northwest’s most recent fiscal quarter that have materially affected or are reasonably likely to materially affect, First
Financial Northwest’s internal control over financial reporting.
Item 9B. Other Information
There was no information to be disclosed by us in a report on Form 8-K during the fourth quarter of fiscal 2021 that
was not so disclosed.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
Item 10. Directors, Executive Officers and Corporate Governance
PART III
The information required under the section captioned “Proposal 1 - Election of Directors” in First Financial
Northwest’s Definitive Proxy Statement for the 2021 Annual Meeting of Shareholders (“Proxy Statement”) is incorporated
herein by reference.
For information regarding the executive officers of First Financial Northwest and the Bank, see the information
contained herein under the section captioned “Item 1. Business - Personnel - Executive Officers of the Registrant.”
Audit Committee Financial Expert
At December 31, 2021, our Audit Committee was composed of Directors Joann E. Lee (Chairman), Cindy L. Runger
and Ralph C. Sabin. Each member of the Audit Committee is “independent” as defined in listing standards of The Nasdaq Stock
Market LLC. Our Board of Directors has designated Directors Joann E. Lee, Cindy L. Runger and Ralph C. Sabin as the Audit
Committee financial experts, as defined in the SEC’s Regulation S-K. Directors Joann E. Lee, Cindy L. Runger and Ralph C.
Sabin are independent as that term is used in Item 407(d)(5)(i)(B) of SEC’s Regulation S-K.
Code of Business Conduct and Ethics
A copy of the Code of Business Conduct and Ethics is available on our website at www.ffnwb.com under Investor
Relations – Corporate Overview – Governance Documents. Additionally, any material amendments to, or waiver from a
provision of the Code of Business Conduct and Ethics will be posted to the same website.
122
Item 11. Executive Compensation
The information required by this item under the sections captioned “Executive Compensation” and “Directors’
Compensation” in the Proxy Statement are incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
(a) Security Ownership of Certain Beneficial Owners and Management.
The information required by this item under the section captioned “Security Ownership of Certain Beneficial Owners and
Management” in the Proxy Statement is incorporated herein by reference.
(b) Security Ownership of Management.
The information required by this item under the section captioned “Security Ownership of Certain Beneficial Owners and
Management” in the Proxy Statement is incorporated herein by reference.
(c) Change In Control
First Financial Northwest is not aware of any arrangements, including any pledge by any person of securities of First
Financial Northwest, the operation of which may at a subsequent date result in a change in control of First Financial Northwest.
(d) Equity Compensation Plan Information
The following table summarizes share and exercise price information about First Financial Northwest’s equity
compensation plans as of December 31, 2021.
Number of securities to
be issued upon exercise
of outstanding options,
warrants, and rights
(a)
Weighted-average
exercise price of
outstanding options,
warrants, and rights
(b)
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
(c)
272,000 $
—
N/A
272,000 $
10.63
—
N/A
10.63
—
1,060,922
N/A
1,060.922
Plan category
Equity compensation plans (stock options)
approved by security holders:
2008 Equity Incentive Plan
2016 Equity Incentive Plan (1)
Equity compensation plans not approved by
security holders
Total
___________________
(1) The shares available for grant under the 2016 Equity Incentive Plan include 230,461 shares of restricted stock. Each share
granted as restricted stock reduces the total available shares for grant by two shares.
Item 13. Certain Relationships and Related Transactions and Director Independence
The information required by this item under the sections captioned “Meetings and Committees of the Board of
Directors and Corporate Governance Matters - Corporate Governance - Transactions with Related Persons,” and “Meetings and
Committees of the Board of Directors and Corporate Governance Matters - Corporate Governance - Director Independence” in
the Proxy Statement are incorporated herein by reference.
123
Item 14. Principal Accounting Fees and Services
The information required by this item under the section captioned "Proposal 3- Ratification of the appointment of
Independent Registered Public Accounting Firm in the Proxy Statement is incorporated herein by reference.
