FIRST FINANCIAL NORTHWEST, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)

Forward-looking statements

Certain matters discussed in this Quarterly Report on Form 10-Q constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements relate to our financial
condition, results of operations, plans, objectives, future performance or
business. Forward-looking statements are not statements of historical fact, are
based on certain assumptions and are generally identified by use of the words
"believes," "expects," "anticipates," "estimates," "forecasts," "intends,"
"plans," "targets," "potentially," "probably," "projects," "outlook" or similar
expressions or future or conditional verbs such as "may," "will," "should,"
"would" and "could." Forward-looking statements include statements with respect
to our beliefs, plans, objectives, goals, expectations, assumptions and
statements about, among other things, expectations of the business environment
in which we operate, projections of future performance or financial items,
perceived opportunities in the market, potential future credit experience, and
statements regarding our mission and vision. These forward-looking statements
are based upon current management expectations and may, therefore, involve risks
and uncertainties. Our actual results, performance, or achievements may differ
materially from those suggested, expressed, or implied by forward-looking
statements as a result of a wide variety or range of factors including, but not
limited to:

•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 allowance for loan and lease losses;
•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 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 allowance for loan
and lease 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;
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•legislative or regulatory changes that adversely affect our business as a
result of COVID-19;
•the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act of
2010 (the "Dodd-Frank Act") and the implementing regulations;
•the availability of resources to address changes in laws, rules, or regulations
or to respond to regulatory actions;
•adverse changes in the securities markets;
•inability of key third-party providers to perform their obligations to us;
•changes in accounting policies and practices, as may be adopted by the
financial institution regulatory agencies or the Financial Accounting Standards
Board, including additional guidance and interpretation on accounting issues and
details of the implementation of new accounting methods; and
•other economic, competitive, governmental, regulatory, and technological
factors affecting our operations, pricing, products and services, and other
risks detailed in our Form 10-K for the year ended December 31, 2021 ("2021
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-Q and in the
other public reports and statements we make may turn out to be wrong because of
the inaccurate assumptions we might make, because of the factors illustrated
above or because of other factors that we cannot foresee. Because of these and
other uncertainties, our actual future results may be materially different from
those expressed in any forward-looking statements made by or on our behalf.
Therefore, these factors should be considered in evaluating the forward-looking
statements, and undue reliance should not be placed on such statements. We
undertake no responsibility to update or revise any forward-looking statements.

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

Insight

First Financial Northwest Bank ("the Bank") is a wholly-owned subsidiary of
First Financial Northwest, Inc. ("the Company") and, as such, comprises
substantially all of the activity for the Company. First Financial Northwest
Bank was a community-based savings bank until February 4, 2016, when the Bank
converted to a Washington chartered commercial bank reflecting the commercial
banking services it now provides to its customers. The Bank primarily serves
King, Pierce, Snohomish, and Kitsap counties, Washington, through its
full-service banking office and headquarters in Renton, Washington, as well as
seven retail branches in King County, Washington, five retail branches in
Snohomish County, Washington, and two retail branches in Pierce County,
Washington.

The Bank's business consists predominantly of attracting deposits from the
general public, combined with borrowing from the FHLB and raising funds in the
wholesale market (which may include brokered deposits), 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 within our current risk tolerance levels and asset/liability
objectives. 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 and 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 loans in 43 other states and the District of
Columbia, with the largest concentrations at March 31, 2022, in California,
Oregon, Texas, Florida and Alabama of $35.8 million, $15.3 million,
$11.2 million, $10.1 million and $8.1 million, respectively.

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.

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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 and the
repricing of retail certificates of deposit at much lower market rates. During
the quarter ended March 31, 2022, loan yields decreased compared to the same
quarter last year, primarily due to the decrease in recognition of unamortized
deferred fee income on Paycheck Protection Program ("PPP") loans forgiven and
repaid by the SBA.

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 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 expenses consist primarily of salaries and employee benefits,
professional fees, regulatory assessments, occupancy and equipment, and other
general and administrative expenses. Salaries and employee benefits consist
primarily of the salaries and wages paid to our employees, payroll taxes,
expenses for retirement, and other employee benefits. Professional fees include
legal services, auditing and accounting services, computer support services, and
other professional services in support of strategic plans. Occupancy and
equipment expenses, which are the fixed and variable costs of buildings and
equipment, consist primarily of lease expenses, real estate taxes, depreciation
expenses, maintenance, and costs of utilities. Also included in noninterest
expense is the change to the Company's unfunded commitment reserve which is
reflected in general and administrative expenses. This unfunded commitment
reserve expense can vary significantly each quarter, based on the amount
believed by management to be sufficient to absorb estimated probable losses
related to unfunded credit facilities, and reflects changes in the amounts that
the Company has committed to fund but has not yet disbursed.

Information related to COVID-19

The Company maintains its commitment to supporting its community and customers
during the COVID-19 pandemic and remains focused on keeping its employees safe
and the Bank running effectively to serve its customers. As of March 31, 2022,
all Bank branches are open with normal hours. The Bank will continue to monitor
branch access and occupancy levels in relation to cases and close contact
scenarios and follow governmental restrictions and public health authority
guidelines.

