FFNW Annual Report Wrap 2015.indd 1
3/25/2016 3:40:42 PM
20.0
15.0
10.0
5.0
0.0
(5.0)
(10.0)
(15.0)
Dec-14
Jan-15 Feb-15 Mar-15
Apr-15 May-15
Jun-15
Jul-15
Aug-15
Sep-15
Oct-15
Nov-15
Dec-15
FFNW
KRE
S&P 500
Western US Peers
74.0%
66.0%
67.3%
80.0%
75.0
70.0
65.0
60.0
55.0
50.0
62.0%
59.5%
59.8%
$0.25 - 1bn
$1 - 3bn
$3 - 5bn
$5 - 10bn
$10 - 20bn
FFNW Peer Group
6
FFNW Annual Report Wrap 2015.indd 3
FFNW Annual Report Wrap 2015.indd 2
7
3/25/2016 3:40:43 PM
3/25/2016 3:40:43 PM
1.20%
1.10
1.00
0.90
0.86%
0.88%
1.09%
1.04%
0.96%
0.72%
0.80
0.70
0.60
0.50
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
3.00
2.80
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
2.95%
For the Fiscal Year Ended December 31, 2015
2.86%
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
2.73%
2.60
Commission File Number: 000-33652
2.63%
2.67%
FIRST FINANCIAL NORTHWEST, INC.
(Exact name of registrant as specified in its charter)
Washington
(State or other jurisdiction of incorporation or organization)
2.40
26-0610707
(I.R.S. Employer Identification Number)
$0.25 - 1bn
$1 - 3bn
$3 - 5bn
$5 - 10bn
$10 - 20bn
Registrant’s telephone number, including area code:
201 Wells Avenue South, Renton, Washington
(Address of principal executive offices)
2.17%
2.20
98057
(Zip Code)
(425) 255-4400
FFNW Peer Group
Securities registered pursuant to Section 12(b) of the Act:
$1 - 3bn
$0.25 - 1bn
2.00
Common Stock, $0.01 par value per share
(Title of Each Class)
$3 - 5bn
$5 - 10bn
$10 - 20bn
The Nasdaq Stock Market LLC
(Name of Each Exchange on Which Registered)
FFNW Peer Group
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
YES NO X
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
1,800,000
$14.00
YES NO X
1,654,547
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
1,600,000
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
1,400,000
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted 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 and post such files). YES X NO
1,200,000
$10.71
$11.40
$10.91
$12.00
$10.88
$10.90
$11.95
$9.97
$12.00
$10.00
$12.37
$12.54
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not
1,000,000
contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ____
992,840
$8.00
800,000
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See definitions of “large accelerated filer,” “accelerated filer” and smaller reporting company in Rule 12b-2 of the
Exchange Act:
600,000
571,651
$6.00
501,820
Large accelerated filer
400,000
Accelerated filer X
Non-accelerated filer
327,112
274,081
268,300
396,757
Smaller reporting company ____
402,657
454,103
$4.00
FFNW Annual Report Wrap 2015.indd 4
3/25/2016 3:40:44 PM
1. Portions of Registrant’s Definitive Proxy Statement for the 2015 Annual Meeting of Shareholders (Part III).
DOCUMENTS INCORPORATED BY REFERENCE
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). YES NO X
200,000
$2.00
0
The aggregate market value of the Common Stock outstanding held by nonaffiliates of the Registrant based on the closing sales
price of the Registrant’s Common Stock as quoted on The Nasdaq Stock Market LLC on June 30, 2015, was $159,608,202 (12,809,647
shares at $12.46 per share). For purposes of this calculation, common stock held only by executive officers, the employee stock ownership
plan and directors of the Registrant is considered to be held by affiliates. As of March 9, 2016, the Registrant had outstanding 13,578,600
shares of common stock.
Q2 2014
Shares Purchased (left scale)
Weighted Average Price (right scale)
Q2 2015
Q4 2015
Q3 2015
Q3 2013
Q4 2014
Q3 2014
Q1 2015
Q4 2013
Q2 2013
$0.00
[This page intentionally left blank]
FIRST FINANCIAL NORTHWEST, INC.
2015 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Forward-Looking Statements
Internet Website
PART I.
Item 1.
Business
General
Market Area
Lending Activities
Asset Quality
Investment Activities
Deposit Activities and Other Sources of Funds
Subsidiaries and Other Activities
Competition
Employees
How We Are Regulated
Taxation
Executive Officers of First Financial Northwest, Inc.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4. Mine Safety Disclosures
PART II.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6.
Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Business Strategy
Critical Accounting Policies
Comparison of Financial Condition at December 31, 2015, and 2014
Comparison of Operating Results for the Years Ended December 31, 2015, and 2014
Comparison of Financial Condition at December 31, 2014, and December 31, 2013
Comparison of Operating Results for the Years Ended December 31, 2014, and 2013
Average Balances, Interest and Average Yields/Costs
Yields Earned and Rates Paid
Rate/Volume Analysis
Asset and Liability Management and Market Risk
Liquidity
Capital
Commitments and Off-Balance Sheet Arrangements
Impact of Inflation
Recent Accounting Pronouncements
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
i
Page
iii
iii
1
1
1
2
13
20
24
27
27
27
27
36
36
38
48
48
48
48
48
51
52
52
54
54
56
59
62
63
67
68
69
70
72
73
73
74
75
75
75
124
124
125
PART III.
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions and Director Independence
Item 14. Principal Accounting Fees and Services
PART IV.
Item 15. Exhibits and Financial Statement Schedules
Signatures
125
125
125
126
126
127
128
ii
Forward-Looking Statements
Certain matters discussed in this Form 10-K constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements relate to our financial condition, results of operations, plans, objectives,
future performance or business. Forward-looking statements are not statements of historical fact, are based on certain assumptions
and are generally identified by use of the words “believes,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “plans,”
“targets,” “potentially,” “probably,” “projects,” “outlook” or similar expressions or future or conditional verbs such as “may,”
“will,” “should,” “would” and “could.” Forward-looking statements include statements with respect to our beliefs, plans, objectives,
goals, expectations, assumptions and statements about, among other things, expectations of the business environment in which
we operate, projections of future performance or financial items, perceived opportunities in the market, potential future credit
experience, and statements regarding our mission and vision. These forward-looking statements are based upon current management
expectations and may, therefore, involve risks and uncertainties. Our actual results, performance, or achievements may differ
materially from those suggested, expressed, or implied by forward-looking statements as a result of a wide variety or range of
factors including, but not limited to: the credit risks of lending activities, including changes in the level and trend of loan
delinquencies and write-offs, that may be affected by deterioration in the housing and commercial real estate markets, and may
lead to increased losses and nonperforming assets in our loan portfolio, and may result in our allowance for loan losses not being
adequate to cover actual losses, and require us to materially increase our reserves; changes in general economic conditions, either
nationally or in our market areas; changes in the levels of general interest rates, and the relative differences between short and
long term interest rates, deposit interest rates, our net interest margin and funding sources; fluctuations in the demand for loans,
the number of unsold homes and other properties and fluctuations in real estate values in our market areas; results of examinations
of us by the Federal Reserve Bank of San Francisco (“FRB”) and our bank subsidiary by the Federal Deposit Insurance Corporation
(“FDIC”), the Washington State Department of Financial Institutions, Division of Banks (“DFI”) or other regulatory authorities,
including the possibility that any such regulatory authority may initiate an enforcement action against the Company or the Bank
which could require us to increase our reserve for loan losses, write-down assets, change our regulatory capital position, affect
our ability to borrow funds or maintain or increase deposits, or impose additional requirements or restrictions on us, any of which
could adversely affect our liquidity and earnings; our ability to pay dividends on our common stock; our ability to attract and
retain deposits; increases in premiums for deposit insurance; our ability to control operating costs and expenses; the use of estimates
in determining the fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines
in valuation; difficulties in reducing risk associated with the loans on our balance sheet; staffing fluctuations in response to product
demand or the implementation of corporate strategies that affect our work force and potential associated charges; computer systems
on which we depend could fail or experience a security breach; our ability to retain key members of our senior management team;
costs and effects of litigation, including settlements and judgments; our ability to implement a branch expansion strategy; our
ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we have acquired or may
in the future acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time
frames and any goodwill charges related thereto; our ability to manage loan delinquency rates; costs and effects of litigation,
including settlements and judgments; increased competitive pressures among financial services companies; changes in consumer
spending, borrowing and savings habits; legislative or regulatory changes that adversely affect our business including changes in
regulatory policies and principles, including the interpretation of regulatory capital or other rules, including as a result of Basel
III; the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act (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; the economic impact of war or any terrorist activities; other economic, competitive, governmental, regulatory,
and technological factors affecting our operations; pricing, products and services; and other risks detailed in this Form 10-K and
our other reports filed with the U.S. Securities and Exchange Commission (“SEC”). Any of the forward-looking statements that
we make in this Form 10-K and in the other public reports and statements we make may turn out to be wrong because of the
inaccurate assumptions we might make, because of the factors illustrated above or because of other factors that we cannot foresee.
Because of these and other uncertainties, our actual future results may be materially different from those expressed in any forward-
looking statements made by or on our behalf. Therefore, these factors should be considered in evaluating the forward-looking
statements, and undue reliance should not be placed on such statements. We undertake no responsibility to update or revise any
forward-looking statements.
As used throughout this report, the terms "Company", “we”, “our”, or “us” refer to First Financial Northwest, Inc. and
its consolidated subsidiaries, including First Financial Northwest Bank and First Financial Diversified Corporation.
Internet Website
The information contained on our website, www.ffnwb.com, is not included as a part of, or incorporated by reference
into, this Annual Report on Form 10-K. Other than an investor’s own Internet access charges, we make available free of charge
iii
through our website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments
to these reports, on our investor relations page. These reports are posted as soon as reasonably practicable after they are electronically
filed with the SEC. All of our SEC filings are also available free of charge at the SEC’s website at www.sec.gov or by calling the
SEC at 1-800-SEC-0330.
Item 1. Business
General
PART I
First Financial Northwest, Inc. (“First Financial Northwest” or the "Company”), a Washington corporation, was formed
on June 1, 2007, for the purpose of becoming the holding company for First Financial Northwest Bank (the "Bank") in connection
with the Bank's conversion from a mutual holding company structure to a stock holding company structure which was completed
on October 9, 2007. At December 31, 2015, we had total assets of $979.9 million, net loans of $685.1 million, deposits of $675.4
million and stockholders’ equity of $170.7 million. First Financial Northwest’s business activities generally are limited to passive
investment activities and oversight of its investment in First Financial Northwest Bank. Accordingly, the information set forth in
this report, including consolidated financial statements and related data, relates primarily to First Financial Northwest Bank.
First Savings Bank, organized in 1923 as a Washington state-chartered savings and loan association, converted to a federal
mutual savings and loan association in 1935 and to a Washington state-chartered mutual savings bank in 1992. In 2002, First
Savings Bank reorganized into a two-tier mutual holding company structure, became a stock savings bank, and the wholly-owned
subsidiary of First Financial of Renton, Inc. In connection with the 2002 conversion, First Savings Bank changed its name to First
Savings Bank Northwest. Subsequently, in August 2015, the Bank changed its name to First Financial Northwest Bank to reflect
the commercial banking services it provides beyond those typically provided by a traditional savings bank. In February 2016, the
Bank officially changed its charter from a Washington chartered stock savings bank to a Washington chartered commercial bank.
First Financial Northwest became a bank holding company, after converting from a savings and loan holding company
on March 31, 2015, and is subject to regulation by the Board of Governors of the Federal Reserve System (the "Federal Reserve
Board") through the Federal Reserve Bank of San Francisco ("FRB"). The change is consistent with First Financial Northwest
Bank's shift in focus from a traditional savings and loan association towards a full service, commercial bank. Additionally, First
Financial Northwest Bank is examined and regulated by the Washington State Department of Financial Institutions (“DFI”) and
by the Federal Deposit Insurance Corporation (“FDIC”). First Financial Northwest Bank is required to maintain reserves at a level
set by the Board of Governors of the Federal Reserve System. The Bank is a member of the Federal Home Loan Bank ("FHLB")
of Des Moines, which is one of the 11 regional banks in the Federal Home Loan Bank System (“FHLB System”). For additional
information, see “How We are Regulated - Regulation and Supervision of First Financial Northwest Bank - Federal Home Loan
Bank System."
In February 2016, First Financial Northwest Bank converted its charter from a community-based savings bank to a
commercial bank as a way of better serving its customer needs. The Bank's largest concentration of customers is in King County,
with additional concentrations in Pierce, Snohomish, and Kitsap counties, Washington. The Bank is headquartered in Renton,
Washington where it has a full-service branch, and has a smaller branch focused on efficiency through the extensive use of the
latest banking technology located in Mill Creek, Washington and a third similar branch is scheduled to open in Edmonds, Washington
in the first quarter of 2016. A fourth office is scheduled to open in the third quarter of 2016 in a commercial development known
as the "Landing", in Renton. First Financial Northwest Bank’s business consists of attracting deposits from the public and utilizing
these funds to originate one-to-four family residential, multifamily, commercial real estate, construction/land development,
business and consumer loans.
The principal executive office of First Financial Northwest Bank is located at 201 Wells Avenue South, Renton,
Washington, 98057; our telephone number is (425) 255-4400.
Market Area
We consider our primary market area to be the Puget Sound Region that consists primarily of King and, to a lesser extent,
Pierce, Snohomish and Kitsap counties. During 2015, the region experienced appreciation in residential market prices for the
fourth consecutive year. In addition, foreclosure and short sale activity declined closer to the historic average level of area sales.
King County has the largest population of any county in the state of Washington and covers approximately 2,100 square
miles. It has a population of approximately 2.1 million residents and a median household income of approximately $72,000,
according to U.S. Census estimates. King County has a diversified economic base with many nationally recognized firms including
Boeing, Microsoft, PACCAR, Starbucks, Costco and Amazon. According to the Washington State Employment Security
Department, the unemployment rate for King County was 4.5% at December 31, 2015, compared to 4.2% at December 31, 2014,
and the national average of 5.0% at December 31, 2015. The median sales price of a residential home in King County was $432,000
during 2015, an 8.1% increase compared to 2014, according to the Northwest Multiple Listing Service ("MLS"). Residential sales
1
iv
Borrower (1)
Number
of Loans
One-to-
Four
Family
Residential
(Rental
Properties) Multifamily
Commercial
Real Estate
(Rental
Properties)
Construction/
Land
Development Consumer
Aggregate
Balance of
Loans (2) (3)
(Dollars in thousands)
Real estate investor
Real estate investor
Real estate investor
Real estate investor
Real estate builder
Total
3
5
2
3
57
70
$
— $
— $
18,327
$
— $
— $
478
—
—
13,063
—
—
2,035
—
15,202
14,499
11,878
—
$
13,541
$
2,035
$
59,906
$
—
—
—
438
438
198
—
—
—
$
198
$
18,327
15,878
14,499
13,913
13,501
76,118
________
(1) The composition of borrowers represented in the table may change between periods.
(2) Net of LIP.
(3) None of these loans are considered impaired.
The composition of loans to our five largest borrowers has changed over the last year. As of December 31, 2015, total
commercial real estate loans to this group of borrowers had increased $25.7 million while total one-to-four family rental properties
and multifamily loans had decreased $7.3 million and $15.5 million, respectively. At December 31, 2015, all of the loans listed
in the table above were in compliance with the original repayment terms of their respective loans.
volumes increased 10.8% in 2015 compared to 2014 and inventory levels as of December 31, 2015 were at 0.8 months according
to the MLS.
Pierce County, covering approximately 1,800 square miles, has the second largest population of any county in the state
of Washington. It has approximately 830,000 residents and a median household income of approximately $59,000, according to
U.S. Census estimates. The Pierce County economy is diversified with the presence of military-related government employment
(Joint Base Lewis-McChord), transportation and shipping employment (Port of Tacoma), and aerospace-related employment
(Boeing). According to the Washington State Employment Security Department, the unemployment rate for Pierce County was
6.1% in December 2015, compared to 7.2% at year-end 2014. The median sales price of a residential home in Pierce County was
$245,000 during 2015, an 8.6% increase compared to 2014, according to the MLS. Residential sales volumes increased by 16.7%
in 2015 compared to 2014 and inventory levels as of December 31, 2015 were at 1.8 months according to the MLS.
Snohomish County has the third largest population of any county in the state of Washington and covers approximately
2,090 square miles. It has approximately 760,000 residents and a median household income of approximately $68,000, according
to U.S. Census estimates. The economy of Snohomish County is diversified with the presence of military-related government
employment (Naval Station Everett), aerospace-related employment (Boeing), and retail trade. According to the Washington State
Employment Security Department, the unemployment rate for Snohomish County was 5.0% in December 2015 compared to 4.6%
in December 2014. The median sales price of a residential home in Snohomish County was $335,000 during 2015, an 8.8% increase
compared to 2014, according to the MLS. Residential sales volumes increased by 18.4% in 2015 compared to 2014 and inventory
levels as of December 31, 2015 were at 1.1 months according to the MLS.
Kitsap County has the seventh largest population of any county in the state of Washington and covers approximately
570 square miles. It has approximately 250,000 residents and a median household income of approximately $62,000, according
to U.S. Census estimates. The Kitsap County economy is diversified with the presence of military-related government employment
(Naval Base Kitsap, Puget Sound Naval Shipyard), health care, retail trade and education. According to the Washington State
Employment Security Department, the unemployment rate for Kitsap County was 5.5% in December 2015 compared to 6.3% in
December 2014. The median sales price of a residential home in Kitsap County was $258,500 during 2015, an 8.0% increase
compared to 2014, according to the MLS. Residential sales volumes increased by 11.0% in 2015 compared to 2014 and inventory
levels as of December 31, 2015 were at 1.8 months according to the MLS.
For a discussion regarding competition in our primary market area, see “- Competition” later in Item 1 of this report.
Lending Activities
General. We focus our lending activities primarily on loans secured by commercial real estate, construction/land
development, first mortgages on one-to-four family residences, multifamily, and to lesser extent, business lending. We offer a
limited variety of secured consumer loans as an accommodation to our customers, including savings account loans and home
equity loans that include lines of credit and second mortgage term loans. As of December 31, 2015, our net loan portfolio totaled
$685.1 million and represented 69.9% of our total assets.
Our current loan policy generally limits the maximum amount of loans we can make to one borrower to 15% of the Bank’s
total risk-based capital, which was $18.2 million at December 31, 2015. Exceptions to this policy are allowed only with the prior
approval of the Board of Directors and if the borrower exhibits financial strength or sufficient, measurable compensating factors
exist after consideration of the loan-to-value ratio, borrower’s financial condition, net worth, credit history, earnings capacity,
installment obligations, and current payment history. The regulatory limit of loans we can make to one borrower is 20% of total
risk-based capital, or $24.2 million, at December 31, 2015.
During 2015, the concentration of loans to our five largest lending relationships increased. At December 31, 2015, loans
to our five largest lending relationships totaled $76.1 million compared to $74.2 million at December 31, 2014, an increase of
$1.9 million, or 2.6%. Although the total of these relationships increased during 2015, their percentage of total loans, net of loans
in process ("LIP") decreased to 10.9% at December 31, 2015 from 11.0% at December 31, 2014 and the total number of loans
comprising these relationships decreased to 70 from 97 during 2015. The following table details the types of loans to our five
largest lending relationships at December 31, 2015.
2
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T
One-to-Four Family Residential Lending. As of December 31, 2015, $253.8 million, or 33.8% of our total loan portfolio
consisted of loans secured by one-to-four family residences.
First Financial Northwest Bank is a traditional portfolio lender when it comes to financing residential home loans. In
2015, we originated $37.8 million in one-to-four family residential loans. At December 31, 2015, $147.2 million, or 58.0% of our
one-to-four family residential portfolio consisted of owner occupied loans with the remaining $106.5 million, or 42.0% consisting
of non-owner occupied loans. In addition, at December 31, 2015, $173.0 million, or 68.2% of our one-to-four family residential
loan portfolio consisted of fixed-rate loans. Substantially all of our one-to-four family residential loans require monthly principal
and interest payments.
We also originate a limited number of jumbo loans that we retain in our portfolio. Mortgage loans secured by one-to-
four family residential properties originated with balances greater than $517,000 in King, Pierce and Snohomish counties, $483,000
for San Juan County, and $417,000 for all other counties are considered jumbo loans. One-to-four family residential loans classified
as jumbo loans totaled $68.3 million and consisted of 79 loans at December 31, 2015. As of December 31, 2015, all of our jumbo
loans were performing in accordance with their repayment terms. There were no jumbo loans charged off in 2015.
Our fixed-rate, one-to-four family residential loans are generally originated with 15 to 30 year terms, although such loans
typically remain outstanding for substantially shorter periods, particularly in the current low interest rate environment. We also
originate hybrid loans with initial fixed terms of five or seven years, that convert to loans whose interest rate adjusts annually
thereafter. In addition, substantially all of our one-to-four family residential loans contain due-on-sale clauses that allow us to
declare the unpaid amount due and payable upon the sale of the property securing the loan. Typically, we enforce these due-on-
sale clauses to the extent permitted by law and as a standard course of business. The average period of time a loan is outstanding
is a function of, among other factors, the level of purchase and sale activity in the real estate market, prevailing interest rates, and
the interest rates payable on outstanding loans.
Our lending policy generally limits the maximum loan-to-value ratio on mortgage loans secured by one-to-four family
residential properties to 85% of the lesser of the appraised value or the purchase price. Properties securing our one-to-four family
residential loans are appraised by independent appraisers approved by us. We require the borrowers to obtain title insurance and
if necessary, flood insurance. We generally do not require earthquake insurance because of competitive market factors.
Our residential construction loans to individuals to build their personal or non-owner occupied residences typically are
structured to be converted to fixed-rate permanent loans at the end of the construction phase with one closing for both the construction
loan and the permanent financing. Prior to making a commitment to fund a construction loan, we require an appraisal of the post
construction value of the project by an independent appraiser. During the construction phase, which typically lasts 12 to 18 months,
an approved inspector or designated Bank employee makes periodic inspections of the construction site to certify construction
has reached the stated percentage of completion. Typically, disbursements are made in monthly draws and interest-only payments
are required. These loans are converted to fixed-rate permanent loans at the end of the construction phase. At December 31, 2014,
there was one non-owner occupied construction loan of $500,000 that converted to a permanent non-owner occupied one-to-four
family loan during 2015. No new construction loans were added to our one-to-four residential loan portfolio during 2015.
Loans secured by rental properties represent a unique credit risk to us and, as a result, we adhere to more stringent
underwriting guidelines. Of primary concern in non-owner occupied real estate lending is the consistency of rental income of the
property. Payments on loans secured by rental properties depend primarily on the tenants' continuing ability to pay rent to the
property owner, the character of the borrower or, if the property owner is unable to find a tenant, the property owner’s ability to
repay the loan without the benefit of a rental income stream. In addition, successful operation and management of non-owner
occupied properties, including property maintenance standards, may affect repayment. As a result, repayment of such loans may
be subject to adverse conditions in the real estate market or the economy. We request that borrowers and loan guarantors, if any,
provide annual financial statements, a budget factoring in a rental income cash flow analysis of the borrower as well as the net
operating income of the property, information concerning the borrower’s expertise, credit history and profitability, and the value
of the underlying property. These loans are generally secured by a first mortgage on the underlying collateral property along with
an assignment of rents and leases. If the borrower has multiple rental property loans with us, the loans are typically not cross-
collateralized. At December 31, 2015, $996,000 of our one-to-four family residential loans were in nonaccrual status, all of which
are owner occupied properties.
Multifamily and Commercial Real Estate Lending. As of December 31, 2015, $143.9 million, or 19.1% of our total
loan portfolio was secured by multifamily and $252.5 million, or 33.6% of our loan portfolio was secured by commercial real
estate properties. Our commercial real estate loans are typically secured by office and medical buildings, retail shopping centers,
mini-storage facilities, industrial use buildings and warehouses. Commercial real estate and multifamily loans are subject to similar
7
underwriting standards and processes. These loans are viewed primarily as cash flow loans and secondarily as loans secured by
real estate.
Typically, multifamily and commercial real estate loans have higher balances, are more complex to evaluate and monitor,
and involve a greater degree of risk than one-to-four-family residential loans. In an attempt to compensate for and mitigate this
risk, these loans are generally priced at higher interest rates than one-to-four family residential loans and generally have a maximum
loan-to-value ratio of 80% of the lesser of the appraised value or purchase price. We generally require loan guarantees by any
parties with a property ownership interest of 20% or more. If the borrower is a corporation or partnership, we generally require
personal guarantees from the principals based upon a review of their personal financial statements and individual credit reports.
The average loan size in our multifamily and commercial real estate loan portfolios was $872,000 and $1.5 million,
respectively, as of December 31, 2015. At this date, $16.1 million, or 11.2%, of our multifamily loans and $47.1 million, or 18.6%,
of our commercial real estate loans were from outside of our primary market area. We currently target individual multifamily and
commercial real estate loans between $1.0 million and $5.0 million. New loan originations exceeding this limit must receive prior
approval from the Bank's Board of Directors. The largest multifamily loan as of December 31, 2015 was a 161-unit apartment
complex with a net outstanding principal balance of $7.9 million located in Franklin County, Washington. As of December 31,
2015, the largest commercial real estate loan had a net outstanding balance of $12.7 million and was secured by a self-storage
facility located in King County, Washington. Both of these loans were performing according to their respective loan repayment
terms as of December 31, 2015.
We also make construction loans for commercial development projects. The projects include multifamily, retail, office/
warehouse and office buildings. These loans typically have an interest-only payment phase during construction and generally
convert to permanent financing when construction is complete. Disbursement of funds is at our sole discretion and is based on
the progress of construction. Generally, the maximum loan-to-value ratio applicable to these loans is 90% of the actual cost of
construction or 80% of the prospective value at completion. At December 31, 2015, $21.1 million, or 14.7% of our multifamily
loans and none of our commercial real estate loan portfolio consisted of these "rollover" construction loans.
The credit risk related to multifamily and commercial real estate loans is considered to be greater than the risk related to
one-to-four family residential loans because the repayment of multifamily and commercial real estate loans typically is dependent
on the income stream from the real estate securing the loan as collateral and the successful operation of the borrower’s business,
that can be significantly affected by adverse conditions in the real estate markets or in the economy. For example, if the cash flow
from the borrower’s project is reduced due to leases not being obtained or renewed, the borrower’s ability to repay the loan may
be impaired. In addition, many of our multifamily and commercial real estate loans are not fully amortizing and contain large
balloon payments upon maturity. These balloon payments generally require the borrower to either refinance or occasionally sell
the underlying property in order to make the balloon payment.
If we foreclose on a multifamily or commercial real estate loan, our holding period for the collateral typically is longer
than for one-to-four family residential mortgage loan foreclosures because there are fewer potential purchasers of the collateral.
Our multifamily and commercial real estate loans generally have relatively large balances to single borrowers or related groups
of borrowers. Accordingly, if we make any errors in judgment in the collectability of our multifamily or commercial real estate
loans, any resulting charge-offs may be larger on a per loan basis than those incurred in our one-to-four family residential or
consumer loan portfolios. At December 31, 2015, there were no multifamily or commercial real estate loans past due 90 days or
more or in nonaccrual status. There were no commercial real estate loans charged-off during the year ended December 31, 2015,
as compared to charge-offs of $311,000 and $98,000 for the years ended December 31, 2014 and 2013, respectively. Multifamily
loan charge-offs totaled $281,000 in 2015, compared to no charge-offs in 2014 and $346,000 of charge offs during the year ended
December 31, 2013.
Construction/Land Development Loans. We originate construction/land development loans primarily to residential
builders for the construction of single-family residences, condominiums, townhouses, and residential developments located in our
market area. Our land development loans are generally made to builders intending to develop lots. Construction/land development
loans to builders generally require the borrower to have an existing relationship with us and a proven record of successful projects.
At December 31, 2015, our total construction/land development loans were $86.6 million, or 11.6% of our total loan portfolio.
The $35.5 million or 69.5% increase in construction/land development loans over the past year reflects our strategic decision to
continue our focus on increasing construction loan origination activity in 2015 as real estate values and general economic conditions
in our market areas continued to improve. Current plans include continuing efforts to increase our balances of construction loans
in 2016, while remaining within our guideline that total acquisition, development, and construction loans not exceed 100% of
risk-based capital, or $121.2 million. At December 31, 2015, our one-to-four family speculative residential construction loans
were $52.2 million, an increase of $32.4 million or 163% during 2015 and our multifamily speculative real estate construction
loans were $25.6 million at December 31, 2015 as compared to $17.9 million at December 31, 2014. There were no construction/
8
land development loans classified as nonaccrual at either December 31, 2015 or 2014. There were no construction/land development
loan charge- offs during the year ended December 31, 2015, as compared to $223,000 and $582,000 for the years ended December
31, 2014, and 2013, respectively.
Following is the composition of our total construction/land development loan portfolio at the dates indicated. All of the
loans represented were performing:
Construction speculative loans:
One-to-four family residential
Multifamily
Commercial real estate
Land development
Total construction/land development loans (1)
December 31,
2015
2014
(In thousands)
$
$
52,233
$
25,551
—
8,768
86,552
$
19,860
17,902
4,300
8,993
51,055
_____________
(1) LIP for construction/land development loans at December 31, 2015, and 2014, was $43.4 million and $26.7 million, respectively.
The following table includes construction/land development loans by county, net of LIP, at December 31, 2015:
County
Loan Balance
Percent of Construction/
Land Development
Loan Balance
King
Whatcom
All other
Total
$
$
(Dollars in thousands)
38,856
2,928
1,388
43,172
90.0%
6.8
3.2
100.0%
Loans to finance the construction of single-family homes and subdivisions and land development loans are generally
offered to builders in our primary market areas. Many of these loans are termed "speculative" because the builder does not have,
at the time of loan origination, a signed contract with a buyer for the home or lot who has a commitment for permanent financing
with either us or another lender. The buyer may be identified either during or after the construction period, with the risk that the
builder may have to fund the debt service on the speculative loan along with real estate taxes and other carrying costs for the
project for a significant period of time after completion of the project until a buyer is identified. The maximum loan-to-value ratio
applicable to these loans is generally 100% of the actual cost of construction, provided that the loan-to-completed value does not
exceed 80%, with approval required from the Chief Credit Officer ("CCO") for loan-to-value ratios over 80%. In addition, a
minimum of 20% verified equity is generally also required. Verified equity refers to cash equity invested in the project. Development
plans are required from builders prior to committing to the loan. We require that builders maintain adequate title insurance and
other appropriate insurance coverage, and, if applicable, appropriate environmental data report(s) that the land is free of hazardous
or toxic waste. While maturity dates for residential construction loans are largely a function of the estimated construction period
of the project and typically do not exceed one year, land development loans generally are for 12 to 18 months. Substantially all
of our residential construction loans have adjustable-rates of interest based on The Wall Street Journal prime rate. During the term
of construction, the accumulated interest on the loan is either added to the principal of the loan through an interest reserve or billed
monthly. At December 31, 2015, the LIP balance on construction/land development loans was $43.4 million, including $41.5
million set aside for interest reserves. When these loans exhaust their original reserves set up at origination, no additional reserves
are permitted unless the loan is re-analyzed and it is determined that the additional reserves are appropriate, based on the updated
analysis. Construction loan proceeds are disbursed periodically as construction progresses and as inspections by our approved
inspectors warrant. Total outstanding net loan amounts for land development loans at December 31, 2015 ranged from $115,000
to $2.9 million with an average individual total loan balance net of LIP of $1.4 million. At December 31, 2015, our three largest
construction/land development loans had outstanding principal balances, net of LIP, of $5.6 million, $3.1 million, and $2.9 million,
of which none are impaired.
Our construction/land development loans are based upon estimates of costs in relation to values associated with the
completed project. Construction/land development lending involves additional risks when compared with permanent residential
9
lending because funds are advanced upon the collateral for the project based on an estimate of costs that will produce a future
value at completion. Because of the uncertainties inherent in estimating construction costs, as well as the market value of the
completed project and the effects of governmental regulation on real property, it is relatively difficult to evaluate accurately the
total funds required to complete a project and the completed project loan-to-value ratio. Changes in the demand, such as for new
housing and higher than anticipated building costs may cause actual results to vary significantly from those estimated. For these
reasons, this type of lending also typically involves higher loan principal amounts and is often concentrated with a small number
of builders. These loans often involve the disbursement of funds with repayment substantially dependent on the success of the
ultimate project and the ability of the borrower to sell or lease the property or obtain permanent take-out financing, rather than
the ability of the borrower or guarantor to repay principal and interest. If our appraisal of the value of a completed project proves
to be overstated, we may have inadequate security for the repayment of the loan upon completion of construction of the project
and may incur a loss. Because construction loans require active monitoring of the building process, including cost comparisons
and on-site inspections, these loans are more difficult and costly to monitor. Increases in market rates of interest may have a more
pronounced effect on construction loans by rapidly increasing the end-purchasers' borrowing costs, thereby reducing the overall
demand for the project. Properties under construction are often difficult to sell and typically must be completed in order to be
successfully sold which also complicates the process of working out problem construction loans. This may require us to advance
additional funds and/or contract with another builder to complete construction. Furthermore, in the case of speculative construction
loans, there is the added risk associated with identifying an end-purchaser for the finished project.
Business Lending. Business loans totaled $7.6 million, or 1.0% of the loan portfolio at December 31, 2015. Business
loans are generally secured by business equipment, accounts receivable, inventory or other property. Loan terms typically vary
from one to five years. The interest rates on such loans are either fixed-rate or adjustable-rate. The interest rates for the adjustable-
rate loans are indexed to the prime rate published in The Wall Street Journal plus a margin. Our business lending policy includes
credit file documentation and requires analysis of the borrower’s background, capacity to repay the loan, the adequacy of the
borrower’s capital and collateral, as well as an evaluation of other conditions affecting the borrower. Analysis of the borrower’s
past, present and future cash flows is also an important aspect of our credit analysis. We generally obtain personal guarantees on
our business loans. The largest business loan had an outstanding balance of $7.2 million at December 31, 2015 and was performing
according to its repayment terms. At December 31, 2015, we did not have any business loans delinquent in excess of 90 days or
in nonaccrual status.
Repayments of business loans are often dependent on the cash flows of the borrower, which may be unpredictable, and
the collateral securing these loans may fluctuate in value. Our business loans are originated primarily based on the identified cash
flow of the borrower and secondarily on the underlying collateral provided by the borrower. Credit support provided by the borrower
for most of these loans and the probability of repayment is based on the liquidation of the pledged collateral and enforcement of
a personal guarantee, if any. As a result, in the case of loans secured by accounts receivable, the availability of funds for the
repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.
The collateral securing business loans may depreciate over time, may be difficult to appraise, or may fluctuate in value based on
the success of the business.
Consumer Lending. We offer a limited variety of consumer loans to our customers, consisting primarily of home equity
loans and savings account loans. Generally, consumer loans have shorter terms to maturity and higher interest rates than one-to-
four family residential loans. Consumer loans are offered with both fixed and adjustable interest rates and with varying terms. At
December 31, 2015, consumer loans were $7.0 million, or 0.9% of the total loan portfolio.
At December 31, 2015, the largest component of the consumer loan portfolio consisted of home equity loans, primarily
home equity lines of credit that totaled $5.1 million, or 73% of the total consumer loan portfolio. The home equity lines of credit
include $3.4 million of equity lines of credit in first lien position and $1.8 million of second liens on residential properties. At
December 31, 2015, unfunded commitments on our home equity lines of credit totaled $12.5 million. Home equity loans are made
for purposes such as the improvement of residential properties, debt consolidation and education expenses. At origination, the
loan-to-value ratio is generally 90% or less, when taking into account both the balance of the home equity loans and the first
mortgage loan. Home equity loans are originated on a fixed-rate or adjustable-rate basis. The interest rate for the adjustable-rate
second lien loans is indexed to the prime rate published in The Wall Street Journal and may include a margin. Home equity loans
generally have a ten year term with a balloon payment due at maturity.
