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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the quarterly period ended September 30, 2023
 
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
           For the transition period from ____________ to ____________
Commission File Number: 001-33652
 
FIRST FINANCIAL NORTHWEST, INC.
(Exact name of registrant as specified in its charter)
 
Washington26-0610707
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification Number)
  
201 Wells Avenue South, Renton, Washington
98057
(Address of principal executive offices)(Zip Code)
  
Registrant’s telephone number, including area code:
(425) 255-4400
  
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.01 par value per shareFFNWThe Nasdaq Stock Market, LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    

Yes    X   No      

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

Yes    X   No      

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer   Non-accelerated filer X
Smaller reporting company XEmerging growth company
    If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. _____
    Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes       No   X   

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: as of November 7, 2023, 9,179,510 shares of the issuer’s common stock, $0.01 par value per share, were outstanding.



FIRST FINANCIAL NORTHWEST, INC.
FORM 10-Q
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
 
 Item 1.Financial Statements
 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Item 4. Controls and Procedures
PART II - OTHER INFORMATION
Item 1.Legal Proceedings
 Item 1A.Risk Factors
 Item 2. Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities
 Item 3.Defaults Upon Senior Securities
 Item 4. Mine Safety Disclosures
 Item 5.Other Information
 Item 6.Exhibits
SIGNATURES
 
 

2

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands, except share data)

Part 1. Financial Information
Item 1. Financial Statements
 September 30, 2023December 31, 2022
Assets
(Unaudited)
Cash on hand and in banks$8,074 $7,722 
Interest-earning deposits with banks49,618 16,598 
Investments available-for-sale, at fair value204,975 217,778 
Investments held-to-maturity, at amortized cost2,450 2,444 
Loans receivable, net of allowance of $15,306, and $15,227
1,168,079 1,167,083 
Federal Home Loan Bank ("FHLB") stock, at cost6,803 7,512 
Accrued interest receivable7,263 6,513 
Deferred tax assets, net3,156 2,597 
Premises and equipment, net19,921 21,192 
Bank owned life insurance ("BOLI"), net37,398 36,286 
Prepaid expenses and other assets13,673 12,479 
Right of use asset (“ROU”), net2,818 3,275 
Goodwill889 889 
Core deposit intangible, net451 548 
Total assets$1,525,568 $1,502,916 
Liabilities and Stockholders' Equity 
Deposits:
Noninterest-bearing deposits$104,164 $119,944 
Interest-bearing deposits1,106,246 1,050,096 
Total deposits1,210,410 1,170,040 
FHLB advances125,000 145,000 
Advance payments from borrowers for taxes and insurance4,760 3,051 
Lease liability, net3,011 3,454 
Accrued interest payable2,646 328 
Other liabilities20,506 20,683 
Total liabilities1,366,333 1,342,556 
 
Commitments and contingencies
Stockholders' Equity 
Preferred stock, $0.01 par value; authorized 10,000,000 shares; no shares issued or outstanding
  
Common stock, $0.01 par value; authorized 90,000,000 shares; issued and outstanding 9,179,510 shares at September 30, 2023, and 9,127,595 shares at December 31, 2022
92 91 
Additional paid-in capital72,926 72,424 
Retained earnings96,206 95,059 
Accumulated other comprehensive loss, net of tax(9,989)(7,214)
Total stockholders' equity159,235 160,360 
Total liabilities and stockholders' equity$1,525,568 $1,502,916 