Critical accounting policies

  Our significant accounting policies are fundamental to understanding our
results of operations and financial condition because they require that we use
estimates and assumptions that may affect the value of our assets or liabilities
and our financial results. These policies are critical because they require
management to make difficult, subjective, and complex judgments about matters
that are inherently uncertain and because it is likely that materially different
amounts would be reported under different conditions or by using different
assumptions. These policies govern the ALLL, the valuation of OREO, and the
calculation of deferred taxes, the right-of-use asset and lease liability on our
operating leases, fair values, and other-than-temporary impairments on the
market value of investments and derivatives. These policies and estimates are
described in further detail in Part II, Item 7 Management's Discussion and
Analysis of Financial Condition and Results of Operations and Note 1, Summary of
Significant Accounting Policies in the 2021 Form 10-K. There have not been any
material changes in the Company's critical accounting policies and estimates as
compared to the disclosure contained in the 2021 Form 10-K.


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Comparison of the financial situation at March 31, 2022 and December 31, 2021

Total assets were $1.42 billion at March 31, 2022, a decrease of 0.8%, from
$1.43 billion at December 31, 2021. The following table details the $11.3
million net change in the composition of our assets at March 31, 2022 from
December 31, 2021.

                                                      Balance at            Balance at
                                                      March 31,            December 31,            Change from
                                                         2022                  2021             December 31, 2021        Percent Change
                                                                                   (Dollars in thousands)
Cash on hand and in banks                           $     7,979          $       7,246          $          733                    10.1  %
Interest-earning deposits                                19,633                 66,145                 (46,512)                  (70.3)
Investments available-for-sale, at fair value           180,212                168,948                  11,264                     6.7
Investments held-to-maturity, at amortized cost           2,426                  2,432                      (6)                   (0.2)
Loans receivable, net                                 1,121,382              1,103,461                  17,921                     1.6
FHLB stock, at cost                                       5,512                  5,465                      47                     0.9
Accrued interest receivable                               5,590                  5,285                     305                     5.8
Deferred tax assets, net                                  1,069                    850                     219                    25.8

Premises and equipment, net                              22,254                 22,440                    (186)                   (0.8)
BOLI, net                                                35,552                 35,210                     342                     1.0
Prepaid expenses and other assets                         8,451                  3,628                   4,823                   132.9
ROU, net                                                  3,455                  3,646                    (191)                   (5.2)
Goodwill                                                    889                    889                       -                       -
Core deposit intangible, net                                650                    684                     (34)                   (5.0)
Total assets                                        $ 1,415,054          $   1,426,329          $      (11,275)                   (0.8) %



Interest-earning deposits with banks. Our interest-earning deposits with banks,
consisting primarily of funds held at the Federal Reserve Bank of San Francisco
("FRB"), decreased by $46.5 million during the three months ended March 31,
2022. Growth in both loans receivable and investments available-for-sale was
achieved by investing idle cash into these higher yielding assets.

Investments available-for-sale. Our investments available-for-sale portfolio
increased by $11.3 million during the three months ended March 31, 2022. During
this period, the Bank purchased available-for-sale investment securities that
included $20.0 million of fixed rate U.S. Treasury bonds. In addition, the Bank
purchased $4.0 million of fixed rate mortgage backed securities and $2.0 million
in variable rate bonds. These purchases have an expected weighted average yield
of 2.20%. During the three months ended March 31, 2022, $30,000 of investments
were called or paid-off early and one $2.4 million investment matured.

The effective duration of the investments available-for-sale at March 31, 2022,
was 3.65% as compared to 3.54% at December 31, 2021. Effective duration measures
the anticipated percentage change in the value of an investment security (or
portfolio) in the event of a 100 basis point change in market yields. Since the
Bank's portfolio includes securities with embedded options (including call
options on bonds and prepayment options on mortgage-backed securities),
management believes that effective duration is an appropriate metric to use as a
tool when analyzing the Bank's investment securities portfolio, as effective
duration incorporates assumptions relating to such embedded options, including
changes in cash flow assumptions as interest rates change.

Loans receivable. Net loans receivable increased $17.9 million during the three
months ended March 31, 2022, primarily due to growth in one-to-four family
residential loans, multifamily loans, and consumer loans of $27.1 million,
$22.7 million, and $4.6 million, respectively. Partially offsetting these
increases, business loans decreased $16.0 million due to a $5.7 million decrease
in PPP loans, an $8.9 million reduction in other business loans, and a $1.4
million decrease in aircraft loans. In addition, construction/land loans
decreased $18.8 million, of which $20.7 million converted to permanent
multi-family loans, and commercial real estate loans decreased $2.4 million.

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At March 31, 2022 and December 31, 2021, the Bank's construction/land loans
totaled 51.9% and 59.7% of total capital plus surplus, respectively, and total
non-owner occupied commercial real estate was 379.6% and 384.0% of total capital
plus surplus, respectively. The Bank has set aggregate concentration guidelines
that total commercial real estate, including residential, non-residential, and
construction/land loans, should not exceed 550% of total capital plus surplus.
Our concentration guideline for construction/land loans is to limit these loans
to 100% of total capital plus surplus. The concentration of construction/land
loans is calculated using the funded balance of these loans and consequently can
fluctuate based on the timing of construction draws and loan payoffs. Management
reviews estimated construction draws and loan payoffs and adjusts loan
originations based on these estimates to achieve compliance with our
construction guidelines. Our commercial and multifamily real estate and
construction/land loan portfolios are subject to ongoing credit reviews
performed by both independent loan review staff, as well as an external
third-party review firm to assist with identifying potential adverse trends and
risks in the portfolio allowing management to initiate timely corrective action,
as necessary. Such reviews also assist with ensuring loan risk grades are
accurately assigned and thereby properly accounted for in the ALLL. The review
places emphasis on large borrowing relationships, stress testing, compliance
with loan covenants, as well as other risk factors warranting enhanced review.