Consumer loans entail greater risk than one-to-four family residential mortgage loans, particularly in the case of consumer
loans that are unsecured or secured by rapidly depreciating assets. In these cases, any repossessed collateral for a defaulted consumer
loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of
damage, loss or depreciation. The remaining deficiency often does not warrant further collection efforts against the borrower
beyond obtaining a deficiency judgment. In addition, consumer loan collections are dependent on the borrower’s continuing
financial stability, and are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore,
10
the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount
that can be recovered on these loans. Home equity lines of credit have greater credit risk than one-to-four family residential
mortgage loans because they are generally secured by mortgages subordinated to the existing first mortgage on the property that
we may or may not hold in our portfolio. We do not have private mortgage insurance coverage on these loans. Adjustable-rate
loans may experience a higher rate of default in a rising interest rate environment due to the increase in payment amounts when
interest rates reset higher. If current economic conditions deteriorate for our borrowers and their home prices continue to fall, we
may also experience higher credit losses from this loan portfolio. Since our home equity loans primarily consist of second lien
loans, it is unlikely that we will be successful in recovering our entire loan principal outstanding in the event of a default. At
December 31, 2015, consumer loans totaling $97,000 were delinquent in excess of 60 days and $89,000 of these loans were in
nonaccrual status. Consumer loan charge-offs totaled $54,000 during the year ended December 31, 2015 compared with charge-
offs of $30,000 and $101,000 during the years ended December 31, 2014 and 2013.
Loan Maturity and Repricing. The following table sets forth certain information at December 31, 2015 regarding the
amount of loans repricing or maturing in our portfolio based on their contractual terms to maturity, but does not include prepayments.
Loan balances are not net of LIP, deferred loan fees and costs, or the ALLL.
Within One
Year
After One
Year
Through
Three Years
After Three
Years
Through
Five Years
After Five
Years
Through
Ten Years
Beyond
Ten Years
Total
(In thousands)
Real Estate:
One-to-four family residential
$
17,230
$
29,006
$
58,786
$
36,125
$
112,625
$
253,772
Multifamily
Commercial
Construction/land development
6,475
16,335
86,552
53,554
53,161
—
42,691
80,342
—
35,116
69,305
—
6,026
33,358
—
Total real estate
126,592
135,721
181,819
140,546
152,009
143,862
252,501
86,552
736,687
7,604
6,979
Business
Consumer
Total
7,361
6,515
—
387
243
—
—
41
—
36
$
140,468
$
136,108
$
182,062
$
140,587
$
152,045
$
751,270
11
The following table sets forth the amount of all loans due after December 31, 2016, with fixed or adjustable interest rates.
Loan balances are not net of LIP, deferred loan fees and costs, or the ALLL.
Real Estate:
One-to-four family residential
Multifamily
Commercial
Total real estate
Business
Consumer
Total
Fixed-Rate
Adjustable-Rate
Total
(In thousands)
$
162,461
$
74,081
$
94,002
193,132
449,595
243
464
43,385
43,034
160,500
—
—
236,542
137,387
236,166
610,095
243
464
$
450,302
$
160,500
$
610,802
Loan Solicitation and Processing. The majority of our consumer and residential mortgage loan originations are generated
through the Bank and from time to time through outside brokers and correspondent relationships we have established with select
mortgage companies. We originate multifamily, commercial real estate and construction/land development loans primarily using
the Bank’s loan officers, with referrals coming from builders, brokers and existing customers.
Upon receipt of a loan application from a prospective borrower, we obtain a credit report and other data to verify specific
information relating to the loan applicant’s employment, income, and credit standing. All real estate loans requiring an appraisal
are done by an independent third-party appraiser. All appraisers are approved by us, and their credentials are reviewed annually,
as is the quality of their appraisals.
We use a multi-level approval matrix which establishes lending targets and tolerance levels depending on the loan type
being approved. The matrix also sets minimum credit standards for each of the loan types as well as approval limits.
Lending Authority. The Directors’ Loan Committee consists of at least three members of the Board of Directors. The
Directors’ Loan Committee has the authority to approve:
(cid:127) Aggregate borrower relationship in excess of $15.0 million, up to 15% of total risk-based capital; and
(cid:127) Each loan request in excess of the loan approval authorities assigned to the Chief Lending Officer ("CLO"),
Senior Credit Approval Officer ("SCAO"), and CCO.
Officer Lending Authority. Individual signing authority has been delegated to three lending or executive officers. Our
CLO has authority from the Board of Directors to approve loan requests for both individual loans and aggregate relationships up
to and including $1.0 million. Our SCAO has authority from the Board of Directors to approve loans and aggregate relationships
up to and including $2.5 million. The Board of Directors has given our CCO authority to approve individual loans up to and
including $5.0 million and aggregate relationships up to and including $15.0 million.
Loan Originations, Servicing, Purchases, Sales and Repayments. For the years ended December 31, 2015 and 2014,
our total loan originations were $229.8 million and $154.5 million, respectively.
One-to-four family residential loans are generally originated in accordance with the guidelines established by Freddie
Mac and Fannie Mae, with the exception of our special community development loans originated to satisfy compliance with the
Community Reinvestment Act. Our loans are underwritten by designated real estate loan underwriters internally in accordance
with standards as provided by our Board-approved loan policy. We require title insurance on all loans and fire and casualty insurance
on all secured loans and home equity loans where real estate serves as collateral. Flood insurance is also required on all secured
loans when the real estate is located in a flood zone.
The following table shows total loans originated, purchased, repaid and other changes during the periods indicated.
Year Ended December 31,
2015
2014
2013
(In thousands)
Loan Originations:
Real estate:
One-to-four family residential
$
37,808
$
35,834
$
Multifamily
Commercial
Construction/land development
Total real estate
Business
Consumer
Total loans originated
Loans purchased
Loans sold
Principal repayments
Charge-offs
Loans transferred to other real estate owned ("OREO")
Change in other items, net
Net increase in loans
$
44,579
64,046
68,637
215,070
11,050
3,660
229,780
1,563
—
(183,962)
(362)
(141)
(25,744)
21,134
$
25,417
39,864
47,157
148,272
3,556
2,669
154,497
12,981
—
(149,557)
(642)
(1,823)
(14,671)
785
$
50,884
24,521
61,288
15,400
152,093
1,053
3,866
157,012
2,241
(3,524)
(132,635)
(1,596)
(6,485)
(2,328)
12,685
Loan Origination and Other Fees. In some instances, we receive loan origination fees on real estate-related products.
Loan fees generally represent a percentage of the principal amount of the loan and are paid by the borrower. The amount of fees
charged to the borrower on one-to-four family residential loans and multifamily and commercial real estate loans can range from
0% to 2%. United States generally accepted accounting principles require that certain fees received, net of certain origination
costs, be deferred and amortized over the contractual life of the loan. Net deferred fees or costs associated with loans that are
prepaid or sold are recognized in income at the time of prepayment or sale. We had $2.9 million and $2.6 million of net deferred
loan fees at December 31, 2015, and 2014, respectively.
One-to-four family residential and consumer loans are generally originated without a prepayment penalty. The majority
of our multifamily and commercial real estate loans, however, have prepayment penalties associated with the loans. Most of the
multifamily and commercial real estate loan originations with interest rates fixed for the first five years will adjust thereafter and
have a prepayment penalty of 2 - 3% of the principal balance in year one, with decreasing penalties in subsequent years. Longer
initial fixed rate terms generally have correspondingly longer prepayment penalty periods.
Asset Quality
As of December 31, 2015, we had $1.3 million of loans past due 30 days or more. These loans represented 0.2% of total
loans, net of LIP, and consisted of nine one-to-four family residential loans (all owner-occupied) and three consumer loans. We
generally assess late fees or penalty charges on delinquent loans of up to 5.0% of the monthly payment. The borrower is given up
to a 15 day grace period from the due date to make the loan payment.
We handle collection procedures internally or with the assistance of outside legal counsel. Late charges are incurred when
the loan exceeds 10 to 15 days past due depending upon the loan product. When a delinquent loan is identified, corrective action
takes place immediately. The first course of action is to determine the cause of the delinquency and seek cooperation from the
borrower in resolving the issue. Additional corrective action, if required, will vary depending on the borrower, the collateral, if
any, and whether the loan requires specific handling procedures as required by the Washington State Deed of Trust Act.
If the borrower is chronically delinquent and all reasonable means of obtaining payments have been exhausted, we will
seek to foreclose on the collateral securing the loan according to the terms of the security instrument and applicable law. The
following table shows our delinquent loans by the type of loan, net of LIP, and the number of days delinquent at December 31,
2015:
12
13
30-59 Days
Loans Delinquent
60-89 Days
90 Days and Greater
Total
Delinquent Loans
Number
of Loans
Principal
Balance
Number
of Loans
Number
Principal
Balance
of Loans
(Dollars in thousands)
Principal
Balance
Number
of Loans
Principal
Balance
5
5
—
5
$
$
678
678
—
678
4
4
2
6
$
$
483
483
78
561
— $
—
1
1
$
—
—
19
19
$
9
9
3
1,161
1,161
97
12
$
1,258
Real estate:
One-to-four family residential:
Owner occupied
Total real estate
Consumer
Total
Nonperforming Assets. The following table sets forth information with respect to our nonperforming assets and troubled
debt restructured loans ("TDRs") for the periods indicated. All loan balances and ratios are calculated using loan balances that are
net of LIP.
December 31,
Our three largest nonperforming loans at December 31, 2015 were as follows:
(cid:127) A one-to-four family residential loan with an outstanding balance of $336,000 secured by an owner-occupied
single family residence in Snohomish County. The purpose of this loan was to refinance an existing lien with
improved terms.
(cid:127) A one-to-four family residential loan with an outstanding balance of $170,000 secured by an owner-occupied
single family residence in King County. The purpose of this loan was to refinance an existing lien with improved
terms.
(cid:127) A one-to-four family residential loan with an outstanding balance of $166,000 secured by an owner-occupied
single family residence in King County. The purpose of the construction-permanent loan was a new primary
residence.
We have reduced our nonperforming loans at December 31, 2015, by $254,000, or 19.0% as compared to December 31,
2014. This reduction was accomplished by transferring one nonperforming loan to OREO, accepting short sales, and charging off
uncollectible portions of loans. Because of our structure, we believe we are able to make decisions regarding offers on OREO and
the real estate underlying our nonperforming loans very quickly compared to larger institutions where decisions could take six to
twelve months. This distinction has worked to our benefit in reducing our nonperforming loans and disposing of OREO.
2015
2014
2013
2012
2011
The following tables summarize our total nonperforming loans, net of LIP and OREO, at December 31, 2015, by county
(Dollars in thousands)
and by type of loan or property:
Loans accounted for on a nonaccrual basis:
Real estate:
One-to-four family residential
$
996
$
Multifamily
Commercial
Construction/land development
Consumer
—
—
—
89
830
—
434
—
75
Total loans accounted for on a nonaccrual basis
1,085
1,339
$
2,297
$
233
1,198
223
44
3,995
6,248
4,711
6,274
4,767
759
$
9,808
949
3,736
9,199
—
22,759
23,692
Nonperforming loans:
One-to-four family residential
Consumer
Total nonperforming loans
Total nonperforming loans
OREO
1,085
3,663
1,339
9,283
3,995
11,465
22,759
17,347
23,692
26,044
Total nonperforming assets
$
4,748
$ 10,622
$ 15,460
$
40,106
$
49,736
OREO:
County
King
Pierce
Kitsap
All Other
Total
Nonperforming
Loans
Number of
Loans
Percent of Total
Nonperforming
Loans
(Dollars in thousands)
$
$
490
$
89
579
$
17
—
17
$
$
— $
489
$
—
—
996
89
— $
489
$
1,085
7
3
10
91.8%
8.2
100.0%
County
King
Pierce
Kitsap
All Other
Total OREO
(Dollars in thousands)
Number
of Properties
Percent of Total
OREO
TDRs:
Nonaccrual (1)
Performing
Total TDRs
Nonperforming loans as a percent of total loans, net
of LIP
Nonperforming loans as a percent of total assets
Nonperforming assets as a percent of total assets
Total loans, net of LIP
Foregone interest on nonaccrual loans
$
131
$
— $
968
42,128
54,241
60,170
$ 42,259
$ 54,241
$ 61,138
$
$
4,528
65,848
70,376
$
$
5,079
66,225
71,304
0.16%
0.11
0.48
$ 697,416
103
0.20%
0.14
1.13
$ 677,033
126
0.59%
0.43
1.68
$ 678,727
650
3.42%
2.41
4.25
$ 665,067
1,399
3.28%
2.24
4.69
$ 721,608
2,178
_______
(1) These loans are also included in the appropriate loan category above under the caption: “Loans accounted for on a nonaccrual
basis.”
When a loan becomes 90 days past due, we generally place the loan on nonaccrual status unless the credit is well secured
and in the process of collection. Loans may be placed on nonaccrual status prior to being 90 days past due if there is an identified
problem such as an impending foreclosure or bankruptcy or if the borrower is unable to meet their scheduled payment obligations.
Commercial real estate (1)
$ — $ 2,048
$
755
$
687
$
Construction/land development
—
173
—
—
Total OREO
$ — $ 2,221
$
755
$
687
$
3,490
173
3,663
6
1
7
95.3%
4.7
100.0%
Total nonperforming assets
$
579
$ 2,238
$
755
$
1,176
$
4,748
_______
(1) Of the six properties classified as commercial real estate, three are office/retail buildings and three are undeveloped lots.
Construction/land development, commercial real estate, and multifamily loans have larger individual loan amounts that
have a greater single impact on asset quality in the event of delinquency or default. We continue to monitor our loan portfolio and
believe additions to nonperforming loans, charge-offs, provisions for loan losses, and/or OREO are possible in the future,
particularly if the housing market and other economic conditions do not continue to improve.
Other Real Estate Owned. Real estate acquired by us as a result of foreclosure or by deed-in-lieu of foreclosure is
classified as OREO until it is sold. When the property is acquired, it is recorded at the lower of its cost or the fair market value of
the property, less selling costs. We had $3.7 million and $9.3 million of OREO at December 31, 2015 and 2014, respectively. At
December 31, 2015, OREO consisted of $3.5 million in commercial real estate properties and $173,000 in construction/land
development properties. Our special assets department's primary focus is the prompt and effective management of our troubled,
nonperforming assets, and expediting their disposition to minimize any potential losses. During 2015, we foreclosed or accepted
deeds-in-lieu of foreclosure on one property totaling $141,000 as compared to six properties totaling $1.8 million during 2014.
14
15
We anticipate continued foreclosure, deed-in-lieu of foreclosure, and short sale activity while we work with our nonperforming
loan customers to minimize our loss exposure.
aforementioned categories but possess weaknesses are designated as special mention. At December 31, 2015, special mention
loans totaled $7.8 million.
Troubled Debt Restructured Loans. We account for certain loan modifications or restructurings as TDRs. In general,
the modification or restructuring of a debt is considered a TDR if, for economic or legal reasons related to the borrower’s financial
difficulties, we grant a concession to the borrower that we would not otherwise consider. These loans are all considered to be
impaired loans. At December 31, 2015, we had $42.3 million in TDRs as compared to $54.2 million at December 31, 2014.
Prior to 2012, we utilized a strategy for a limited number of our lending relationships of establishing an “A” and “B”
note structure. We created an “A” note representing a reduced principal balance expected to be fully collected and at a debt service
level and loan-to-value ratio acceptable to us. The “A” note was classified as a performing TDR as long as the borrower continued
to perform in accordance with the note terms. The “B” note represented the amount of the principal reduction portion of the original
note and was immediately charged-off. The “B” note is held by the Bank and when the “A” note is paid off, the Bank may proceed
with collection efforts on the “B” note. At December 31, 2015, 99.7% of our TDRs were classified as performing compared to
100.0% at December 31, 2014. Of the $42.1 million of performing TDRs at December 31, 2015, $20.4 million were related to an
“A” note as a result of an “A” and “B” note workout strategy.
The largest TDR relationship at December 31, 2015 totaled $11.6 million and was comprised of $10.9 million in one-to-
four family residential loans secured by rental properties and a $769,000 owner occupied commercial property, all located in King
County. At December 31, 2015, there was no LIP in connection with our TDRs. For additional information regarding our TDRs,
see Note 3 of the Notes to Consolidated Financial Statements contained in Item 8 of this report on Form 10-K.
The following table summarizes our total TDRs:
Nonperforming TDRs:
One-to-four family residential
Total nonperforming TDRs
Performing TDRs:
One-to-four family residential
Multifamily
Commercial real estate
Consumer
Total performing TDRs
Total TDRs
December 31,
2015
2014
(In thousands)
$
$
131
131
35,099
1,594
5,392
43
42,128
$
42,259
$
—
—
42,908
2,172
9,118
43
54,241
54,241
Classified Assets. Federal regulations provide for the classification of lower quality loans and other assets as substandard,
doubtful or loss. An asset is considered substandard if it is inadequately protected by the current net worth and payment capacity
of the borrower or of any collateral pledged. Substandard assets include those characterized by the distinct possibility that we will
sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all the weaknesses inherent in those
classified substandard with the added characteristic that the weaknesses present make collection or liquidation in full highly
questionable and improbable, on the basis of currently existing facts, conditions and values. Assets classified as loss are those
considered uncollectible and of such little value that their continuance as assets without the establishment of a specific loss reserve
is not warranted.
When we classify problem assets as either substandard or doubtful, we may establish a specific allowance in an amount
we deem prudent. General allowances represent loss allowances that have been established to recognize the inherent risk associated
with lending activities, but unlike specific allowances, have not been specifically allocated to particular problem assets. When an
insured institution classifies problem assets as a loss, it is required to charge-off those assets in the period in which they are deemed
uncollectible. Our determinations as to the classification of our assets and the amount of our valuation allowances are subject to
review by the FDIC and the DFI that can order the establishment of additional loss allowances or the charge-off of specific loans
against established loss reserves. Assets that do not currently expose us to sufficient risk to warrant classification in one of the
In connection with the filing of periodic reports with the FDIC and in accordance with our loan policy, we regularly
review the problem loans in our portfolio to determine whether any loans require classification in accordance with applicable
regulations. The decrease in our classified loans during the year ended December 31, 2015 was a result of loan charge-offs, loans
transferred to OREO, and short sales, as well as our efforts to work with our borrowers to bring their loans current when possible
or restructure the loan when appropriate. During 2015, we continued our aggressive approach to reduce nonperforming assets and
improve asset quality.
Classified loans, net of LIP, consisting solely of substandard loans, were as follows at the dates indicated:
One-to-four family residential
Multifamily
Commercial real estate
Consumer
Total classified loans
December 31,
2015
2014
(In thousands)
2,693
$
—
496
89
6,314
1,964
1,598
297
3,278
$
10,173
$
$
With the exception of these classified loans, of which $1.1 million were accounted for as nonaccrual loans at December
31, 2015, management is not aware of any loans as of December 31, 2015, where the known credit problems of the borrower would
cause us to have serious doubts as to the ability of such borrowers to comply with their present loan repayment terms and which
may result in the future inclusion of such loans in the nonperforming loan categories.
Allowance for Loan Losses. Management recognizes that loan losses may occur over the life of a loan and that the ALLL
must be maintained at a level necessary to absorb specific losses on impaired loans and probable losses inherent in the loan
portfolio. Our methodology for analyzing the ALLL consists of two components: general and specific allowances. The general
allowance is determined by applying factors to our various groups of loans. Management considers factors such as charge-off
history, the prevailing economy, the borrower’s ability to repay, the regulatory environment, competition, geographic and loan
type concentrations, policy and underwriting standards, nature and volume of the loan portfolio, managements’ experience level,
our loan review and grading systems, the value of underlying collateral, and the level of problem loans in assessing the ALLL.
The specific allowance component is created when management believes that the collectability of a specific loan has been impaired
and a loss is probable. The specific reserves are computed using current appraisals, listed sales prices and other available information,
less costs to complete, if any, and costs to sell the property. This evaluation is inherently subjective as it requires estimates that
are susceptible to significant revision as more information becomes available or as future events differ from predictions. In
addition, specific reserves may be created upon a loan's restructuring, based on a discounted cash flow analysis comparing the
present value of the anticipated repayments under the restructured terms to the outstanding principal balance of the loan.
Quarterly, our Board of Directors' Internal Asset Review Committee reviews and recommends approval of the allowance
for loan losses and any provision or recapture of provision for loan losses, and the full Board of Directors approves the provision
or recapture after considering the Committee's recommendation. The allowance is increased by the provision for loan losses which
is charged against current period earnings. If the analysis of our loan portfolio indicates the risk of loss is less than the balance of
the ALLL, a recapture of provision of loan loss is added to current period earnings.
As a result of payoffs of larger loans and improvement in credit quality of our loan portfolio, we recorded a $2.2 million
recapture of provision from our ALLL for the year ended December 31, 2015, as compared to recaptures of $2.1 million and
$100,000 for the years ended December 31, 2014 and 2013, respectively. The improvement in the quality of loans was reflected
in reductions in the levels of nonperforming loans, classified assets, and charge-offs, as well as our efforts working with our
borrowers when possible to bring their loan payments current. When this option was not feasible, we promptly initiated foreclosure
or deed-in-lieu of foreclosure proceedings. We also utilized short sales as an option to liquidate properties prior to foreclosure.
The continued focus that we placed on reducing our nonperforming loans during 2015 resulted in a reduction of $254,000 in
nonperforming loans. The ALLL was $9.5 million, or 1.4% of total loans net of LIP at December 31, 2015 as compared to $10.5
million, or 1.6% at December 31, 2014. The level of the ALLL is based on estimates and the ultimate losses may vary from the
estimates. Management reviews the adequacy of the ALLL on a quarterly basis.
16
17
A loan is considered impaired when, based on current information and events, it is probable we will be unable to collect
the scheduled payments of principal or interest when due, according to the contractual terms of the loan agreement. Factors
considered by management in determining impairment include payment status, collateral value, market conditions, rent rolls, and
the borrower's and guarantor's, if any, financial strength. Loans that experience insignificant payment delays and payment shortfalls
generally are not classified as impaired. Management determines the significance of payment delays and shortfalls on a case-by-
case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including length of the delay,
the reasons for the delay, the borrower’s prior payment record and the amounts of the shortfall in relation to the principal and
interest owed. Loans are evaluated for impairment on a loan-by-loan basis. As of December 31, 2015 and 2014, impaired loans
were $43.3 million and $55.7 million, respectively. At December 31, 2015, there was no LIP in connection with our impaired
loans.
18
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19
We believe that the ALLL as of December 31, 2015 was adequate to absorb the probable and inherent losses in the loan
portfolio at that date. While we believe the estimates and assumptions used in our determination of the adequacy of the ALLL are
reasonable, there can be no assurance that such estimates and assumptions will be proven correct in the future, or that the actual
amount of future provisions will not exceed the amount of past provisions, or that any increased provisions that may be required
will not adversely impact our financial condition and results of operations. Future additions to the ALLL may become necessary
based upon changing economic conditions, the level of problem loans, business conditions, credit concentrations, increased loan
balances or changes in the underlying collateral of the loan portfolio. In addition, the determination of the amount of the ALLL
is subject to review by bank regulators as part of the routine examination process that may result in the establishment of additional
loss reserves or the charge-off of specific loans against established loss reserves based upon their judgment of information available
to them at the time of their examination.
The following table sets forth an analysis of our ALLL at the dates and for the periods indicated.
ALLL at beginning of period
(Recapture of provision) provision for loan losses
$ 10,491
(2,200)
$ 12,994
(2,100)
$ 12,542
(100)
$ 16,559
$ 22,534
3,050
4,700
At or For the Year Ended December 31,
2015
2014
2013
2012
2011
(Dollars in thousands)
Charge-offs:
One-to-four family residential
Multifamily
Commercial real estate
Construction/land development
Business
Consumer
Total charge-offs
Total recoveries
Net recoveries (charge-offs)
ALLL at end of period
ALLL as a percent of total loans, net of LIP
Net recoveries (charge-offs) to average loans receivable, net of
LIP
ALLL as a percent of nonperforming loans, net of LIP
Investment Activities
(27)
(281)
—
—
—
(54)
(362)
1,534
1,172
$ 9,463
(78)
—
(311)
(223)
—
(30)
(642)
239
(403)
$ 10,491
(456)
(346)
(98)
(582)
(13)
(101)
(1,596)
2,148
552
$ 12,994
(2,229)
(153)
(6,088)
(630)
—
(491)
(9,591)
2,524
(7,067)
$ 12,542
(2,330)
(125)
(4,249)
(4,058)
—
(263)
(11,025)
350
(10,675)
$ 16,559
1.36%
1.55%
1.91%
1.89%
2.29%
0.18
(0.06)
872.17% 783.50% 325.26%
0.08
(1.07)
55.11%
(1.39)
69.89%
General. Under Washington State law, savings banks are permitted to invest in various types of liquid assets, including
U.S. Treasury obligations, securities of various federal agencies, certain certificates of deposit of insured banks and savings
institutions, banker’s acceptances, repurchase agreements, federal funds, commercial paper, investment grade corporate debt
securities, and obligations of states and their political sub-divisions.
The Investment, Asset/Liability Committee ("ALCO"), consisting of the Chief Executive Officer, Chief Financial Officer,
and Controller of First Financial Northwest Bank, other members of management and the Board of Directors, has the authority
and responsibility to administer our investment policy, monitor portfolio strategies, and recommend appropriate changes to policy
and strategies to the Board of Directors. On a monthly basis, management reports to the Board a summary of investment holdings
with respective market values and all purchases and sales of investment securities. The Chief Financial Officer has the primary
responsibility for the management of the investment portfolio and considers various factors when making decisions, including the
marketability, maturity, liquidity, and tax consequences of proposed investments. The maturity structure of investments will be
affected by various market conditions, including the current and anticipated slope of the yield curve, the level of interest rates, the
trend of new deposit inflows, and the anticipated demand for funds via deposit withdrawals and loan originations and purchases.
The general objectives of the investment portfolio are to provide liquidity when loan demand is high, to assist in maintaining
earnings when loan demand is low, and to maximize earnings while satisfactorily managing risk, including credit risk, reinvestment
risk, liquidity risk and interest rate risk.
At December 31, 2015, our investment portfolio consisted principally of mortgage-backed securities, municipal bonds,
U.S. government agency obligations, and corporate bonds. From time to time, investment levels may increase or decrease depending
upon yields available on investment opportunities and management’s projected demand for funds for loan originations, net deposit
flows, and other activities. At December 31, 2015, we did not hold securities of any single issuer (other than government-sponsored
entities) that exceeded 10% of our shareholders' equity.
Mortgage-Backed Securities. The mortgage-backed securities in our portfolio were comprised of Fannie Mae, Freddie
Mac, and Ginnie Mae mortgage-backed securities. These issuers guarantee the timely payment of principal and interest in the
event of default. The mortgage-backed securities had a weighted-average yield of 2.09% at December 31, 2015.
U.S. Government Agency Obligations. The agency securities in our portfolio were comprised of Fannie Mae, Freddie
Mac, and FHLB agency securities. These issuers guarantee the timely payment of principal and interest in the event of default.
At December 31, 2015, the portfolio of government agency securities had a weighted-average yield of 1.54%.
Ginnie Mae is part of a U.S. government agency and its guarantees are backed by the full faith and credit of the United
States. Fannie Mae, Freddie Mac, and the Federal Home Loan Banks are U.S. government-sponsored entities. Although their
guarantees are not backed by the full faith and credit of the United States, they may borrow from the U.S. Treasury, which has
taken other steps to ensure these U.S. Government-sponsored entities can fulfill their financial obligations.
Corporate Bonds. The corporate bond portfolio was primarily comprised of variable rate securities issued by various
financial institutions. At December 31, 2015, the corporate bond portfolio had a weighted-average yield of 2.53%.
Municipal Bonds. The municipal bond portfolio at December 31, 2015 was comprised of both taxable and tax-exempt
municipal bonds. The weighted-average yield on the municipal bond portfolio was 2.90% at December 31, 2015.
Federal Home Loan Bank Stock. As a member of the FHLB Des Moines, we are required to own capital stock. The
required amount of capital stock is based on a percentage of our previous year-end assets and our outstanding FHLB advances.
The redemption of any excess stock we hold is at the discretion of the FHLB Des Moines. The carrying value of the stock totaled
$6.1 million at December 31, 2015. During the years ended December 31, 2015 and 2014, we received FHLB cash dividends of
$69,000 and $7,000, respectively. During 2015, FHLB stock was repurchased from us as a result of the merger of FHLB Seattle
and FHLB Des Moines and also as a result of our payoff of an FHLB advance. During 2015 and 2014, 6,074 shares and 2,729
shares, respectively of FHLB stock were repurchased from us by the FHLB Des Moines at par value.
The following table sets forth the composition of our investment portfolio at the dates indicated.
2015
December 31,
2014
2013
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
(In thousands)
$
$
50,288
26,011
13,802
11,231
556
13,541
14,010
$
50,321
26,137
13,732
11,507
557
13,542
13,769
$
40,083
21,442
26,049
—
642
16,863
14,061
$
40,916
21,946
26,013
—
644
16,816
14,039
$
46,234
25,707
34,403
1,401
642
23,222
14,079
46,232
25,856
33,873
1,202
648
22,704
13,849
Available-for-sale:
Mortgage-backed securities:
Fannie Mae
Freddie Mac
Ginnie Mae
Tax-exempt municipal bonds
Taxable municipal bonds
U.S. government agencies
Corporate bonds
Total available-for-sale
$
129,439
$
129,565
$
119,140
$
120,374
$
145,688
$
144,364
At December 31, 2015, 2014, and 2013 there were no investments held to maturity.
20
21
During the year ended December 31, 2015, gross proceeds from the call and sale of investments was $27.3 million, with
net realized gains of $92,000.
Management reviews investment securities on an ongoing basis for the presence of other than temporary impairment
("OTTI") or permanent impairment, taking into consideration current market conditions, fair value in relationship to cost, extent
and nature of the change in fair value, issuer rating changes and trends, whether management intends to sell a security or if it is
likely that we will be required to sell the security before recovery of the amortized cost basis of the investment, which may be
maturity, and other factors. For debt securities, if management intends to sell the security or it is likely that we will be required to
sell the security before recovering its cost basis, the entire impairment loss would be recognized in earnings as an OTTI. If
management does not intend to sell the security and it is not likely that we will be required to sell the security, but management
does not expect to recover the entire amortized cost basis of the security, only the portion of the impairment loss representing
credit losses would be recognized in earnings. The credit loss on a security is measured as the difference between the amortized
cost basis and the present value of the cash flows expected to be collected. Projected cash flows are discounted by the original or
current effective interest rate, depending on the nature of the security being measured for potential OTTI. The remaining impairment
related to all other factors, the difference between the present value of the cash flows expected to be collected and fair value, is
recognized as a charge to other comprehensive income (loss). Impairment losses related to all other factors are presented as separate
categories within other comprehensive income (loss). There were no losses related to OTTI at December 31, 2015 and 2014. For
additional information regarding our investments, see Note 2 of the Notes to Consolidated Financial Statements contained in Item
8.
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Deposit Activities and Other Sources of Funds
The following table sets forth information regarding our certificates of deposit and other deposits at December 31, 2015.
GeneralDeposits and loan repayments are the major sources of our funds for lending and other investment purposes.
Scheduled loan repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are
influenced significantly by general interest rates and market conditions. Borrowings from the FHLB are used to supplement the
availability of funds from other sources and also as a source of term funds to assist in the management of interest rate risk.
Weighted-
Average
Interest
Rate
Term
Category
Amount
(Dollars in thousands)
Our deposit composition reflects a mixture of various deposit products. We rely on marketing activities, customer service,
and the availability of a broad range of products and services to attract and retain customer deposits.
Deposits. We offer a competitive range of deposit products within our market area, including noninterest bearing accounts,
NOW accounts, money market deposit accounts, statement savings accounts, and certificates of deposit. Deposit account terms
vary according to the minimum balance required, the time periods the funds must remain on deposit, and the interest rate, among
other factors. In determining the terms of our deposit accounts, we consider the development of long-term profitable customer
relationships, current market interest rates, current maturity structures, deposit mix, our customer preferences, and the profitability
of acquiring customer deposits compared to alternative funding sources. As part of our strategy to shift our deposit mix to lower
cost funds, we continued to better align our pricing with competitors in our local market to meet our goals. To supplement local
deposits, funds are also generated through national brokered certificates of deposit. Brokered certificates of deposit were added
in 2014 as a source of funds for the $70.0 million dividend paid from the Bank to the Holding Company and as part of our asset/
liability objectives. At December 31, 2015, $66.2 million, or 9.8% of total deposits were brokered certificates of deposit, with
remaining maturities ranging from 2.5 to five years. These funds cannot be withdrawn early except in the case of the death or
adjudication of incompetence of the depositor. However, the Bank has a quarterly call option six months after issuance that allows
the Bank to close the certificate of deposit and return the deposit to the customer if the Bank determines it is in its best interest to
do so. The longer term nature of these brokered deposits, along with the enhanced features of these deposits as compared to retail
certificates of deposit, assists us in our interest rate risk management efforts.
The following table sets forth our total deposit activity for the periods indicated.
2015
Year Ended December 31,
2014
(In thousands)
2013
Total deposits, beginning balance
Increase (decrease) in retail deposits
Increase (decrease) in brokered funds
Net increase (decrease) in deposits
Total deposits, ending balance
$
$
614,127
$
49,558
11,722
61,280
$
612,065
(52,367)
54,429
2,062
675,407
$
614,127
$
665,797
(53,732)
—
(53,732)
612,065
At December 31, 2015, deposits totaled $675.4 million. We had $225.4 million of jumbo (greater than $100,000)
certificates of deposit, which were 33.4% of total deposits at December 31, 2015. At that date, included in the jumbo certificates
of deposit, were public funds totaling $16.0 million, or 2.4% of total deposits. Under Washington State law, in order to participate
in the public funds program, we are required to pledge 100% of the public deposits held in the form of eligible securities.
—% N/A
Noninterest bearing demand deposits
$
0.10
0.17
0.38
0.10
0.24
0.39
1.16
1.09
N/A
N/A
N/A
NOW
Statement savings
Money market (1)
Certificates of deposit, retail
Three months or less
Over three through six months
Over six through twelve months
Over twelve months
Total certificates of deposit, retail
1.62
Over twelve months
Certificates of deposit, brokered
29,392
16,261
28,327
211,436
903
2,106
27,499
293,332
323,840
66,151
Percentage
of Total
Deposits
4.4%
2.4
4.2
31.3
0.1
0.3
4.1
43.4
47.9
9.8
Total deposits
$
675,407
100.0%
_______________
(1) Money market funds include $62.8 million of developer construction accounts that are part of the EB-5 Immigrant Investor
Program with $59.0 million expected to be withdrawn during 2016. See Item 1A. For more information see “If limitations arise
in our ability to utilize the national brokered deposit market or to replace short-term deposits, our ability to replace maturing
deposits on acceptable terms could be adversely impacted” and "Non-compliance with the USA PATRIOT Act, Bank Secrecy Act,
or other laws and regulations could result in fines or sanctions" in Item 1.A. Risk Factors contained in this report.
Certificates of Deposit. The following table sets forth the amount and maturities of certificates of deposit at December
31, 2015.