Item 15. Exhibits and Financial Statement Schedules
PART IV
(a)
Exhibits
+10.12
+10.13 Offer letter for Randy T. Riffle (13)
+10.14
3.1
3.2
4.1
4.2
+10.1
+10.2
+10.3
+10.4
+10.5
+10.6
+10.7
+10.8
+10.9
+10.10
+10.11
+10.15
+10.16
+10.17
+10.18
14
21
23
31.1
31.2
32.1
32.2
101
104
Articles of Incorporation of First Financial Northwest (1)
Amended and Restated Bylaws of First Financial Northwest (2)
Form of stock certificate of First Financial Northwest (1)
Description of Capital Stock of First Financial Northwest (3)
Amended Employment Agreement between First Financial Northwest Bank and Joseph W. Kiley III (4)
Form of Change in Control Severance Agreement for Executive Officers (5)
Amended Executive Supplemental Retirement Plan Participation Agreement with Joseph W. Kiley III (6)
2008 Equity Incentive Plan (7)
2016 Equity Incentive Plan (8)
Forms of incentive and non-qualified stock option award agreements under the 2008 Equity Incentive Plan(9)
Form of restricted stock award agreement under the 2008 Equity Incentive Plan (9)
Employment Agreement between First Financial Northwest Bank and Richard P. Jacobson (4)
Form of restricted stock award agreement under the 2016 Equity Incentive Plan (10)
Form of incentive stock option award agreement under the 2016 Equity Incentive Plan (11)
Form of non-qualified stock option award agreement under the 2016 Equity Incentive Plan (11)
Form of restricted stock award agreement under the 2016 Equity Incentive Plan (12)
Form of Involuntary Termination Agreement with Randy T. Riffle (14)
Form of Change in Control Severance Agreement with Randy T. Riffle (14)
Supplemental Executive Retirement Plan Agreement for Joseph W. Kiley III (15)
Supplemental Executive Retirement Plan Agreement for Richard P. Jacobson (16)
Form of Change in Control Severance Agreement (Amended and Restated) by and between First Financial
Northwest Bank and Simon Soh, Dalen D. Harrison, and Ronnie J. Clariza (17)
Code of Business Conduct and Ethics (Registrant elects to satisfy Regulation S-K §229.406(c) by posting its Code
of Ethics on the Company’s website at www.ffnwb.com pursuant to Regulation S-K section 229.406(c))
Subsidiaries *
Consent of Independent Registered Public Accounting Firm- Moss Adams LLP *
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act *
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act *
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act *
Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act *
The following materials from First Financial Northwest’s Annual Report on Form 10-K for the year ended
December 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) Notes to
Consolidated Financial Statements.
Cover Page Interactive Date File
124
______________
* Copies of these exhibits are available upon written request to Investor Relations, First Financial Northwest, Inc., 201
Wells Avenue South Renton Washington 98057
(1) Filed as an exhibit to First Financial Northwest’s Registration Statement on Form S-1 on June, 6, 2007 (333-143539)
(2) Filed as an exhibit to First Financial Northwest’s Current Report on Form 8-K dated May 15, 2020.
(3) File as an exhibit to First Financial Northwest’s Annual Report on Form 10-K for December 31, 2020 filed on March
12, 2021.
(4) Filed as an exhibit to First Financial Northwest’s Current Report on Form 8-K dated December 5, 2013.
(5) Filed as an exhibit to First Financial Northwest’s Current Report on Form 8-K dated September 9, 2014.
(6) Filed as an exhibit to First Financial Northwest’s Current Report on Form 8-K dated January 15, 2020.
(7) Filed as Appendix A to First Financial Northwest’s definitive proxy statement dated April 15, 2008.
(8) Filed as an exhibit to First Financial Northwest’s Current Report on Form 8-K dated June 15, 2016.
(9) Filed as an exhibit to First Financial Northwest’s Current Report on Form 8-K dated July 1, 2008.
(10) Filed as an exhibit to First Financial Northwest’s Quarterly Report on Form 10-Q for March 31, 2018 filed on May 8,
2018.
(11) Filed as an exhibit to First Financial Northwest’s Registration Statement on Form S-8 on June 15, 2016 (333-212029).