The following table presents a breakdown of our multifamily, commercial and
construction loans by collateral type at March 31, 2022 and December 31, 2021.
Total commercial real estate loans and construction/land loans are net of $5,000
and $39.0 million of LIP, respectively, at March 31, 2022, as compared to
$89,000 and $43.3 million LIP, respectively, at December 31, 2021.

                                                      March 31, 2022                                      December 31, 2021
                                                                   % of Total in                                         % of Total in
                                            Amount                   Portfolio                   Amount                    Portfolio
                                                                   (In thousands)
Multifamily residential                $      152,855                      
100.0  %       $        130,146                       100.0  %

Non-residential:
Retail                                        142,725                        34.2  %                138,463                        33.0  %
Office                                         87,394                        21.0                    90,727                        21.6
Hotel / motel                                  58,406                        14.0                    64,854                        15.5
Storage                                        34,442                         8.3                    32,990                         7.9
Mobile home park                               20,409                         4.9                    20,636                         4.9
Warehouse                                      21,103                         5.0                    17,724                         4.2
Nursing home                                   12,622                         3.0                    12,713                         3.0
Other non-residential                          39,887                         9.6                    41,310                         9.9
Total non-residential                         416,988                       100.0  %                419,417                       100.0  %

Construction/land:
One-to-four family residential                 35,953                        48.1  %                 34,677                        37.1  %
Multifamily                                    17,196                        23.0                    37,194                        39.8
Commercial                                      6,189                         8.3                     6,189                         6.6
Land                                           15,359                        20.6                    15,395                        16.5
Total construction/land                        74,697                       100.0  %                 93,455                       100.0  %
Total multifamily residential,
non-residential and construction/land
loans                                  $      644,540                                      $        643,018



Included in total construction/land loans at March 31, 2022, are $17.2 million
of multifamily loans and $6.2 million of commercial real estate loans that will
roll over to permanent loans at the completion of their construction period in
accordance with the terms of the construction/land loan. At December 31, 2021,
construction/land loans included $37.2 million of multifamily loans and $6.2
million of commercial real estate loans that will roll over to permanent loans
at the completion of their construction period in accordance with the terms of
the construction/land loan.

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To assist in our strategic initiatives for loan growth and to achieve geographic
diversification, the Bank originates and purchases loans and utilize loan
participations with the underlying collateral located within areas of Washington
State outside our primary market area or in other states. The Bank's goal with
respect to loan participations is to locate a selling bank that is unable to
make an entire loan due to legal or lending concentration limitations. Sellers
of these loans are reviewed for management/lending experience, financial
condition, asset quality metrics, and regulatory matters. Loans acquired through
participation or purchase must meet the Bank's underwriting and risk guidelines.
During the three months ended March 31, 2022, the Bank purchased $9.5 million of
loans and loan participations to borrowers located in Washington and other
states, including $3.7 million of commercial real estate loans and $5.8 million
of consumer loans secured by classic/collectible automobiles.

The majority of our loan portfolio continues to be secured by properties located
in our primary market area, however a significant amount is secured by
properties in other areas of Washington, in California, and in other states. At
March 31, 2022, total loans secured by collateral located in California
represented 3.1% of our total loans, and total loans secured by collateral
located outside the states of California and Washington represented 9.7% of our
total loans. The following table details geographic concentrations in our loan
portfolio:
                                                                                                At March 31, 2022
                                   One-to-Four
                                     Family                                     Commercial
                                   Residential            Multifamily          Real Estate           Construction/Land          Business          Consumer             Total
                                                                                                 (In thousands)
King County                     $      316,638          $     84,630          $   254,176          $           70,961          $ 18,418          $ 10,145          $   754,968
Pierce County                           37,655                13,239               28,159                           -               293               576               79,922
Snohomish County                        31,936                 8,454               14,740                         849             6,205             1,325               63,509
Kitsap County                            4,718                     5                  740                       2,253               209                 -                7,925
Other Washington Counties               16,014                31,324               35,879                         634               417               563               84,831
California                                   -                 9,639               18,209                           -               187             7,752               35,787
Outside Washington
and California (1)                       5,270                 5,564               65,085                           -             4,817            29,070              109,806
Total loans                     $      412,231          $    152,855          $   416,988          $           74,697          $ 30,546          $ 49,431          $ 1,136,748


_______________
(1) Includes loans in Oregon, Texas, Florida and Alabama of $15.3 million, $11.2
million, $10.1 million and $8.1 million, respectively, and loans in 38 other
states and the District of Columbia.