Within
One Year
After One Year
Through
Two Years
After Two
Years Through
Three Years
After Three
Years Through
Four Years
Thereafter
Total
0.00 - 1.00%
1.01 - 2.00%
2.01 - 3.00%
5.01 - 6.00%
Total
$
$
113,517
21,146
—
—
134,663
$
$
29,695
58,323
—
129
88,147
$
$
$
(In thousands)
10,799
55,927
—
—
66,726
$
— $
— $
82,203
—
—
82,203
$
17,611
641
—
18,252
$
154,011
235,210
641
129
389,991
The following table sets forth the amount of our jumbo certificates of deposit by remaining maturity as of December 31,
2015. Jumbo certificates of deposit are certificates in amounts greater than $100,000.
Maturity Period
Three months or less
Over three months through six months
Over six months through twelve months
Over twelve months
Total
Certificates of Deposit
(In thousands)
$
$
16,633
25,808
48,292
134,673
225,406
24
25
Deposit Flow. The following table sets forth the deposit balances by the types of accounts we offered at the dates indicated.
The following table sets forth information regarding FHLB advances at the end of and during the periods indicated. The
2015
December 31,
2014
2013
Amount
Percent of
Total
Amount
Percent of
Total
Amount
Percent of
Total
table includes both long- and short-term borrowings.
At or for the Year Ended December 31,
2015
2014
2013
(Dollars in thousands)
(Dollars in thousands)
Maximum amount of borrowings outstanding at any month end
$
135,500
$
135,500
$
119,000
Noninterest bearing
$
NOW
Statement savings
Money market (1)
Certificates of deposit, retail:
0.00 - 1.00%
1.01 - 2.00%
2.01 - 3.00%
3.01 - 4.00%
5.01 - 6.00%
Total certificates of deposit,
retail
Certificates of deposit,
brokered
1.01 - 2.00%
2.01 - 3.00%
Total certificates of deposit,
brokered
Total deposits
29,392
16,261
28,327
211,436
154,011
169,494
206
—
129
4.4% $
2.4
4.2
31.3
22.8
25.1
—
—
—
14,354
20,752
23,901
142,532
210,297
147,672
67
123
—
2.3% $
3.4
3.9
23.2
34.3
24.1
—
—
—
10,619
25,471
20,396
145,172
222,508
114,542
71,504
1,737
116
323,840
47.9
358,159
58.4
410,407
65,715
436
66,151
9.7
0.1
9.8
33,126
21,303
54,429
5.3
3.5
8.8
—
—
—
1.7%
4.2
3.3
23.7
36.4
18.7
11.7
0.3
—
67.1
—
—
—
$
675,407
100.0% $
614,127
100.0% $
612,065
100.0%
_______________
(1) Money market funds include $62.8 million of developer construction accounts that are part of the EB-5 Immigrant investor
Program with $59.0 million expected to be withdrawn during 2016. See Item 1A. For more information see “If limitations arise
in our ability to utilize the national brokered deposit market or to replace short-term deposits, our ability to replace maturing
deposits on acceptable terms could be adversely impacted” and "Non-compliance with the USA PATRIOT Act, Bank Secrecy Act,
or other laws and regulations could result in fines or sanctions" in Item 1.A. Risk Factors contained in this report.
Borrowings. Customer deposits are the primary source of funds for our lending and investment activities. We use advances
from the FHLB to supplement our supply of lendable funds, to meet short-term deposit withdrawal requirements and to provide
longer term funding to better match the duration of selected loan and investment maturities. In addition, at December 31, 2015
we had available a total of $35.0 million lines of credit between two other financial institutions as supplemental funding sources.
As a member of the FHLB, we are required to own capital stock in the FHLB and are authorized to apply for advances
on the security of that stock and certain of our mortgage loans provided certain creditworthiness standards have been met. Advances
are individually made under various terms pursuant to several different credit programs, each with its own interest rate and range
of maturities. Depending on the program, limitations on the amount of advances are based on the financial condition of the member
institution and the adequacy of collateral pledged to secure the credit. We maintain a credit facility with the FHLB that provides
for immediately available advances, subject to acceptable collateral. At December 31, 2015, our remaining FHLB credit capacity
was $217.0 million and outstanding advances from the FHLB totaled $125.5 million.
Average borrowings outstanding
Weighted-average rate paid
Balance outstanding at end of the year
Weighted-average rate paid at end of the year
Subsidiaries and Other Activities
133,527
128,839
0.94%
0.91%
67,796
1.08%
$
125,500
$
135,500
$
119,000
0.97%
0.95%
0.86%
First Financial Northwest, Inc. First Financial Northwest has two wholly-owned subsidiaries, First Financial Northwest
Bank and First Financial Diversified Corporation. First Financial Diversified Corporation currently holds a loan portfolio of one-
to-four family residential, commercial real estate, business, and consumer loans. At December 31, 2015, First Financial Diversified's
net loans receivable of $3.8 million represented less than one percent of the Company's loan portfolio.
First Financial Northwest Bank. First Financial Northwest Bank is a community-based commercial bank. The Bank
primarily serves the greater Puget Sound region of King and to a lesser extent, Pierce, Snohomish and Kitsap Counties, Washington
through our full-service banking office located in Renton, Washington and branch office in Mill Creek, Washington. We are in the
business of attracting deposits from the public and utilizing those deposits to originate loans.
Competition
We face competition in originating loans and attracting deposits within our primary geographic market area. We compete
by consistently delivering high-quality, personal service to our customers that results in a high level of customer satisfaction.
Based on the most current FDIC Deposit Market Share Report dated June 30, 2015, we ranked 16th in terms of deposits
with a deposit market share of 0.97%, among the 47 FDIC-insured depository institutions located in King County. The top five
banks in the market (comprised of Bank of America, Wells Fargo Bank, U.S. Bank, J.P. Morgan Chase, and Key Bank) controlled
75.5% of the King County deposit market with deposits of $53.5 billion out of the $70.9 billion total deposits in King County as
of June 30, 2015. Aside from these traditional competitors, credit unions, insurance companies and brokerage firms also compete
for consumer deposit relationships.
Our competition for loans comes principally from commercial banks, mortgage brokers, thrift institutions, credit unions,
and finance companies. Several other financial institutions, including those previously mentioned, compete with us for banking
business in our targeted market area. These institutions have far more resources than we do and, as a result, are able to offer a
broader range of services, such as trust departments and enhanced retail services. Among the advantages of some of these institutions
are their ability to make larger loans, finance extensive advertising campaigns, access lower cost funding sources, and allocate
their investable assets in regions of highest yield and demand. The challenges posed by such large competitors may impact our
ability to originate loans, secure low cost deposits, and establish product pricing levels that support our net interest margin goals
that may limit our future growth and earnings potential.
Employees
At December 31, 2015, we had 107 full-time employees. Our employees are not represented by any collective bargaining
group. We consider our employee relations to be good.
How We Are Regulated
The following is a brief description of certain laws and regulations that are applicable to First Financial Northwest and
First Financial Northwest Bank. On March 31, 2015, First Financial Northwest rescinded the 10(1) election made by First Financial
Northwest Bank and converted from a registered savings and loan holding company to a bank holding company. As a bank holding
company, First Financial Northwest is subject to examination and supervision by, and is required to file certain reports with, the
FRB. First Financial Northwest also is subject to the rules and regulations of the SEC under the federal securities laws. First
26
27
Financial Northwest Bank, which changed its charter from a Washington-chartered savings bank to a Washington-chartered
commercial bank effective on February 4, 2016, is subject to regulation and oversight by the DFI, the applicable provisions of
Washington law and by the regulations of the DFI adopted thereunder. First Financial Northwest Bank also is subject to regulation
and examination by the FDIC, which insures its deposits to the maximum extent permitted by law.
The laws and regulations affecting depository institutions and their holding companies have changed significantly,
particularly in connection with the enactment of The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
("Dodd-Frank Act"). Among other changes, the Dodd-Frank Act established the Consumer Financial Protection Bureau ("CFPB")
as an independent bureau of the FRB. The CFPB assumed responsibility for the implementation of the federal financial consumer
protection and fair lending laws and regulations and has authority to impose new requirements. In addition, the regulations governing
us may be amended from time to time by the respective regulators. Any such legislation or regulatory changes in the future could
adversely affect us. We cannot predict whether any such changes may occur.
Regulation and Supervision of First Financial Northwest Bank
General. As a state-chartered commercial bank, First Financial Northwest Bank is subject to applicable provisions of
Washington state law and regulations of the DFI. State law and regulations govern First Financial Northwest Bank’s ability to
take deposits and pay interest, to make loans on or invest in residential and other real estate, to make consumer loans, to invest in
securities, to offer various banking services to its customers and to establish branch offices. Under state law, commercial banks
in Washington also generally have all of the powers that federal commercial banks have under federal laws and regulations. First
Financial Northwest Bank is subject to periodic examination and reporting requirements by and of the DFI.
Insurance of Accounts and Regulation by the FDIC. First Financial Northwest Bank’s deposits are insured up to
$250,000 per separately insured depositor by the DIF of the FDIC. As insurer, the FDIC imposes deposit insurance premiums and
is authorized to conduct examinations of, and to require reporting by, FDIC-insured institutions. The FDIC also may prohibit any
insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious risk to the deposit
insurance fund. The FDIC also has the authority to initiate enforcement actions against commercial institutions and may terminate
the deposit insurance if it determines that the institution has engaged in unsafe or unsound practices or is in an unsafe or unsound
condition.
The Dodd-Frank Act requires the FDIC's deposit insurance assessments to be based on assets instead of deposits. The
FDIC has issued rules which specify that the assessment base for a bank is equal to its total average consolidated assets less average
tangible equity capital. The FDIC revised assessment rates range from approximately five basis points to 35 basis points, depending
on applicable adjustments for unsecured debt issued by an institution and brokered deposits (and to further adjustment for institutions
that hold unsecured debt of other FDIC-insured institutions), until such time as the FDIC's reserve ratio equals 1.15%. Once the
FDIC's reserve ratio reaches 1.15% and the reserve ratio for the immediately prior assessment period is less than 2.0%, the applicable
assessment rates may range from three basis points to 30 basis points (subject to adjustments as described above). If the reserve
ratio for the prior assessment period is equal to or greater than 2.0% and less than 2.5%, the assessment rates may range from two
basis points to 28 basis points and if the reserve ratio for the prior assessment period is greater than 2.5%, the assessment rates
may range from one basis point to 25 basis points (in each case subject to adjustments as described above). No institution may
pay a dividend if it is in default on its federal deposit insurance assessment.
In addition, federally insured institutions are required to pay a Financing Corporation (“FICO”) assessment in order to
fund the interest on bonds issued to resolve thrift failures in the 1980s. At December 31, 2015, the FICO assessment equaled 0.58
basis points of the assessment base, computed on assets. These assessments will continue until the bonds mature in the years 2017
through 2019. For 2015, the Bank incurred approximately $48,000 in FICO assessments.
The FDIC may terminate the deposit insurance of any insured depository institution, including First Financial Northwest
Bank, if it determines after a hearing that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe
or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or any condition imposed
by an agreement with the FDIC. It also may suspend deposit insurance temporarily during the hearing process for the permanent
termination of insurance if the institution has no tangible capital. If insurance of accounts is terminated, the accounts at the institution
at the time of the termination, less subsequent withdrawals, shall continue to be insured for a period of six months to two years,
as determined by the FDIC. We are not aware of any practice, condition or violation that might lead to termination of First Financial
Northwest Bank’s deposit insurance.
A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results
of operations of the Bank. There can be no prediction as to what changes in insurance assessment rates may be made in the future.
Standards for Safety and Soundness. The federal banking regulatory agencies have prescribed, by regulation, guidelines
for all insured depository institutions relating to: internal controls, information systems and internal audit systems, loan
documentation, credit underwriting, interest rate risk exposure, asset growth, asset quality, earnings and compensation, fees and
benefits. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address
problems at insured depository institutions before capital becomes impaired. Each insured depository institution must implement
a comprehensive written information security program that includes administrative, technical and physical safeguards appropriate
to the institution’s size and complexity and the nature and scope of its activities. The information security program also must be
designed to ensure the security and confidentiality of customer information, protect against any unanticipated threats or hazards
to the security or integrity of such information, protect against unauthorized access to or use of such information that could result
in substantial harm or inconvenience to any customer and ensure the proper disposal of customer and consumer information. Each
insured depository institution must also develop and implement a risk-based response program to address incidents of unauthorized
access to customer information in customer information systems. If the FDIC determines that an institution fails to meet any of
these guidelines, it may require an institution to submit to the FDIC an acceptable plan to achieve compliance. We are not aware
of any conditions relating to these safety and soundness standards that would require submission of a plan of compliance by First
Financial Northwest Bank.
Capital Requirements. Federally insured financial institutions, such as First Financial Northwest Bank, are required to
maintain a minimum level of regulatory capital.
Effective January 1, 2015 (with some changes transitioned into full effectiveness over two to four years), First Financial
Northwest Bank became subject to new capital regulations adopted by the FRB and the FDIC, which create a new required ratio
for common equity Tier 1 (“CET1”) capital, increase the minimum leverage and Tier 1 capital ratios, change the risk-weightings
of certain assets for purposes of the risk-based capital ratios, create an additional capital conservation buffer over the required
capital ratios, and change what qualifies as capital for purposes of meeting the capital requirements. These regulations implement
the regulatory capital reforms required by the Dodd Frank Act and the “Basel III” requirements.
Under the new capital regulations, the minimum capital ratios are: (1) a CET1 capital ratio of 4.5% of risk-weighted
assets; (2) a Tier 1 capital ratio of 6.0% of risk-weighted assets; (3) a total risk-based capital ratio of 8.0% of risk-weighted assets;
and (4) a leverage ratio (the ratio of Tier 1 capital to average total adjusted assets) of 4.0%. CET1 generally consists of common
stock; retained earnings; accumulated other comprehensive income (“AOCI”) unless an institution elects to exclude AOCI from
regulatory capital; and certain minority interests; all subject to applicable regulatory adjustments and deductions. Tier 1 capital
generally consists of CET1 and noncumulative perpetual preferred stock. Tier 2 capital generally consists of other preferred stock
and subordinated debt meeting certain conditions plus an amount of the allowance for loan and lease losses up to 1.25% of assets.
Total capital is the sum of Tier 1 and Tier 2 capital.
There are a number of changes in what constitutes regulatory capital compared to the rules in effect prior to January 1,
2015, some of which are subject to transition periods. These changes include the phasing-out of certain instruments as qualifying
capital and eliminate or significantly reduce the use of hybrid capital instruments, especially trust preferred securities, as regulatory
capital. Mortgage servicing assets and deferred tax assets over designated percentages of CET1 will be deducted from capital. In
addition, Tier 1 capital includes AOCI, which includes all unrealized gains and losses on available for sale debt and equity
securities. However, because of our asset size, we are eligible for the one-time option of permanently opting out of the inclusion
of unrealized gains and losses on available for sale debt and equity securities in our capital calculations. We elected this option in
the first quarter of 2015.
For purposes of determining risk-based capital, assets and certain off-balance sheet items are risk-weighted from 0% to
1,250%, depending on the risk characteristics of the asset or item. The new regulations make certain changes in the risk-weighting
of assets to better reflect credit risk and other risk exposure compared to the earlier capital rules. These include a 150% risk weight
(up from 100%) for certain high volatility commercial real estate acquisition, development and construction loans and for non-
residential mortgage loans that are 90 days past due or otherwise in nonaccrual status; a 20% (up from 0%) credit conversion
factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable
(currently set at 0%); and a 250% risk weight (up from 100%) for mortgage servicing and deferred tax assets that are not deducted
from capital.
In addition to the minimum CET1, Tier 1, leverage ratio and total capital ratios, First Financial Northwest Bank must
maintain a capital conservation buffer consisting of additional CET1 capital greater than 2.5% of risk-weighted assets above the
required minimum levels in order to avoid limitations on paying dividends, repurchasing shares, and paying discretionary
bonuses. The new capital conservation buffer requirement is to be phased in beginning on January 1, 2016 when a buffer greater
than 0.625% of risk-weighted assets will be required, which amount will increase each year until the buffer requirement is fully
implemented on January 1, 2019.
28
29
To be consider “well capitalized,” a depository institution must have a Tier 1 risk-based capital ratio of at least 8%, a
total risk-based capital ratio of at least 10%, a CET1 capital ratio of at least 5% and a leverage ratio of at least 5% and not be
subject to an individualized order, directive or agreement under which its primary federal banking regulator requires it to maintain
a specific capital level. As of December 31, 2015, First Financial Northwest Bank met the requirements to be "well capitalized"
and met the fully phased-in capital conservation buffer requirement.
The table below sets forth First Financial Northwest Bank’s capital position at December 31, 2015 and 2014, based on
FDIC thresholds to be well-capitalized.
Bank equity capital under U.S. Generally Accepted Accounting Principles
("GAAP")
$112,404
$108,239
December 31,
2015
2014
Amount
Ratio
Amount
Ratio
(Dollars in thousands)
Tier 1 leverage capital
Tier 1 leverage capital requirement
Excess
Common tier 1
Common equity tier 1 capital requirement
Excess
Tier 1 risk-based capital
Tier 1 risk-based capital requirement
Excess
Total risk-based capital
Total risk-based capital requirement
Excess
$112,613
11.61% $108,596
11.79%
48,484
5.00
36,849
4.00
$ 64,129
6.61% $ 71,747
7.79%
$112,613
16.36%
44,735
6.50
$ 67,878
9.86%
$112,613
16.36% $108,596
18.30%
$ 55,058
$ 57,555
8.00% $ 23,734
4.00%
8.36% $ 84,862
14.30%
$121,238
17.62% $116,053
19.56%
68,823
10.00
47,469
8.00
$ 52,415
7.62% $ 68,584
11.56%
The FDIC also has authority to establish individual minimum capital requirements in appropriate cases upon a
determination that an institution's capital level is or may become inadequate in light of particular risks or circumstances.
Management of First Financial Northwest Bank believes that, under the current regulations, First Financial Northwest Bank
will continue to meet its minimum capital requirements in the foreseeable future.
For a complete description of First Financial Northwest Bank’s required and actual capital levels on December 31, 2015,
see Note 12 of the Notes to Consolidated Financial Statements contained in Item 8 of this report on Form 10-K.
Prompt Corrective Action. Federal statutes establish a supervisory framework for FDIC-insured institutions based on
five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized. An institution's category depends upon where its capital levels are in relation to relevant capital measures. The
well-capitalized category is described above. An institution that is not well capitalized is subject to certain restrictions on brokered
deposits, including restrictions on the rates it can offer on its deposits, generally. To be considered adequately capitalized, an
institution must have the minimum capital ratios described above. Any institution which is neither well capitalized nor adequately
capitalized is considered undercapitalized.
Undercapitalized institutions are subject to certain prompt corrective action requirements, regulatory controls and
restrictions which become more extensive as an institution becomes more severely undercapitalized. Failure by First Financial
Northwest Bank to comply with applicable capital requirements would, if unremedied, result in progressively more severe
restrictions on its activities and lead to enforcement actions, including, but not limited to, the issuance of a capital directive to
ensure the maintenance of required capital levels and, ultimately, the appointment of the FDIC as receiver or conservator. Banking
regulators will take prompt corrective action with respect to depository institutions that do not meet minimum capital
requirements. Additionally, approval of any regulatory application filed for their review may be dependent on compliance with
capital requirements.
At December 31, 2015, First Financial Northwest Bank was categorized as “well capitalized” under the prompt corrective
action regulations of the FDIC. For additional information, see Note 12 of the Notes to Consolidated Financial Statements contained
in Item 8 of this report on Form 10-K.
Federal Home Loan Bank System. First Financial Northwest Bank became a member of the FHLB of Des Moines in
connection with the merger of the FHLB of Seattle and the FHLB of Des Moines in May 2015. The FHLB Des Moines is one of
11 regional FHLBs that administer the home financing credit function of savings institutions. The FHLBs are subject to the
oversight of the FHFA and each FHLB serves as a reserve or central bank for its members within its assigned region. The FHLBs
are funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System and makes loans or
advances to members in accordance with policies and procedures established by the Board of Directors of the FHLB, which are
subject to the oversight of the Federal Housing Finance Board. All advances from the FHLB are required to be fully secured by
sufficient collateral as determined by the FHLB. In addition, all long-term advances are required to provide funds for residential
home financing. See “Business – Deposit Activities and Other Sources of Funds – Borrowings.”
Upon completion of the merger between the FHLB of Seattle and the FHLB of Des Moines, First Financial Northwest
Bank received stock in the FHLB of Des Moines equal to the same number of shares held in the FHLB of Seattle prior to the
merger. Subsequently, the FHLB of Des Moines repurchased excess stock to bring First Financial Northwest Bank's stock ownership
in compliance with the required holding levels, which fluctuates based in part on the level of outstanding FHLB advances. As a
result of the Bank's subsequent payoff of an advance, additional shares of FHLB stock were repurchased to maintain our stock
ownership at the revised required level. At December 31, 2015, the Bank had $6.1 million in FHLB stock that was in compliance
with the holding requirements.
Other than as noted above, during the year ended December 31, 2015, the FHLB of Des Moines did not repurchase any
of its membership stock from First Financial Northwest Bank. The FHLB pays dividends quarterly, and First Financial Northwest
Bank received $69,000 in dividends during the year ended December 31, 2015.
The FHLBs continue to contribute to low- and moderately-priced housing programs through direct loans or interest
subsidies on advances targeted for community investment and low- and moderate-income housing projects. These contributions
have adversely affected the level of FHLB dividends paid and could continue to do so in the future. These contributions could
also have an adverse effect on the value of FHLB stock in the future. A reduction in value of First Financial Northwest Bank’s
FHLB stock may result in a decrease in net income and possibly capital.
Commercial Real Estate Lending Concentrations. The federal banking agencies have issued guidance on sound risk
management practices for concentrations in commercial real estate lending. The particular focus is on exposure to commercial
real estate loans that are dependent on the cash flow from the real estate held as collateral and that are likely to be sensitive to
conditions in the commercial real estate market (as opposed to real estate collateral held as a secondary source of repayment or
as an abundance of caution). The purpose of the guidance is not to limit a bank's commercial real estate lending but to guide banks
in developing risk management practices and capital levels commensurate with the level and nature of real estate concentrations. The
guidance directs the FDIC and other bank regulatory agencies to focus their supervisory resources on institutions that may have
significant commercial real estate loan concentration risk. A bank that has experienced rapid growth in commercial real estate
lending, has notable exposure to a specific type of commercial real estate loan, or is approaching or exceeding the following
supervisory criteria may be identified for further supervisory analysis with respect to real estate concentration risk:
(cid:127) Total reported loans for construction, land development and other land represent 100% or more of the bank's capital; or
(cid:127) Total commercial real estate loans (as defined in the guidance) represent 300% or more of the bank's total regulatory capital
or the outstanding balance of the bank's commercial real estate loan portfolio has increased 50% or more during the prior
36 months.
The guidance provides that the strength of an institution's lending and risk management practices with respect to such
concentrations will be taken into account in supervisory guidance on evaluation of capital adequacy. As of December 31, 2015,
First Financial Northwest Bank's aggregate recorded loan balances for construction, land development and land loans were 33.9%
of regulatory capital. In addition, at December 31, 2015, First Financial Northwest Bank's loans on commercial real estate, as
defined by the FDIC, were 343.6% of regulatory capital.
30
31
Activities and Investments of Insured State-Chartered Financial Institutions. Federal law generally limits the
activities and equity investments of FDIC-insured, state-chartered banks to those that are permissible for national banks. An insured
state bank is not prohibited from, among other things, (1) acquiring or retaining a majority interest in a subsidiary, (2) investing
as a limited partner in a partnership the sole purpose of which is direct or indirect investment in the acquisition, rehabilitation or
new construction of a qualified housing project, provided that such limited partnership investments may not exceed 2% of the
bank’s total assets, (3) acquiring up to 10% of the voting stock of a company that solely provides or reinsures directors’, trustees’
and officers’ liability insurance coverage or bankers’ blanket bond group insurance coverage for insured depository institutions
and (4) acquiring or retaining the voting shares of a depository institution owned by another FDIC-insured institution if certain
requirements are met.
is in default in payment of any assessments due to the FDIC. Dividends on First Financial Northwest Bank’s capital stock may
not be paid in an aggregate amount greater than the aggregate retained earnings of First Financial Northwest Bank, without the
approval of the Director of the DFI.
The amount of dividends actually paid during any one period is strongly affected by First Financial Northwest Bank’s
policy of maintaining a strong capital position. Federal law further provides that no insured depository institution may pay a cash
dividend if it would cause the institution to be “undercapitalized,” as defined in the prompt corrective action regulations. Moreover,
the federal bank regulatory agencies also have the general authority to limit the dividends paid by insured banks if such payments
are deemed to constitute an unsafe and unsound practice.
Washington State has enacted a law regarding financial institution parity. Primarily, the law affords Washington state-
chartered commercial banks the same powers as Washington state-chartered savings banks. In order for a bank to exercise these
powers, it must provide 30 days' notice to the Director of the DFI and the Director must authorize the requested activity. Finally,
the law provides additional flexibility for Washington state-chartered commercial and savings banks with respect to interest rates
on loans and other extensions of credit. Specifically, they may charge the maximum interest rate allowable for loans and other
extensions of credit by federally-chartered financial institutions to Washington residents.
Privacy Standards. The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (“GLBA”) modernized
the financial services industry by establishing a comprehensive framework to permit affiliations among commercial banks,
insurance companies, securities firms and other financial service providers. First Financial Northwest Bank is subject to FDIC
regulations implementing the privacy protection provisions of the GLBA. These regulations require First Financial Northwest
Bank to disclose its privacy policy, including informing consumers of its information sharing practices and informing consumers
of their rights to opt out of certain practices.
Environmental Issues Associated With Real Estate Lending. The Comprehensive Environmental Response,
Compensation and Liability Act (“CERCLA”) is a federal statute that generally imposes strict liability on all prior and present
“owners and operators” of sites containing hazardous waste. However, Congress acted to protect secured creditors by providing
that the term “owner and operator” excludes a person whose ownership is limited to protecting its security interest in the site.
Since the enactment of the CERCLA, this “secured creditor exemption” has been the subject of judicial interpretations that have
left open the possibility that lenders could be liable for cleanup costs on contaminated property that they hold as collateral for a
loan. To the extent that legal uncertainty exists in this area, all creditors, including First Financial Northwest Bank, that have made
loans secured by properties with potential hazardous waste contamination (such as petroleum contamination) could be subject to
liability for cleanup costs that often are substantial and can exceed the value of the collateral property.
Federal Reserve System. The Federal Reserve requires that all depository institutions maintain reserves on transaction
accounts and non-personal time deposits. These reserves may be in the form of cash or deposits with the regional Federal Reserve
Bank. NOW accounts and other types of accounts that permit payments or transfers to third parties fall within the definition of
transaction accounts and are subject to reserve requirements, as are any non-personal time deposits at a savings bank. As of
December 31, 2015, First Financial Northwest Bank’s deposits with the Federal Reserve exceeded its Regulation D reserve
requirements.
Affiliate Transactions. First Financial Northwest and First Financial Northwest Bank are separate and distinct legal
entities. First Financial Northwest (and any non-bank subsidiary of First Financial Northwest) is an affiliate of First Financial
Northwest Bank. Federal laws strictly limit the ability of banks to engage in certain transactions with their affiliates. Transactions
deemed to be a “covered transaction” under Section 23A of the Federal Reserve Act and between a bank and an affiliate are limited
to 10% of the bank’s capital and surplus and, with respect to all affiliates, to an aggregate of 20% of the bank’s capital and surplus.
Further, covered transactions that are loans and extensions of credit generally are required to be secured by eligible collateral in
specified amounts. Federal law also requires that covered transactions and certain other transactions listed in Section 23B of the
Federal Reserve Act between a bank and its affiliates be on terms as favorable to the bank as transactions with nonaffiliates. For
additional information, see "– Regulation and Supervision of First Financial Northwest – Limitations on Transactions with
Affiliates" below.
Community Reinvestment Act. First Financial Northwest Bank is subject to the provisions of the Community
Reinvestment Act of 1977 (“CRA”) that requires the appropriate federal bank regulatory agency to assess a bank’s performance
under the CRA in meeting the credit needs of the community serviced by the bank, including low and moderate income
neighborhoods. The regulatory agency’s assessment of the bank’s record is made available to the public. Further, a bank’s CRA
performance must be considered in connection with a bank’s application, to among other things, establish a new branch office
that will accept deposits, relocate an existing office or merge or consolidate with, or acquire the assets or assume the liabilities of,
a federally regulated financial institution. First Financial Northwest Bank received a “satisfactory” rating during its most recent
examination.
Dividends. The amount of dividends payable by First Financial Northwest Bank to First Financial Northwest depends
upon First Financial Northwest Bank’s earnings and capital position, and is limited by federal and state laws, regulations and
policies. According to Washington law, First Financial Northwest Bank may not declare or pay a cash dividend on its capital stock
if it would cause its net worth to be reduced below (1) the amount required for liquidation accounts or (2) the net worth requirements,
if any, imposed by the Director of the DFI. In addition, dividends may not be declared or paid if First Financial Northwest Bank
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Other Consumer Protection Laws and Regulations. The Dodd-Frank Act established the CFPB and empowered it to
exercise broad regulatory, supervisory and enforcement authority with respect to both new and existing consumer financial
protection laws. First Financial Northwest Bank is subject to consumer protection regulations issued by the CFPB, but as a financial
institution with assets of less than $10 billion, First Financial Northwest Bank is generally subject to supervision and enforcement
by the FDIC and the DFI with respect to its compliance with consumer financial protection laws and CFPB regulations.
First Financial Northwest Bank is subject to a broad array of federal and state consumer protection laws and regulations
that govern almost every aspect of its business relationships with consumers. While not exhaustive, these laws and regulations
include the Truth-in-Lending Act, the Truth in Savings Act, the Electronic Fund Transfer Act, the Expedited Funds Availability
Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Real Estate Settlement Procedures Act, the Home Mortgage
Disclosure Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, the Right to Financial Privacy Act, the Home
Ownership and Equity Protection Act, the Consumer Leasing Act, the Fair Credit Billing Act, the Homeowners Protection Act,
the Check Clearing for the 21st Century Act, laws governing flood insurance, laws governing consumer protections in connection
with the sale of insurance, federal and state laws prohibiting unfair and deceptive business practices and various regulations that
implement some or all of the foregoing. These laws and regulations mandate certain disclosure requirements and regulate the
manner in which financial institutions must deal with customers when taking deposits, making loans, collecting loans and providing
other services. Failure to comply with these laws and regulations can subject First Financial Northwest Bank to various penalties,
including but not limited to, enforcement actions, injunctions, fines, civil liability, criminal penalties, punitive damages and the
loss of certain contractual rights.
Regulation and Supervision of First Financial Northwest
General. First Financial Northwest, as sole shareholder of First Financial Northwest Bank, is a bank holding company
registered with the FRB. In March 2015, First Financial Northwest rescinded the 10(l) election made by First Financial Northwest
Bank under the Home Owners’ Loan Act, and converted from a savings and loan holding company to a bank holding company.
Bank holding companies are subject to comprehensive regulation by the FRB under the Bank Holding Company Act of 1956, as
amended (“BHCA”), and the regulations of the FRB. Accordingly, First Financial Northwest is required to file quarterly reports
with the FRB and provide additional information as the FRB may require. The FRB may examine First Financial Northwest, and
any of its subsidiaries, and charge First Financial Northwest for the cost of the examination. The FRB also has extensive enforcement
authority over bank holding companies, including, among other things, the ability to assess civil money penalties, to issue cease
and desist or removal orders and to require that a holding company divest subsidiaries (including its bank subsidiaries). In general,
enforcement actions may be initiated for violations of law and regulations and unsafe or unsound practices. First Financial
Northwest is also required to file certain reports with, and otherwise comply with the rules and regulations of the SEC.
The Bank Holding Company Act. Under the BHCA, First Financial Northwest is supervised by the FRB. The FRB
has a policy that a bank holding company is required to serve as a source of financial and managerial strength to its subsidiary
bank and may not conduct its operations in an unsafe or unsound manner. In addition, the Dodd-Frank Act and earlier FRB policy
provide that a bank holding company should serve as a source of strength to its subsidiary bank by having the ability to provide
financial assistance to its subsidiary bank during periods of financial distress to the bank. A bank holding company's failure to
meet its obligation to serve as a source of strength to its subsidiary bank will generally be considered by the FRB to be an unsafe
and unsound banking practice or a violation of the FRB’s regulations or both. No regulations have yet been proposed by the FRB
to implement the source of strength doctrine required by the Dodd-Frank Act. First Financial Northwest and any subsidiaries that
33
it may control are considered “affiliates” within the meaning of the Federal Reserve Act, and transactions between First Financial
Northwest Bank and affiliates are subject to numerous restrictions. With some exceptions, First Financial Northwest and its
subsidiaries are prohibited from tying the provision of various services, such as extensions of credit, to other services offered by
First Financial Northwest or by its affiliates.
Acquisitions. The BHCA prohibits a bank holding company, with certain exceptions, from acquiring ownership or
control of more than 5% of the voting shares of any company that is not a bank or bank holding company and from engaging in
activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries. Under the BHCA,
the FRB may approve the ownership of shares by a bank holding company in any company, the activities of which the FRB has
determined to be so closely related to the business of banking or managing or controlling banks as to be a proper incident
thereto. These activities include: operating a savings institution, mortgage company, finance company, credit card company or
factoring company; performing certain data processing operations; providing certain investment and financial advice; underwriting
and acting as an insurance agent for certain types of credit-related insurance; leasing property on a full-payout, non-operating
basis; selling money orders, travelers' checks and U.S. Savings Bonds; real estate and personal property appraising; providing tax
planning and preparation services; and, subject to certain limitations, providing securities brokerage services for customers.
Regulatory Capital Requirements. Bank holding companies, like First Financial Northwest, are subject to capital
adequacy requirements of the FRB under the BHCA and the regulations of the FRB. For a bank holding company with less than
$1.0 billion in assets, the capital guidelines apply on a bank only basis and the FRB expects the holding company’s subsidiary
bank to be well capitalized the prompt corrective action regulations. If First Financial Northwest were subject to regulatory
guidelines for bank holding companies with $1.0 billion or more in assets, at December 31, 2015, First Financial Northwest would
have exceeded all regulatory requirements.
The following table presents the regulatory capital ratios for First Financial Northwest as of December 31, 2015:
Tier I leverage capital (to average assets)
$
Common equity tier I (to risk-weighted assets)
Tier I risk-based capital (to risk-weighted assets)
Total risk-based capital (to risk-weighted assets)
Actual
Amount
Ratio
(Dollars in thousands)
170,877
170,877
170,877
179,551
17.55%
24.69%
24.69%
25.94%
Acquisition of Control. Under the federal Change in Bank Control Act, a notice must be submitted to the FRB if any
person (including a company), or group acting in concert, seeks to acquire “control” of a bank holding company or commercial
bank. An acquisition of control can occur upon the acquisition of 10% or more of the voting stock of a bank holding company or
commercial bank or as otherwise defined by the FRB. Under the Change in Bank Control Act, the FRB has 60 days from the filing
of a complete notice to act, taking into consideration certain factors, including the financial and managerial resources of the acquirer
and the anti-trust effects of the acquisition. Any company that so acquires control would then be subject to regulation as a bank
holding company.
Restrictions on Dividends. First Financial Northwest’s ability to declare and pay dividends may depend in part on
dividends received from First Financial Northwest Bank. Under Washington State law, First Financial Northwest is prohibited
from paying a dividend if, as a result of its payment, it would be unable to pay its debts as they become due in the normal course
of business or if First Financial Northwest's total liabilities would exceed its total assets. For additional information, see Item 1.A.
“Risk Factors – Certain regulatory restrictions are imposed on us and lack of compliance could result in monetary penalties and/
or additional regulatory actions.”
Stock Repurchases. A bank holding company, except for certain “well-capitalized” and highly rated bank holding
companies, is required to give the FRB prior written notice of any purchase or redemption of its outstanding equity securities if
the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or
redemptions during the preceding twelve months, is equal to 10% or more of its consolidated net worth. The FRB may disapprove
such a purchase or redemption if it determines that the proposal would constitute an unsafe or unsound practice or would violate
any law, regulation, FRB order or any condition imposed by, or written agreement with, the FRB. During the year ended
December 31, 2015, First Financial Northwest repurchased 1,521,817 shares of its common stock.