See accompanying selected notes to consolidated financial statements.
3


FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
Consolidated Income Statements
(Dollars in thousands, except per share amounts)
(Unaudited)
 Three Months Ended September 30,Nine Months Ended September 30,
 2023202220232022
Interest income
Loans, including fees$16,918 $13,618 $49,796 $37,893 
Investment securities2,118 1,609 6,331 3,595 
Interest-earning deposits with banks525 125 1,381 181 
Dividends on FHLB stock113 83 364 228 
Total interest income19,674 15,435 57,872 41,897 
Interest expense  
Deposits9,205 2,326 24,127 4,982 
FHLB advances and other borrowings766 392 2,476 1,006 
Total interest expense9,971 2,718 26,603 5,988 
Net interest income9,703 12,717 31,269 35,909 
Recapture of provision for credit losses(300)(400)(208)(900)
Net interest income after recapture of provision for credit losses10,003 13,117 31,477 36,809 
Noninterest income  
BOLI income244 243 826 782 
Wealth management revenue, net53 89 193 276 
Deposit related fees247 245 722 705 
Loan related fees79 195 215 748 
Other income, net54 6 184 17 
Total noninterest income677 778 2,140 2,528 
Noninterest expense
Salaries and employee benefits5,018 5,417 15,543 16,156 
Occupancy and equipment1,193 1,188 3,517 3,621 
Professional fees553 549 1,857 1,732 
Data processing742 675 2,139 2,044 
Regulatory assessments200 105 568 295 
Insurance and bond premiums111 112 356 354 
Marketing97 92 273 226 
Other general and administrative856 876 2,975 2,497 
Total noninterest expense8,770 9,014 27,228 26,925 
Income before federal income tax provision1,910 4,881 6,389 12,412 
Federal income tax provision409 935 1,278 2,398 
Net income$1,501 $3,946 $5,111 $10,014 
Basic earnings per common share$0.16 $0.44 $0.56 $1.11 
Diluted earnings per common share$0.16 $0.43 $0.56 $1.10 
Basic weighted average number of common shares outstanding9,127,568 8,981,037 9,117,554 8,983,806 
Diluted weighted average number of common shares outstanding9,150,059 9,068,541 9,146,709 9,088,206 

See accompanying selected notes to consolidated financial statements.
4


FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
(Unaudited)







Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
Net income$1,501 $3,946 $5,111 $10,014 
Other comprehensive loss, before tax:
Unrealized holding losses on investments available-for-sale(938)(6,486)(3,726)(19,187)
Tax effect197 1,362 783 4,029 
Gains on cash flow hedges720 3,182 213 9,569 
Tax effect(151)(668)(45)(2,009)
Other comprehensive loss, net of tax(172)(2,610)(2,775)(7,598)
Total comprehensive income$1,329 $1,336 $2,336 $2,416 

See accompanying selected notes to consolidated financial statements.

5


FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity
(Dollars in thousands except per share amounts)
(Unaudited)
Three Months Ended September 30, 2022
 SharesCommon StockAdditional Paid-in CapitalRetained EarningsAccumulated Other Comprehensive Loss,
 net of tax
Unearned
ESOP
Shares
Total Stockholders’ Equity
Balances at June 30, 20229,091,533 $91 $71,835 $90,066 $(4,814)$(282)$156,896 
Net income— — — 3,946 — — 3,946 
Other comprehensive loss, net of tax— — — — (2,610)— (2,610)
Exercise of stock options50,000 — 407 — — — 407 
Issuance of common stock - restricted stock awards, net(1)
13,332  — — — —  
Compensation related to stock options and restricted stock awards— — 327 — — — 327 
Allocation of 28,214 ESOP shares
— — 148 — — 282 430 
Repurchase and retirement of common stock(27,270) (422)— — — (422)
Cash dividend declared and paid ($0.12 per share)
— — — (1,084)— — (1,084)
Balances at September 30, 20229,127,595 $91 $72,295 $92,928 $(7,424)$ $157,890 
(1) These shares were forfeited.
Nine Months Ended September 30, 2022
 SharesCommon StockAdditional Paid-in CapitalRetained EarningsAccumulated Other Comprehensive Loss,
 net of tax
Unearned
ESOP
Shares
Total Stockholders’ Equity
Balances at December 31, 20219,125,759 $91 $72,298 $86,162 $174 $(846)$157,879 
Net income— — — 10,014 — — 10,014 
Other comprehensive loss, net of tax— — — — (7,598)— (7,598)
Exercise of stock options54,481 (1)455 — — — 454 
Issuance of common stock - restricted stock awards, net45,544   — — —  
Compensation related to stock options and restricted stock awards— — 641 — — — 641 
Allocation of 84,640 ESOP shares
— — 526 — — 846 1,372 
Repurchase and retirement of common stock(84,981)1 (1,399)— — — (1,398)
Canceled common stock - restricted stock awards(13,208)— (226)— — — (226)
Cash dividend declared and paid ($0.36 per share)
— — — (3,248)— — (3,248)
Balances at September 30, 20229,127,595 $91 $72,295 $92,928 $(7,424)$ $157,890 