The ALLL decreased to $15.2 million at March 31, 2022, from $15.7 million at
December 31, 2021, and represented 1.33% and 1.40% of total loans receivable at
March 31, 2022, and December 31, 2021, respectively. The ALLL consists of two
components, the general allowance and the specific allowance. The ALLL general
allowance decreased as a partial result of $8.1 million of loans downgraded to
substandard, where the individual analysis on these loans indicated no
additional specific reserve was needed and these loans were omitted from the
general allowance calculations used to calculate the ALLL and provision for loan
losses. The downgrades included a $6.4 million participation interest in
commercial loans secured by medical rehabilitation facilities that were impacted
unfavorably by the limitations on elective medical procedures during the
COVID-19 pandemic. In addition, a $1.7 million multifamily property loan was
downgraded to substandard subsequent to an overall financial analysis on one of
our borrowing relationships with multiple other loans that were previously
downgraded to substandard. Further, balances of lower risk one-to-four family
loans and multifamily residential loans increased and balances of higher risk
construction/land loans and business loans decreased, thereby reducing the
related general allowance. Partially offsetting these decreases in the general
allowance, a $6.3 million participation interest in a loan secured by a nursing
home facility was downgraded to special mention due to continued reduced
occupancy as a result of the COVID-19 pandemic. The $5.2 million balance of PPP
loans was omitted from the ALLL calculation at March 31, 2022, as these loans
are fully guaranteed by the SBA. 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 in turn will reimburse
the Bank for the amount forgiven.

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To March 31, 2022total specific allowances decreased by $2,000 because
December 31, 2021 following the amortization of the concession previously granted on an existing TDR. For more information, see “Comparison of operating results for the three months ended March 31, 2022and 2021 – Allowance for Loan Losses” discussed below.

We believe that the ALLL at March 31, 2022, was adequate to absorb the probable
and inherent risks of loss in the loan portfolio at that date. While we believe
the estimates and assumptions used in our determination of the adequacy of the
allowance are reasonable, there can be no assurance that such estimates and
assumptions will be proven correct in the future, that the actual amount of
future losses will not exceed the amount of past provisions, or that any
increased provisions that may be required will not adversely impact our
financial condition and results of operations. Future additions to the allowance
may become necessary based upon changing economic conditions, the level of
problem loans, business conditions, credit concentrations, increased loan
balances, or changes in the underlying collateral of the loan portfolio. In
addition, the determination of the amount of our ALLL is subject to review by
bank regulators as part of the routine examination process, which may result in
the establishment of additional loss allowances or the charge-off of specific
loans against established loss allowances based upon their judgment of
information available to them at the time of their examination. Uncertainties
relating to our ALLL are heightened as a result of the risks surrounding the
COVID-19 pandemic as described in further detail in Part 1, Item 1A of our 2021
Form 10-K.

As we work with our borrowers that face difficult financial circumstances, we
explore various options available to minimize our risk of loss. At times, the
best option for our customers and the Bank is to modify the loan for a period of
time, usually one year or less. Certain loan modifications are accounted for as
TDRs. These modifications have included a reduction in interest rate on the loan
for a period of time, advancing the maturity date of the loan, or allowing
interest-only payments for a specific time frame. These modifications are
granted only when there is a reasonable and attainable restructured loan plan
that has been agreed to by the borrower and is considered to be in the Bank's
best interest.

The following table presents a breakdown of our TDRs on the dates indicated, which were all efficient and in a situation of regularization:

                                            March 31, 2022          December 31, 2021          Three Month Change
                                                                   (Dollars in thousands)

Performing TDRs:
One-to-four family residential            $         2,095          $          2,107          $               (12)

Total TDRs                                $         2,095          $          2,107          $               (12)
% TDRs classified as performing                     100.0  %                

100.0%



  Our TDRs decreased $12,000 at March 31, 2022, compared to December 31, 2021 as
a result of principal repayments. At March 31, 2022, there were no committed but
undisbursed funds in connection with our TDRs. The largest TDR relationship at
March 31, 2022, totaled $907,000 and was secured by non-owner occupied
one-to-four family properties located in Pierce County.

  Loans are considered past due if a scheduled principal or interest payment is
due and unpaid for 30 days or more. At March 31, 2022, total past due loans were
$208,000, representing 0.02% of total loans receivable, and at December 31,
2021, were 255,000, representing 0.02% of total loans receivable.

  Nonaccrual loans are loans that are 90 days or more delinquent or other loans
which, in management's opinion, the borrower is unable to meet scheduled payment
obligations. At March 31, 2022, the Bank had a $179,000 classic car loan on
nonaccrual status. There were no nonaccrual loans at December 31, 2021. The Bank
has initiated repossession of the collateralized vehicle on this loan and does
not expect to incur a loss.

We continue to focus our efforts on working with borrowers to bring their past
due loans current. By taking ownership of the underlying collateral if needed,
we can generally convert non-earning assets into earning assets on a more timely
basis than which may otherwise be the case. Our success in this area is
reflected by continued low balance of nonperforming assets.

OREO. OREO includes properties acquired by the Bank through foreclosure or
acceptance of a deed in lieu of foreclosure. At March 31, 2022, and December 31,
2021, the Bank had no OREO properties and no real estate secured loans in the
foreclosure process.
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  Intangible assets. The balance of goodwill was $889,000 at both March 31, 2022
and December 31, 2021. Goodwill was calculated as the excess purchase price of
the branches acquired in August 2017 (the "Branch Acquisition") over the fair
value of the assets acquired and liabilities assumed.

  The core deposit intangible ("CDI") recorded as part of the Branch Acquisition
represents the fair value of the customer relationships on the acquired
noninterest-bearing demand, interest-bearing demand, savings, and money market
accounts. The CDI balance was $650,000 at March 31, 2022 and $684,000 at
December 31, 2021. The initial ratio of CDI to the acquired balances of core
deposits was 2.23%. The CDI amortizes into noninterest expense on an accelerated
basis over ten years.