Limitations on Transactions with Affiliates. Transactions between banks and any affiliate are governed by Sections
23A and 23B of the FRB Act. An affiliate of a bank is any company or entity that controls, is controlled by or is under common
control with the Bank. In a holding company context, the holding company and any companies that are controlled by such holding
companies are affiliates of the Bank. Generally, Section 23A limits the extent to which the bank or its subsidiaries may engage in
“covered transactions” with any one affiliate to an amount equal to 10% of the institution’s capital stock and surplus and contain
an aggregate limit on all such transactions with all affiliates to an amount equal to 20% of such capital stock and surplus. Section
23B applies to “covered transactions” as well as certain other transactions and requires that all transactions be on terms substantially
the same, or at least as favorable, to the bank as those provided to a nonaffiliate. The term “covered transaction” includes the
making of loans to, purchase of assets from and issuance of a guarantee to an affiliate and similar transactions.
In addition, Sections 22(g) and (h) of the FRB Act place restrictions on loans to executive officers, directors and principal
shareholders. Under Section 22(h), loans to a director, executive officer or greater than 10% shareholder of a bank and certain
affiliated interests, may not exceed, together with all other outstanding loans to such person and affiliated interests, the bank’s
loans to one borrower limit (generally equal to 15% of the institution’s unimpaired capital and surplus). Section 22(h) also requires
that loans to directors, executive officers and principal shareholders be made on terms substantially the same as offered in
comparable transactions to other persons unless the loans are made pursuant to a benefit or compensation program that (1) is
widely available to employees of the institution and (2) does not give preference to any director, executive officer or principal
shareholder, or certain affiliated interests, over other employees of the bank. Section 22(h) also requires prior board approval for
certain loans. In addition, the aggregate amount of extensions of credit by a bank to all insiders cannot exceed the bank’s unimpaired
capital and surplus. Furthermore, Section 22(g) places additional restrictions on loans to executive officers. At December 31, 2015,
First Financial Northwest Bank was in compliance with these restrictions.
Federal Securities Laws. First Financial Northwest’s common stock is registered with the SEC under Section 12(b) of
the Securities Exchange Act of 1934, as amended ("Exchange Act"). We are subject to information, proxy solicitation, insider
trading restrictions and other requirements under the Exchange Act.
The Dodd-Frank Act On July 21, 2010, the Dodd-Frank Act was signed into law. The Dodd-Frank-Act imposes new
restrictions and an expanded framework of regulatory oversight for financial institutions, including depository institutions and
implements new capital regulations that First Financial Northwest and First Financial Northwest Bank will become subject to and
that are discussed above under the section entitled “- Regulation and Supervision of First Financial Northwest Bank - Capital
Requirements.”
In addition, among other changes, the Dodd-Frank Act requires public companies, like First Financial Northwest, to (i)
provide their shareholders with a non-binding vote (a) at least once every three years on the compensation paid to executive officers
and (b) at least once every six years on whether they should have a “say on pay” vote every one, two or three years; (ii) have a
separate, non-binding shareholder vote regarding golden parachutes for named executive officers when a shareholder vote takes
place on mergers, acquisitions, dispositions or other transactions that would trigger the parachute payments; (iii) provide disclosure
in annual proxy materials concerning the relationship between the executive compensation paid and the financial performance of
the issuer; and (iv) amend Item 402 of Regulation S-K to require companies to disclose the ratio of the Chief Executive Officer's
annual total compensation to the median annual total compensation of all other employees. For certain of these changes, the
implementing regulations have not been promulgated, so the full impact of the Dodd-Frank Act on public companies cannot be
determined at this time.
The federal banking agencies have issued final rules to implement the provisions of Section 619 of the Dodd Frank Act
commonly referred to as the Volcker Rule. The regulations contain prohibitions and restrictions on the ability of financial institutions
holding companies and their affiliates to engage in proprietary trading and to hold certain interests in, or to have certain relationships
with, various types of investment funds, including hedge funds and private equity funds. The regulations became effective on
April 1, 2014 with full compliance phased in over a period that ended on July 21, 2015. Management believes First Financial
Northwest's investment portfolio and investment strategies are in compliance with the various provisions of the Volcker Rule
regulations.
Sarbanes-Oxley Act of 2002. As a public company that files periodic reports with the SEC under the Exchange Act,
First Financial Northwest, is subject to the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley Act"), which addresses, among other
issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate
information. The Sarbanes-Oxley Act represents significant federal involvement in matters traditionally left to state regulatory
systems, such as the regulation of the accounting profession, and to state corporate law, such as the relationship between a board
of directors and management and between a board of directors and its committees. Our policies and procedures have been updated
to comply with the requirements of the Sarbanes-Oxley Act.
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35
Taxation
Federal Taxation
General. First Financial Northwest and First Financial Northwest Bank are subject to federal income taxation in the same
general manner as other corporations, with some exceptions discussed below. The following discussion of federal taxation is
intended only to summarize certain pertinent federal income tax matters and is not a comprehensive description of the tax rules
applicable to First Financial Northwest or First Financial Northwest Bank. The tax years still open for review by the Internal
Revenue Service are 2012 through 2015.
First Financial Northwest files a consolidated federal income tax return with First Financial Northwest Bank. Accordingly,
any cash distributions made by First Financial Northwest to its shareholders are considered to be taxable dividends and not as a
non-taxable return of capital to shareholders for federal and state tax purposes.
Method of Accounting. For federal income tax purposes, First Financial Northwest currently reports its income and
expenses on the accrual method of accounting and uses a fiscal year ending on December 31 for filing its federal income tax return.
Minimum Tax. The Internal Revenue Code imposes an alternative minimum tax at a rate of 20% on a base of regular
taxable income plus certain tax preferences, called alternative minimum taxable income. The alternative minimum tax is payable
to the extent such alternative minimum taxable income is in excess of an exemption amount. Net operating losses can offset no
more than 90% of alternative minimum taxable income. Certain payments of alternative minimum tax may be used as credits
against regular tax liabilities in future years. The Company's alternative minimum tax credit carryforward at December 31, 2015
totaled $1.4 million, with no expiration date.
Net Operating Loss Carryovers. A financial institution may carry back net operating losses to the preceding two taxable
years and forward to the succeeding 20 taxable years. This provision applies to losses incurred in taxable years beginning after
August 2009. The Company had no net operating loss carryforwards at December 31, 2015.
Corporate Dividends-Received Deduction. First Financial Northwest may eliminate from its income dividends received
from First Financial Northwest Bank as a wholly-owned subsidiary of First Financial Northwest that files a consolidated return
with First Financial Northwest Bank. The corporate dividends-received deduction is 100%, or 80%, in the case of dividends
received from corporations with which a corporate recipient does not file a consolidated tax return, depending on the level of stock
ownership of the payer of the dividend. Corporations that own less than 20% of the stock of a corporation distributing a dividend
may deduct 70% of dividends received or accrued on their behalf.
For additional information regarding our federal income taxes, see Note 13 of the Notes to Consolidated Financial
Statements contained in Item 8.
Washington State Taxation
First Financial Northwest and its subsidiaries are subject to a business and occupation tax imposed under Washington
state law at the rate of 1.50% of gross receipts. In addition, various municipalities also assess business and occupation taxes at
differing rates. Interest received on loans secured by first lien mortgages or deeds of trust on residential properties, rental income
from properties, and certain investment securities are exempt from this tax. An audit by the Washington State Department of
Revenue was completed for the years 2010 through 2013, resulting in no material tax revisions.
Executive Officers of First Financial Northwest, Inc.
The business experience for at least the past five years for the executive officers of First Financial Northwest and its
primary subsidiary First Financial Northwest Bank is set forth below.
, age 60, has served as President and Chief Executive Officer of First Financial Northwest and First
Financial Diversified since September 2013, and served as President, Chief Executive Officer, Director of First Financial Northwest
Bank since September 2012, and Director of First Financial Northwest and First Financial Diversified since December 2012. He
previously served as President, Chief Executive Officer and Director of Frontier Bank, F.S.B., located in Palm Desert, California,
and its holding company, Western Community Bancshares, Inc. from 2010 to 2012. From 2007 to 2010, Mr. Kiley was a Director
at California General Bank. From 2009 to 2011, Mr. Kiley served as the President, Chief Executive Officer and Director of Imperial
Capital Bank, located in San Diego, California and its holding company, Imperial Capital Bancorp, Inc. Mr. Kiley has over 20
36
years of executive experience at banks, thrifts and their holding companies that included serving as president, chief executive
officer, chief financial officer, and director. Mr. Kiley holds a Bachelor of Science degree in Business Administration (Accounting)
from California State University, Chico and is a former California certified public accountant. Mr. Kiley is an active member of
the Renton Rotary Club and is Chairman of the Board of the Renton Chamber of Commerce.
, age 52, has served as Chief Operating Officer of the Bank since July 2013, Chief Financial Officer
of First Financial Northwest, First Financial Diversified, and the Bank since August 2013, and Chief Operating Officer of First
Financial Northwest since September 2013. He was appointed as a director of First Financial Northwest and First Financial
Northwest Bank effective September 2013. Mr. Jacobson served as a consultant to First Financial Northwest from April 2010 to
April 2012, and from that time until July 2013, served as a mortgage loan originator in Palm Desert, California. Prior to that, he
had been employed by Horizon Financial Corp, and Horizon Bank, Bellingham, Washington since 1987, and had served as President,
Chief Executive Officer and a director of Horizon Financial Corp and Horizon Bank from 2008 to 2010. Mr. Jacobson also served
as Chief Financial Officer of Horizon Financial Corp and Horizon Bank from March 2000 until October 2008. Between 1985 and
2008, Mr. Jacobson served in several other positions at Horizon Financial Corp. and Horizon Bank, and spent two years as a
Washington State licensed real estate appraiser from 1992 to 1994. Mr. Jacobson received his Bachelor’s degree in Business
Administration (Finance) from the University of Washington. In addition, Mr. Jacobson graduated with honors from the American
Banker Association’s National School of Banking. Mr. Jacobson is a past president of the Whatcom County North Rotary club
and has served on the boards of his church, the United Way, Boys and Girls Club, and Junior Achievement.
, age 70, was Senior Vice President and Chief Credit Officer of First Financial Northwest Bank
and First Financial Diversified prior to his retirement on January 1, 2016. Prior to joining First Financial Northwest Bank in June
2010, Mr. Robinson was Senior Vice President, Senior Credit Approval Officer at East West Bank, the successor to United
Commercial Bank, from 2000 to May 2010. Mr. Robinson has over 45 years of banking experience. During his banking career,
Mr. Robinson has held positions such as Chief Credit Officer, Manager of Special Credits and Senior Vice President and Manager
of Commercial Lending at various banks.
age 61, is Senior Vice President and Chief Credit Officer of First Financial Northwest Bank as of
January 6, 2016. Mr. DeRitis previously served as First Vice President, Credit Administration since joining First Financial Northwest
Bank in April 2015. Prior to that, he was the Chief Credit Officer at Eastside Commercial Bank, Bellevue, Washington, from
March 2013 to March 2015. From October 2012 until February 2013, Mr. DeRitis was employed as Risk/Lending Consultant by
Impact Capital, a non-profit Washington state community based lender. From January 1990 until July 2012, he was employed by
KeyBank in a variety of credit related positions and served as Senior Vice President in charge of credit administration and approval
for KeyBank's Western Community Development Banking division (encompassing six states, including Washington) prior to his
departure. Mr. DeRitis received his Bachelor of Science degree from Santa Clara University and his Master's in Business
Administration from the University of Washington. In addition, he holds a professional certificate from Pacific Coast Banking
School. He is an active volunteer in the community, serving on the Board of Trustees for Plymouth Housing Group in Seattle,
Washington.
, age 51, is Senior Vice President and Chief Lending Officer of First Financial Northwest Bank. Prior to his
promotion in October 2012, Mr. Soh served as Vice President and Loan Production Manager of First Financial Northwest Bank,
a position he held since August 2010. Prior to that, he was First Vice President and Commercial Lending Manager at East West
Bank. In 1998, Mr. Soh was a founding member of Pacifica Bank in Bellevue, Washington that merged with United Commercial
Bank in 2005, later becoming East West Bank in 2009. Mr. Soh has over 27 years of experience in commercial banking.
, age 35, was appointed Chief Risk Officer and Senior Vice President of First Financial Northwest
Bank in November 2013. Mr. Clariza previously served as Vice President and Risk Management Officer since May 2008, and
prior to that, as Assistant Vice President and Compliance Officer, as well as serving in various other compliance and internal audit
roles since he began with the Bank in 2003. Mr. Clariza is a graduate of the University of Washington where he received his
Bachelor of Arts degree in Business Administration, Finance, and is a certified regulatory Compliance Officer. Mr. Clariza is a
member of the Washington Bankers' Association Education Committee and has been involved with the Seattle Children's Hospital
Guild Association as a Volunteer Compliance Manager.
, age 56, was appointed Chief Deposit Officer of First Financial Northwest Bank in March 2014 and
Senior Vice President in July 2014. Ms. Harrison served as Senior Vice President and Director of Retail Banking at Peoples Bank
in Bellingham, Washington from 2010 until 2014. Prior to that, she served as Vice President of Rainier Pacific Bank, Tacoma,
Washington, from 1994 until 2010. Ms. Harrison received a Bachelor of Arts degree in Business Administration from St Mary's
College in Moraga, California. Ms. Harrison has served on the boards of Rainier Pacific Foundation, First Place for Children, and
Gig Harbor Rotary Foundation, and currently serves on the board of Renton Salvation Army.
37
, age 50, is Vice President and Controller of First Financial Northwest and First Financial Northwest
Bank. Prior to joining First Financial Northwest in October 2013, she was employed by Realty in Motion, LLC, a holding company
for several mortgage default service companies in Bellevue, Washington. From 1999 until joining First Financial Northwest, Ms.
Huestis held key accounting positions at affiliated companies within Reality in Motion, with her most recent position being that
of Controller. Ms. Huestis received a Bachelor of Science degree in Accounting from Central Washington University. She is a
certified public accountant and is a member of the American Institute of Certified Public Accountants.
Although management believes it has implemented effective asset and liability management strategies to reduce the
potential effects of changes in interest rates on our results of operations, any substantial, unexpected or prolonged change in market
interest rates could have a material adverse effect on our financial condition and results of operations. Also, our interest rate risk
modeling techniques and assumptions likely may not fully predict or capture the impact of actual interest rate changes on our
balance sheet. See Item 7., “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Asset
and Liability Management and Market Risk,” of this Form 10-K.
Item 1A. Risk Factors.
An investment in our common stock is subject to risks inherent in our business. Before making an investment decision,
you should carefully consider the risks and uncertainties described below together with all of the other information included in
this report and our other filings with the SEC. In addition to the risks and uncertainties described below, other risks and uncertainties
not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business,
financial condition, capital levels, cash flows, liquidity, results of operations and prospects. The risks discussed below also include
forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking
statements. The market price of our common stock could decline significantly due to any of these identified or other risks and you
could lose some or all of your investment. This report is qualified in its entirety by these risk factors.
Our business may be adversely affected by downturns in the national economy and in the economies in our market areas.
Substantially all of our loans are to businesses and individuals in the state of Washington. A decline in the economies of
the four counties which we consider to be our primary market area could have a material adverse effect on our business, financial
condition, results of operations, and prospects.
While real estate values and unemployment rates have recently improved, a prolonged slow economic recovery or a
deterioration in economic conditions in the market areas we serve could result in the following consequences, any of which could
have a materially adverse impact on our business, financial condition, results of operations:
loan delinquencies, problem assets and foreclosures may increase;
(cid:127)
(cid:127) we may increase our allowance for loan losses;
(cid:127)
(cid:127)
demand for our products and services may decline resulting in a decrease in our total loans or assets;
collateral for loans, especially real estate, may decline in value, exposing us to increased risk of loss on existing
loans, reducing customers’ borrowing power, and reducing the value of assets and collateral associated with
existing loans;
the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us;
and
the amount of our low-cost or noninterest-bearing deposits may decrease and the composition of our deposits
may be adversely affected.
(cid:127)
(cid:127)
A decline in local economic conditions may have a greater effect on our earnings and capital than on the earnings and
capital of larger financial institutions whose real estate loan portfolios are geographically diverse. If we are required to liquidate
a significant amount of collateral during a period of reduced real estate values, our financial condition and profitability could be
adversely affected.
Assumptions used in our interest rate risk management efforts, if proven incorrect, could have an adverse impact on our
income and capital levels.
Our earnings and cash flows are largely dependent upon our net interest income. Interest rates are highly sensitive to
many factors that are beyond our control, including general economic conditions and policies of various governmental and
regulatory agencies, particularly the Federal Reserve. Changes in monetary policy, including changes in interest rates, could
influence not only the interest we receive on loans and investments and the amount of interest we pay on deposits and borrowings,
but these changes could also affect (i) our ability to originate loans and obtain deposits, (ii) the fair value of our financial assets
and liabilities and (iii) the average duration of our mortgage-backed securities portfolio and other interest-earning assets. If the
interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other
investments, our net interest income, and therefore earnings, could be adversely affected. Earnings could also be adversely affected
if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other
borrowings.
A return of recessionary conditions could result in increases in our level of non-performing loans and/or reduce demand
for our products and services, which could have an adverse effect on our results of operations.
Economic conditions have improved since the end of the economic recession that officially ended in June, 2009, however,
economic growth has been slow and uneven, unemployment remains high and concerns still exist over the federal deficit and
government spending, which have all contributed to diminished expectations for the economy. A return of recessionary conditions
and/or negative developments in the domestic and international credit markets may significantly affect the markets in which we
do business, the value of our loans and investments, and our ongoing operations, costs and profitability. Declines in real estate
values and sales volumes and high unemployment levels may result in higher than expected loan delinquencies and a decline in
demand for our products and services. These negative events may cause us to incur losses and may adversely affect our capital,
liquidity, and financial condition.
Furthermore, the Board of Governors of the Federal Reserve System, in an attempt to help the economy, has, among
other things, kept interest rates low through its targeted federal funds rate and the purchase of U.S. Treasury and mortgage-backed
securities. The Federal Reserve Board has recently increased the federal funds rate by 25 basis points and indicated further
increases in the federal funds rate would occur in 2016. As the federal funds rate increases, market interest rates would likely rise,
which may negatively affect the housing markets and the U.S. economic recovery. In addition, deflationary pressures, while
possibly lowering our operating costs, could have a significant negative effect on our borrowers, especially our business borrowers,
and the values of underlying collateral securing loans, which could negatively affect our financial performance.
Our construction/land development loans are based upon estimates of costs and the value of the completed project.
We make construction/land development loans to contractors and builders primarily to finance the construction of single
and multi-family homes, subdivisions, as well as commercial properties. We originate these loans whether or not the collateral
property underlying the loan is under contract for sale. At December 31, 2015, construction/land development loans totaled $86.6
million, or 11.6% of our total loan portfolio, an increase of $35.5 million or 69.5% since December 31, 2014. At December 31,
2015, $25.6 million were multifamily construction loans and $52.2 million were one-to-four family construction loans. Land loans,
which are loans made with land as security, totaled $8.8 million, or 1.2% of our total loan portfolio at December 31, 2015. Land
loans include raw land and land acquisition and development loans. In addition, at December 31, 2015, the construction/land
development loan totals excluded $21.1 million of multifamily "rollover" construction loans because these loans are structured to
convert to permanent financing when construction is complete.
Construction/land development lending generally involves additional risks because funds are advanced upon estimates
of costs in relation to values associated with the completed project. Construction/land development lending involves additional
risks when compared with permanent residential lending because funds are advanced upon the collateral for the project based on
an estimate of costs that will produce a future value at completion. Because of the uncertainties inherent in estimating construction
costs, as well as the market value of the completed project and the effects of governmental regulation on real property, it is relatively
difficult to evaluate accurately the total funds required to complete a project and the completed project loan-to-value ratio. Changes
in the demand, such as for new housing and higher than anticipated building costs, may cause actual results to vary significantly
from those estimated. For these reasons, this type of lending also typically involves higher loan principal amounts and is often
concentrated with a small number of builders. A downturn in housing, or the real estate market, could increase loan delinquencies,
defaults and foreclosures, and significantly impair the value of our collateral and our ability to sell the collateral upon foreclosure.
Some of our builders have more than one loan outstanding with us and also have residential mortgage loans for rental properties
with us. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly
greater risk of loss.
In addition, during the term of most of our construction loans, no payment from the borrower is required since the
accumulated interest is added to the principal of the loan through an interest reserve. As a result, these loans often involve the
disbursement of funds with repayment substantially dependent on the success of the ultimate project and the ability of the borrower
to sell or lease the property or obtain permanent take-out financing, rather than the ability of the borrower or guarantor to repay
principal and interest. If our appraisal of the value of a completed project proves to be overstated, we may have inadequate security
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for the repayment of the loan upon completion of construction of the project and may incur a loss. Because construction loans
require active monitoring of the building process, including cost comparisons and on-site inspections, these loans are more difficult
and costly to monitor. Increases in market rates of interest may have a more pronounced effect on construction loans by rapidly
increasing the end-purchasers' borrowing costs, thereby reducing the overall demand for the project. Properties under construction
are often difficult to sell and typically must be completed in order to be successfully sold which also complicates the process of
working out problem construction loans. This may require us to advance additional funds and/or contract with another builder to
complete construction. Furthermore, in the case of speculative construction loans, there is the added risk associated with identifying
an end-purchaser for the finished project. At December 31, 2015, $77.8 million of our construction/land development loans were
for speculative construction loans and all of our construction/land development loans were classified as performing.
Our level of commercial and multifamily real estate loans may expose us to increased lending risks.
While commercial and multifamily real estate lending may potentially be more profitable than single-family residential
lending, it is generally more sensitive to regional and local economic conditions, making loss levels more difficult to predict.
Collateral evaluation and financial statement analysis in these types of loans requires a more detailed analysis at the time of loan
underwriting and on an ongoing basis. At December 31, 2015, we had $252.5 million of commercial real estate loans, representing
33.6% of our total loan portfolio and $143.9 million of multifamily loans, representing 19.1% of our total loan portfolio. These
loans typically involve higher principal amounts than other types of loans and some of our commercial borrowers have more than
one loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship can expose
us to a significantly greater risk of loss compared to an adverse development with respect to a one-to-four family residential loan.
Repayment on these loans is dependent upon income generated, or expected to be generated, by the property securing the loan in
amounts sufficient to cover operating expenses and debt service that may be adversely affected by changes in the economy or
local market conditions. For example, if the cash flow from the borrower’s project is reduced as a result of leases not being obtained
or renewed, the borrower’s ability to repay the loan may be impaired. Commercial and multifamily loans also expose a lender to
greater credit risk than loans secured by one-to-four family residential real estate because the collateral securing these loans
typically cannot be sold as easily as residential real estate. In addition, many of our commercial and multifamily real estate loans
are not fully amortizing and contain large balloon payments upon maturity. Such balloon payments may require the borrower to
either sell or refinance the underlying property in order to make the payment that may increase the risk of default or non-payment.
A secondary market for most types of commercial and multifamily real estate loans is not readily available, so we have
less opportunity to mitigate credit risk by selling part or all of our interest in these loans. As a result of these characteristics, if we
foreclose on a commercial or multifamily real estate loan, our holding period for the collateral typically is longer than for one-to-
four family residential loans because there are fewer potential purchasers of the collateral. Accordingly, charge-offs on commercial
real estate loans may be larger on a per loan basis than those incurred with our residential or consumer loan portfolios.
The level of our commercial real estate loan portfolio may subject us to additional regulatory scrutiny.
The FDIC, the Federal Reserve and the Office of the Comptroller of the Currency have promulgated joint guidance on
sound risk management practices for financial institutions with concentrations in commercial real estate lending. Under this
guidance, a financial institution that, like us, is actively involved in commercial real estate lending should perform a risk assessment
to identify concentrations. A financial institution may have a concentration in commercial real estate lending if, among other
factors (i) total reported loans for construction, land development, and other land represent 100% or more of total capital, or (ii)
total reported loans secured by multi-family and non-farm residential properties, loans for construction, land development and
other land, and loans otherwise sensitive to the general commercial real estate market, including loans to commercial real estate
related entities, represent 300% or more of total capital. Based on the FDIC criteria, the Bank has a concentration in commercial
real estate lending as total loans for multifamily, non-farm/non-residential, construction, land development and other land
represented 343.6% of total risk-based capital at December 31, 2015. The particular focus of the guidance is on exposure to
commercial real estate loans that are dependent on the cash flow from the real estate held as collateral and that are likely to be at
greater risk to conditions in the commercial real estate market (as opposed to real estate collateral held as a secondary source of
repayment or as an abundance of caution). The purpose of the guidance is to guide banks in developing risk management practices
and capital levels commensurate with the level and nature of real estate concentrations. The guidance states that management
should employ heightened risk management practices including board and management oversight and strategic planning,
development of underwriting standards, risk assessment and monitoring through market analysis and stress testing.
Our non-owner occupied real estate loans may expose us to increased credit risk.
At December 31, 2015, $106.5 million, or 42.0% of our one-to-four family residential loan portfolio and 14.2% of our
total loan portfolio, consisted of loans secured by non-owner occupied residential properties. At December 31, 2015, all of our
non-owner occupied one-to-four family residential loans were performing in accordance with their repayment terms. Loans secured
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by non-owner occupied properties generally expose a lender to greater risk of non-payment and loss than loans secured by owner
occupied properties because repayment of such loans depend primarily on the tenant’s continuing ability to pay rent to the property
owner, who is our borrower, or, if the property owner is unable to find a tenant, the property owner’s ability to repay the loan
without the benefit of a rental income stream. In addition, the physical condition of non-owner occupied properties is often below
that of owner occupied properties due to lenient property maintenance standards that negatively impact the value of the collateral
properties. Furthermore, some of our non-owner occupied residential loan borrowers have more than one loan outstanding with
us. At December 31, 2015, we had 46 non-owner occupied residential loan relationships with an outstanding balance over $500,000
and an aggregate balance of $81.1 million. Consequently, an adverse development with respect to one credit relationship may
expose us to a greater risk of loss compared to an adverse development with respect to an owner occupied residential mortgage
loan.
Our business may be adversely affected by credit risk associated with residential property.
At December 31, 2015, $253.8 million, or 33.8% of our total loan portfolio, was secured by first liens on one-to-four
family residential loans. In addition, at December 31, 2015, our home equity lines of credit totaled $5.1 million. These types of
loans are generally sensitive to regional and local economic conditions that significantly impact the ability of borrowers to meet
their loan payment obligations, making loss levels difficult to predict. A decline in residential real estate values resulting from a
downturn in the Washington housing market may reduce the value of the real estate collateral securing these types of loans and
increase our risk of loss if borrowers default on their loans. Recessionary conditions or declines in the volume of real estate sales
and/or the sales prices coupled with elevated unemployment rates may result in higher than expected loan delinquencies or problem
assets, and a decline in demand for our products and services. These potential negative events may cause us to incur losses,
adversely affect our capital and liquidity and damage our financial condition and business operations.
High loan-to-value ratios on a portion of our residential mortgage loan portfolio exposes us to greater risk of loss.
Some of our residential mortgage loans are secured by liens on mortgage properties in which the borrowers have little
or no equity because of a decline in the value of the property. Residential loans with high loan-to-value ratios will be more sensitive
to declining property values than those with lower loan-to-value ratios and, therefore, may experience a higher incidence of default
and severity of losses. In addition, if the borrowers sell their homes, such borrowers may be unable to repay their loans in full
from the sale. As a result, these loans may experience higher rates of delinquencies, defaults and losses.
To meet our growth objectives we may originate or purchase loans outside of our market area which could affect the level
of our net interest margin and nonperforming loans.
In order to achieve our desired loan portfolio growth, we anticipate that we may, from time to time, opportunistically
purchase loans outside of our market area either individually, through participations, or in bulk or “pools”. We will perform certain
due diligence procedures and may re-underwrite these loans to our underwriting standards prior to purchase, and anticipate acquiring
loans subject to customary limited indemnities, however, we may be exposed to a greater risk of loss as we acquire loans of a type
or in geographic areas where management may not have substantial prior experience and which may be more difficult for us to
monitor. Further, when determining the purchase price we are willing to pay to acquire loans, management will make certain
assumptions about, among other things, how borrowers will prepay their loans, the real estate market and our ability to collect
loans successfully and, if necessary, to dispose of any real estate that may be acquired through foreclosure. To the extent that our
underlying assumptions prove to be inaccurate or the basis for those assumptions change (such as an unanticipated decline in the
real estate market), the purchase price paid may prove to have been excessive, resulting in a lower yield or a loss of some or all
of the loan principal. For example, if we purchase “pools” of loans at a premium and some of the loans are prepaid before we
anticipate, we will earn less interest income on the acquired loans than expected. Our success in increasing our loan portfolio
through loan purchases will depend on our ability to price the loans properly and on general economic conditions in the geographic
areas where the underlying properties or collateral for the loans acquired are located. Inaccurate estimates or declines in economic
conditions or real estate values in the markets where we purchase loans could significantly adversely affect the level of our
nonperforming loans and our results of operations.
Our results of operations, liquidity and cash flows are subject to interest rate risk.
Our earnings and cash flows are largely dependent upon net interest income. Interest rates are highly sensitive to many
factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory
agencies and, in particular, the Federal Reserve. Changes in monetary policy, including changes in interest rates, could influence
not only the interest we receive on loans and investments and the amount of interest we pay on deposits and borrowings, but these
changes could also affect (i) our ability to originate loans and obtain deposits, (ii) the fair value of our financial assets and liabilities
and (iii) the average duration of our mortgage-backed securities portfolio and other interest-earning assets. If the interest rates
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paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, our
net interest income, and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest
rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings.
In addition, bank regulators periodically review our OREO and may require us to recognize additional write-downs. Any
increase in our write-downs, as required by such regulators, may have a material adverse effect on our financial condition, results
of operations, and capital.
A prolonged period of exceptionally low market interest rates, such as we are currently experiencing limits our ability to
lower our interest expense, while the average yield on our loan portfolio may continue to decrease as our loans reprice or are
originated at these low market rates, which could have an adverse effect on our results of operations. Furthermore, a portion of
our adjustable-rate loans have interest rate floors below which the loan's contractual interest rate may not adjust. At December 31,
2015, 37.7% of our total loans were comprised of adjustable-rate loans. At that date, $136.8 million, or 48.2%, of these loans with
an average interest rate of 4.5% were at their floor interest rate. The inability of our loans to adjust downward can contribute to
increased income in periods of declining interest rates, although this result is subject to the risks that borrowers may refinance
these loans during periods of declining interest rates. Also, when loans are at their respective floor, there is a further risk that our
interest income may not increase as rapidly as our cost of funds during periods of increasing interest rates and could have a material
adverse effect on our results of operations.
We principally manage interest rate risk by managing our volume and mix of our earning assets and funding liabilities.
In a changing interest rate environment, we may not be able to manage this risk effectively as our interest rate risk modeling
techniques and assumptions may not fully predict or capture the impact of actual interest rate changes on our balance sheet or
projected operating results. If we are unable to manage interest rate risk effectively, our business, financial condition and results
of operations could be materially harmed.
Our allowance for loan losses may prove to be insufficient to absorb losses in our loan portfolio.
While conditions in the housing and real estate markets and economic conditions in our market areas have recently
improved, if slow economic conditions return or real estate values and sales deteriorate, we may experience higher delinquencies
and credit losses. As a result, we could be required to increase our provision for loan losses and to charge-off additional loans in
the future. If charge-offs in future periods exceed the ALLL, we may need additional provisions to replenish the ALLL. In addition,
bank regulatory agencies periodically review our ALLL and may require an increase in the provision for possible loan losses or
the recognition of further loan charge-offs, based on judgments different than those of management.
The determination of the appropriate level of the ALLL inherently involves a high degree of subjectivity and requires us
to make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our
borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. In determining
the amount of the ALLL, we review our loans and the loss and delinquency experience and evaluate economic conditions and
make significant estimates of current credit risks and future trends, all of which may undergo material changes. If our estimates
are incorrect, the ALLL may not be sufficient to cover losses inherent in our loan portfolio, resulting in the need for increases in
our provision for loan losses. Deterioration in economic conditions, new information regarding existing loans, identification of
additional problem loans or relationships, and other factors, both within and outside of our control, may increase our loan charge-
offs and/or may otherwise require an increase in the ALLL. Any increases in the provision for loan losses will result in a decrease
in net income and may have a material adverse effect on our financial condition, results of operations, and capital.
In addition, proposed regulatory changes relating to the ALLL, including, but not limited to, the Financial Accounting
Standards Board's ("FASB") proposed Current Expected Credit Losses Model could significantly impact the calculation and timing
of amounts required to be included in the ALLL to cover for expected losses over the entire life of a loan.
If our investments in other real estate owned are not properly valued and managed our earnings could be reduced.
Our inventory of OREO property reduced from $9.3 million at December 31, 2014 to $3.7 million at December 31, 2015,
however, we continue to foreclose on loans in our portfolio. We use current property valuations in the form of appraisals when a
loan has been foreclosed and the property taken in as OREO. Subsequently, an evaluation is performed by our experienced lending
staff during the asset's holding period. Our net book value in the loan at the time of foreclosure and thereafter is compared to the
updated market value of the foreclosed property less estimated selling costs (fair value). A charge-off is recorded for any excess
in the asset's net book value over its fair value. If our valuation process is incorrect, the fair value of our investments in OREO
may not be sufficient to recover our net book value in such assets, resulting in the need for additional write-downs. During 2015,
we had $41,000 in valuation write-downs to our inventory of OREO properties. In addition, we may incur significant property
management and legal expenses related to our OREO. Additional material write-downs or expenses relating to our OREO could
have a material adverse effect on our financial condition and results of operations.
We may incur losses on our securities portfolio as a result of changes in interest rates.
Our securities portfolio may be affected by fluctuations in market value, potentially reducing accumulated other
comprehensive income and/or earnings. Fluctuations in market value may be caused by changes in market interest rates, lower
market prices for securities and limited investor demand. Our securities portfolio is evaluated for other-than-temporary impairment.
If this evaluation shows impairment to the actual or projected cash flows associated with one or more securities, a potential loss
to earnings may occur. Changes in interest rates can also have an adverse effect on our financial condition, as our available-for-
sale securities are reported at their estimated fair value, and therefore are impacted by fluctuations in interest rates. We increase
or decrease our stockholders' equity by the amount of change in the estimated fair value of the available-for-sale securities, net of
taxes. There can be no assurance that the declines in market value will not result in other-than-temporary impairments of these
assets, and would lead to accounting charges that could have a material adverse effect on our net income and capital levels.
Liquidity risk could impair our ability to fund operations and jeopardize our financial condition
Liquidity is essential to our business, therefore, the inability to obtain adequate funding may negatively affect growth
and, consequently, our earnings capability and capital levels. An inability to raise funds through deposits, borrowings, the sale of
loans or investment securities, or other sources could have a substantial negative effect on our liquidity. Our access to funding
sources in amounts adequate to finance our activities on terms that are acceptable to us could be impaired by factors that affect
us specifically or the financial services industry or economy in general. Factors that could detrimentally impact our access to
liquidity sources include a decrease in the level of our business activity as a result of a downturn in the Washington markets in
which our loans are concentrated, negative operating results, or adverse regulatory action against us. Our ability to borrow could
also be impaired by factors that are not specific to us, such as a disruption in the financial markets or negative views and expectations
about the prospects for the financial services industry and the continued uncertainty in credit markets. In particular, our liquidity
position could be significantly constrained if we are unable to access funds from the FHLB Des Moines, the Federal Reserve Bank
of San Francisco or other wholesale funding sources, or if adequate financing is not available at acceptable interest rates. Finally,
if we are required to rely more heavily on more expensive funding sources, our revenues may not increase proportionately to cover
our costs. In this case, our results of operations and financial condition would be negatively affected. Additionally, collateralized
public funds are bank deposits of state and local municipalities. These deposits are required to be secured by certain investment
grade securities to ensure repayment that, on the one hand, tends to reduce our contingent liquidity risk by making these funds
somewhat less credit sensitive, but on the other hand, reduces standby liquidity by restricting the potential liquidity of the pledged
collateral. Although these funds historically have been a relatively stable source of funds for us, availability depends on the
individual municipality's fiscal policies and cash flow needs. At December 31, 2015 we had $16.0 million in public funds.