6


FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity
(Dollars in thousands except per share amounts)
(Unaudited)
Three Months Ended September 30, 2023
 SharesCommon StockAdditional Paid-in CapitalRetained EarningsAccumulated Other Comprehensive Loss,
 net of tax
Total Stockholders’ Equity
Balances at June 30, 20239,148,086 $92 $72,544 $95,896 $(9,817)$158,715 
Net income— — — 1,501 — 1,501 
Other comprehensive loss, net of tax— — — — (172)(172)
Exercise of stock options95,019 — 1,023 — — 1,023 
Issuance of common stock - restricted stock awards, net13,000  — — —  
Compensation related to stock options and restricted stock awards— — 270 — — 270 
Canceled common stock - restricted stock awards(76,595)— (911)— — (911)
Cash dividend declared and paid ($0.13 per share)
— — — (1,191)— (1,191)
Balances at September 30, 20239,179,510 $92 $72,926 $96,206 $(9,989)$159,235 
Nine Months Ended September 30, 2023
 SharesCommon StockAdditional Paid-in CapitalRetained EarningsAccumulated Other Comprehensive Loss,
 net of tax
Total Stockholders’ Equity
Balances at December 31, 20229,127,595 $91 $72,424 $95,059 $(7,214)$160,360 
Net income— — — 5,111 — 5,111 
Other comprehensive loss, net of tax— — — — (2,775)(2,775)
Exercise of stock options95,019 — 1,023 — — 1,023 
Issuance of common stock - restricted stock awards, net40,618 1 — — — 1 
Compensation related to stock options and restricted stock awards— — 497 — — 497 
Canceled common stock - stock awards(83,722)— (1,018)— — (1,018)
Cash dividend declared and paid ($0.39 per share)
— — — (3,569)— (3,569)
Adjustment to beginning retained earnings, net of tax - adoption of ASU 2016-13— — — (395)— (395)
Balances at September 30, 20239,179,510 $92 $72,926 $96,206 $(9,989)$159,235 
See accompanying selected notes to consolidated financial statements.
7


FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
 Nine Months Ended September 30,
 20232022
Cash flows from operating activities:  
Net income$5,111 $10,014 
Adjustments to reconcile net income to net cash provided by
   operating activities:
Recapture of provision for credit losses(208)(900)
Net amortization of premiums and discounts on investments408 593 
Depreciation of premises and equipment1,531 1,642 
Loss on disposal of premises and equipment4  
Deferred federal income taxes284 515 
Allocation of ESOP shares 1,372 
Stock compensation expense497 641 
BOLI income(826)(782)
Annuity income(9)(6)
Changes in operating assets and liabilities:
Prepaid expenses and other assets(884)(306)
ROU565 542 
Advance payments from borrowers for taxes and insurance1,709 2,124 
Accrued interest receivable(750)(976)
Lease liability(551)(520)
Accrued interest payable2,318 73 
Other liabilities(366)9,176 
Net cash provided by operating activities8,833 23,202 
Cash flows from investing activities:  
Proceeds from calls and maturities of investments available-for-sale 3,781 
Principal repayments on investments available-for-sale8,669 13,796 
Purchases of investments available-for-sale (89,687)
Net increase in loans receivable(1,096)(38,987)
Redemption (purchase) of FHLB stock709 (2,247)
Purchase of premises and equipment(264)(810)
Purchase of BOLI(286)(72)
Net cash provided (used) by investing activities7,732 (114,226)
8


FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Nine Months Ended September 30,
20232022
Cash flows from financing activities:  
Net increase (decrease) in deposits$40,370 $(8,038)
Advances from the FHLB179,000 105,000 
Repayments of advances from the FHLB(199,000)(50,000)
Proceeds from stock options exercises1,023 454 
Net share settlement of stock awards(1,017)(226)
Repurchase and retirement of common stock (1,398)
Dividends paid(3,569)(3,248)
Net cash provided by financing activities16,807 42,544 
Increase (decrease) in cash and cash equivalents33,372 (48,480)
Cash and cash equivalents at beginning of period24,320 73,391 
Cash and cash equivalents at end of period$57,692 $24,911 
Supplemental disclosures of cash flow information:  
Cash paid during the period for:  
Interest paid$24,285 $5,915 
Federal income taxes paid1,900 2,000 
Noncash items:
Change in unrealized loss on investments available-for-sale$(3,726)$(19,187)
Change in unrealized gain on cash flow hedges213 9,569 
Initial recognition of ROU108 156 
Initial recognition of lease liability108 156 
   Adjustment to beginning retained earnings - adoption of ASU 2016-13, net of tax395 — 

See accompanying selected notes to consolidated financial statements.

9



FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Description of Business

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

At September 30, 2023, the Bank operated in 15 locations in Washington with the headquarters and seven retail branch locations in King County, five retail branch locations in Snohomish County and two retail branches in Pierce County. The Bank’s primary market area consists of King, Snohomish, Pierce and Kitsap counties, Washington.

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

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

Note 2 - Basis of Presentation

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

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

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


10


FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 3 - Recently Issued Accounting Pronouncements

Recent Accounting Pronouncements

Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments - Credit Losses (Topic 326) as amended by ASU 2018-19, ASU 2019-04 and ASU 2019-05, was originally issued by the Financial Accounting Standards Board (“FASB”) in June 2016. This ASU replaces the incurred loss methodology that delays recognition until it is probable a loss has been incurred with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. The amendments in this ASU require a financial asset that is measured at amortized cost to be presented at the net amount expected to be collected. The income statement would then reflect the measurement of credit losses for newly recognized financial assets as well as changes to the expected credit losses that have taken place during the reporting period. The measurement of expected credit losses will be based on historical information, current conditions, and reasonable and supportable forecasts that impact the collectability of the reported amount. Available-for-sale securities will bifurcate the fair value mark and establish an allowance for credit losses through the income statement for the credit portion of that mark. The interest portion will continue to be recognized through accumulated other comprehensive income or loss. The change in allowance recognized as a result of adoption will occur through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the ASU is adopted. This ASU was effective for smaller reporting companies, such as the Company, on January 1, 2023. ASU 2019-05 issued in April 2019 further provides that entities that have certain financial instruments measured at amortized cost that have credit losses, to irrevocably elect the fair value option in Subtopic 825-10, upon adoption of Topic 326. The fair value option applies to available-for-sale debt securities. This ASU was 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. On January 1, 2023, the Company adopted this ASU, which resulted in a net of tax charge of $395,000 to retained earnings, and a $500,000 increase to allowance for credit losses for the cumulative effect of adopting this guidance. The impact that the transition to CECL had on the expected credit losses on unfunded commitments was deemed to be immaterial.

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 London Interbank Offering Rate (“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. Effective January 25, 2021, the Company adhered to the Interbank Offered Rate Fallbacks Protocol (“Protocol”) as published by the International Swaps and Derivatives Association, Inc. and recommended by the Alternative Reference Rates Committee. Additionally, effective January 1, 2022, the Company was no longer initiating or renewing loans using LIBOR as an index. The Company holds derivative instruments that use LIBOR as the reference rate that were impacted by the discontinuance of LIBOR on June 30, 2023. As of September 30, 2023, the Company’s derivative instruments’ variable-rate interest payments have been converted to be based on Secured Overnight Financing Rate (“SOFR”).