Deposits. In the first three months of 2022, deposits fell $17.4 million for $1.14 billion to March 31, 2022compared to $1.16 billion to
December 31, 2021. The deposit accounts consisted of the following:

                                                                            Balance at
                                                     Balance at            December 31,            Change from
                                                   March 31, 2022              2021             December 31, 2021        Percent Change
                                                                                  (Dollars in thousands)
Noninterest-bearing                              $       130,596          $    117,751          $       12,845                    10.9  %
Interest-bearing demand                                   99,794                97,907                   1,887                     1.9
Savings                                                   23,441                23,146                     295                     1.3
Money market                                             609,080               624,543                 (15,463)                   (2.5)
Certificates of deposit, retail                          277,190               294,127                 (16,937)                   (5.8)

                                                 $     1,140,101          $  1,157,474          $      (17,373)                   (1.5)



Decreases in money market accounts and retail certificates of deposit of $15.5
million and $16.9 million, respectively, were partially offset by increases in
noninterest-bearing demand accounts and interest-bearing demand accounts of
$12.8 million and $1.9 million, respectively. The Bank continued its strategy to
shift the deposit composition to lower cost transaction accounts.

At March 31, 2022 and December 31, 2021, we held $58.5 million and $60.6 million
in public funds, respectively, primarily in retail certificates of deposit and
money market accounts.

Advances. We use advances from the FHLB as an alternative funding source to
manage interest rate risk, to leverage our balance sheet and to supplement our
deposits. Total FHLB advances were $95.0 million at both March 31, 2022, and
December 31, 2021. At March 31, 2022, the Bank's advances included $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, all of which are utilized in
cash flow hedge agreements, as described below. At March 31, 2022, all of our
FHLB advances were due to reprice in less than two months. At that date, there
were no FHLB Fed Funds short-term borrowings.

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

The following table presents details of the Bank's interest rate swap agreements
as of March 31, 2022. For each interest rate swap agreement listed, the Bank has
secured a fixed-rate FHLB advance for the notional amount that reprices at the
same frequency as the corresponding interest rate swap. The Bank pays a fixed
interest rate to the counterparty and in return, receives a floating interest
rate based on the index noted in the below table. The original term of these
interest rate swap agreements range from four to eight years.
                                       41

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                                                                                  Fixed rate paid to            Index rate received
  Notional amount             Start Date                Maturity Date                counterparty                from counterparty             Repricing Frequency
                                                                       (Dollars in thousands)
$         15,000               9/27/2019                  9/27/2024                            1.440  %            1-month LIBOR                     monthly
          10,000              11/20/2019                 11/20/2023                            1.585               3-month LIBOR                    quarterly
          15,000               3/2/2020                   3/2/2026                             0.911               1-month LIBOR                     monthly
          15,000               3/2/2020                   3/2/2027                             0.937               1-month LIBOR                     monthly
          15,000               3/2/2020                   3/2/2028                             0.984               1-month LIBOR                     monthly
          15,000              10/25/2021                 10/25/2028                            0.793               3-month LIBOR                    quarterly
          10,000              10/25/2021                 10/25/2029                            0.800               3-month LIBOR                    quarterly



A change in the net fair value of these cash flow hedges is recognized as an
other asset or other liability on the balance sheet with the tax-effected
portion of the change included in other comprehensive income. At March 31, 2022
and December 31, 2021, we recognized fair value assets of $6.0 million and $1.5
million, respectively, 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 derivative transaction to
incorporate ISDA's fallback terms, providing for a clear transition from LIBOR
to SOFR.

  Stockholders' Equity. Total stockholders' equity had a slight decrease of
$122,000 during the first three months of 2022, to $157.8 million at March 31,
2022, from $157.9 million at December 31, 2021. Stockholders' equity decreased
$2.1 million, net of tax, following an increase in market interest rates during
the quarter which negatively impacted the fair value of our available-for-sale
investments, outpacing the improvement in market values of our cash flow hedges.
In addition, stockholders' equity decreased by $694,000 from the repurchase of
40,784 shares of common stock, $1.1 million in cash dividends paid, and $226,000
from canceled restricted stock awards. As part of the strategy to increase
shareholder value, the Company's Board of Directors authorized a stock
repurchase plan that began on August 16, 2021, for the repurchase of up to
476,000 shares of the Company's stock. At this repurchase plan's expiration on
February 15, 2022, the Company had repurchased 459,732 shares at an average
price of $16.83 per share. The Board of Directors has authorized another stock
repurchase plan that began on February 18, 2022, and which expires on August 17,
2022. This plan authorizes the repurchase of up to 455,000 shares. At March 31,
2022, the Company had repurchased 17,716 shares under this repurchase plan at an
average price of $17.00 per share. At that date, 437,284 shares were available
for purchase under this repurchase plan. These decreases to stockholders' equity
were partially offset by a $763,000 increase in net income and $663,000 increase
in stock based compensation.

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

                                                  Three Months Ended March 31,
                                                 2022                          2021
    Dividend declared per common share     $       0.12                    

$0.11

    Dividend payout ratio (1)                      33.2   %                

42.3%

______________

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

Comparison of operating results for the three months ended March 31, 2022 and 2021

General. Net income for the three months ended March 31, 2022, was $3.3 million,
or $0.36 per diluted share compared to $2.5 million, or $0.26 per diluted share
for the three months ended March 31, 2021. Contributing to the $763,000 increase
in net income during the three months ended March 31, 2022, was a $1.2 million
decrease in interest expense that more
                                       42

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than to compensate for $538,000 decrease in interest income. Moreover $500,000
the recovery of loan loss allowance was recorded for the three months ended
March 31, 2022compared to a $300,000 allowance for loan losses for the three months ended March 31, 2021. Partially offsetting these improvements, non-interest expense increased $497,000.