If limitations arise in our ability to utilize the national brokered deposit market or to replace short-term deposits, our
ability to replace maturing deposits on acceptable terms could be adversely impacted.
First Financial Northwest Bank utilizes the national brokered deposit market for a portion of our funding needs. At
December 31, 2015, the balance of brokered certificates of deposit was $66.2 million, with remaining maturities of 2.5 to 5 years.
If we are unable to participate in this market for any reason in the future, our ability to replace these deposits at maturity could be
adversely impacted.
In addition, an increasingly important source of deposits for the Bank is construction funds for large developers as part
of the EB-5 Immigrant Investor Program ("EB-5 Program"). At December 31, 2015, money market funds include $62.8 million
of EB-5 construction accounts with $59.0 million expected to be withdrawn during 2016. These deposits are expected to be short
term in nature. If we are unable to replace these funds as they run off with new accounts, the loss of funds could adversely impact
the results of our operations. See also "Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, or other laws and
regulations could result in fines or sanctions" below and "Deposit Activities" in Item 1. Business in this report.
Further, there may be competitive pressures to pay higher interest rates on deposits, which would increase our funding
costs. If deposit clients move money out of the Bank deposits and into other investments (or into similar products at other
institutions that may provide a higher rate of return), we could lose a relatively low cost source of funds, increasing our funding
costs and reducing our net interest income and net income. Additionally, any such loss of funds could result in reduced loan
originations, which could materially negatively impact our growth strategy and results of operations.
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Our limited branch locations limit our ability to attract deposits and as a result, a large portion of our deposits are certificates
of deposit, including “jumbo” certificates that may not be as stable as other types of deposits.
significant discretion in drafting the implementing rules and regulations, and consequently, many of the details and much of the
impact of the Dodd-Frank Act may not be known for many months or years.
With two branch locations in operation during 2015, our ability to compete with larger institutions for noninterest bearing
deposits is limited as these institutions have a larger branch network providing greater convenience to customers. As a result, we
are dependent on more interest rate sensitive deposits. At December 31, 2015, $323.8 million, or 47.9%, of our total deposits were
retail certificates of deposit and, of that amount, $225.4 million were “jumbo” certificates greater than or equal to $100,000, with
$72.5 million of these certificates greater than or equal to $250,000. In addition, deposit inflows are significantly influenced by
general interest rates. Our money market accounts and jumbo certificates of deposit and the retention of these deposits are
particularly sensitive to general interest rates, making these deposits traditionally a more volatile source of funding than other
deposit accounts. In order to retain our money market accounts and jumbo certificates of deposit, we may have to pay a higher
rate, resulting in an increase in our cost of funds. In a rising rate environment, we may be unwilling or unable to pay a competitive
rate because of the resulting compression in our interest rate spread. To the extent that such deposits do not remain with us, they
may need to be replaced with borrowings or other deposits that could increase our cost of funds and negatively impact our interest
rate spread and financial condition.
Our branching strategy will cause our expenses to increase faster than revenues.
In September 2015, we opened a new branch office in Mill Creek, Washington. At December 31, 2015, we have obtained
FDIC approval to open a third location in Edmonds, Washington, which is expected to open in the first quarter of 2016. In February
2016, we obtained FDIC approval to open a fourth location at a commercial development at the Renton Landing. Current plans
include opening offices much smaller than traditional bank branch offices, utilizing the improved technology available with our
new core data processor. This allows us to maintain management's focus on efficiency, while working to expand the Bank's presence
into new markets. The success of our expansion strategy into new markets, however, is contingent upon numerous factors, such
as our ability to select suitable locations, assess each market's competitive environment, secure managerial resources, hire and
retain qualified personnel and implement effective marketing strategies. The opening of new offices may not increase the volume
of our loans and deposits as quickly or to the degree that we hope, and opening new offices will increase our operating expenses.
On average, de novo branches do not become profitable until three to four years after opening. We currently expect to lease rather
than own the additional branch properties. Further, the projected time line and the estimated dollar amounts involved in opening
de novo branches could differ significantly from actual results. In addition, we may not successfully manage the costs and
implementation risks associated with our branching strategy. Accordingly, any new branch may negatively impact our earnings
for some period of time until the branch reaches certain economies of scale. Finally, there is a risk that our new branches will not
be successful even after they have been established.
We may be required to raise additional capital in the future, but that capital may not be available when it is needed, or it
may only be available on unacceptable terms, which could adversely affect our financial condition and results of operations.
We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations.
Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside
of our control, and on our financial performance. Accordingly, we may not be able to raise additional capital, if needed, on terms
acceptable to us. If we cannot raise additional capital when needed, our ability to further expand our operations and pursue our
growth strategy could be materially impaired and our financial condition and liquidity could be materially and adversely affected.
In addition, if we are unable to raise additional capital when required by our bank regulators, we may be subject to adverse
regulatory action.
We operate in a highly regulated environment and may be adversely affected by changes in federal and state laws and
regulations that are expected to increase our costs of operations.
As a state-chartered, federally insured commercial bank, First Financial Northwest Bank is currently subject to extensive
examination, supervision and comprehensive regulation by the FDIC and the DFI and as a bank holding company First Financial
Northwest is subject to examination, supervision and regulation by the FRB. These regulatory authorities have extensive discretion
in connection with their supervisory and enforcement activities, including the ability to impose restrictions on an institution's
operations, reclassify assets, determine the adequacy of an institution's ALLL and determine the level of deposit insurance premiums
assessed.
Additionally, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) has significantly
changed the bank regulatory structure and will affect the lending, deposit, investment, trading and operating activities of financial
institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new
implementing rules and regulations, and to prepare numerous studies and reports for Congress. The federal agencies are given
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Certain provisions of the Dodd-Frank Act are expected to have a near term impact on us. For example, a provision of
the Dodd-Frank Act eliminates the federal prohibitions on paying interest on demand deposits, thus allowing businesses to have
interest bearing checking accounts. Depending on competitive responses, this significant change to existing law could have an
adverse impact on our interest expense.
The Dodd-Frank Act created a new Consumer Financial Protection Bureau (the “CFPB”) with broad powers to supervise
and enforce consumer protection laws. The CFPB has broad rule-making authority for a wide range of consumer protection laws
that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices.
The CFPB has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets.
Financial institutions such as First Financial Northwest Bank with $10 billion or less in assets will continue to be examined for
compliance with the consumer laws by their primary bank regulators but are subject to the rules of the CFPB.
The CFPB has issued a number of final regulations and changes to certain consumer protections under existing laws.
These final rules, most of the provisions of which (including the qualified mortgage rule) generally prohibit creditors from extending
mortgage loans without regard for the consumer’s ability-to-repay and add restrictions and requirements to mortgage origination
and servicing practices. In addition, these rules limit prepayment penalties and require the creditor to retain evidence of compliance
with the ability-to-repay requirement for three years. Compliance with these rules has increased our overall regulatory compliance
costs and may require changes to our underwriting practices with respect to mortgage loans. This includes compliance with, The
Truth in Lending Act and the Real Estate Settlement Procedures Act Integrated Disclosure (TRID) rule, which combines certain
disclosures that consumers receive in connection with applying for and closing a mortgage loan. Moreover, these rules may
adversely affect the volume of mortgage loans that we underwrite and may subject us to increased potential liabilities related to
such residential loan origination activities.
The Dodd-Frank Act requires minimum leverage (Tier 1) and risk-based capital requirements for bank holding companies
and savings and loan holding companies that are no less stringent than those applicable to banks, which will limit our ability to
borrow at the holding company level and invest the proceeds from such borrowings as capital in First Financial Northwest Bank,
and will exclude certain instruments that previously have been eligible for inclusion by bank holding companies as Tier 1 capital,
such as trust preferred securities.
It is difficult to predict at this time what specific impact the Dodd-Frank Act and the yet to be written implementing rules
and regulations will have on community banks. However, it is expected that at a minimum they will increase our operating and
compliance costs, which could adversely affect key operating efficiency ratios, and could increase our interest expense. See -
“Business - How We are Regulated” contained in Part I, Item I of this report.
Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, or other laws and regulations could result in fines or
sanctions.
The United and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism
Act ("USA PATRIOT Act") and Bank Secrecy Acts require financial institutions to develop programs to prevent financial institutions
from being used for money laundering and terrorist activities. If such activities are detected, financial institutions are obligated
to file suspicious activity reports with the U.S. Treasury’s Office of Financial Crimes Enforcement Network. These rules require
financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial
accounts. Failure to comply with these regulations could result in fines or sanctions. During the last few years, several banking
institutions have received large fines for non-compliance with these laws and regulations. While we have developed policies and
procedures designed to assist in compliance with these laws and regulations, no assurance can be given that these policies and
procedures will be effective in preventing violations of these laws and regulations.
Beginning in 2015, we began opening money market accounts for large construction developers that are typically part
of the EB-5 Program. Foreign investors opening accounts at the Bank are required to have filed the I-526 application and to have
established U.S. residency. As part of the I-526 application process, funds used in the project are screened to ensure they were
obtained through lawful means. If account holders or the source of the funds later prove to be fraudulent, the Bank may be subject
to fines or sanctions, or at a minimum, incur reputational damage.
New or changing tax, accounting, and regulatory rules and interpretations could significantly impact strategic initiatives,
results of operations, cash flows, and financial condition.
45
The banking industry is extensively regulated. Federal and state banking regulations are designed primarily to protect
the deposit insurance funds and consumers, not to benefit a company’s shareholders. These regulations may sometimes impose
significant limitations on operations. The significant federal and state banking regulations that affect us are described in this report
under the heading “Item 1. Business- How We are Regulated”. These regulations, along with the currently existing tax, accounting,
securities, insurance, and monetary laws, regulations, rules, standards, policies, and interpretations control the methods by which
financial institutions conduct business, implement strategic initiatives and tax compliance, and govern financial reporting and
disclosures. These laws, regulations, rules, standards, policies, and interpretations are constantly evolving and may change
significantly over time. Any new regulations or legislation, change in existing regulations or oversight, whether a change in
regulatory policy or a change in a regulator's interpretation of a law or regulation, could have a material impact on our operations,
increase our costs of regulatory compliance and of doing business and or otherwise adversely affect us and our profitability. Further,
changes in accounting standards can be both difficult to predict and involve judgment and discretion in their interpretation by us
and our independent accounting firms. These changes could materially impact, potentially even retroactively, how we report our
financial condition and results of our operations as could our interpretation of those changes.
Legal and regulatory proceedings and related matters could adversely affect us or the financial services industry in general.
We, and other participants in the financial services industry upon whom we rely to operate, have been and may in the
future become involved in legal and regulatory proceedings. Most of the proceedings we consider to be in the normal course of
our business or typical for the industry; however, it is inherently difficult to assess the outcome of these matters and there can be
no assurance that anyone in particular, including us, will prevail in any proceeding or litigation. There could be substantial cost
and management diversion in such litigation and proceedings, and any adverse determination could have a materially adverse
effect on our business, brand or image, or our financial condition and results of our operations.
Our real estate lending also exposes us to the risk of environmental liabilities.
In the course of our business, we may foreclose and take title to real estate and could be subject to environmental liabilities
with respect to these properties. We may be held liable to a governmental entity or to third parties for property damage, personal
injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or may be
required to investigate or clean up hazardous or toxic substances, or chemical releases at a property. The costs associated with
investigation or remediation activities could be substantial. In addition, as the owner or former owner of a contaminated site, we
may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination
emanating from the property. If we ever become subject to significant environmental liabilities, our business, financial condition
and results of operations could be materially and adversely affected.
We are subject to certain risks in connection with our use of technology.
Our security measures may not be sufficient to mitigate the risk of a cyber-attack. Communications and information
systems are essential to the conduct of our business, as we use such systems to manage our customer relationships, our general
ledger and virtually all other aspects of our business. Our operations rely on the secure processing, storage, and transmission of
confidential and other information in our computer systems and networks. Although we take protective measures and endeavor
to modify them as circumstances warrant, the security of our computer systems, software, and networks may be vulnerable to
breaches, unauthorized access, misuse, computer viruses, or other malicious code and cyber-attacks that could have a security
impact. If one or more of these events occur, this could jeopardize our or our customers' confidential and other information
processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions or
malfunctions in our operations or the operations of our customers or counterparties. We may be required to expend significant
additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures, and we
may be subject to litigation and financial losses that are either not insured against or not fully covered through any insurance
maintained by us. We could also suffer significant reputational damage.
We support the ability of our customers to transact business through multiple automated methods. As such, we may be
susceptible to fraud performed through these technologies.
Security breaches in our internet banking activities could further expose us to possible liability and damage our reputation.
Any compromise of our security also could deter customers from using our internet banking services that involve the transmission
of confidential information. We rely on standard internet security systems to provide the security and authentication necessary to
effect secure transmission of data. These precautions may not protect our systems from compromises or breaches of our security
measures, and could result in significant legal liability and significant damage to our reputation and our business.
Our security measures may not protect us from systems failures or interruptions. While we have established policies and
procedures to prevent or limit the impact of systems failures and interruptions, there can be no assurance that such events will not
occur or that they will be adequately addressed if they do. In addition, we outsource certain aspects of our data processing and
other operational functions to certain third-party providers. If our third-party providers encounter difficulties, or if we have difficulty
in communicating with them, our ability to adequately process and account for transactions could be affected, and our business
operations could be adversely impacted. Threats to information security also exist in the processing of customer information
through various other vendors and their personnel.
The occurrence of any failures or interruptions may require us to identify alternative sources of such services, and we
cannot assure you that we could negotiate terms that are as favorable to us, or could obtain services with similar functionality as
found in our existing systems without the need to expend substantial resources, if at all. Further, the occurrence of any systems
failure or interruption could damage our reputation and result in a loss of customers and business, could subject us to additional
regulatory scrutiny, or could expose us to legal liability. Any of these occurrences could have a material adverse effect on our
financial condition and results of operations.
Our business may be adversely affected by an increasing prevalence of fraud and other financial crimes.
Our loans to businesses and individuals and our deposit relationships and related transactions are subject to exposure to
the risk of loss due to fraud and other financial crimes. Nationally, reported incidents of fraud and other financial crimes have
increased. We have also experienced losses due to apparent fraud and other financial crimes. While we have policies and procedures
designed to prevent such losses, there can be no assurance that such losses will not occur.
We are dependent on key personnel and the loss of one or more of those key personnel may materially and adversely affect
our prospects.
Competition for qualified employees and personnel in the banking industry is intense and there are a limited number of
qualified persons with knowledge of, and experience in, the community banking industry where First Financial Northwest Bank
conducts its business. The process of recruiting personnel with the combination of skills and attributes required to carry out our
strategies is often lengthy. Our success depends to a significant degree upon our ability to attract and retain qualified management,
loan origination, finance, administrative, marketing and technical personnel and upon the continued contributions of our
management and personnel. In particular, our success has been and continues to be highly dependent upon the abilities of key
executives, including our President, and certain other employees. In addition, our success has been and continues to be highly
dependent upon the services of our directors, many of whom are at or nearing retirement age, and we may not be able to identify
and attract suitable candidates to replace such directors.
We participate in a multiple employer defined benefit pension plan for the benefit of our employees. If we were to withdraw
from this plan, or if Pentegra, the multiple employer defined benefit pension plan sponsor, requires us to make additional
contributions, we could incur a substantial expense in connection with the withdrawal or the request for additional
contributions.
We participate in the Pentegra Defined Benefit Plan for Financial Institutions, a multiple employer pension plan for the
benefit of our employees. Effective March 31, 2013, we did not allow additional employees to participate in this plan. On March
31, 2013, we froze the future accrual of benefits under this plan with respect to those participating employees. In connection with
our decision to freeze our benefit accruals under the plan, and since then, we considered withdrawing from the plan.
The actual expense that would be incurred in connection with a withdrawal from the plan is primarily dependent upon
the timing of the withdrawal, the total value of the plan’s assets at the time of withdrawal, general market interest rates at that
time, expenses imposed on withdrawal, and other conditions imposed by Pentegra as set forth in the plan. If we choose to withdraw
from the plan in the future, we could incur a substantial expense in connection with the withdrawal.
Even if we do not withdraw from the plan Pentegra, as sponsor of the plan, may request that we make an additional
contribution to the plan, in addition to contributions that we are regularly required to make, or obtain a letter of credit in favor of
the plan, if our financial condition worsens to the point that it triggers certain criteria set out in the plan. If we fail to make the
contribution or obtain the requested letter of credit, then we may be forced to withdraw from the plan and establish a separate,
single employer defined benefit plan that we anticipate would be underfunded to a similar extent as under the multiple employer
plan.
46
47
Item 1B. Unresolved Staff Comments
Not applicable. First Financial Northwest has not received any written comments from the SEC regarding its periodic or
current reports under the Securities Exchange Act of 1934, as amended, that are unresolved.
Item 2. Properties
At December 31, 2015, the corporate office for First Financial Northwest and First Financial Northwest Bank is located
at 201 Wells Avenue South, Renton, Washington and is owned by us. The Bank's full service retail operation is also at this location.
At December 31, 2015, the Bank conducts community banking activities in a leased location in Mill Creek, Washington, and has
secured a lease to open an additional branch in Edmonds, Washington. The lending division operations of First Financial Northwest
Bank are located at 207 Wells Avenue South. This location is also the site for the operations of First Financial Northwest's
subsidiary, First Financial Diversified.
Item 3. Legal Proceedings
From time to time, we are involved as plaintiff or defendant in various legal actions arising in the normal course of
business. As of December 31, 2015, we were not involved in any significant litigation and do not anticipate incurring any material
liability as a result of any such litigation.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is traded on The Nasdaq Stock Market LLC’s Global Select Market ("NASDAQ"), under the symbol
“FFNW.” As of December 31, 2015, there were 13.8 million shares of common stock issued and outstanding and we had 650
shareholders of record, excluding persons or entities that hold stock in nominee or “street name” accounts with brokers.
Dividends
First Financial Northwest Bank is a wholly-owned subsidiary of First Financial Northwest. Under federal regulations,
the dollar amount of dividends First Financial Northwest Bank may pay to First Financial Northwest depends upon its capital
position and recent net income. Generally, if First Financial Northwest Bank satisfies its regulatory capital requirements, it may
make dividend payments up to the limits prescribed by state law and FDIC regulations. See “Item 1. Business – How We Are
Regulated – Regulation and Supervision of First Financial Northwest – Dividends” and Note 12 of the Notes to Consolidated
Financial Statements contained in Item 8.
There were $3.2 million in dividends declared and paid during the year ended December 31, 2015 and there were $2.9
million in dividends declared and paid during the year ended December 31, 2014. The price range per share of our common stock
presented below represents the highest and lowest sales prices for our common stock on the NASDAQ during each quarter of the
two most recent fiscal years.
2015
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2014
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Stock Repurchases
High
Low
Cash Dividend
Declared and
Paid
$
12.60
$
11.82
$
12.71
12.78
14.00
11.49
11.61
11.97
$
10.98
$
10.03
$
11.25
11.26
12.39
9.99
10.21
10.00
0.06
0.06
0.06
0.06
0.05
0.05
0.05
0.05
The Company's Board of Directors authorized two stock repurchase plans in 2015. Stock repurchases are made in
accordance with a plan established under the guidelines specified under Rule 10b5-1 of the Securities Exchange Act of 1934 as
administered through an independent broker. From January 1, 2015 through April 22, 2015, the Company purchased 293,300
shares at an average price of $12.00 per share under the 2014 plan that began on October 22, 2014. On April 22, 2015, the Board
of Directors authorized the repurchase of up to 1,492,400 shares of the Company's stock. This authorization for the first plan began
on April 28, 2015 and expired on October 28, 2015, at which time 864,463 shares had been repurchased at an average price per
share of $12.18. On October 29, 2015, the Board of Directors authorized a new share repurchase plan for an additional 1,410,000
shares from November 2, 2015 through April 27, 2016. As of December 31, 2015, 364,054 shares had been repurchased at an
average cost of $12.61 per share. The following table represents the share repurchased during the fourth quarter ended December
31, 2015.
Period
October 1 - October 31, 2015 (1)
November 1 - November 30, 2015 (2)
December 1 - December 31, 2015 (2)
Total Number of
Shares
Purchased
Average
Price Paid
per Share
Total Number of
Shares
Purchased as
Part of Plan
Maximum
Number of
Shares that May
be Repurchased
Under the Plan
90,049
$
361,839
2,215
454,103
12.24
12.60
13.25
12.54
90,049
361,839
2,215
454,103
—
1,048,161
1,045,946
1,045,946
_______________
(1) Shares repurchased under plan effective April 28, 2015 through October 28, 2015
(2) Shares repurchased under plan effective November 2, 2015 through April 27, 2016
Equity Compensation Plan Information
The equity compensation plan information presented under subparagraph (d) in Part III, Item 12 of this report is
incorporated herein by reference.
48
49
Performance Graph
Item 6. Selected Financial Data
The following graph compares the cumulative total shareholder return on First Financial Northwest’s Common Stock
with the cumulative total return on the Russell 2000 Index, the NASDAQ Bank Index, and the SNL Thrift Index, a peer group
index. The graph assumes that total return includes the reinvestment of all dividends and that the value of the investment in First
Financial Northwest’s common stock and each index was $100 on December 31, 2010, and is the base amount used in the graph.
The closing price of First Financial Northwest’s common stock on December 31, 2015 was $13.96.
The following table sets forth certain information concerning our consolidated financial position and results of operations
at and for the dates indicated and has been derived from our audited consolidated financial statements. The information below is
qualified in its entirety by the detailed information included elsewhere herein and should be read along with Item 7. "Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and Item 8. "Financial Statements and Supplementary
Data” included in this Form 10-K.
FINANCIAL CONDITION DATA:
(In thousands, except share data)
At or For the Year Ended December 31,
2015
2014
2013
2012
2011
Total assets
Investments available-for-sale
Loans receivable, net (1)
Deposits
Advances from the FHLB
Stockholders’ equity
OPERATING DATA:
Interest income
Interest expense
Net interest income
(Recapture of provision) provision for loan losses
Net interest income after (recapture of provision)
provision for loan losses
Noninterest income
Noninterest expense
Income before provision (benefit) for federal
income taxes
Provision (benefit) for federal income taxes
Net income
Basic earnings per share
Diluted earnings per share
___________________
(1) Net of ALLL, LIP and deferred loan fees and costs.
$ 979,913
$ 936,997
$ 920,979
$ 942,655
$ 1,059,390
129,565
685,072
675,407
125,500
170,673
120,374
663,938
614,127
135,500
181,412
144,364
663,153
612,065
119,000
184,355
152,262
650,468
665,797
83,066
187,117
129,002
703,288
788,665
83,066
181,320
$
37,197
$
38,689
$
38,539
$
41,466
$
6,751
30,446
(2,200)
32,646
1,279
19,878
14,047
4,887
9,160
0.67
0.67
$
$
$
6,241
32,448
(2,100)
34,548
498
18,503
16,543
5,856
10,687
0.72
0.71
$
$
$
7,526
31,013
(100)
31,113
891
21,082
12,246
29,220
3,050
26,170
974
25,430
10,922
(13,543)
24,465
1.47
1.46
$
$
$
$
$
$
1,714
(999)
2,713
0.15
0.15
$
$
$
51,052
18,485
32,567
4,700
27,867
2,672
26,297
4,242
—
4,242
0.24
0.24
First Financial Northwest, Inc.
NASDAQ Bank Index
Russell 2000
SNL Thrift Index
12/31/2010
100.00
100.00
100.00
100.00
12/31/2011
147.50
89.50
95.82
84.12
12/31/2012
188.75
106.23
111.49
102.32
12/31/2013
262.28
150.55
154.78
131.30
12/31/2014
310.14
157.95
162.35
141.22
12/31/2015
366.65
171.92
155.18
158.80
50
51
KEY FINANCIAL RATIOS:
Performance Ratios:
Return on average assets
Return on average equity
Dividend payout ratio
Equity-to-assets ratio
Interest rate spread
Net interest margin
Average interest-earning assets to average interest-bearing
liabilities
Efficiency ratio
Noninterest expense as a percent of average total assets
Book value per common share
Capital Ratios: (1)
Tier 1 leverage
Common equity tier 1
Tier 1 capital ratio
Total capital ratio
Asset Quality Ratios: (2)
Nonperforming loans as a percent of total loans
Nonperforming assets as a percent of total assets
ALLL as a percent of total loans, net of LIP
At or For the Year Ended December 31,
2015
2014
2013
2012
2011
0.96%
1.17%
2.73%
0.27%
0.37%
5.15
35.57
17.42
3.23
3.38
5.85
27.73
19.36
3.62
3.77
13.12
8.11
20.02
3.49
3.68
120.45
121.15
121.77
62.66
2.07
56.37
2.03
66.08
2.36
$ 12.40
$ 11.96
$ 11.25
$
1.47
—
19.85
2.85
3.08
118.12
84.22
2.54
9.95
2.36
—
17.12
2.78
3.01
113.33
74.62
2.29
9.64
$
11.61% 11.79% 18.60%
15.79%
13.54%
16.36
16.36
17.62
0.16
0.48
1.36
n/a
18.30
19.56
0.20
1.13
1.55
n/a
27.18
28.44
0.59
1.68
1.91
n/a
26.11
27.37
3.42
4.25
1.89
55.11
1.07
n/a
23.49
24.76
3.28
4.69
2.29
69.89
1.39
ALLL as a percent of nonperforming loans, net of LIP
Net charge-offs (recoveries) to average loans receivable, net
872.17
(0.18)
783.50
0.06
325.26%
(0.08)
_______________
(1) Capital ratios are for First Financial Northwest Bank only.
(2) Loans are reported net of LIP.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This discussion and analysis reviews our consolidated financial statements and other relevant statistical data and is
intended to enhance your understanding of our financial condition and results of operations. The information in this section has
been derived from the Consolidated Financial Statements and footnotes thereto that appear in Item 8 of this Form 10-K. The
information contained in this section should be read in conjunction with these Consolidated Financial Statements and footnotes
and the business and financial information provided in this Form 10-K. Unless otherwise indicated, the financial information
presented in this section reflects the consolidated financial condition and results of operations of First Financial Northwest and
its subsidiaries.
Overview
First Financial Northwest Bank is a wholly-owned subsidiary of First Financial Northwest and, as such, comprises
substantially all of the activity for First Financial Northwest. First Financial Northwest Bank was a community-based savings
bank until February 4, 2016, when the Bank converted to a Washington chartered commercial bank reflecting the commercial
banking services it now provides to its customers. The Bank primarily serves King and to a lesser extent, Pierce, Snohomish and
Kitsap Counties, Washington through our full-service banking office located in Renton, Washington and, beginning in the third
quarter of 2015, its branch office located in Mill Creek, Washington. Additional branch locations are scheduled to open in Edmonds,
Washington in the first quarter of 2016 and at the Landing development in Renton, Washington in the third quarter of 2016.
First Financial Northwest Bank’s business consists of attracting deposits from the public and utilizing these funds to
originate one-to-four family residential, multifamily, commercial real estate, construction and land development, business, and
consumer loans.
Over the last year, improvements in the economy, employment rates, stronger real estate prices, and a general lack of
new housing inventory in certain areas in the Puget Sound region have led to our increasing originations of construction loans for
properties located in our market area. We anticipate that construction lending will continue to be a strong element of our total
portfolio in future periods. We will continue to take a disciplined approach in our construction and land development lending by
concentrating our efforts on smaller one-to-four residential loans to builders known to us and avoiding large land development
opportunities. In addition, and on a limited basis, we provide multifamily loans to developers with proven success in this type of
construction. Originations of construction and land development loans increased from $47.2 million in 2014 to $68.6 million in
2015. These short term loans typically mature in six to eighteen months. In addition, the funding is usually not fully disbursed at
origination, thereby reducing our net loans receivable in the short term. At December 31, 2015, our receivable for construction/
land development loans net of LIP was $43.2 million, a 77.0% increase from $24.4 million at December 31, 2014.
With the current low interest rate environment, we are not aggressively pursuing longer term assets, but rather are focused
on financing shorter term loans. During 2015, originations of new loans and refinances outpaced repayments, resulting in net loans
receivable of $685.1 million at December 31, 2015, as compared to $663.9 million at December 31, 2014.
Our primary source of revenue is net interest income. Net interest income is the difference between interest income that
we earn on our loans and investments and interest expense that we pay on our deposits and borrowings. Changes in levels of
interest rates affect our net interest income. First Financial Northwest Bank is liability-sensitive, meaning our interest-bearing
liabilities reprice at a faster rate than our interest-earning assets. Changes in the composition of our interest-earning assets and
interest-bearing liabilities resulted in a decline in our net interest rate spread to 3.23% for the year ended December 31, 2015 from
3.62% for the year ended December 31, 2014.
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. During 2015,
we had a recapture of provision for loan losses of $2.2 million, as compared to a recapture of $2.1 million for the year ended
December 31, 2014. The recapture during 2015 was primarily attributable to payoffs of larger, classified loans, recoveries of $1.5
million and overall improvement in the credit quality of our loan portfolio. Our total adversely classified loans decreased $6.9
million during 2015, to $3.3 million at December 31, 2015, from $10.2 million at December 31, 2014. We will continue to monitor
our loan portfolio and make adjustments to our ALLL as we deem necessary.
Noninterest income is generated from various loan or deposit fees, increases in the cash surrender value of bank owned
life insurance ("BOLI"), and commissions earned on our investment services brokerage relationship. This income is increased or
partially offset by net gain or loss on sales of investment securities. Our noninterest income increased $781,000 during the year
ended December 31, 2015 as compared to 2014. The increase was primarily attributable to a $410,000 increase in the value of
our BOLI policies and a $268,000 increase in other noninterest income.
Our noninterest expenses consist primarily of salaries and employee benefits, OREO-related expenses, professional fees,
regulatory assessments, occupancy and equipment, and other general and administrative expenses. Salaries and employee benefits
consist primarily of the salaries and wages paid to our employees, payroll taxes, expenses for retirement, and other employee
benefits. OREO-related expenses consist primarily of maintenance and costs of utilities for the OREO inventory, market valuation
adjustments, build-out expenses, gains and losses from OREO sales, legal fees, real estate taxes, and insurance related to the
properties included in the OREO inventory. Professional fees include legal services, auditing and accounting services, computer
support services, and other professional services in support of our strategic plans. Occupancy and equipment expenses, which are
the fixed and variable costs of buildings and equipment, consist primarily of real estate taxes, depreciation expenses, maintenance,
and costs of utilities. Our noninterest expenses increased $1.4 million during the year ended December 31, 2015 as compared to
2014. The increase was primarily attributable to a $2.0 million increase in salary and employee benefits expenses partially offset
by a $612,000 increase in the net gain on sales of OREO and reduction in net OREO expenses and valuation adjustments of
$541,000.
Net income for the year ended December 31, 2015 was $9.2 million or $0.67 per diluted share, as compared to $10.7
million or $0.71 per diluted share for the year ended December 31, 2014. The decrease in net income for the year ended December
31, 2015 was primarily the result of a $2.0 million decrease in net interest income due to the decrease in our interest rate spread
combined with a $1.4 million increase in noninterest expenses partially offset by a $781,000 increase in noninterest income and
a $969,000 decrease in federal income tax provision.
52
53
Business Strategy
Our long-term business strategy is to operate and grow First Financial Northwest Bank as a well-capitalized and profitable
community bank, offering one-to-four family residential, commercial and multifamily, construction/land development, consumer
and business loans along with a diversified array of deposit and other products and services to individuals and businesses in our
market areas. We intend to accomplish this strategy by leveraging our established name and franchise, capital strength, and loan
production capability by:
(cid:127) Capitalizing on our intimate knowledge of our local communities to serve the convenience and needs of customers, and
delivering a consistent, high-quality level of professional service;
(cid:127) Offering competitive deposit rates and developing customer relationships to expand our core deposits, diversifying the
deposit mix, growing lower cost deposits, attracting new customers, and expanding our footprint in the geographical area
we serve;
(cid:127) Utilizing wholesale funding sources, including but not limited to Federal Home Loan Bank advances and acquiring
deposits in the national brokered certificate of deposit market, to assist with funding needs and interest rate risk
management efforts, as needed;
(cid:127) Managing our loan portfolio to minimize concentration risk and diversify the types of loans within the portfolio;
(cid:127) Managing credit risk to minimize the risk of loss and interest rate risk to optimize our net interest margin; and
(cid:127)
Improving profitability through disciplined pricing, expense control and balance sheet management, while continuing to
provide excellent customer service.
Critical Accounting Policies
Critical accounting policies are those that involve significant judgments and assumptions by management and that have,
or could have, a material impact on our income or the carrying value of our assets. The following are our critical accounting
policies.
Allowance for Loan Losses. Management recognizes that loan losses may occur over the life of a loan and that the ALLL
must be maintained at a level necessary to absorb specific losses on impaired loans and probable losses inherent in the loan
portfolio. Our methodology for analyzing the ALLL consists of two components: general and specific allowances. The general
allowance is determined by applying factors to our various groups of loans. Management considers factors such as charge-off
history, the current and expected economic conditions, borrower’s ability to repay, the regulatory environment, competition,
geographic and loan type concentrations, policy and underwriting standards, nature and volume of the loan portfolio, management’s
experience level, our loan review and grading systems, the value of underlying collateral, and the level of problem loans in assessing
the ALLL. Specific allowances result when management performs an impairment analysis on a loan when it determines it is
probable that all contractual amounts of principal and interest will not be paid as scheduled. The analysis usually occurs when a
loan has been classified as substandard or placed on nonaccrual status. If the market value less costs to sell ("market value") of
the impaired loan is less than the recorded investment in the loan, impairment is recognized by establishing a specific reserve in
the ALLL for the loan or by adjusting an existing reserve amount. The amount of the specific reserve is computed using current
appraisals, listed sales prices, and other available information less costs to complete, if any, and costs to sell the property. This
evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes
available or as future events differ from predictions. In addition, specific reserves may be created upon a loan's restructuring, based
on a discounted cash flow analysis, comparing the present value of the anticipated repayments under the restructured terms to the
outstanding principal balance of the loan.
Our Board of Directors' Internal Asset Review Committee reviews and recommends for approval the allowance for loan
losses on a quarterly basis, and any related provision or recapture of provision for loan losses, and the full Board of Directors
approves the provision or recapture after considering the Committee's recommendations. The allowance is increased by the
provision for loan losses which is charged against current period earnings. When analysis of the loan portfolio warrants, the
allowance is decreased and a recapture of provision of loan losses is included in current period earnings.
We believe that the ALLL is a critical accounting estimate because it is highly susceptible to change from period-to-
period requiring management to make assumptions about probable losses inherent in the loan portfolio. The impact of an unexpected
large loss could deplete the allowance and potentially require increased provisions to replenish the allowance, thereby reducing
earnings. For additional information see Item 1A. "Risk Factors – Our allowance for loan losses may prove to be insufficient to
absorb losses in our loan portfolio,” in this Form 10-K.