(12) Filed as an exhibit to First Financial Northwest’s Quarterly Report on Form 10-Q for September 30, 2018 filed
November 7, 2018.
(13) Filed as an exhibit to First Financial Northwest’s Current Report on Form 8-K dated December 20, 2018.
(14) Filed as an exhibit to First Financial Northwest’s Current Report on Form 8-K dated January 3, 2019.
(15) Filed as an exhibit to First Financial Northwest’s Current Report on Form 8-K dated January 15, 2020.
(16) Filed as an exhibit to First Financial Northwest’s Current Report on Form 8-K dated January 15, 2020.
(17) Filed as an exhibit to First Financial Northwest’s Current Report on Form 8-K dated December 21, 2020.
“+” indicates management contract, compensatory plan, or arrangement.
Item 16. Form 10-K Summary.
None.
125
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
FIRST FINANCIAL NORTHWEST, INC.
Date: March 11, 2022
By:
/s/ Joseph W. Kiley III
Joseph W. Kiley III
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Ralph C. Sabin
Ralph C. Sabin
/s/ Joseph W. Kiley III
Joseph W. Kiley III
/s/ Richard P. Jacobson
Richard P. Jacobson
Chairman of the Board and Director
March 11, 2022
President, Chief Executive Officer and Director
March 11, 2022
(Principal Executive Officer)
Chief Financial Officer and Director
March 11, 2022
(Principal Financial Officer)
/s/ Christine A. Huestis
Christine A. Huestis
First Vice President and Controller
(Principal Accounting Officer)
/s/ Diane C. Davis
Diane C. Davis
/s/ Joann E. Lee
Joann E. Lee
/s/ Roger H. Molvar
Roger H. Molvar
/s/ Richard M. Riccobono
Richard M. Riccobono
/s/ Cindy L. Runger
Cindy L. Runger
Director
Director
Director
Director
Director
126
March 11, 2022
March 11, 2022
March 11, 2022
March 11, 2022
March 11, 2022
March 11, 2022
Corporate and
Shareholder Information
Directors and
Executive Management
CORPORATE HEADQUARTERS
FIRST FINANCIAL NORTHWEST, INC.
201 Wells Avenue South
Renton, WA 98057
Phone: (425) 255-4400
Fax: (425) 228-7227
www.ffnwb.com
SUBSIDIARIES
First Financial Northwest Bank
First Financial Diversified Corporation
TRANSFER AGENT
Computershare
462 South 4th Street, Suite 1600
Louisville, KY 40202
Phone: (781) 575-4226
Toll Free: (800) 368-5948
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Moss Adams, LLP
2707 Colby Avenue, Suite 801
Everett, WA 98201
SEC COUNSEL
Breyer & Associates
8180 Greensboro Drive, Suite 785
McLean, VA 22102
STOCK EXCHANGE
First Financial Northwest, Inc. common stock
trades on the NASDAQ Global Select Market
under the symbol FFNW.
Directors
Ralph C. Sabin, Chairman
Diane C. Davis
Richard P. Jacobson
Joseph W. Kiley III
Joann E. Lee
Roger H. Molvar
Richard M. Riccobono
Cindy L. Runger
FIRST FINANCIAL NORTHWEST BANK
Executive Management
Joseph W. Kiley III, President and
Chief Executive Officer
Richard P. Jacobson, Executive Vice President,
Chief Financial Officer and Chief Operating
Officer
Ronnie J. Clariza, Senior Vice President,
Chief Risk Officer
Dalen D. Harrison, Senior Vice President,
Chief Banking Officer
Simon Soh, Senior Vice President,
Chief Credit Officer
INVESTOR AND SHAREHOLDER INFORMATION
Requests for company information or to receive a copy
of this Annual Report to Shareholders without charge
may be sent to:
ANNUAL MEETING OF SHAREHOLDERS
The Annual Meeting of Shareholders will be a
virtual meeting on Wednesday, June 8, 2022
at 9:00 a.m. Pacific Time.
First Financial Northwest, Inc.
Investor Relations
201 Wells Avenue South
PO Box 360
Renton, WA 98057