Net Interest Income. Net interest income for the three months ended March 31,
2022, increased $622,000 to $11.4 million from $10.7 million for the three
months ended March 31, 2021, due to the decrease in interest expense outpacing
the decrease in interest income.

Interest income decreased by $538,000 for the three months ended March 31, 2022,
as compared to the same period in 2021, primarily as a result of a $623,000
decrease in loan interest income due to a reduction in average loan yields
partially offset by an increase in the average loan balance. Our average loan
yield declined to 4.36% for the three months ended March 31, 2022, from 4.66%
for the three months ended March 31, 2021. The average loan yield for the three
months ended March 31, 2021, was favorably impacted by significantly higher net
deferred fee recognition from the forgiveness of PPP loans, totaling $718,000 as
compared to $172,000 in the quarter ended March 31, 2022. The average balance of
loans receivable increased $16.1 million to $1.1 billion for the three months
ended March 31, 2022.

Interest income from investment securities increased $83,000, as a combined
result of a $13.5 million combined increase in the average balance of taxable
and non-taxable investment securities. The yield of taxable securities increased
five basis points to 1.96% while the yield on non-taxable securities decreased
three basis points to 1.96% for the three months ended March 31, 2022, as
compared to the same period in 2021.

Interest income from interest-earning deposits remained relatively unchanged
with a $7,000 increase for the three months ended March 31, 2022, as compared to
the three months ended March 31, 2021. During these comparative periods, the
average yield increased to 0.15% for the three months ended March 31, 2022, from
0.09% for the three months ended March 31, 2021. Excess cash was invested in
higher earning assets, resulting in a $2.5 million decrease in the average
balance of interest-earning deposits for the three months ended March 31, 2022,
as compared to the same period in 2021.

The decrease in interest income was more than offset by a $1.0 million decrease
in deposit interest expense for the three months ended March 31, 2022, as
compared to the three months ended March 31, 2021. The average rate paid on
interest-bearing deposits decreased to 0.50% for the three months ended
March 31, 2022, as compared to 0.94% for the three months ended March 31, 2021.
Although the average balance of interest-bearing deposits increased $31.2
million for the three months ended March 31, 2022, as compared to the same
period in 2021, a $107.7 million decrease in the average balance of higher cost
retail certificates of deposit was replaced by a $138.7 million increase in
lower cost money market accounts, resulting in a net decrease in cost.

Interest expense from borrowings decreased $118,000 as a combined result of a
$25.0 million decrease in the average balance and a 13 basis point decrease in
cost for the three months ended March 31, 2022, as compared to the same period
in 2021. Our borrowings are comprised of FHLB advances matched to fixed-rate
interest rate swap agreements. Reductions in both the average balance and cost
of borrowings was the result of the repayment of $25.0 million in FHLB advances
due to a $50.0 million maturing interest rate swap agreement, and the $25.0
million of fixed rate FHLB advances secured at lower rates upon the onset of
$25.0 million of previously contracted forward-starting interest rate swap
agreements in October 2021.

The Company's net interest margin increased to 3.43% for the three months ended
March 31, 2022, from 3.31% for the three months ended March 31, 2021. This
increase was primarily due to the 43 basis point reduction in our average cost
of interest bearing liabilities outpacing the 25 basis point reduction in our
average yield on interest earning assets between periods. For more information
on this, see "How We Measure the Risk of Interest Rate Changes" in Item 3 of
this report.
                                       43

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The following table presents the effects of changing rates and volumes on our
net interest income during the periods indicated. 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.

                                                                    Three Months Ended March 31, 2022
                                                                       Compared to March 31, 2021
                                                                          Net Change in Interest
                                                              Rate                Volume               Total
                                                                             (In thousands)
Interest-earning assets:
Loans receivable, net                                    $       (807)         $      184          $     (623)
Investment securities, taxable                                     21                  37                  58
Investment securities, non-taxable                                 (2)                 27                  25
Interest-earning deposits with banks                                8                  (1)                  7
FHLB stock                                                          7                 (12)                 (5)
Total net change in income on interest-earning assets            (773)                235                (538)

Interest-bearing liabilities:
Interest-bearing demand                                            (8)                 (1)                 (9)
Statement savings                                                   -                   -                   -
Money market                                                     (127)                114                 (13)
Certificates of deposit, retail                                  (508)               (512)             (1,020)

Borrowings                                                        (31)                (87)               (118)
Total net change in expense on interest-bearing
liabilities                                                      (674)               (486)             (1,160)
Total net change in net interest income                  $        (99)         $      721          $      622






                                       44
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The following table compares detailed average balances, related interest income
or interest expense, associated yields and rates, and the resulting net interest
margin for the three months ended March 31, 2022 and 2021. Average balances have
been calculated using the average daily balances during the period. Interest and
dividends are not reported on a tax equivalent basis. Nonaccrual loans are
included in the average balance of net loans receivable and are considered to
carry a zero yield.