In March 2022, the FASB issued ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. This ASU eliminates the accounting guidance for troubled debt restructured loans (“TDRs”) by creditors while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Additionally, the ASU requires public business entities to disclose current-period gross charge-offs by year of origination for financing receivables and net investments in leases. This ASU is effective upon adoption of ASU 2016-13. On January 1, 2023, the Company adopted this ASU at the same time ASU 2016-13 was adopted. The Company had no loans modified for borrowers experiencing financial difficulty during the nine months ended September 30, 2023. The Company had a $22,000 gross charge-off in consumer loans since the adoption of this ASU and the write off was included in the table with the summary of loans by type and risk category at September 30, 2023, in Note 5.


11


FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 4 - Investments

    Investments available-for-sale are summarized as follows at the dates indicated:
 September 30, 2023
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
(In thousands)
Mortgage-backed investments:   
   Fannie Mae$11,616 $ $(2,185)$9,431 
   Freddie Mac13,618  (2,216)11,402 
   Ginnie Mae28,299  (1,793)26,506 
   Other31,454  (2,169)29,285 
Municipal bonds36,671  (7,341)29,330 
U.S. Government agencies72,191 7 (1,491)70,707 
Corporate bonds33,000  (4,686)28,314 
Total$226,849 $7 $(21,881)$204,975 
 December 31, 2022
 Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
 (In thousands)
Mortgage-backed investments:   
   Fannie Mae$11,800 $ $(1,860)$9,940 
   Freddie Mac13,720  (1,831)11,889 
   Ginnie Mae29,426 18 (1,601)27,843 
   Other34,295  (1,906)32,389 
Municipal bonds36,968 17 (6,102)30,883 
U.S. Government agencies76,718 6 (2,370)74,354 
Corporate bonds33,000  (2,520)30,480 
Total$235,927 $41 $(18,190)$217,778 

There were no holdings of investment securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders’ equity at September 30, 2023 and December 31, 2022.
     
    













12


FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

 September 30, 2023
 Less Than 12 Months12 Months or LongerTotal
Fair ValueGross Unrealized
Loss
Fair ValueGross Unrealized
Loss
Fair ValueGross Unrealized
Loss
(In thousands)
Mortgage-backed investments:
   Fannie Mae$ $ $9,431 $(2,185)$9,431 $(2,185)
   Freddie Mac673 (57)10,729 (2,159)11,402 (2,216)
   Ginnie Mae11,547 (70)14,959 (1,723)26,506 (1,793)
   Other2,376 (104)26,909 (2,065)29,285 (2,169)
Municipal bonds4,748 (175)24,582 (7,166)29,330 (7,341)
U.S. Government agencies20  67,955 (1,491)67,975 (1,491)
Corporate bonds5,767 (233)22,547 (4,453)28,314 (4,686)
Total$25,131 $(639)$177,112 $(21,242)$202,243 $(21,881)

 December 31, 2022
 Less Than 12 Months12 Months or LongerTotal
Fair ValueGross Unrealized
Loss
Fair ValueGross Unrealized
Loss
Fair ValueGross Unrealized
Loss
(In thousands)
Mortgage-backed investments:
   Fannie Mae$6,710 $(1,073)$3,226 $(787)$9,936 $(1,860)
   Freddie Mac4,677 (272)6,476 (1,559)11,153 (1,831)
   Ginnie Mae7,645 (310)13,714 (1,291)21,359 (1,601)
   Other27,430 (1,614)4,959 (292)32,389 (1,906)
Municipal bonds7,892 (680)20,901 (5,422)28,793 (6,102)
U.S. Government agencies43,664 (1,184)30,224 (1,186)73,888 (2,370)
Corporate bonds17,241 (1,259)13,239 (1,261)30,480 (2,520)
Total$115,259 $(6,392)$92,739 $(11,798)$207,998 $(18,190)