Valuation of OREO. Real estate properties acquired through foreclosure or by deed-in-lieu of foreclosure are recorded
at the lower of cost or fair value less estimated costs to sell. Fair value is generally determined by management based on a number
of factors, including third-party appraisals of fair value in an orderly sale. Accordingly, the valuation of OREO is subject to
significant external and internal judgment. If the carrying value of the loan at the date a property is transferred into OREO exceeds
the fair value less estimated costs to sell, the excess is charged to the ALLL. Management periodically reviews OREO values to
determine whether the property continues to be carried at the lower of its recorded book value or fair value, net of estimated costs
to sell. Any further decreases in the value of OREO are considered valuation adjustments and are charged to noninterest expense
in the Consolidated Income Statements. Expenses and income from the maintenance and operations and any gains or losses from
the sales of OREO are included in noninterest expense.
Deferred Taxes. Deferred tax assets arise from a variety of sources, the most significant being expenses recognized in
our financial statements but disallowed in the tax return until the associated cash flow occurs, and write-downs in the value of
assets for financial statement purposes that are not deductible for tax purposes until the asset is sold or deemed worthless.
When warranted, we record a valuation allowance to reduce our deferred tax assets to the amount that can be recognized
in line with the relevant accounting standards. The level of deferred tax asset recognition is influenced by management’s assessment
of our historic and future profitability profile. At each balance sheet date, existing assessments are reviewed and, if necessary,
revised to reflect changed circumstances. In a situation where income is less than projected or recent losses have been incurred,
the relevant accounting standards require convincing evidence that there will be sufficient future tax capacity. For additional
information regarding our deferred taxes, see Note 13 of the Notes to Consolidated Financial Statements contained in Item 8.
Other-Than-Temporary Impairments On the Market Value of Investments. Declines in the fair value of available-
for-sale or held-to-maturity investments below their cost that is deemed to be other-than-temporary results in a reduction in the
carrying amount of such investments to their fair value. A charge to earnings and an establishment of a new cost basis for the
investment is made. Unrealized investment losses are evaluated at least quarterly to determine whether such declines should be
considered other-than-temporary and therefore be subject to immediate loss recognition. Although these evaluations involve
significant judgment, an unrealized loss in the fair value of a debt security is generally deemed to be temporary when the fair value
of the investment security is below the carrying value primarily due to changes in interest rates and there has not been significant
deterioration in the financial condition of the issuer. Other factors that may be considered in determining whether a decline in the
value of a debt security is other-than-temporary include ratings by recognized rating agencies; the extent and duration of an
unrealized loss position; actions of commercial banks or other lenders relative to the continued extension of credit facilities to the
issuer of the security; the financial condition, capital strength and near-term prospects of the issuer and recommendations of
investment advisers or market analysts. Therefore, deterioration of market conditions could result in impairment losses recognized
within the investment portfolio.
Fair Value. FASB ASC 820, Fair Value Measurements and Disclosures, establishes a hierarchical disclosure framework
associated with the level of pricing observability utilized in measuring financial instruments at fair value. The degree of judgment
utilized in measuring the fair value of financial instruments generally correlates to the level of pricing observability. Financial
instruments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally
will have a higher degree of pricing observability and a lesser degree of judgment utilized in measuring fair value. Conversely,
financial instruments rarely traded or not quoted will generally have little or no pricing observability and a higher degree of
judgment utilized in measuring fair value. Pricing observability is impacted by a number of factors, including the type of financial
instrument, whether the financial instrument is new to the market and not yet established and the characteristics specific to the
transaction. See Note 8 of the Notes to Consolidated Financial Statements contained in Item 8 for additional information about
the level of pricing transparency associated with financial instruments carried at fair value.
54
55
Comparison of Financial Condition at December 31, 2015 and December 31, 2014
Assets. The following table details the changes in the composition of our assets at December 31, 2015 from December
31, 2014.
Balance at
December 31, 2015
Change from
December 31, 2014
Percentage
Change
Cash on hand and in banks
$
Interest-earning deposits
Investments available-for-sale, at fair value
Loans receivable, net
Premises and equipment, net
FHLB stock, at cost
Accrued interest receivable
Deferred tax assets, net
OREO
Bank owned life insurance ("BOLI")
Prepaid expenses and other assets
Total assets
5,713
99,998
129,565
685,072
17,707
6,137
2,968
4,556
3,663
23,309
1,225
(Dollars in thousands)
(207)
1,869
$
9,191
21,134
973
(608)
(297)
(3,782)
(5,620)
20,533
(270)
42,916
$
979,913
$
(3.5)%
1.9
7.6
3.2
5.8
(9.0)
(9.1)
(45.4)
(60.5)
739.7
(18.1)
4.6 %
The primary factor behind the increase in total assets was the $61.3 million increase in funds from our deposit liabilities.
These funds were partially used to increase our loan portfolio by $21.1 million, increase our available-for-sale investment portfolio
by $9.2 million, and to purchase $20.0 million in additional BOLI.
Investments. Our investments available-for-sale increased 7.6% to $129.6 million at December 31, 2015 from $120.4
million at December 31, 2014. During 2015, we changed the composition of our investments by purchasing $57.3 million of
securities with an expected yield of 2.38% and selling $25.6 million of securities with an average yield of 1.96%. This strategy
to improve the performance of our investment portfolio resulted in an average yield of 1.84% in 2015 compared to 1.74% in 2014.
In addition, the sales generated a net gain of $92,000 for the year ended December 31, 2015. The purchase of $57.3 million in
new available-for-sale investments includes $49.8 million in fixed rate and $7.5 million in variable rate securities. In addition to
the purchase and sale activity, we received calls, or partial calls, of $1.7 million during 2015. The reconfiguration of our investment
portfolio resulted in an increase of the effective duration of the portfolio to 3.20% at December 31, 2015, as compared to 2.40%
at December 31, 2014. Effective duration is a measure that attempts to quantify the anticipated percentage change in the value of
an investment (or portfolio) in the event of a 100 basis point change in market yields. Since the Bank's portfolio includes securities
with embedded options (including call options on bonds and prepayment options on mortgage-backed securities), management
believes that effective duration is an appropriate metric to use as a tool when analyzing the Bank's investment securities portfolio,
as effective duration incorporates assumptions relating to such embedded options, including changes in cash flow assumptions as
interest rates change. The fair market value of the investment portfolio had a pre-tax decrease of $9.2 million during the year ended
December 31, 2015.
Loans receivable. Net loans receivable grew by $21.1 million during 2015 to $685.1 million with increases of $35.5
million in our construction/land development loans and $23.4 million in our multifamily loans. These increases were partially
offset by a decrease in our one-to-four family residential loans of $19.9 million. Commercial real estate and one-to-four family
residential loans continue to be the largest concentrations in our loan portfolio at 33.6% and 33.8%, respectively, of total loans.
Our construction/land development loans increased to 11.6% of our total loan portfolio in 2015 from 7.2% in 2014 as we continue
to originate more of these shorter term, higher yielding loans.
The quality of our loan portfolio continued to improve during 2015 as our nonperforming loans decreased to $1.1 million
at December 31, 2015 from $1.3 million at December 31, 2014. Nonperforming loans as a percent of our total loan portfolio, net
of LIP, remains low at 0.16% and 0.20% at December 31, 2015 and 2014, respectively. Adversely classified loans decreased to
$3.3 million at December 31, 2015, from $10.2 million at December 31, 2014. The following table presents a breakdown of our
nonperforming assets:
Nonperforming loans:
One-to-four family residential
Commercial real estate
Consumer
Total nonperforming loans
OREO
Total nonperforming assets
December 31,
2015
2014
Amount of
Change
Percent of
Change
(Dollars in thousands)
$
996
$
—
89
1,085
3,663
$
830
434
75
1,339
9,283
$
4,748
$
10,622
$
166
(434)
14
(254)
(5,620)
(5,874)
20.0 %
(100.0)
18.7
(19.0)
(60.5)
(55.3)%
We continued to focus on reducing our nonperforming assets through loan work outs, foreclosures, short-sales, and
acceptance of deeds in lieu of foreclosure. Foregone interest during the year ended December 31, 2015 relating to nonperforming
loans totaled $103,000. There was no LIP related to nonperforming loans at December 31, 2015 or 2014. OREO decreased $5.6
million to $3.7 million at December 31, 2015 as we continue to sell our inventory of foreclosed real estate and experience decreased
foreclosure activity. We foreclosed on $141,000 of real estate during 2015, as compared to $1.8 million during 2014 and $6.5
million in 2013. The number of properties that transferred into OREO has decreased considerably compared to previous years
and, consequently, the number of properties that we sold has also declined. During 2015, we transferred one property into OREO,
compared to six properties during 2014 and 15 properties during 2013. Sales of OREO in 2015 totaled nine properties, as compared
to 12 properties in 2014, and 43 properties in 2013. The decline in both the transfer of properties into OREO and the sale of OREO
properties was a result of our continued efforts to identify the problem loans within our portfolio and take prompt appropriate
actions to turn nonperforming assets into performing assets.
Allowance for loan and lease losses. We believe that we use the best information available to establish the ALLL, and
that the ALLL as of December 31, 2015 was adequate to absorb the probable and inherent losses in the loan portfolio at that
date. While we believe the estimates and assumptions used in our determination of the adequacy of the allowance are reasonable,
there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount
of future provisions will not exceed the amount of past provisions, or that any increased provisions that may be required will not
adversely impact our financial condition and results of operations. Future additions to the allowance may become necessary based
upon changing economic conditions, the level of problem loans, business conditions, credit concentrations, increased loan balances,
or changes in the underlying collateral of the loan portfolio. In addition, the determination of the amount of our ALLL is subject
to review by bank regulators as part of the routine examination process that which may result in the establishment of additional
loss reserves or the charge-off of specific loans against established loss reserves based upon their judgment of information available
to them at the time of their examination.
The ALLL was $9.5 million or 1.36% of total loans outstanding, net of LIP, at December 31, 2015 as compared to $10.5
million or 1.55% of total loans outstanding, net of LIP, at December 31, 2014. The ALLL represented 872.2% of nonperforming
loans at December 31, 2015 compared to 783.5% at December 31, 2014. The following table details activity and information
related to the ALLL for the years ended December 31, 2015 and 2014. All loan balances and ratios are calculated using loan
balances that are net of LIP.
56
57
ALLL balance at beginning of year
Recapture of provision for loan losses
Charge-offs
Recoveries
ALLL balance at end of year
ALLL as a percent of total loans, net of LIP
ALLL as a percent of nonperforming loans
Total nonperforming loans
Nonperforming loans as a percent of total loans
Total loans receivable, net LIP
Total loans originated
At or For the Years Ended
December 31,
2015
2014
(Dollars in thousands)
$
10,491
(2,200)
(362)
1,534
9,463
$
1.36%
872.17
1,085
0.16%
697,416
229,780
$
$
12,994
(2,100)
(642)
239
10,491
1.55%
783.50
1,339
0.20%
677,033
154,497
$
$
$
$
Deposits. During the year ended December 31, 2015, deposits increased $61.3 million to $675.4 million as compared to
$614.1 million at December 31, 2014. The largest change to our deposits occurred with a $68.9 million increase to money market
accounts, as part of our focus on strengthening our core deposit position. This growth in money market accounts was primarily
comprised of $62.8 million in deposits generated in short term accounts from large construction developers that are part of the
EB-5 Immigrant Investor Program. We expect $59.0 million of these funds to be withdrawn in 2016. In addition, money market
accounts increased $6.2 million due to consumer retail deposits.
Retail certificates of deposit decreased $34.3 million as we continued to reduce higher cost certificates of deposit by
competing slightly less aggressively on certain deposit interest rates. As a partial offset, management increased our brokered
certificates of deposit by $11.7 million to $66.2 million at December 31, 2015. While these certificates carry a higher cost of funds
than retail certificates, their remaining maturity ranges from 2.5 to five years with a call option six months after issuance. The
longer term nature of these brokered deposits, along with their enhanced features, compared to retail certificates of deposit, assist
us in our interest rate risk management efforts. Also contributing to our efforts to reduce our cost of funds, a $4.5 million decrease
in NOW accounts was more than offset by a $15.0 million increase in noninterest checking accounts. Noninterest checking accounts
are primarily comprised of operating accounts of businesses located in our primary market. In addition, statement savings accounts
increased $4.4 million.
Advances. We use advances from the FHLB as an alternative funding source to manage funding costs, reduce interest
rate risk and to leverage our balance sheet. Total FHLB advances at December 31, 2015 were $125.5 million as compared to
$135.5 million at December 31, 2014. During 2015, we did not incur any new FHLB advances and paid off $10.0 million at
maturity which had a 0.71% cost of funds. As a result, the weighted average rate of our FHLB advances increased to 0.97% for
the year ended December 31, 2015, as compared to 0.91% for the year ended December 31, 2014. At December 31, 2015, $84.0
million of FHLB advances are due to mature within one year, with the remaining $41.5 million due in one to five years.
Stockholders’ Equity. Total stockholders’ equity decreased $10.7 million, or 5.9% to $170.7 million at December 31,
2015 from $181.4 million at December 31, 2014, primarily due to stock repurchases. Retained earnings increased $5.9 million
due to net income of $9.2 million for 2015, partially offset by $3.2 million of dividends paid to shareholders. Additional paid-in-
capital decreased $17.1 million due to the repurchase and retirement of 1,523,567 shares of common stock at an average price of
$12.25 per share, partially offset by $1.6 million of stock-based compensation expense.
Comparison of Operating Results for the Years Ended December 31, 2015 and December 31, 2014
Net Interest Income. Net interest income in 2015 was $30.4 million, a $2.0 million or 6.2% decrease from $32.4 million
in 2014. The decrease was attributable to a $1.5 million decrease in interest income combined with a $510,000 increase in interest
expense. The primary factors behind the decrease in interest income were a decrease in the average yield on our interest-earning
assets from 4.50% to 4.13% and an increase in the percentage of average interest-earning deposits to average total interest earning
assets. While our total average interest-earning assets increased by $40.1 million, the average balance of interest-earning deposits,
held primarily at the FRB and carrying a nominal yield, increased by $57.7 million while the average balance of higher yielding
net loan receivables declined $9.6 million, creating a net decrease in interest as a result of these changes in average balances. Our
interest rate spread for the year ended December 31, 2015 decreased 39 basis points to 3.23% compared to 3.62% for 2014 due
primarily to the decrease in our average yield on interest earning assets.
Interest Income. Total interest income decreased $1.5 million to $37.2 million for the year ended December 31, 2015
from $38.7 million for the year ended December 31, 2014. The following table compares average interest-earning asset balances,
associated yields, and resulting changes in interest and dividend income for the years ended December 31, 2015 and 2014:
Year Ended December 31,
2015
2014
Average
Balance
Yield
Average
Balance
Yield
Change in
Interest and
Dividend Income
Loans receivable, net
667,739
$
Investments available-for-sale
121,893
Interest-earning deposits
104,476
FHLB stock
6,527
Total interest-earning assets
900,635
$
(Dollars in thousands)
5.18% $
1.84
0.26
1.06
675,353
131,474
46,776
6,899
5.37% $
1.74
0.25
0.10
4.13% $
860,502
4.50% $
(1,668)
(45)
159
62
(1,492)
Interest income from net loans receivable decreased $1.7 million, or 4.6%, to $34.6 million for the year ended December
31, 2015. The decrease was due primarily to a decrease in yield from 5.37% in 2014 to 5.18% in 2015. The continued low rate
environment during the year resulted in payoffs and refinances of higher yielding loans. While the balance of our net loans receivable
increased $21.1 million from December 31, 2014 to December 31, 2015, the growth occurred in the latter part of the year, resulting
in a $7.6 million decrease in average loans receivable during 2015, further contributing to the decline in interest income.
Interest income from investments available-for-sale decreased $45,000 primarily as a result of a $9.6 million decrease
in the average balance during the year ended December 31, 2015, partially offset by a ten basis point increase in average yield.
The balance at December 31, 2015 increased $9.2 million from December 31, 2014, however the average balance for the year
decreased as principal paydowns of $18.7 million occurred throughout the year while the $30.0 million net increase from purchase
and sale activity occurred primarily in the third and fourth quarters of 2015. While the expected average yield on purchased
securities exceeds the average yield on securities sold by 42 basis points, the benefit from the higher average yield was limited to
the period since purchase.
Interest income on interest-bearing deposits increased $159,000 during the year ended December 31, 2015 due almost
entirely to the $57.7 million increase in the average balance of these deposits. The rate earned on these funds remained stable
with a one basis point increase in our average yield over the prior year.
58
59
Interest Expense. The following table details average balances, cost of funds and the resulting increase in interest expense
for the years ended December 31, 2015 and 2014:
Year Ended December 31,
2015
2014
Average
Balance
Cost
Average
Balance
Cost
(Dollars in thousands)
Change in
Interest
Expense
NOW accounts
$
17,866
0.10% $
26,083
Statement savings accounts
Money market accounts
167,139
Certificates of deposit, retail 338,180
Certificates of deposit, brokered
64,917
Advances from the FHLB 133,527
0.15
0.36
1.06
1.91
0.95
21,044
22,580
140,147
381,736
15,928
128,839
0.11% $
0.13
0.22
1.15
1.95
0.91
Total interest-bearing liabilities
747,712
$
0.90% $
710,274
0.88% $
(5)
10
291
(813)
932
95
510
Total interest expense for the year ended December 31, 2015 increased 8.17% to $6.8 million from $6.2 million in 2014.
Interest on brokered certificates of deposit increased by $932,000, primarily due to a $49.0 million increase in the average balance.
The addition of brokered funds occurred midyear of 2014, therefore the related increase in interest expense was primarily a
reflection of the number of days interest was paid during the year on these funds. These additional brokered deposits were obtained
with maturities ranging from four to six years in an effort to help mitigate the Bank's interest rate risk in a rising rate environment,
however, this interest rate risk protection came at a cost to current earnings as the rates paid on these longer term deposits are
higher than shorter term deposit rates. In addition, interest on money market accounts increased by $291,000, primarily as a result
of a 14 basis point increase in the cost of these funds. The average balance of money market funds increased by $27.0 million,
resulting in $60,000 of the increase in money market interest expense. Interest expense on FHLB advances increased by $95,000
as a combined result of a $4.7 million increase in the average balance and a four basis point increase in the cost of these funds.
Partially offsetting these increases, interest expense for retail certificates of deposit decreased $813,000 during 2015 as compared
to 2014 as a combined result of a $43.6 million decrease in the average balance and a nine basis point decrease in the cost of these
funds.
Provision for Loan Losses. We recorded a recapture of $2.2 million of the provision for loan losses for the year ended
December 31, 2015, reflecting continued improvement in the risk profile of our loan portfolio. During 2015, we had net recoveries
of $1.2 million on previously charged off loans. In addition, payoffs of $5.0 million on three loans classified as "special mention"
and the decline in classified loans in our loan portfolio resulted in a reduction to the general allowance at December 31, 2015.
Loans classified as "substandard" decreased to $3.3 million at December 31, 2015 from $10.2 million at December 31, 2014.
As of December 31, 2015, nonperforming loans, net of LIP, totaled $1.1 million as compared to $1.3 million at December
31, 2014. Nonperforming loans as a percent of total loans was 0.16% at December 31, 2015, compared to 0.20% at December 31,
2014. Of our nonperforming loans, $996,000 related to the one-to-four family residential loan portfolio and $89,000 related to
consumer loans.
Noninterest Income. Noninterest income increased $781,000 to $1.3 million for the year ended December 31, 2015
from $498,000 for 2014. The following table provides a detailed analysis of the changes in the components of noninterest income:
Service fees on deposit accounts
Loan service fees
Gain (loss) on sale of investments
BOLI change in cash surrender value
Other
Total noninterest income
$
$
60
Year Ended
December 31, 2015
Change from
December 31, 2014
(Dollars in thousands)
$
29
(38)
112
410
268
781
211
151
92
533
292
1,279
$
Percentage
Change
15.8%
(20.0)
562.1
333.5
1,128.8
157.0%
During 2015, the cash surrender value of our BOLI policies increased by $410,000, generated primarily by the addition
of $20.0 million in additional BOLI policies in April 2015. We recognize the increase in cash surrender value of these policies as
noninterest income, which assists in offsetting expenses for employee benefits. In addition, we realized a net gain on sale of
securities held for investment of $92,000 in 2015 as compared to a net loss on sale of $20,000 in 2014. Contributing to the increase
in other noninterest income during 2015, the sale of investment property generated a net gain of $95,000, and our new wealth
management line of business generated $180,000 in commission revenue during its first eight months of operations.
Noninterest Expense. Noninterest expense increased $1.4 million to $19.9 million for the year ended December 31,
2015 from $18.5 million for 2014. The following table provides a detailed analysis of the changes in the components of noninterest
expense:
Year Ended
December 31, 2015
Change from
December 31, 2014
Percentage
Change
(Dollars in thousands)
Salaries and employee benefits
$
13,940
$
1,953
Occupancy and equipment
Professional fees
Data processing
(Gain) loss on sales of OREO property, net
OREO market value adjustments
OREO-related expenses, net
Regulatory assessments
Insurance and bond premiums
Marketing
Other general and administrative
Total noninterest expense
$
1,440
1,631
759
(526)
41
1
470
359
211
1,552
19,878
$
75
91
97
(612)
(352)
(189)
74
(42)
114
166
1,375
16.3%
5.5
5.9
14.7
(711.6)
(89.6)
(99.5)
18.7
(10.5)
117.5
12.0
7.4%
A significant factor behind the increase in noninterest expense during 2015 was a result of an increase in salaries and
employee benefits of $2.0 million. Salary expense increased by $1.3 million as a result of increased employees related to our core
processor conversion project and the opening of a new branch office in Mill Creek, Washington, and wage increases as compared
to the previous year. In addition, the contribution expense for our defined benefit plan increased by $250,000 as the contribution
was electively increased as allowed under last year's pension relief legislation. Health insurance costs increased by $256,000
during 2015 as a combined result of increased premiums and increased head count. These increases in compensation expenses
were partially offset by a $150,000 increase in capitalized loan origination costs.
Noninterest expense benefitted from sales of OREO properties which generated a $526,000 net gain in 2015, from the
sale of a $4.4 million property, compared to a net loss of $86,000 in 2014. Further, the OREO market valuation expense decreased
by $352,000 as a reflection of improvements in the housing prices in our market area. In addition, our OREO inventory decreased
to seven properties at December 31, 2015 from 15 properties at December 31, 2014, reducing our OREO holding costs by $189,000
during the year. Marketing expenses increased $114,000 during the year ended December 31, 2015 as compared to last year,
primarily as a result of increased customer communication and publicity for our branch opening, core conversion, and the Bank
name change that occurred in the third quarter of 2015. Other general and administrative expenses increased by $166,000 during
2015 as compared to 2014 primarily as a result of a $148,000 increase in our reserve for unfunded commitments. The balances
of unused lines of credit and construction loans in process increased by $22.4 million year over year, thereby requiring an increase
in the related reserve. The 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.
Federal Income Tax Expense. We recorded a $4.9 million federal income tax provision for 2015, compared to $5.9
million for 2014, primarily as a result of the reduction in pre-tax net income. The provision is based on a 35% tax rate, adjusted
for permanent and temporary differences.
61
Comparison of Financial Condition at December 31, 2014 and December 31, 2013
Assets. The following table details the changes in the composition of our assets from at December 31, 2014 from December
31, 2013.
Balance at
December 31, 2014
Cash on hand and in banks
Interest-earning deposits
Investments available for sale, at fair value
Loans receivable, net
Premises and equipment, net
FHLB stock, at cost
Accrued interest receivable
Deferred tax assets, net
OREO
Prepaid expenses and other assets
Total assets
$
$
5,920
98,129
120,374
663,938
16,734
6,745
3,265
8,338
9,283
4,271
936,997
Change from
December 31, 2013
(Dollars in thousands)
(154)
$
48,628
(23,990)
785
(557)
(272)
(433)
(6,497)
(2,182)
690
16,018
$
Percentage
Change
(2.5)%
98.2
(16.6)
0.1
(3.2)
(3.9)
(11.7)
(43.8)
(19.0)
19.3
1.7 %
Interest-earning deposits increased $48.6 million partially as a result of $27.2 million in cash flow from the investments
available-for-sale portfolio for calls, sales, and scheduled principal repayments. In addition, the increase in interest-earning deposits
reflects liquidity provided by a $16.5 million increase in FHLB advances and $54.4 million increase in brokered certificates of
deposit, partially offset by a decrease in retail deposits of $52.4 million.
Our investments available-for-sale decreased $24.0 million, or 16.6% to $120.4 million at December 31, 2014 from
$144.4 million at December 31, 2013. During the year ended December 31, 2014, we sold a $5.0 million variable rate security
and had a call redemption on a $1.4 million tax-exempt municipal bond. Gross proceeds from the sale was $5.0 million with a net
loss of $20,000. During the year ended December 31, 2014, we purchased two securities for a total of $2.1 million. The anticipated
yields on the securities purchased during the year were 2.20% while the security sold had a yield of 0.15%. The underlying collateral
of the purchased bonds qualify for the Community Reinvestment Act ("CRA") and were purchased to support our CRA compliance
efforts. This investment portfolio activity resulted in an increase of the effective duration of the portfolio to 2.40% at December
31, 2014, as compared to 1.64% at December 31, 2013. Effective duration is a measure that attempts to quantify the anticipated
percentage change in the value of an investment (or portfolio) in the event of a 100 basis point change in market yields. Since the
Bank's portfolio includes securities with embedded options (including call options on bonds and prepayment options on mortgage-
backed securities), management believes that effective duration is an appropriate metric to use as a tool when analyzing the Bank's
investment securities portfolio, as effective duration incorporates assumptions relating to such embedded options, including changes
in cash flow assumptions as interest rates change.
Net loans receivable remained relatively unchanged, increasing $785,000 during 2014, to $663.9 million. However, the
composition of loans receivable changed, reflecting our focus on short-term higher yielding construction and land development
loans. Construction and land development loans increased $20.4 million or 67%, representing 7.2% of our gross loan portfolio at
December 31, 2014, as compared to 4.5% at December 31, 2013. The increase in construction and land development loans was
predominantly related to "in-fill" one-to-four family speculative construction projects in selective urban areas that have high levels
of nearby amenities. Subject to market conditions, we anticipate continuing to increase our construction and land development
loans as a percentage of our total loan portfolio during 2015.
The quality of our loan portfolio continued to improve during 2014 as our nonperforming loans decreased to $1.3 million
at December 31, 2014 from $4.0 million at December 31, 2013. Nonperforming loans as a percent of our total loan portfolio, net
of LIP, was 0.20% and 0.59% at December 31, 2014 and 2013, respectively. Adversely classified loans decreased to $10.2 million
at December 31, 2014, from $14.4 million at December 31, 2013. The following table presents a breakdown of our nonperforming
assets:
Nonperforming loans:
One-to-four family residential
Multifamily
Commercial real estate
Construction/land development
Consumer
Total nonperforming loans
OREO
Total nonperforming assets
December 31,
2014
2013
Amount of
Change
Percent of
Change
(Dollars in thousands)
$
830
$
2,297
$
—
434
—
75
1,339
9,283
233
1,198
223
44
3,995
11,465
$
10,622
$
15,460
$
(1,467)
(233)
(764)
(223)
31
(2,656)
(2,182)
(4,838)
(63.9)%
(100.0)
(63.8)
(100.0)
70.5
(66.5)
(19.0)
(31.3)%
We continued to focus on reducing our nonperforming assets through loan work outs, foreclosures, short-sales, and
acceptance of deeds in lieu of foreclosure. Foregone interest during the year ended December 31, 2014 relating to nonperforming
loans totaled $126,000. There were no LIP related to nonperforming loans at December 31, 2014 or 2013. OREO decreased $2.2
million to $9.3 million at December 31, 2014, from $11.5 million at December 31, 2013 as we continue to sell our inventory of
foreclosed real estate. We foreclosed or accepted deeds in lieu of foreclosure on $1.8 million of real estate during 2014, as compared
to $6.5 million during 2013 and $12.1 million in 2012. The number of properties that transferred into OREO has decreased
considerably compared to previous years and, consequently, the number of properties that we sold has also declined. During 2014,
we transferred six properties into OREO, compared to 15 properties during 2013 and 35 properties during 2012. Sales of OREO
in 2014 totaled 12 properties, as compared to 43 properties in 2013, and 89 properties in 2012. The decline in both the transfer of
properties into OREO and the sale of OREO properties was a result of our efforts to identify the problem loans within our portfolio
and take prompt appropriate actions to turn these nonperforming assets into performing assets.
Deposits. During the year ended December 31, 2014, deposits increased $2.1 million to $614.2 million as compared to
$612.1 million at December 31, 2013. Retail certificates of deposit decreased $52.2 million as we continued to reduce higher cost
certificates of deposit by competing slightly less aggressively on certain deposit interest rates. To offset this decrease, management
implemented a strategy of generating funds through national brokered certificates of deposit. This new source of funds added
$54.4 million of certificates of deposit as of December 31, 2014. While these certificates carry a higher cost of funds than retail
certificates, they range in maturity from four to six years with a call option six months after issuance. The longer term nature of
these brokered deposits, along with their enhanced features, compared to retail certificates of deposit, assist us in our interest rate
risk management efforts. Also contributing to our efforts to reduce our cost of funds, a $4.7 million decrease in NOW accounts
was partially offset by a $3.7 million increase in noninterest checking accounts. In addition, statement savings accounts increased
$3.5 million while higher cost money market accounts decreased $2.6 million.
Advances. We use advances from the FHLB as an alternative funding source to manage funding costs, reduce interest
rate risk and to leverage our balance sheet. Total advances at December 31, 2014 were $135.5 million as compared to $119.0
million at December 31, 2013. During the year ended December 31, 2014, we match funded a commercial real estate loan and a
multifamily loan by obtaining advances of $10.0 million and $6.5 million, respectively, both of which qualified for interest rate
discounts from the FHLB under its Community Investment Program, which support loans for low to moderate income housing
and community development. The weighted average rate of our FHLB advances decreased to 0.91% for the year ended December
31, 2014, as compared to 1.08% for the year ended December 31, 2013.
Stockholders’ Equity. Total stockholders’ equity decreased $3.0 million, or 1.6% to $181.4 million at December 31,
2014 from $184.4 million at December 31, 2013. Retained earnings increased $7.7 million due to net income of $10.7 million for
2014, and $2.9 million of dividends paid to shareholders. Additional paid-in-capital decreased $17.6 million due to the repurchase
and retirement of 1,594,033 shares of common stock at an average price of $11.02 per share, including commissions, partially
offset by a $3.6 million increase due to the exercise of 369,275 shares of stock options.
Comparison of Operating Results for the Years Ended December 31, 2014 and December 31, 2013
Net Interest Income. Net interest income in 2014 was $32.4 million, a $1.4 million or 4.5% increase from $31.0 million
in 2013. The increase was attributable to a $1.3 million decrease in interest expense partially offset by a $150,000 increase in
interest income. Average interest-earning assets increased $18.8 million to $860.5 million for the year ended December 31, 2014
62
63
from the year ended December 31, 2013 primarily due to increases in the average balance of our net loans receivable and interest-
earning deposits of $22.1 million and $16.0 million, respectively. However, the yield on total interest earning assets decreased
eight basis points, primarily due to a 17 basis point decrease in the yield on our loan portfolio. Although our average interest-
bearing liabilities increased $19.1 million to $710.3 million for 2014, primarily due to increased borrowings from the FHLB and
the addition of brokered certificates of deposit, which were partially offset by declines in retail certificates of deposit, the cost of
funds decreased 21 basis points during 2014, primarily due to a 32 basis point decline in the cost of retail certificates of deposit.
This improvement in rates more than offset the impact of the average balance growth, which contributed to the growth in net
interest income. Our interest rate spread for the year ended December 31, 2014 increased 13 basis points to 3.62% compared to
3.49% for 2013 as the decrease in our average cost of funds outweighed the decrease in our yield on interest earning assets. Our
net interest margin for 2014 increased nine basis points to 3.77%, from 3.68% in 2013.
Interest Income. Total interest income increased $150,000 to $38.7 million for the year ended December 31, 2014 from
$38.5 million for the year ended December 31, 2013. The following table compares average interest-earning asset balances,
associated yields, and resulting changes in interest and dividend income for the years ended December 31, 2014 and 2013:
Year Ended December 31,
2014
2013
Average
Balance
Yield
Average
Balance
Yield
Change in
Interest and
Dividend Income
Loans receivable, net
675,353
$
Investments available-for-sale
131,474
Interest-earning deposits 46,776
FHLB stock
6,899
Total interest-earning assets
860,502
$
(Dollars in thousands)
5.37% $
1.74
0.25
0.10
653,238
150,507
30,749
7,170
5.54% $
1.49
0.26
0.04
4.50% $
841,664
4.58% $
73
37
36
4
150
Interest income from net loans receivable increased $73,000 to $36.3 million for the year ended December 31, 2014. The
increase was due to a $22.1 million increase in the average balance of net loans receivable partially offset by a 17 basis point
decrease in the average loan yield. Our new loan originations were generally at lower rates than our existing loans that were paid
off or transferred to OREO, resulting in an overall lower yield in the portfolio.
Interest income from investments available-for-sale increased $37,000 even though the average balance of these
investments decreased by $19.0 million. Our yield on investments available-for-sale increased by 25 basis points from 2013 to
2014. During 2014, we purchased two fixed rate securities with expected yield of 2.20% and sold a variable rate security yielding
0.15%.
Interest income on interest-bearing deposits increased $36,000 during the year ended December 31, 2014 due almost
entirely to the $16.0 million increase in the average balance of these deposits. The rate earned on these funds remained stable
from 2013 to 2014 with a one basis point decrease in our yield.
Interest Expense. The following table details average balances, cost of funds and the resulting decrease in interest expense
for the years ended December 31, 2014 and 2013:
Year Ended December 31,
2014
2013
Average
Balance
Cost
Average
Balance
Cost
(Dollars in thousands)
NOW accounts
$
21,044
0.11% $
22,580
Statement savings accounts
Money market accounts
140,147
Certificates of deposit, retail 381,736
Certificates of deposit, brokered
15,928
Advances from the FHLB 128,839
0.13
0.22
1.15
1.95
0.91
17,890
18,878
148,904
437,720
—
67,796
0.17% $
0.16
0.20
1.47
—
1.08
Total interest-bearing liabilities
710,274
$
0.88% $
691,188
1.09% $
Change in
Interest
Expense
(7)
(1)
21
(2,055)
311
446
(1,285)
Total interest expense for the year ended December 31, 2014 decreased $1.3 million or 17.1% to $6.2 million from $7.5
million in 2013. The decline in our interest expense is the result of an overall decrease of 21 basis points in our average cost of
funds, partially offset by an increase of $19.1 million in our average interest bearing liabilities. Retail certificates of deposit drove
the decline, accounting for $2.1 million of the decrease in interest expense for the year ended December 31, 2014, as compared
to the year ended December 31, 2013. The average cost for retail certificates of deposit decreased 32 basis points to 1.15% during
2014. In addition, the average balance of retail certificates of deposit decreased by $56.0 million as higher priced certificates were
not renewed at maturity. Partially offsetting this decrease in interest expense, was $311,000 in interest expense related to $54.4
million in brokered certificates of deposit acquired during the third and fourth quarters of 2014 at an average rate of 1.95% for
the year. In addition, interest expense for FHLB advances increased $446,000 as a result of a $61.0 million increase in average
FHLB advances, partially offset by a 17 basis point reduction in the average cost of FHLB advances.
Provision for Loan Losses. We recorded a recapture of $2.1 million of the provision for loan losses for the year ended
December 31, 2014, reflecting continued improvement in the risk profile of our loan portfolio. Much of the decrease in the provision
was related to loan upgrades in the commercial real estate portfolio, due to loan upgrades and the payoff on a $5.0 million loan
that was internally classified as "special mention", reducing the general reserve requirement in our ALLL calculations.
Improvements in the risk ratings of our one-to-four family residential portfolio contributed a significant portion of the recapture.