                                                                                             Three Months Ended March 31,
                                                                          2022                                                          2021
                                                    Average             Interest             Yield /              Average             Interest             Yield /
                                                    Balance           Earned / Paid            Cost               Balance           Earned / Paid            Cost
                                                                                                (Dollars in thousands)
Assets
Loans receivable, net                            $ 1,115,428          $   12,001                 4.36  %       $ 1,099,364          $   12,624                 4.66  %
Investment securities, taxable                       147,048                 712                 1.96              139,086                 654          

1.91

Investment securities, non-taxable                    24,637                 119                 1.96               19,122                  94          

1.99

Interest-earning deposits with
banks                                                 49,857                  19                 0.15               52,336                  12                 0.09
FHLB stock                                             5,467                  74                 5.49                6,412                  79                 5.00
Total interest-earning assets                      1,342,437              12,925                 3.90            1,316,320              13,463                 4.15
Noninterest earning assets                            81,617                                                        77,893
Total average assets                             $ 1,424,054                                                   $ 1,394,213

Liabilities and Stockholders' Equity
Interest-bearing demand                          $    99,862          $       18                 0.07  %       $   103,540          $       27                 0.11  %
Statement savings                                     23,699                   2                 0.03               19,754                   2                 0.04
Money market                                         616,401                 378                 0.25              477,710                 391                 0.33
Certificates of deposit, retail                      287,545                 859                 1.21              395,291               1,879          

1.93

Total interest-bearing deposits                    1,027,507               1,257                 0.50              996,295               2,299                 0.94
Borrowings                                            95,000                 300                 1.28              120,000                 418                 1.41
Total interest-bearing liabilities                 1,122,507               1,557                 0.56            1,116,295               2,717         

0.99

Noninterest bearing liabilities                      142,791                                                       120,062
Average equity                                       158,756                                                       157,856
Total average liabilities and equity             $ 1,424,054                                                   $ 1,394,213
Net interest income                                                   $   11,368                                                    $   10,746
Net interest margin                                                                              3.43  %                                                       3.31  %



Provision for Loan Losses. Management recognizes that loan losses may occur over
the life of a loan and that the ALLL must be maintained at a level necessary to
absorb specific losses on impaired loans and probable losses inherent in the
loan portfolio. 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. 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 allowance is established in the ALLL for the loan. The
amount of the specific allowance 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
                                       45

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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 substandard or placed on nonaccrual status are
deemed to be collateral based loans. 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 allowance 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.

During the three months ended March 31, 2022, management evaluated the adequacy
of the ALLL and concluded that a $500,000 recapture of provision for loan losses
was appropriate. This recapture was primarily attributed to the downgrade to
substandard and impaired status of a $6.4 million participation interest in a
commercial loan secured by medical rehabilitation facilities and a $1.7 million
multifamily loan subsequent to an overall financial analysis of a single
borrowing relationship with multiple other loans that were previously downgraded
to substandard and impaired status. These downgrades removed the loans from the
calculation of the general allowance to an individual analysis for a specific
allowance, however, the analysis concluded that no losses are anticipated from
these loans. By omitting these loans from the general allowance calculations,
the general allowance was reduced, contributing to the recapture. Partially
offsetting these decreases in the general allowance, a $6.3 million
participation interest in a loan secured by a nursing home facility was
downgraded to special mention due to continued reduced occupancy as a result of
the COVID-19 pandemic. In addition, changes in the composition of our loan
portfolio, with growth in lower risk one-to-four family residential and
multifamily loans, and reduced balances in higher risk construction/land
development and business loans contributed to the recapture of provision for the
three months ended March 31, 2022. In comparison, a $300,000 provision for loan
losses was recognized for the three months ended March 31, 2021, primarily the
result of downgrades on $10.5 million of loans to the single lending
relationship discussed above. These loans, secured by a bowling alley, roller
skating and restaurant location, and a separate hostel business were adversely
impacted by the COVID-19 pandemic. For more information, see Note 5 - Loans
Receivable--ALLL.


                                       46
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The following table presents certain credit ratios at the periods indicated and for each of the components of the calculation of the ratios.

                                                                    At or 

For the three months ended March, 31st,

                                                                          2022                         2021
                                                                              (Dollars in thousands)
ALLL as a percent of total loans                                                1.33    %                   1.39  %
ALLL at period end                                              $             15,159            $         15,502
Total loans outstanding                                                    1,136,748                   1,116,391

Non-accrual loans as a percentage of total loans outstanding at
period end                                                                      0.02    %                   0.18  %
Total non-accrual loans                                         $                179            $          2,036
Total loans outstanding                                                    1,136,748                   1,116,391

ALLL as a percent of non-accrual loans at period end                        8,468.72    %                 761.39  %
ALLL at period end                                              $             15,159            $         15,502
Total non-accrual loans                                                          179                       2,036

Net collections over the period to average outstanding loans: Residential one-family to four-family:

                                                    -    %                   0.01  %
Net recoveries during period                                    $                  2            $             28
Average loans receivable, net (1)                                            390,236                     374,851
Multifamily:                                                                       -    %                      -  %
Net recoveries during period                                    $                  -            $              -
Average loans receivable, net (1)                                            131,373                     137,419
Commercial:                                                                        -    %                      -  %
Net recoveries during period                                    $                  -            $              -
Average loans receivable, net (1)                                            415,173                     383,399
Construction/land development:                                                     -    %                      -  %
Net recoveries during period                                    $                  -            $              -
Average loans receivable, net (1)                                             94,387                      90,409
Business:                                                                          -    %                      -  %
Net recoveries during period                                    $                  -            $              -
Average loans receivable, net (1)                                             37,786                      73,604
Consumer:                                                                          -    %                      -  %
Net recoveries during period                                    $                  -            $              -
Average loans receivable, net (1)                                             46,473                      39,682
Total loans:                                                                       -    %                      -  %
Net recoveries during period                                    $                  2            $             28
Average loans receivable, net (1)                                          1,115,428                   1,099,364


_______________

(1) Average loans receivable, net balances, includes unearned loans and deferred charges.