Available-for-sale (“AFS”) debt securities are considered impaired if the fair value is less than the amortized cost. On a quarterly basis, management evaluates impaired debt securities to determine if an allowance for credit losses is required. If it is determined that a credit loss exists and an allowance is required, the credit loss on a debt security is measured as the difference between the amortized cost and the present value of the cash flows expected to be collected, limited by the amount of the impairment. For impaired debt securities that the Company does not intend to sell and it is not likely that it will be required to sell but does not expect to recover the entire security’s amortized cost basis, only the portion of the impairment representing a credit loss would be recognized in earnings. If the Company intends to sell a debt security, or it is likely that the Company will be required to sell the debt security before recovering its cost basis, the entire impairment would be recognized through earnings. The Company considers many factors including the severity and duration of the impairment, economic circumstances, recent events specific to the issuer or industry, and for debt securities, external credit ratings and recent rating updates. Projected cash flows are discounted by the original or current effective interest rate depending on the nature of the debt security being measured for a potential credit loss. The remaining impairment related to all other factors is recognized as a charge to other comprehensive income (“OCI”).

The Company had 131 securities and 123 securities in an unrealized loss position, with 114 and 62 of these securities in an unrealized loss position for 12 months or more, at September 30, 2023, and December 31, 2022, respectively. Management does not believe that the unrealized losses at September 30, 2023 and December 31, 2022 were related to credit losses. The declines in fair market value of these securities were mainly attributed to changes in market interest rates, credit
13


FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

spreads, market volatility and liquidity conditions. Currently, the Company does not intend to sell, and it is not more likely than not that the Company will be required to sell the positions before their recovery of the amortized cost basis, which may be at maturity. As such, no allowance for credit losses was recorded with respect to AFS securities for the three and nine months ended September 30, 2023.

    The amortized cost and estimated fair value of investments available-for-sale at September 30, 2023, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Investments not due at a single maturity date, primarily mortgage-backed investments, are shown separately.
 September 30, 2023
 Amortized CostFair Value
 (In thousands)
Due within one year$39,802 $39,194 
Due after one year through five years10,532 10,008 
Due after five years through ten years31,036 25,882 
Due after ten years60,492 53,267 
 141,862 128,351 
Mortgage-backed investments84,987 76,624 
Total$226,849 $204,975 

Under Washington state law, in order to participate in the public funds program, the Company is required to pledge eligible securities as collateral in an amount equal to 50% of the public deposits held less the FDIC insured amount. Investment securities with market values of $26.0 million and $21.0 million were pledged as collateral for public deposits at September 30, 2023, and December 31, 2022, respectively, both of which exceeded the collateral requirements established by the Washington Public Deposit Protection Commission.

    For the three and nine months ended September 30, 2023, there were no calls, sales or maturities of investment securities. For the three and nine months ended September 30, 2022, there were $399,000 and $3.8 million, respectively, in calls and maturities on investment securities with no gain or loss generated.

    In January 2020, the Bank purchased three annuity contracts, totaling $2.4 million, to be held long-term to satisfy the benefit obligation associated with certain supplemental executive retirement plan agreements. At September 30, 2023, the annuities were reported as investments held-to-maturity at an amortized cost of $2.5 million on the Company’s Consolidated Balance Sheets. The amortized cost is considered the fair value of the investment.
14


FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 5 - Loans Receivable and Allowance for Credit Losses

Loans receivable are summarized as follows at the dates indicated: 
 September 30, 2023December 31, 2022
 (In thousands)
One-to-four family residential:   
Permanent owner occupied$260,970 $232,869 
Permanent non-owner occupied232,238 241,311 
493,208 474,180 
 
Multifamily140,022 126,866 
 
Commercial real estate394,691 407,904 
 
Construction/land: 
One-to-four family residential43,532 52,492 
Multifamily 2,043 15,393 
Land9,766 9,759 
 55,341 77,644 
Business27,975 31,363 
Consumer72,148 64,353 
Total loans receivable, gross1,183,385 1,182,310 
Less: 
ACL(1)
15,306 15,227