In addition, specific reserves decreased $965,000 during 2014 due to improved collateral valuations, improvements in expected
cash flows, and a 13.3% decline in our impaired loan portfolio. The weighted-average historical loss factor, which is an element
within the loss calculation of the provision for loan losses also decreased over the prior four year period as charge-offs decreased.
As of December 31, 2014, nonperforming loans, net of LIP, totaled $1.3 million as compared to $4.0 million at December
31, 2013. Nonperforming loans as a percent of total loans was 0.20% at December 31, 2014, compared to 0.59% at December 31,
2013. Of our nonperforming loans, $830,000 related to the one-to-four family residential loan portfolio, $434,000 related to the
commercial real estate loan portfolio, and $75,000 related to consumer loans.
The ALLL was $10.5 million or 1.55% of total loans outstanding, net of LIP, at December 31, 2014 as compared to $13.0
million or 1.91% of total loans outstanding, net of LIP, at December 31, 2013. The ALLL represented 783.5% of nonperforming
loans at December 31, 2014 compared to 325.3% at December 31, 2013. The following table details activity and information
related to the ALLL for the years ended December 31, 2014 and 2013. All loan balances and ratios are calculated using loan
balances that are net of LIP.
64
65
ALLL balance at beginning of period
(Recapture of provision) provision for loan losses
Charge-offs
Recoveries
ALLL balance at end of period
ALLL as a percent of total loans
ALLL as a percent of nonperforming loans
Total nonperforming loans
Nonperforming loans as a percent of total loans
Total loans receivable
Total loans originated
At or For the Years Ended
December 31,
2014
2013
(Dollars in thousands)
12,994
(2,100)
(642)
239
10,491
1.55%
783.50
1,339
0.20%
677,033
154,497
$
$
$
12,542
(100)
(1,596)
2,148
12,994
1.91%
325.26
3,995
0.59%
678,727
157,012
$
$
$
Noninterest Income. Noninterest income decreased $393,000 to $498,000 for the year ended December 31, 2014 from
$891,000 for 2013. The following table provides a detailed analysis of the changes in the components of noninterest income:
Year Ended
December 31, 2014
Change from
December 31, 2013
Percentage
Change
Service fees on deposit accounts
Loan service fees
Loss on sale of investments
Servicing rights, net
Other
Total noninterest income
$
$
(Dollars in thousands)
(2)
21
$
18
59
(489)
(393)
$
81
186
(20)
3
248
498
(2.4)%
12.7
47.4
105.4
(66.4)
(44.1)%
The decrease in noninterest income for the year ended December 31, 2014 from the prior year was primarily due to the
sale of investment property in 2013 that resulted in a $325,000 gain and had generated $82,000 in rental income in 2013. In
addition, we had $60,000 in income in 2013 from forfeited earnest money by a prospective purchaser of an OREO property.
Noninterest Expense. Noninterest expense decreased $2.6 million to $18.5 million for the year ended December 31,
2014 from $21.1million for 2013. The following table provides a detailed analysis of the changes in the components of noninterest
expense:
Year Ended
December 31, 2014
Change from
December 31, 2013
Percentage
Change
Salaries and employee benefits
$
Occupancy and equipment
Professional fees
Data processing
(Gain) on sales of OREO property, net
OREO market value adjustments
OREO-related expenses, net
Regulatory assessments
Insurance and bond premiums
Proxy contest and related litigation
Marketing
Prepayment penalty on FHLB Advances
Other general and administrative
Total noninterest expense
$
$
(Dollars in thousands)
(1,979)
(23)
(79)
4
1,198
(10)
(411)
(297)
(117)
(106)
(7)
(679)
(73)
(2,579)
11,987
1,347
1,540
681
86
393
190
396
401
—
97
—
1,385
18,503
$
(14.2)%
(1.7)
(4.9)
0.6
(107.7)
(2.5)
(68.4)
(42.9)
(22.6)
(100.0)
(6.7)
(100.0)
(5.0)
(12.2)%
The decrease in noninterest expense during 2014, compared to 2013, was primarily due to a decrease of $2.0 million in
salaries and employee benefits. Salaries and employee benefits decreased $713,000 due to a reduction in staff and in severance
payouts related to management changes in 2013. In addition, stock compensation expense decreased $1.0 million as the largest
group of participants became fully vested in their previously granted stock awards during 2013. Costs to fund the Company's
retirement plan also decreased by $416,000 in 2014 due to the freezing of the defined benefit plan in 2013.
Additionally, OREO related expenses decreased $411,000 as the number of OREO properties decreased from 21 properties
at December 31, 2013, to 15 properties at December 31, 2014. Noninterest expense also benefited from the absence of prepayment
penalties on FHLB advances, as we incurred $679,000 in penalties from the prepayment of high costing FHLB advances during
2013. These decreases were partially offset by a $1.2 million change in the net gain or loss on sales of OREO property, with an
$86,000 net loss on the sales of OREO properties during 2014, compared to a net gain of $1.1 million on the sale of OREO
properties during 2013.
Federal Income Tax Expense. As a result of $16.5 million in pre-tax net income, we had a federal income tax provision
of $5.9 million for the year ended December 31, 2014. The provision is based on a 35% tax rate, adjusted for permanent and
temporary differences. During the year ended December 31, 2013, we recognized a federal income tax benefit of $13.5 million,
primarily due to the reversal of $13.9 million in the deferred tax asset valuation allowance. With the Company's return to profitability,
it was determined that maintaining the full valuation allowance on our deferred tax asset was no longer appropriate as it was more
likely than not that the deferred tax asset would be realized in future periods. The net deferred tax asset at December 31, 2014 of
$8.3 million includes a $450,000 valuation allowance relating to the net capital loss on the sale of an investment.
Average Balances, Interest and Average Yields/Cost
The following table presents information regarding average balances of assets and liabilities as well as interest income
from average interest-earning assets and interest expense on average interest-bearing liabilities, resultant yields, interest rate
spreads, net interest margins and the ratio of average interest-earning assets to average interest-bearing liabilities. Average balances
have been calculated using the average daily balances during the period. Interest and dividends are not reported on a tax equivalent
basis.
66
67
Year Ended December 31,
Yields Earned and Rates Paid
2015
Interest
and
Dividends
Average
Balance (1)
Yield/
Cost
Average
Balance (1)
2014
Interest
and
Dividends
Yield/
Cost
Average
Balance (1)
2013
Interest
and
Dividends
Yield/
Cost
(Dollars in thousands)
Interest-earnings assets:
$ 667,739
Loans receivable, net
$ 34,612
5.18% $ 675,353
$ 36,280
5.37% $ 653,238
$ 36,207
5.54%
131,474
2,287
150,507
2,250
Investments available-for-sale
Interest-earning deposits
FHLB stock
Total interest-earning assets
Noninterest earning assets
121,893
104,476
6,527
900,635
57,519
2,242
274
69
37,197
1.84
0.26
1.06
4.13
Total average assets
$ 958,154
Interest-bearing liabilities
NOW accounts
$
17,866
$
Statement savings accounts
Money market accounts
Certificates of deposit, retail
Certificates of deposit, brokered
Total deposits
Advances from the FHLB
Total interest-bearing liabilities
Noninterest bearing liabilities
Average equity
26,083
167,139
338,180
64,917
614,185
133,527
747,712
32,538
177,904
18
40
603
3,574
1,243
5,478
1,273
6,751
46,776
6,899
860,502
49,946
$ 910,448
0.10% $
21,044
$
0.15
0.36
1.06
1.91
0.89
0.95
0.90
22,580
140,147
381,736
15,928
581,435
128,839
710,274
17,576
182,598
115
7
38,689
23
30
312
4,387
311
5,063
1,178
6,241
1.74
0.25
0.10
4.50
30,749
7,170
841,664
53,454
$ 895,118
0.11% $
17,890
$
0.13
0.22
1.15
1.95
0.87
0.91
0.88
18,878
148,904
437,720
—
623,392
67,796
691,188
17,393
186,537
79
3
38,539
30
31
291
6,442
—
6,794
732
7,526
Total average liabilities and equity
$ 958,154
$ 910,448
$ 895,118
Net interest income
$ 30,446
$ 32,448
$ 31,013
Interest rate spread
Net interest margin
Ratio of average interest-
earning assets to average
3.23%
3.38%
3.62%
3.77%
interest-bearing liabilities
120.45%
121.15%
121.77%
________________
(1) The average loans receivable, net balances include nonaccruing loans.
1.49
0.26
0.04
4.58
0.17%
0.16
0.20
1.47
—
1.09
1.08
1.09
3.49%
3.68%
The following table presents the weighted-average yields earned on our assets and the weighted-average interest rates
paid on our liabilities, together with the net yield on interest-earning assets and liabilities, for the dates indicated.
Yield on interest-earning assets:
Loans receivable, net
4.86%
5.18%
5.37%
5.54%
Weighted
average yield
December 31,
2015
Net Yield
Year Ended December 31,
2015
2014
2013
Investment securities available-for-sale
2.19
FHLB stock
Interest-earning deposits
Total interest-earning assets
Rate paid on interest-bearing liabilities:
NOW accounts
Statement savings accounts
Money market accounts
Certificates of deposit, retail
Certificates of deposit, brokered
Total interest-bearing deposits
Advances from the FHLB
—
0.50
3.98
0.10
0.17
0.38
1.09
1.62
0.85
0.97
0.87
Total interest-bearing liabilities
Interest rate spread
Net interest margin
3.11
N/A
1.84
1.06
0.26
4.13
0.10
0.15
0.36
1.06
1.91
0.89
0.95
0.90
3.23
3.38
Rate/Volume Analysis
1.74
0.10
0.25
4.50
0.11
0.13
0.22
1.15
1.95
0.87
0.91
0.88
3.62
3.77
1.49
0.04
0.26
4.58
0.17
0.16
0.20
1.47
—
1.09
1.08
1.09
3.49
3.68
The following table presents the effects of changing rates and volumes on our net interest income. Information is provided
with respect to: (1) effects on interest income attributable to changes in volume (changes in volume multiplied by prior rate); and
(2) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume). Changes in rate/volume
are allocated proportionately to the changes in rate and volume.
68
69
Year Ended December 31, 2015
Compared to December 31, 2014
Change in Interest
Year Ended December 31, 2014
Compared to December 31, 2013
Change in Interest
2015
2014
Rate
Volume
Total
Rate
Volume
Total
interest rates and the interest rate sensitivity of our assets and liabilities. The risk associated with changes in interest rates and our
ability to adapt to these changes is known as interest rate risk and is our most significant market risk.
We have utilized the following strategies in our efforts to manage interest rate risk:
(cid:127) we are originating shorter term, higher yielding loans, whenever possible;
(In thousands)
(cid:127) we have attempted, where possible, to extend the maturities of our deposits which typically fund our long-term assets;
Interest-earning assets:
Loans receivable, net
Investments available-for-sale
Interest-earning deposits
FHLB stock
$
(1,259) $
122
17
62
Net change in interest income
(1,058)
Interest-bearing liabilities:
NOW accounts
Statement savings accounts
Money market accounts
Certificates of deposit, retail
Certificates of deposit, brokered
Advances from the FHLB
Net change in interest expense
$
(2) $
5
231
(312)
(25)
52
(51)
Net change in net interest income
$
(1,007) $
Asset and Liability Management and Market Risk
(409) $
(167) $
$
142
— $
(434)
(1,668) $
(45)
159
62
(1,492)
(1,150) $
324
(5)
4
(827)
$
1,223
(287)
41
—
977
73
37
36
4
150
(3) $
$
5
$
60
(501) $
$
957
43
$
561
(995) $
(5) $
10
291
(813)
932
95
510
(2,002) $
(12) $
(7)
34
(1,228)
—
(218)
(1,431)
604
$
5
$
6
(13)
(827)
311
664
146
831
$
(7)
(1)
21
(2,055)
311
446
(1,285)
1,435
General. Our Board of Directors has approved an asset/liability management policy to guide management in maximizing
interest rate spread by managing the differences in terms between interest-earning assets and interest-bearing liabilities while
maintaining acceptable levels of liquidity, capital adequacy, interest rate sensitivity, credit risk, and profitability. The policy
established an Investment, Asset/Liability Committee ("ALCO") comprised of certain members of senior management and the
Board of Directors. The Committee’s purpose is to communicate, coordinate and manage our asset/liability position consistent
with our business plan and Board-approved policies. The ALCO meets quarterly to review various areas including:
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
economic conditions;
interest rate outlook;
asset/liability mix;
interest rate risk sensitivity;
current market opportunities to promote specific products;
historical financial results;
projected financial results; and
capital position.
The Committee also reviews current and projected liquidity needs. As part of its procedures, the Committee regularly
reviews interest rate risk by forecasting the impact that changes in interest rates may have on net interest income and the market
value of portfolio equity, which is defined as the net present value of an institution’s existing assets, liabilities and off-balance
sheet instruments and evaluating such impacts against the maximum potential change in the market value of portfolio equity that
is authorized by the Board of Directors.
Our Risk When Interest Rates Change. The rates of interest we earn on assets and pay on liabilities generally are
established contractually for a period of time. Market interest rates change over time. Our loans generally have longer maturities
than our deposits. Accordingly, our results of operations, like those of other financial institutions, are impacted by changes in
(cid:127) we have invested in securities with relatively short average lives, generally less than eight years;
(cid:127) we have added adjustable-rate securities to our investment portfolio; and
(cid:127) we have added brokered certificates of deposit with a call option as a new funding source.
How We Measure the Risk of Interest Rate Changes. We monitor our interest rate sensitivity on a quarterly basis to
measure the change in net interest income in varying rate environments. Management retains the services of Darling Consulting
Group, LLC ("DCG") to assist in its interest rate risk and asset-liability management. DCG has over 30 years of experience in
asset-liability management. Management and DCG use various assumptions to evaluate the sensitivity of our operations to changes
in interest rates. Although management believes these assumptions are reasonable, the interest rate sensitivity of our assets and
liabilities on net interest income and the market value of portfolio equity could vary substantially if different assumptions were
used or actual experience differs from these assumptions. Although certain assets and liabilities may have similar maturities or
periods of repricing, they may react differently to changes in market interest rates. The interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types of assets and liabilities
lag behind changes in market interest rates. Non-uniform changes and fluctuations in market interest rates across various maturities
will also affect the results presented. In addition, certain assets, such as adjustable-rate mortgage loans, have features which restrict
changes in interest rates on a short-term basis and over the life of the asset. Further, a portion of our adjustable-rate loans have
interest rate floors below which the loan's contractual interest rate may not adjust. Approximately 37.7% of our total loans were
comprised of adjustable-rate loans at December 31, 2015. At that date, $136.8 million, or 48.2%, of these loans with a weighted-
average interest rate of 4.5% were at their floor interest rate. The inability of our loans to adjust downward can contribute to
increased income in periods of declining interest rates. However, when loans are at their floors, there is a further risk that our
interest income may not increase as rapidly as our cost of funds during periods of increasing interest rates. Further, in the event
of a significant change in interest rates, prepayment and early withdrawal levels would likely deviate from those assumed. Finally,
the ability of many borrowers to service their debt may decrease in the event of an interest rate increase. We consider all these
factors in monitoring our interest rate exposure.
The assumptions we use are based upon a combination of proprietary and market data that reflect historical results and
current market conditions. These assumptions relate to interest rates, prepayments, deposit decay rates and the market value of
certain assets under the various interest rate scenarios. We use market data to determine prepayments and maturities of loans,
investments and borrowings and use our own assumptions on deposit decay rates except for time deposits. Time deposits are
modeled to reprice to market rates upon their stated maturities. We also assume that non-maturity deposits can be maintained with
rate adjustments not directly proportionate to the change in market interest rates, based upon our historical deposit decay rates,
which are substantially lower than market decay rates. We have demonstrated in the past that the tiering structure of our deposit
accounts during changing rate environments results in relatively lower volatility and less than market rate changes in our interest
expense for deposits. We tier our deposit accounts by balance and rate, whereby higher balances within an account earn higher
rates of interest. Therefore, deposits that are not very rate sensitive (generally, lower balance tiers) are separated from deposits
that are rate sensitive (generally, higher balance tiers). When interest rates rise, we do not have to raise interest rates proportionately
on less rate sensitive accounts to retain these deposits. These assumptions are based upon our analysis of our customer base,
competitive factors, and historical experience.
Our income simulation model examines changes in net interest income in which interest rates were assumed to remain
at their base level, instantaneously increase by 100, 200 and 300 basis points or decline immediately by 100 basis points. Reductions
of rates by 200 and 300 basis points were not reported due to the very low rate environment.
The following table illustrates the estimated change in our net interest income over the next 12 months from December
31, 2015, that would occur in the event of an immediate change in interest rates equally across all maturities, with no effect given
to any steps that we might take to counter the effect of that interest rate movement.
70
71
Interest Rate Simulation Impact on Net Interest Income
for the year ended December 31, 2015
Basis Point Change in Rates
Net Interest
Income
% Change
(Dollars in thousands)
$
+300
+200
+100
Base
(100)
29,696
29,654
29,554
29,683
28,387
0.04%
(0.10)
(0.43)
—
(4.37)
The following table illustrates the change in our net portfolio value (“NPV”) at December 31, 2015 that would occur in
the event of an immediate change in interest rates equally across all maturities, with no effect given to any steps that we might
take to counter the effect of that interest rate movement.
Basis Point
Change in Rates (1)
Amount
Net Portfolio Value (2)
$ Change (3)
Net Portfolio as % of Portfolio Value of Assets
% Change
NPV Ratio (4)
% Change (5)
Market Value
of Assets (6)
(Dollars in thousands)
+300
+200
+100
Base
(100)
$
158,653
$
168,782
180,563
191,025
193,931
(32,372)
(22,243)
(10,462)
—
2,906
(16.95)%
(11.64)
(5.48)
—
1.52
17.31%
(3.28)% $
17.96
18.71
19.33
19.23
(2.25)
(1.06)
—
0.29
916,778
939,939
965,131
988,384
1,008,483
__________
(1) No rates in the model are allowed to go below zero. Given the relatively low level of market interest rates, a calculation for
a decrease of greater than 100 basis points has not been prepared.
(2) The net portfolio value is the difference between the present value of the discounted cash flows of assets and liabilities and
represents the market value of the Company’s equity for any given interest rate scenario. Net portfolio value is useful for
determining, on a market value basis, how equity changes in response to various interest rate scenarios. Large changes in net
portfolio value reflect increased interest rate sensitivity and generally more volatile earnings streams.
(3) The increase or decrease in the estimated net portfolio value at the indicated interest rates compared to the net portfolio value
assuming no change in interest rates.
(4) Net portfolio value divided by the market value of assets.
(5) The increase or decrease in the net portfolio value divided by the market value of assets.
(6) The market value of assets represents the value of assets under the various interest rate scenarios and reflects the sensitivity
of those assets to interest rate changes.
The net interest income and net portfolio value tables presented above are predicated upon a stable balance sheet with
no growth or change in asset or liability mix. In addition, the net portfolio value is based upon the present value of discounted
cash flows using our estimates of current replacement rates to discount the cash flows. The effects of changes in interest rates in
the net interest income table are based upon a cash flow simulation of our existing assets and liabilities and assuming that delinquency
rates would not change as a result of changes in interest rates, although there can be no assurance that this will be the case.
Delinquency rates may change when interest rates change as a result of changes in the loan portfolio mix, underwriting conditions,
loan terms or changes in economic conditions that have a delayed effect on the portfolio. Even if interest rates change in the
designated amounts, there can be no assurance that our assets and liabilities would perform as assumed. Also, a change in U.S.
Treasury rates in the designated amounts accompanied by a change in the shape of the Treasury yield curve would cause changes
to the net portfolio value and net interest income other than those indicated above.
Liquidity
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.
72
Our primary sources of funds are customer deposits, scheduled loan and investment repayments, including interest
payments, maturing loans and investment securities, and advances from the FHLB. These funds, together with equity, are used to
fund loans, acquire investment securities and other assets, and fund continuing operations. While maturities and the scheduled
amortization of loans are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by the
level of interest rates, economic conditions and competition. We believe that our current liquidity position, and our forecasted
operating results are sufficient to fund all of our existing commitments.
Liquidity management is both a daily and long-term function of business management. Excess liquidity is generally
invested in short-term investments such as overnight deposits or agency or mortgage-backed securities. On a longer term basis,
we maintain a strategy of investing in various lending products as described in greater detail under “Item 1. Business – Lending
Activities.” At December 31, 2015, the undisbursed portion of construction LIP totaled $53.9 million and unused lines of credit
were $12.5 million. We use our sources of funds primarily to meet ongoing commitments, to pay maturing certificates of deposit
and withdrawals on other deposit accounts, to fund loan commitments, and to maintain our portfolio of investment securities.
Certificates of deposit scheduled to mature in one year or less at December 31, 2015 totaled $134.7 million. Management’s policy
is to maintain deposit rates at levels that are competitive with other local financial institutions. In 2015, our posture was to be less
aggressive in competing for certificates of deposit and public funds and focus on core deposit acquisition to reduce our cost of
funds. Based on historical experience, we believe that a significant portion of maturing certificates of deposit will remain with
First Financial Northwest Bank. As further funding sources, we had the ability at December 31, 2015 to borrow an additional
$217.0 million from the FHLB and $35.0 million from unused lines of credit with other financial institutions to meet commitments
and for liquidity purposes. See the Consolidated Statements of Cash Flows in Item 8 of this report for further details on our cash
flow activities.
We measure our liquidity based on our ability to fund our assets and to meet liability obligations when they come due.
Liquidity (and funding) risk occurs when funds cannot be raised at reasonable prices, or in a reasonable time frame, to meet our
normal or unanticipated obligations. We regularly monitor the mix between our assets and our liabilities to manage our liquidity
and funding requirements.
Our primary source of funds is our retail deposits. When retail deposits are not available to provide the funds for our
assets, 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 six months. Also, we determine funding
concentrations and our need for sources of funds other than deposits. This information is used by our Asset/Liability Management
Committee in forecasting funding needs and investing opportunities.
Capital
Our total stockholders’ equity was $170.7 million at December 31, 2015. Consistent with our goal to operate a sound
and profitable financial organization we will actively seek to maintain a “well capitalized” institution in accordance with regulatory
standards. As of December 31, 2015, First Financial Northwest Bank exceeded all regulatory capital requirements. Regulatory
capital ratios for First Financial Northwest Bank were as follows as of December 31, 2015: Total capital to risk-weighted assets
was 17.62%; Tier 1 capital to risk-weighted assets and Common equity tier 1 capital was 16.36%; and Tier 1 capital to total assets
was 11.61%. At December 31, 2015, First Financial Northwest Bank met the financial ratios to be considered well-capitalized
under the regulatory guidelines. See Item 1, "Business – How We Are Regulated – Regulation and Supervision of First Financial
Northwest Bank – Capital Requirements.”
Commitments and Off-Balance Sheet Arrangements
We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing
needs of our customers. These financial instruments include commitments to extend credit and the unused portions of lines of
credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized
in the consolidated statements of financial condition. Commitments to extend credit and lines of credit are not recorded as an asset
or liability by us until the instrument is exercised. At December 31, 2015 and 2014, we had no commitments to originate loans
for sale.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition
established in the loan agreement. Commitments generally have fixed expiration dates or other termination clauses and may require
payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts
73
The principal effect of inflation on earnings, as distinct from levels of interest rates, is in the area of noninterest expense.
Expense items such as employee compensation, employee benefits, and occupancy and equipment costs may be subject to increases
as a result of inflation. An additional effect of inflation is the possible increase in dollar value of the collateral securing loans that
we have made. Our management is unable to determine the extent, if any, to which properties securing loans have appreciated in
dollar value due to inflation.
Recent Accounting Pronouncements
See Note 1 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information contained under Item 7. "Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Asset and Liability Management and Market Risk” of this Form 10-K is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2015, and 2014
Consolidated Income Statements for the Years Ended December 31, 2015, 2014, and 2013
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2015, 2014, and 2013
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2015, 2014, and 2013
Consolidated Statements of Cash Flows For the Years Ended December 31, 2015, 2014, and 2013
Notes to Consolidated Financial Statements
Page
76
78
79
80
81
82
84
do not necessarily represent future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by us upon extension of credit, is based on our credit evaluation of the customer.
The amount and type of collateral required varies, but may include real estate and income-producing commercial properties.
The following table summarizes our outstanding commitments for lease payments, to advance additional amounts pursuant
to outstanding lines of credit, and to disburse funds related to our construction loans at December 31, 2015.
Amount of Commitment Expiration - Per Period
Total
Amounts
Committed
Through
One Year
After One
Through
Three Years
After Three
Through Five
Years
After
Five Years
Unused portion of lines of credit
12,514
$
$
Undisbursed portion of construction loans
53,854
Total commitments
$
66,368
$
(In thousands)
3,134
20,030
23,164
$
$
3,719
33,824
37,543
$
$
5,222
—
5,222
$
$
439
—
439
First Financial Northwest and its subsidiaries from time to time are involved in various claims and legal actions arising
in the ordinary course of business. There are currently no matters that in the opinion of management would have a material adverse
effect on First Financial Northwest’s consolidated financial position, results of operation or liquidity.
Among our contingent liabilities are exposures to limited recourse arrangements with respect to sales of whole loans and
participation interests.
We anticipate that we will continue to have sufficient funds and alternative funding sources to meet our current
commitments.
The following table presents a summary of significant contractual obligations as of December 31, 2015, maturing as
indicated:
Deposits (1)
Term debt
Other long-term liabilities (2)
Lease commitments
Total contractual obligations
Less Than
One Year
One to
Three Years
Three to
Five Years
More than
Five Years
Total
(In thousands)
$ 420,079
$
154,873
$
94,377
$
6,078
$ 675,407
84,000
31,500
10,000
192
107
383
420
330
157
—
1,303
—
125,500
2,208
684
$ 504,378
$
187,176
$ 104,864
$
7,381
$ 803,799
___________
(1) Deposit accounts with indeterminate maturities, such as noninterest bearing, NOW, savings and money market accounts are
(2)
reflected as obligations due in less than one year.
Includes maximum payments related to employee benefit plans, assuming all future vesting conditions are met. Additional
information about employee benefit plans is provided in Note 10 of the Notes to Consolidated Financial Statements included
in Item 8 of this Form 10-K.
Impact of Inflation
The Consolidated Financial Statements and related financial data presented herein have been prepared in accordance
with accounting principles generally accepted in the United States of America. These principles generally require the measurement
of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing
power of money over time due to inflation.
Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature.
The primary impact of inflation is reflected in the increased cost of our operations. As a result, interest rates generally have a more
significant impact on a financial institution’s performance than do general levels of inflation. Interest rates do not necessarily move
in the same direction or to the same extent as the prices of goods and services. In a period of rapidly rising interest rates, the
liquidity and maturity structures of our assets and liabilities are critical to the maintenance of acceptable performance levels.
74
75
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the
risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the consolidated financial position of First Financial Northwest, Inc. and Subsidiaries as of
December 31, 2015 and 2014, and the consolidated results of its operations and its cash flows for each
of the three years in the period ended December 31, 2015, in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, First Financial Northwest, Inc.
Internal Control ‐ Integrated Framework (2013)
and Subsidiaries maintained, in all material respects, effective internal control over financial reporting
as of December 31, 2015, based on criteria established in
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Everett, Washington
March 8, 2016
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
First Financial Northwest, Inc.
We have audited the accompanying consolidated balance sheets of First Financial Northwest, Inc. and
Subsidiaries (the Company) as of December 31, 2015 and 2014, and the related consolidated statements
of income, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the
Internal Control ‐ Integrated
period ended December 31, 2015. We also have audited the Company’s internal control over financial
Framework (2013)
reporting as of December 31, 2015, based on criteria established in
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
The Company’s management is responsible for these financial statements, for maintaining effective
internal control over financial reporting, and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying Management’s Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on these consolidated financial
statements and an opinion on the Company’s internal control over financial reporting based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are free of material
misstatement and whether effective internal control over financial reporting was maintained in all
material respects. Our audits of the consolidated financial statements included examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated financial statements,
assessing the accounting principles used and significant estimates made by management, and evaluating
the overall consolidated financial statement presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal control over financial reporting, assessing the
risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also included performing such other procedures
as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis
for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only
in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share data)
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
Consolidated Income Statements
(Dollars in thousands, except share data)
Assets
Cash on hand and in banks
Interest-earning deposits with banks
Investments available-for-sale, at fair value
Loans receivable, net of allowance of $9,463 and $10,491
Premises and equipment, net
Federal Home Loan Bank ("FHLB") stock, at cost
Accrued interest receivable
Deferred tax assets, net
Other real estate owned ("OREO")
Bank owned life insurance ("BOLI"), net
Prepaid expenses and other assets
Total assets
Liabilities and Stockholders' Equity
Deposits
Noninterest-bearing deposits
Interest-bearing deposits
Total deposits
Advances from the FHLB
Advance payments from borrowers for taxes and insurance
Accrued interest payable
Other liabilities
Total liabilities
Commitments and contingencies (Note 13)
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
13,768,814 shares at December 31, 2015, and 15,167,381 shares at December 31, 2014
Additional paid-in capital
Retained earnings, substantially restricted
Accumulated other comprehensive loss, net of tax
Unearned Employee Stock Ownership Plan ("ESOP") shares
Total stockholders' equity
Total liabilities and stockholders' equity
See accompanying notes to consolidated financial statements.
December 31,
2015
2014
$
$
5,713
99,998
129,565
685,072
17,707
6,137
2,968
4,556
3,663
23,309
1,225
5,920
98,129
120,374
663,938
16,734
6,745
3,265
8,338
9,283
2,776
1,495
Interest income
Loans, including fees
Investments available-for-sale
Interest-earning deposits with banks
Dividends on FHLB stock
Total interest income
Interest expense
Deposits
FHLB advances
Total interest expense
Net interest income
Recapture of provision for loan losses
Net interest income after recapture of provision for loan losses
$
979,913
$
936,997
Noninterest income
$
29,392
$
14,354
646,015
675,407
125,500
1,794
135
6,404
599,773
614,127
135,500
1,707
142
4,109
809,240
755,585
—
138
136,338
42,892
(1,077)
(7,618)
170,673
—
151
153,395
36,969
(357)
(8,746)
181,412
$
979,913
$
936,997
Net gain (loss) on sale of investments
BOLI income
Other
Total noninterest income
Noninterest expense
Salaries and employee benefits
Occupancy and equipment
Professional fees
Data processing
(Gain) loss on sale of OREO property, net
OREO market value adjustments
OREO related expenses, net
Regulatory assessments
Insurance and bond premiums
Proxy contest and related litigation
Marketing
Prepayment penalty on FHLB advances
Other general and administrative
Total noninterest expense
Income before provision for federal income taxes
Federal income tax provision (benefit)
Net income
Basic earnings per share
Diluted earnings per share
Weighted average number of common shares outstanding
Weighted average number of diluted shares outstanding
Year Ended December 31,
2015
2014
2013
$
34,612
$
36,280
$
2,242
274
69
2,287
115
7
36,207
2,250
79
3
$
37,197
$
38,689
$
38,539
$
$
5,478
1,273
5,063
1,178
6,751
$
6,241
$
30,446
(2,200)
32,646
$
32,448
(2,100)
34,548
$
$
92
533
654
$
1,279
$
13,940
1,440
1,631
759
(526)
41
1
470
359
—
(20)
123
395
498
11,987
1,347
1,540
681
86
393
190
396
401
—
6,794
732
7,526
31,013
(100)
31,113
(38)
140
789
891
13,966
1,370
1,619
677
(1,112)
403
601
693
518
106
211
—
1,552
19,878
14,047
4,887
9,160
0.67
0.67
13,528,393
13,685,982
$
$
$
$
97
—
1,385
18,503
16,543
5,856
10,687
0.72
0.71
14,747,086
14,887,198
$
$
$
$
104
679
1,458
21,082
10,922
(13,543)
24,465
1.47
1.46
16,580,882
16,609,867
$
$
$
$
78
79
See accompanying notes to consolidated financial statements.
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(In thousands)
Net income
Year Ended December 31,
2015
2014
2013
(In thousands)
$
9,160
$
10,687
$
24,465
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) on available-for-sale securities (net of tax
provision (benefit) of ($356), $888, and ($106) for 2015, 2014, and 2013,
respectively)
Reclassification adjustment for net (gains) losses realized in income (net of
tax (benefit) provision of ($32), $7, and $13 for 2015, 2014, and 2013,
respectively)
Other comprehensive (loss) income, net of tax
Total comprehensive income
(660)
1,650
(2,793)
(60)
(720) $
$
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13
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12,350
$
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25
(2,768)
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See accompanying notes to consolidated financial statements.
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FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest
Federal income taxes
Noncash transactions:
Loans transferred to OREO, net of deferred loan fees and allowance for loan and
lease losses ("ALLL")
Change in unrealized loss on investments available-for-sale
2015
Year Ended December 31,
2014
48,474
55,575
$ 104,049
2013
$ (32,166)
87,741
55,575
1,662
104,049
$ 105,711
$
$
$
$
$
6,757
228
$
6,187
309
7,617
98
141
(1,108)
1,823
2,558
6,485
(2,861)
See accompanying notes to consolidated financial statements.
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities
$
9,160
$
10,687
$
24,465
Year Ended December 31,
2014
2013
2015
(2,200)
41
(526)
1,104
(92)
809
—
4,170
1,400
440
(533)
270
87
297
(7)
2,295
(2,100)
393
86
1,389
20
755
11
5,602
1,216
384
(123)
(100)
403
(1,112)
1,863
38
799
—
(13,742)
1,087
1,416
(140)
(567)
1,558
(139)
433
54
484
(340)
(214)
(91)
(685)
15,205
45,137
27,009
(69,010)
(19,070)
(75)
13,151
9
(26)
264
—
(2,611)
$
16,715
$
18,585
$
27,327
18,651
(57,290)
(19,075)
—
6,246
—
(1,781)
608
(20,000)
$ (45,314) $
6,430
20,818
(2,109)
(508)
(120)
3,646
—
(209)
272
—
28,220
$
Recapture of provision for loan losses
OREO market value adjustments
(Gain) loss on sale of OREO property, net
Net amortization of premiums and discounts on investments
(Gain) loss on sale of investments available-for-sale
Depreciation of premises and equipment
Loss on sale of premises and equipment
Deferred federal income taxes (benefit)
Allocation of ESOP shares
Stock compensation expense
Change in cash surrender value of BOLI
Changes in operating assets and liabilities:
Prepaid expenses and other assets
Net increase (decrease) in advance payments from borrowers for taxes
and insurance
Accrued interest receivable
Accrued interest payable
Other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Proceeds from sales and call of investments
Principal repayments on investments
Purchases of investments
Net (increase) decrease in loans receivable
Capital (expenditures) reimbursements related to OREO
Proceeds from sales of OREO properties
Net proceeds from sale or disposal of fixed assets
Purchases of premises and equipment
FHLB stock redemptions
Purchase of BOLI
Net cash (used in) provided by investing activities
Cash flows from financing activities:
Net increase (decrease) in deposits
Advances from the FHLB
Repayments of advances from the FHLB
Proceeds from stock options exercises
Repurchase and retirement of common stock
Dividends paid
Net cash provided by (used by) financing activities
$
continued
82
61,280
—
(10,000)
935
(18,717)
(3,237)
30,261
$
2,062
16,500
—
3,611
(17,566)
(2,938)
1,669
(53,732)
119,010
(83,076)
3,023
(28,090)
(1,895)
$ (44,760)
83
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies
First Financial Northwest, Inc. (“First Financial Northwest”), a Washington corporation, was formed on June 1, 2007 for
the purpose of becoming the holding company for First Financial Northwest Bank (“the Bank”) in connection with the conversion
from a mutual holding company structure to a stock holding company structure completed on October 9, 2007. First Financial
Northwest's business activities generally are limited to passive investment activities and oversight of its investment in First Financial
Northwest Bank. Accordingly, the information presented in the consolidated financial statements and related data, relates primarily
to First Financial Northwest Bank. First Financial Northwest converted from a savings and loan holding company to a bank holding
company in 2015 and is subject to regulation by the Board of Governors of the Federal Reserve Bank of San Francisco (“FRB”)
as the successor to the Office of Thrift Supervision (“OTS”). First Financial Northwest Bank is regulated by the Federal Deposit
Insurance Corporation (“FDIC”) and the Washington State Department of Financial Institutions (“DFI”).