                                       47

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Non-interest income. Non-interest income increased $25,000 for $789,000 for the quarter ended March 31, 2022compared to the quarter ended March 31, 2021.

The following table presents a detailed analysis of the variations in the components of non-interest income:

                                                                                             Change from
                                                                                             Three Months
                                    Three Months Ended          Three Months Ended              Ended
                                      March 31, 2022              March 31, 2021            March 31, 2021           Percent Change
                                                                         (Dollars in thousands)

BOLI income                        $              288          $              269          $          19                        7.1  %
Wealth management revenue                          82                         160                    (78)                     (48.8)
Deposit related fees                              215                         200                     15                        7.5
Loan related fees                                 199                         132                     67                       50.8
Other                                               5                           3                      2                       66.7
Total noninterest income           $              789          $              764          $          25                        3.3



  During the three months ended March 31, 2022, as compared to the three months
ended March 31, 2021, loan related fee income increased $67,000, primarily due
to a $60,000 increase in loan prepayment fees. BOLI income increased $19,000 as
a result of additional policies purchased in 2021. Wealth management revenue
decreased $78,000 during the three months ended March 31, 2022, as compared to
the same period in 2021, primarily due to a reduction in sales personnel.

Non-interest expenses. Non-interest expenses increased $497,000 for $8.6 million
for the three months ended March 31, 2022from $8.1 million for the three months ended March 31, 2021.

The following table presents a detailed analysis of the variations of the components of non-interest expenses:

                                                                                                        Change from Three
                                                  Three Months Ended        Three Months Ended            Months Ended
                                                    March 31, 2022            March 31, 2021             March 31, 2021             Percent Change
                                                                                        (Dollars in thousands)
Salaries and employee benefits                    $          5,261          $          4,945          $              316                       6.4  %
Occupancy and equipment                                      1,228                     1,100                         128                      11.6
Professional fees                                              452                       532                         (80)                    (15.0)
Data processing                                                677                       697                         (20)                     (2.9)

Regulatory assessments                                         101                       121                         (20)                    (16.5)
Insurance and bond premiums                                    129                       124                           5                       4.0
Marketing                                                       37                        29                           8                      27.6
Other general and administrative                               741                       581                         160                      27.5
Total noninterest expense                         $          8,626          $          8,129          $              497                       6.1



During the three months ended March 31, 2022, salaries and employee benefits
increased $316,000 as compared to the three months ended March 31, 2021,
primarily due to higher than normal vacancies in staffing in the year ago
quarter. In addition, occupancy and equipment expense increased $128,000 as a
result of the opening of our fifteenth branch in March 2021. Other general and
administrative expenses increased $160,000, primarily due to conference
attendance and business entertainment related expenses as business generating
opportunities increased this quarter. Partially offsetting these increases,
professional fees decreased $80,000, and data processing and regulatory
assessments each decreased by $20,000.

Federal Income Tax Expense. The federal income tax provision increased to
$771,000 for the three months ended March 31, 2022, as compared to $584,000 for
the same period in 2021, primarily due to a $950,000 increase in income before
federal income taxes.

                                       48
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Cash 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. At
March 31, 2022, the undisbursed portion of construction LIP totaled $39.0
million and unused lines of credit were also $39.0 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 March 31, 2022, totaled $142.0
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 March 31, 2022 to borrow an additional $297.5
million from the FHLB, based on our collateral capacity, $97.9 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 1 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 effectively 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. We also determine funding concentrations and our needs for funding sources other than deposits. This information is used by our Asset/Liability Management Committee to forecast funding needs and investment 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 the remainder of
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
                                       49

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increases or decreases in the number of shares, except in connection with the early vesting of share awards currently outstanding).

At March 31, 2022, we project that our fixed commitments for the remainder of
the fiscal year ending December 31, 2022, will include (i) $627,000 of operating
lease payments and (ii) other future obligations and accrued expenses of $18.2
million. At March 31, 2022, 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 $157.8 million at March 31, 2022. 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 March 31, 2022, First Financial
Northwest Bank exceeded all regulatory capital requirements. Regulatory capital
ratios for First Financial Northwest Bank were as follows as of March 31, 2022:
Total capital to risk-weighted assets was 15.33%; Tier 1 capital and Common
equity tier 1 capital to risk-weighted assets was 14.08%; and Tier 1 capital to
total assets was 10.51%. At March 31, 2022, First Financial Northwest Bank met
the financial ratios to be considered well-capitalized under the regulatory
guidelines. In addition, the Bank is required to maintain a capital conservation
buffer consisting of additional Common equity Tier 1 capital greater than 2.5%
of risk-weighted assets above the required minimum regulatory capital levels in
order to avoid limitations on paying dividends, engaging in share repurchases,
and paying discretionary bonuses based on percentages of eligible retained
income that could be utilized for such actions. At March 31, 2022, the Bank's
capital conservation buffer was 7.33%. See Item 1. "Business - How We Are
Regulated - Regulation and Supervision of First Financial Northwest Bank -
Capital Requirements" included in the 2021 Form 10-K for additional information
regarding regulatory capital requirements for the Bank.

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.

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