First Financial Northwest Bank was organized in 1923 as a Washington state-chartered savings and loan association,
converted to a federal mutual savings and loan association in 1935, and converted to a Washington state-chartered mutual savings
bank in 1992. In 2002, First Financial Northwest Bank reorganized into a two-tier mutual holding company structure, became a
stock savings bank and became the wholly-owned subsidiary of First Financial of Renton, Inc. In connection with the mutual to
stock conversion in 2007, the Bank changed its name to First Savings Bank Northwest. In August 2015, the Bank changed its
name to First Financial Northwest Bank to support the expansion of focus to being more than a traditional "savings" bank and in
February 4, 2016 changed its charter from a Washington chartered stock savings bank to a Washington chartered commercial bank.
First Financial Northwest Bank is a community-based commercial bank primarily serving King and, to a lesser extent,
Pierce, Snohomish and Kitsap Counties, Washington through a full-service banking office located in Renton, Washington and a
branch office in Mill Creek, Washington. First Financial Northwest Bank's business consists of attracting deposits from the public
and utilizing these deposits to originate one-to-four family residential, multifamily, commercial real estate, construction/land
development, business and consumer loans.
The accompanying consolidated financial statements include the accounts of First Financial Northwest and its wholly-
owned subsidiaries First Financial Northwest Bank and First Financial Diversified Corporation (collectively, "the Company").
All significant intercompany balances and transactions between First Financial Northwest and its subsidiaries have been eliminated
in consolidation.
The accounting and reporting policies of First Financial Northwest and its subsidiaries conform to U.S. generally accepted
accounting principles (“GAAP”). In preparing the consolidated financial statements, management makes estimates and assumptions
based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the
disclosures provided. Actual results could differ from these estimates. Material estimates particularly subject to change include
the allowance for loan and lease losses (“ALLL”), other real estate owned (“OREO”), deferred tax assets and the fair values of
financial instruments.
84
The Company has evaluated events and transactions subsequent to December 31, 2015 for potential recognition or
disclosure and determined there are no such events or transactions requiring recognition or disclosure.
For purposes of reporting cash flows, cash and cash equivalents include cash on hand and in banks, interest-bearing
deposits and federal funds sold all with maturities of three months or less.
The Bank is required to maintain an average reserve balance with the FRB or maintain such reserve balance in the form
of cash. The required reserve balance was $434,000 at December 31, 2015, and $171,000 at December 31, 2014.
Investments are classified into one of three categories: (1) held-to-maturity, (2) available-for-sale, or (3) trading. We had
no held-to-maturity or trading securities at December 31, 2015, or 2014. Investments are categorized as held-to-maturity when
we have the positive intent and ability to hold them to maturity.
Investments are classified as available-for-sale if the Company intends to hold the securities for an indefinite period of
time, but not necessarily to maturity. Investments available-for-sale are reported at fair value. Unrealized holding gains and losses
on investments available-for-sale are excluded from earnings and are reported in other comprehensive income (loss), net of
applicable taxes. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.
Amortization or accretion of purchase premiums and discounts are included in investment income using the level-yield method
over the remaining period to contractual maturity. Dividend or interest income is recognized when it is earned.
The estimated fair value of investments is based on quoted market prices for investments traded in active markets or
dealer quotes. Mortgage-backed investments represent participation interest in pools of first mortgage loans originated and serviced
by the issuers of the investments.
Management makes an assessment to determine whether there have been any events or economic circumstances to indicate
that a security on which there is an unrealized loss is impaired on an other-than-temporary basis. Management considers many
factors including the severity and duration of the impairment, recent events specific to the issuer or industry, and for debt securities,
external credit ratings and recent downgrades. Securities on which there is an unrealized loss that is deemed to be an other-than-
temporary impairment (“OTTI”) are written down to fair value. For equity securities, the write-down is recorded as a realized loss
in noninterest income in the Consolidated Income Statements. For debt securities, if management intends to sell the security or it
is likely that management will be required to sell the security before recovering its cost basis, the entire impairment loss would
be recognized in earnings as an OTTI. If management does not intend to sell the security and it is not likely that management will
be required to sell the security but management does not expect to recover the entire amortized cost basis of the security, only the
portion of the impairment loss representing credit losses would be recognized in earnings. The credit loss on a security is measured
as the difference between the amortized cost basis and the present value of the cash flows expected to be collected. Projected cash
flows are discounted by the original or current effective interest rate depending on the nature of the security being measured for
potential OTTI. The remaining impairment related to all other factors, the difference between the present value of the cash flows
expected to be collected and fair value, is recognized as a charge to other comprehensive income (“OCI”). Impairment losses
related to all other factors are presented as separate categories within OCI.
Loans are recorded at their outstanding principal balance adjusted for charge-offs, the ALLL and net deferred fees or
costs. Interest on loans is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs,
are deferred and recognized in interest income using the level-yield method without anticipating prepayments.
The accrual of interest on loans is discontinued at the time the loan is 90 days delinquent unless the loan is well secured
and in the process of collection. Consumer and other loans are typically managed in the same manner. In all cases, loans are placed
on nonaccrual or charged-off at an earlier date if collection of principal or interest is doubtful.
All interest accrued but not collected on loans that are placed on nonaccrual is reversed against interest income. Loans
are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments
are reasonably assured. In order to return a nonaccrual loan to accrual status, each loan is evaluated on a case-by-case basis. We
85
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
evaluate the borrower's financial condition to ensure that future loan payments are reasonably assured. We also take into
consideration the borrower's willingness and ability to make the loan payments and historical repayment performance. We require
the borrower to make the loan payments consistently for a period of at least six months as agreed to under the terms of any modified
loan agreement before we will consider reclassifying the loan to accrual status.
may require management to make adjustments to the allowance based on their judgments about information available to them at
the time of their examination.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be
unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.
Factors considered by management in determining impairment include payment status, collateral value, market conditions, rent
rolls and the financial strength of the borrower(s) and guarantor(s), if any. Loans that experience insignificant payment delays and
payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and the borrowers, including the length of the delay, the reasons for
the delay, the borrower's prior payment history and the amount of the shortfall in relation to the principal and interest owed.
Impairment is measured by the fair value method on a loan-by-loan basis.
When a loan is identified as impaired, its impairment is measured using the present value of expected future cash flows,
discounted at the loan's effective interest rate, except when the sole (remaining) source of repayment for the loan is the operation
or liquidation of the collateral. In these cases, the Company uses an observable market price or current fair value of the collateral,
less certain completion costs and closing costs when foreclosure is probable, instead of discounted cash flows. The Company
obtains annual updated appraisals for impaired collateral dependent loans that exceed $1.0 million and loans that have been
transferred to OREO. In addition, the Company may order appraisals on properties not included within these guidelines when
there are extenuating circumstances where the Company is not otherwise able to determine the fair value of the property. Appraised
values may be discounted based on management's historical knowledge, changes in market conditions from the time of valuation
and/or management's expertise and knowledge of the borrower. If management determines that the value of the impaired loan is
less than the recorded investment in the loan, an impairment is recognized through an allowance estimate or a charge-off to the
ALLL.
Certain loan modifications or restructurings are accounted for as troubled debt restructurings ("TDR"). In general, the
modification or restructuring of a debt is considered a TDR if, for economic or legal reasons related to the borrower's financial
difficulties, a concession is granted to the borrower that the Company would not otherwise consider. Examples of these modifications
or restructurings include advancement of maturity date, accepting interest only payments for a period of time, or granting an
interest rate concession for a period of time. The impaired portion of the loan with an interest rate concession and/or interest-only
payments for a specific period of time are calculated based on the present value of expected future cash flows discounted at the
loan’s effective interest rate. The effective interest rate is the rate of return implicit on the original loan. This impaired amount
reduces the ALLL and a valuation allowance is established to reduce the loan balance. As loan payments are received in future
periods, the ALLL entry is reversed and the valuation allowance is reduced utilizing the level yield method over the modification
period. A loan that is determined to be classified as a TDR is generally reported as a TDR until the loan is paid in full or otherwise
settled, sold, or charged-off.
The allowance for loan and lease losses ("ALLL") is a valuation allowance for probable incurred credit losses. Losses
are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Any subsequent
recoveries are credited to the allowance.
The ALLL is evaluated on a regular basis by management and is based upon management's periodic review of the
collectability of the loans and factors such as the nature and volume of the loan portfolio, historical loss considerations, adverse
situations that may affect the borrower's ability to repay, estimated value of any underlying collateral, and prevailing economic
conditions. The evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more
information becomes available.
While management uses available information to recognize losses on loans, future additions to the allowance may be
necessary based on changes in economic conditions or changes to the credit quality of the loan portfolio. In addition, various
regulatory agencies, as an integral part of their examination process, periodically review the Company's ALLL. Such agencies
86
Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization
are computed using the straight-line method over the estimated useful lives of the assets. The estimated useful lives used to compute
depreciation and amortization is 15 to 40 years for buildings and building improvements, and is three to seven years for furniture,
fixtures, and equipment. Leasehold improvements are amortized over the life of the lease. Management reviews buildings,
improvements and equipment for impairment on an annual basis or whenever events or changes in the circumstances indicate that
the undiscounted cash flows for the property are less than its carrying value. If identified, an impairment loss is recognized through
a charge to earnings based on the fair value of the property.
As a member of the Federal Home Loan Bank System, the Bank is required to maintain a minimum level of investment
in the Federal Home Loan Bank of Des Moines (“FHLB”) stock, based on specified percentages of outstanding mortgages and
the Bank's outstanding FHLB advances. Ownership of FHLB stock is restricted to the FHLB and member institutions. The Bank's
investment in FHLB stock is carried at par value ($100 per share), which reasonably approximates its fair value.
Transfers of an entire financial asset, a group of entire financial assets, or participating interest in an entire financial asset
are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be
surrendered when (1) the assets have been isolated from the Bank, (2) the transferee obtains the right (free of conditions that
constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Bank does not maintain
effective control over the transferred assets through an agreement to repurchase them before their maturity.
OREO consists principally of properties acquired through foreclosure and is stated at the lower of cost or estimated market
value less selling costs. Losses arising from the acquisition of property, in full or partial satisfaction of loans, are charged to the
ALLL.
Subsequent to the transfer to foreclosed assets held for sale, these assets continue to be recorded at the lower of cost or
fair value (less estimated costs to sell), based on periodic evaluations. Subsequent write-downs in value are charged to noninterest
expense. Generally, legal and professional fees associated with foreclosures are expensed as incurred. Costs incurred to improve
property prior to sale are capitalized; however, in no event are recorded costs allowed to exceed estimated fair value. Subsequent
gains, losses, or expenses recognized on the sale of these properties are included in noninterest expense. The amounts that will
ultimately be recovered from foreclosed assets may differ substantially from the carrying value of the assets because of future
market factors beyond management's control.
The Company has purchased life insurance on certain key executives and officers. Bank-owned life insurance ("BOLI")
is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender
value adjusted for other charges or other amounts due that are probable at settlement. Increases to the cash surrender value are
recorded as noninterest income and partially offset expenses for employee benefits.
Financial instruments include off-balance sheet credit instruments, such as unused lines of credit and commercial letters
of credit issued to meet customer financing needs. The face amount of these items represents the exposure to loss before considering
customer collateral or ability to repay. Such financial instruments are recorded when they are funded.
87
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Management maintains a reserve for unfunded commitments to absorb probable losses associated with our off-balance
sheet commitments to lend funds such as unused lines of credit and the undisbursed portion of construction loans. Management
determines the adequacy of the reserve based on reviews of individual exposures, current economic conditions, and other relevant
factors. The reserve is based on estimates and ultimate losses may vary from the current estimates. The reserve is evaluated on a
regular basis and necessary adjustments are reported in earnings during the period in which they become known. The reserve for
unfunded commitments is included in the other liabilities section of the consolidated balance sheets.
Compensation cost is recognized for stock options and restricted stock awards, based on the fair value of these awards
at the grant date. A Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of the
Company's common stock at the grant date is used for restricted stock awards. Compensation cost is recognized over the required
service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a
straight-line basis over the requisite service period for the entire award.
The Company files a consolidated Federal income tax return and records its provision for income taxes under the asset
and liability method. Deferred taxes result from temporary differences in the recognition of certain income and expense amounts
between the Company's financial statements and its tax return. The principal items giving rise to these differences include net
operating losses, valuation adjustments on foreclosed properties, and allowance for credit losses. Deferred tax assets and liabilities
are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected
to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes. Valuation allowances are established to reduce the net carrying amount of deferred tax assets if it is
determined to be more likely than not that all or some portion of the potential deferred tax asset will not be realized. The Company's
policy is to recognize interest and penalties associated with income tax matters in income tax expense.
The cost of shares issued to the Employee Stock Ownership Plan ("ESOP"), but not yet allocated to participants, is shown
as a reduction of stockholders' equity. Compensation expense is based on the market price of shares as they are committed to be
released to participant accounts. Dividends on allocated ESOP shares reduce retained earnings; dividends on unearned ESOP
shares reduce debt and accrued interest.
Nonvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are
participating securities and are included in the computation of earnings per share ("EPS") pursuant to the two-class method. The
two-class method is an earnings allocation formula that determines EPS for each class of common stock and participating security
according to dividends declared or accumulated and participation rights in undistributed earnings. Certain shares of the Company's
nonvested restricted stock awards qualify as participating securities.
Net income is allocated between the common stock and participating securities pursuant to the two-class method, based
on their rights to receive dividends, participate in earnings or absorb losses. Basic earnings per common share is computed by
dividing net earnings available to common shareholders by the weighted average number of common shares outstanding during
the period, excluding participating nonvested restricted shares. As ESOP shares are committed to be released, they are included
in the outstanding shares used in the basic EPS calculation.
Diluted earnings per share is computed in a similar manner, except that first the denominator is increased to include the
number of additional shares that would have been outstanding if potentially dilutive shares, excluding the participating securities,
were issued using the treasury stock method. For all periods presented, stock options and certain restricted stock awards are
potentially dilutive non-participating instruments issued by the Company.
Undistributed losses are not allocated to the nonvested share-based payment awards (the participating securities) under
the two-class method as the holders are not contractually obligated to share in the losses of the Company.
88
Comprehensive income consists of net income and unrealized gains and losses on investments available-for-sale which
are also recognized as separate components of equity, net of tax.
Advertising costs are generally expensed as incurred.
Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully
disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates,
credit risk, prepayments and other factors, especially in the absence of broad markets for particular items. Changes in assumptions
or in market conditions could significantly affect the estimates.
The Company's activities are considered to be a single industry segment for financial reporting purposes. The Company
is engaged in the business of attracting deposits from the general public and providing lending services. Substantially all income
is derived from a diverse base of investments and commercial, construction, mortgage, and consumer lending activities.
Certain amounts in the consolidated financial statements for prior years have been reclassified to conform to the current
consolidated financial statement presentation. The results of the reclassifications are not considered material and have no effect
on previously reported net income or stockholders' equity.
In September 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU")
2015-16, Business Combinations (Topic 805). ASU No. 2015-16 simplifies the accounting for measurement period adjustments.
The amendments require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement
period in the reporting period when the adjustment amounts are determined. The acquirer is required to record in the same period's
financial statements the effect on earnings from changes in depreciation, amortization, or other income effects resulting from the
change to provisional amounts, calculated as if the accounting had been completed at the acquisition date. The acquirer must
present separately on the income statement, or disclose in the notes, the amount recorded in current-period earnings that would
have been recorded in previous reporting periods if the provisional amount had been recognized at the acquisition date. For public
business entities, the amendments are effective for fiscal years beginning after December 15, 2015, including interim periods
within those fiscal years. The adoption of ASU No. 2015-16 is not expected to have a material impact on the Company's consolidated
financial statements.
In November 2015, the FASB issued ASU No. 2015-17, Income Taxes, Balance Sheet Classification of Deferred Taxes.
ASU 2015-17 simplifies the presentation of deferred income taxes by requiring deferred tax liabilities and assets be classified as
noncurrent in a classified statement of financial position. Prior to this amendment, entities were required to separate deferred
income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position based on the
classification of the related asset or liability for financial reporting, or by the expected reversal date of the temporary difference.
The ASU is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods
within those annual periods. The adoption of ASU 2015-17 is not expected to have a material impact on the Company's consolidated
financial statements.
In January 2016, FASB issued ASU No. 2016-01, Financial Instruments--Overall, Recognition and Measurement of
Financial Assets and Financial Liabilities. ASU 2016-01 requires equity investments (except those accounted for under the equity
method of accounting) to be measured at fair value with changes in fair value recognized in net income. The amendments in this
update also require an entity to present separately in other comprehensive income the portion of the total change in the fair value
of a liability resulting from a change in instrument-specific credit risk. In addition, the ASU eliminates the requirement to disclose
the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments
measured at amortized cost on the balance sheet. The ASU also clarifies that an entity should evaluate the need for a valuation
allowance on a deferred tax asset related to available-for-sale securities in combination with the entity's other deferred tax assets.
89
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amendments in this update are effective for fiscal years beginning after December 15, 2017, including interim periods within
those fiscal years. Early application is permitted for fiscal years or interim periods that have not yet been issued if adopted at the
beginning of the fiscal year. The adoption of ASU 2016-01 is not expected to have a material impact on the Company's consolidated
financial statements.
The amortized cost and estimated fair value of investments available-for-sale at December 31, 2015, by expected maturity,
are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties. Investments not due at a single maturity date, primarily mortgage-
backed investments are shown separately.
In February 2016, FASB issued ASU No. 2016-02, Leases (Topic 842). ASU No. 2016-02 requires lessees to recognize
on the balance sheet the assets and liabilities arising from operating leases. A lessee should recognize a liability to make lease
payments and a right-of-use asset representing its right to use the underlying asset for the lease term. A lessee should include
payments to be made in an optional period only if the lessee is reasonably certain to exercise an option to extend the lease or not
to exercise an option to terminate the lease. For a finance lease, interest payments should be recognized separately from amortization
of the right-of-use asset in the statement of comprehensive income. For operating leases, the lease cost should be allocated over
the lease term on a generally straight-line basis. The amendments in ASU 2016-02 are effective for fiscal years beginning after
December 15, 2018, including interim periods within those fiscal years. Early application of the amendments in the ASU is
permitted. The adoption of ASU 2016-02 is not expected to have a material impact on the Company's consolidated financial
statements.
Note 2 - Investments
The following tables summarize the amortized cost and fair value of investments available-for-sale at December 31,
2015, and 2014, and the corresponding amounts of gross unrealized gains and losses.
Mortgage-backed investments:
Fannie Mae
Freddie Mac
Ginnie Mae
Municipal bonds
U.S. Government agencies
Corporate bonds
Mortgage-backed investments:
Fannie Mae
Freddie Mac
Ginnie Mae
Municipal bonds
U.S. Government agencies
Corporate bonds
Amortized
Cost
December 31, 2015
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(In thousands)
Fair Value
$
50,288
$
26,011
13,802
11,787
13,541
14,010
$
260
243
44
277
89
4
$
129,439
$
917
$
(227) $
(117)
(114)
—
(88)
(245)
(791) $
50,321
26,137
13,732
12,064
13,542
13,769
129,565
Amortized
Cost
December 31, 2014
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(In thousands)
Fair Value
$
$
40,083
21,442
26,049
642
16,863
14,061
119,140
$
$
863
526
87
2
104
39
1,621
$
$
(30) $
(22)
(122)
—
(151)
(62)
(387) $
40,916
21,946
26,014
644
16,816
14,038
120,374
Due within one year
Due after one year through five years
Due after five years through ten years
Due after ten years
Mortgage-backed investments
December 31, 2015
Amortized
Cost
Fair Value
(In thousands)
$
— $
9,845
16,349
13,144
39,338
90,101
—
9,802
16,222
13,351
39,375
90,190
$
129,439
$
129,565
Under Washington state law, in order to participate in the public funds program the Company is required to pledge 100%
of the public deposits held in the form of eligible securities. Investments with a carrying value of $17.4 million and $16.3 million
were pledged as collateral for public deposits at December 31, 2015, and 2014, respectively, both of which exceeded the minimum
collateral requirements established by the Washington Public Deposit Protection Commission. At December 31, 2015, and 2014,
there were no investments pledged as collateral for FHLB advances.
Sales of available-for-sale investments were as follows:
Proceeds
Gross gains
Gross losses
Year Ended December 31,
2015
2014
2013
(In thousands)
$
27,327
$
4,980
$
45,137
449
(357)
—
(20)
11
(49)
The following tables summarize the aggregate fair value and gross unrealized loss by length of time those investments
have been continuously in an unrealized loss position at December 31, 2015 and 2014.
Mortgage-backed investments:
Fannie Mae
Freddie Mac
Ginnie Mae
Municipal bonds
U.S. Government agencies
Corporate bonds
Less Than 12 Months
Fair Value
Unrealized
Loss
December 31, 2015
12 Months or Longer
Total
Fair Value
Unrealized
Loss
Fair Value
Unrealized
Loss
(In thousands)
$
$
37,593
12,115
5,508
—
9,605
10,263
75,084
$
$
(227) $
(117)
(29)
—
(88)
(245)
(706) $
— $
—
3,233
—
—
—
3,233
$
— $
—
(85)
—
—
—
(85) $
37,593
12,115
8,741
—
9,605
10,263
78,317
$
$
(227)
(117)
(114)
—
(88)
(245)
(791)
There were no investments classified as held-to-maturity at December 31, 2015, or 2014.
90
91
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Less Than 12 Months
December 31, 2014
12 Months or Longer
Total
Fair Value
Unrealized
Loss
Fair Value
Unrealized
Loss
Fair Value
Unrealized
Loss
(In thousands)
$
— $
— $
1,456
$
—
1,883
—
545
1,496
$
3,924
$
—
(6)
—
—
(4)
(10) $
1,832
9,952
—
8,096
5,942
27,278
$
(30) $
(22)
(116)
—
(151)
(58)
(377) $
1,456
$
1,832
11,835
—
8,641
7,438
31,202
$
(30)
(22)
(122)
—
(151)
(62)
(387)
Mortgage-backed investments:
Fannie Mae
Freddie Mac
Ginnie Mae
Municipal bonds
U.S. Government agencies
Corporate bonds
At December 31, 2015, the Company had 43 securities with a gross unrealized loss of $791,000 with a fair value of $78.3
million. At December 31, 2014, the Company had 24 securities with a gross unrealized loss of $387,000 with a fair value of $31.2
million. Management reviewed the financial condition of the entities underlying the securities at both December 31, 2015, and
December 31, 2014, and determined that no OTTI was required. Management believes that, while actual fluctuation in unrealized
losses will occur over the life of an investment security, the temporary impairment on the investment securities that were in an
unrealized loss position at December 31, 2015 and 2014, will be incrementally relieved as the individual investment securities
approach their respective contractual maturity dates. The unrealized losses relate principally to the general change in interest rate
and illiquidity, and not credit quality. As management does not intend to sell the security, and it is likely that it will not be required
to sell the security before its anticipated recovery, no declines are deemed to be other-than-temporary.
Note 3 - Loans Receivable
Loans receivable at December 31, 2015, and 2014 are summarized as follows:
One-to-four family residential:
Permanent owner occupied
Permanent non-owner occupied
Construction non-owner occupied
Multifamily:
Permanent
Construction
Commercial real estate:
Permanent
Construction
Land
Construction/land development: (1)
One-to-four family residential
Multifamily
Commercial
Land development
Business
Consumer
Total loans
Less:
Loans in process ("LIP")
Deferred loan fees, net
ALLL
Loans receivable, net
December 31,
2015
2014
(In thousands)
$
147,229
$
106,543
—
253,772
122,747
21,115
143,862
244,211
—
8,290
252,501
52,233
25,551
—
8,768
86,552
7,604
6,979
751,270
53,854
2,881
9,463
685,072
$
$
161,013
112,180
500
273,693
116,014
4,450
120,464
239,211
6,100
2,956
248,267
19,860
17,902
4,300
8,993
51,055
3,783
7,130
704,392
27,359
2,604
10,491
663,938
___________
(1) Excludes construction loans that will convert to permanent loans. The Company considers these loans to be "rollovers" in that
one loan is originated for both the construction loan and permanent financing. These loans are classified according to the
underlying collateral. At December 31, 2015, the Company had $21.1 million, or 14.7% of the total multifamily loans, and no
commercial or one-to-four family residential loans in these "rollover" type of loans. At December 31, 2014, the Company had
$6.1 million, or 2.5% of the total commercial real estate portfolio, $4.5 million, or 3.7% of the total multifamily loans and
$500,000, or 0.2% of the total one-to-four family residential loans in these rollover type of loans. At December 31, 2015 and
December 31, 2014, $8.3 million and $3.0 million, respectively, of commercial real estate loans were not included in the
construction/land development category because the Company classifies raw land or buildable lots when it does not intend to
finance the construction as commercial real estate land loans.
At December 31, 2015, and 2014 there were no loans classified as held for sale.
92
93
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Most of the Bank's lending activity occurs within the state of Washington. The primary market areas include King and
to a lesser extent Pierce, Snohomish and Kitsap counties. The Company's loan portfolio consists of one-to-four family residential
loans which comprised 33.8% of the total loan portfolio at December 31, 2015. Commercial real estate and multifamily loans were
33.6% and 19.1%, respectively, of the total loan portfolio at December 31, 2015, with construction/land development loans,
consumer, and business loans accounting for the remaining 13.5% of the loan portfolio. Included in the one-to-four family
residential, multifamily, commercial real estate, construction/land development, and consumer loan portfolios at December 31,
2015, were $13.5 million, $2.0 million, $59.9 million, $438,000, $198,000 of total loans, respectively, to the Company's five largest
borrowing relationships.
The Company originates both adjustable and fixed interest rate loans. The composition of loans receivable at December
31, 2015, and 2014, was as follows:
Fixed Rate
Adjustable Rate
December 31, 2015
Term to Maturity
Principal
Balance
(In thousands)
Term to Rate Adjustment
Principal
Balance
Due within one year
After one year through three years
$
17,476 Due within one year
107,792 After one year through three years
$
After three years through five years
91,283 After three years through five years
After five years through ten years
99,348 After five years through ten years
122,992
28,316
90,779
41,239
166
$
283,492
Thereafter
151,879 Thereafter
$
467,778
December 31, 2014
guarantors. Loans identified as criticized (watch and special mention) or classified (substandard, doubtful or loss) are subject to
problem loan reporting every three months.
The following tables summarize changes in the ALLL and loan portfolio by type of loan and reserve method for the
periods indicated.
At or For the Year Ended December 31, 2015
One-to-
Four
Family
Residential Multifamily
Commercial
Real Estate
Construction/
Land
Development
(In thousands)
ALLL:
Business
Consumer
Total
Beginning balance
$
3,694
$
1,646
$
4,597
$
355
$
(27)
936
(1,575)
3,028
2,516
512
$
$
$
$
(281)
78
(145)
1,298
1,295
3
$
$
—
181
(1,236)
3,542
3,364
178
$
$
—
—
586
941
941
—
$
$
$
$
$
47
—
3
179
229
229
—
152
(54)
336
(9)
425
$ 10,491
(362)
1,534
(2,200)
9,463
$
386
$
8,731
39
732
Charge-offs
Recoveries
(Recapture) provision
Ending balance
General reserve
Specific reserve
Loans: (1)
Total Loans
General reserve (2)
Specific reserve (3)
$
253,772
$
133,388
$
252,501
$
43,172
$
7,604
$
6,979
$697,416
217,677
36,095
131,793
1,595
247,110
5,391
43,172
—
7,604
—
6,771
654,127
208
43,289
Fixed Rate
Adjustable Rate
Term to Maturity
Principal
Balance
(In thousands)
Term to Rate Adjustment
Principal
Balance
____________
(1) Net of LIP.
(2) Loans collectively evaluated for impairment.
(3) Loans individually evaluated for impairment.
Due within one year
$
39,649 Due within one year
$
After one year through three years
70,416 After one year through three years
After three years through five years
128,142 After three years through five years
After five years through ten years
117,199 After five years through ten years
Thereafter
129,560 Thereafter
$
484,966
98,830
27,314
32,842
59,682
758
$
219,426
The majority of the adjustable-rate loans are tied to the prime rate as published in The Wall Street Journal. The remaining
adjustable-rate loans have interest rate adjustment limitations and are generally indexed to the FHLB Long-Term Bullet advance
rates published by the FHLB. Future market factors may affect the correlation of the interest rate adjustment with the rates paid
on
deposits that have been primarily utilized to fund these loans.
ALLL. When the Company classifies problem assets as either substandard or doubtful, pursuant to Federal regulations,
it may establish a specific reserve in an amount deemed prudent to address the risk specifically or may allow the loss to be addressed
in the general allowance. General allowances represent loss allowances which have been established to recognize the inherent risk
associated with lending activities, but which, unlike specific allowances, have not been specifically allocated to the particular
problem assets. When an insured institution classifies problem assets as a loss, pursuant to Federal regulations, it is required to
charge-off such assets in the period in which they are deemed uncollectible. The determination as to the classification of the
Company's assets and the amount of valuation allowances is subject to review by bank regulators, who can require the establishment
of additional loss allowances.
Loan grades are used by the Company to identify and track potential problem loans which do not rise to the levels described
for substandard, doubtful, or loss. The grades for watch and special mention are assigned to loans which have been criticized based
upon known characteristics such as periodic payment delinquency or stale financial information from the borrower and/or
At or For the Year Ended December 31, 2014
One-to-
Four
Family
Residential Multifamily
Commercial
Real Estate
Construction/
Land
Development
(In thousands)
Business
Consumer
Total
$
$
$
$
$
$
$
$
5,141
(78)
50
(1,419)
3,694
2,894
800
273,565
229,827
43,738
$
$
$
$
1,377
—
—
269
1,646
1,619
27
120,271
118,099
2,172
$
$
$
$
5,881
(311)
174
(1,147)
4,597
4,268
329
247,968
238,416
9,552
$
$
$
$
399
(223)
—
179
355
355
—
24,316
24,316
—
$
$
$
$
14
—
10
23
47
47
—
3,783
3,783
—
182
(30)
5
(5)
152
$ 12,994
(642)
239
(2,100)
$ 10,491
93
59
$
9,276
1,215
7,130
6,933
197
$677,033
621,374
55,659
ALLL:
Beginning balance
Charge-offs
Recoveries
(Recapture) provision
Ending balance
General reserve
Specific reserve
Loans: (1)
Total Loans
General reserve (2)
Specific reserve (3)
_____________
(1) Net of LIP.
(2) Loans collectively evaluated for impairment.
(3) Loans individually evaluated for impairment.
94
95
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At or For the Year Ended December 31, 2013
One-to-
Four
Family
Residential Multifamily
Commercial
Real Estate
Construction/
Land
Development
(In thousands)
Business
Consumer
Total
$
$
$
$
$
$
$
$
5,562
(456)
1,303
(1,268)
5,141
3,601
1,540
280,674
232,526
48,148
$
$
$
$
1,139
(346)
237
347
1,377
1,292
85
117,181
114,740
2,441
$
$
$
$
5,207
(98)
7
765
5,881
5,326
555
247,402
234,093
13,309
$
$
$
$
437
(582)
455
89
399
399
—
23,127
22,904
223
$
$
$
$
30
(13)
—
(3)
14
14
—
1,142
1,142
—
167
(101)
146
(30)
182
$ 12,542
(1,596)
2,148
(100)
$ 12,994
182
—
$ 10,814
2,180
9,201
9,157
44
$678,727
614,562
64,165
ALLL:
Beginning balance
Charge-offs
Recoveries
(Recapture) provision
Ending balance
General reserve
Specific reserve
Loans: (1)
Total Loans
General reserve (2)
Specific reserve (3)
______________
(1) Net of LIP.
(2) Loans collectively evaluated for impairment.
(3) Loans individually evaluated for impairment.
Past Due Loans. Loans are considered past due if the required principal and interest payments have not been received as
of the date such payments were due. At December 31, 2015, total past due loans comprised 0.18% of total loans, net of LIP, as
compared to 0.66% at December 31, 2014.
The following tables represent a summary at December 31, 2015, and 2014, of the aging of loans by type:
Loans Past Due as of December 31, 2015
30-59 Days
60-89 Days
90 Days
and
Greater
Total
Current
Total
Loans (1) (2)
(In thousands)
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Loans Past Due as of December 31, 2014
30-59 Days
60-89 Days
90 Days
and
Greater
Total
Current
Total
Loans (1) (2)
(In thousands)
Real estate:
One-to-four family residential:
Owner occupied
Non-owner occupied
$
Multifamily
Commercial real estate
Construction/land development
666
—
1,965
—
—
2,631
—
—
2,631
$
$
$
575
—
—
325
—
900
—
75
975
666
164
—
11
—
841
—
—
841
1,907
164
1,965
336
—
4,372
—
75
4,447
$
$
159,106
112,388
118,306
247,632
24,316
661,748
3,783
7,055
672,586
$
$
161,013
112,552
120,271
247,968
24,316
666,120
3,783
7,130
677,033
Total real estate
Business
Consumer
Total
________________________
(1) There were no loans 90 days past due and still accruing interest at December 31, 2014.
(2) Net of LIP.
$
$
$
$
Nonaccrual Loans. Loans are considered past due if the required principal and interest payments have not been received
as of the date such payments were due. Loans are placed on nonaccrual when they are 90 days delinquent or when, in management's
opinion, the borrower is unable to meet scheduled payment obligations.
In order to return a nonaccrual loan to accrual status, each loan is evaluated on a case-by-case basis. The Company
evaluates the borrower's financial condition to ensure that future loan payments are reasonably assured. The Company also takes
into consideration the borrower's willingness and ability to make the loan payments and historical repayment performance. The
Company requires the borrower to make loan payments consistently for a period of at least six months as agreed to under the terms
of the loan agreement before the Company will consider reclassifying the loan to accrual status.
The following table is a summary of nonaccrual loans at December 31, 2015, and 2014 by type of loan
One-to-four family residential
Commercial real estate
Consumer
Total nonaccrual loans
December 31,
2015
2014
(In thousands)
$
$
996
—
89
1,085
$
$
830
434
75
1,339
Real estate:
One-to-four family residential:
Owner occupied
Non-owner occupied
$
Multifamily
Commercial real estate
Construction/land development
Total real estate
Business
Consumer
Total
_________________________
(1) There were no loans 90 days past due and still accruing interest at December 31, 2015.
(2) Net of LIP.
$
$
$
$
$
$
678
—
—
—
—
678
—
—
678
483
—
—
—
—
483
—
78
561
96
— $
—
—
—
—
—
—
19
19
1,161
—
—
—
—
1,161
—
97
1,258
$
$
146,068
106,543
133,388
252,501
43,172
681,672
7,604
6,882
696,158
$
$
147,229
106,543
133,388
252,501
43,172
682,833
7,604
6,979
697,416
Nonperforming loans, net of LIP, were $1.1 million and $1.3 million at December 31, 2015, and 2014, respectively.
Foregone interest on nonaccrual loans for the years ended December 31, 2015, 2014, and 2013 were $103,000, $126,000 and
$650,000, respectively.
The following tables summarize the loan portfolio at December 31, 2015, and 2014, by type and payment activity:
December 31, 2015
One-to-Four
Family
Residential Multifamily
Commercial
Real Estate
Construction /
Land
Development
Business
Consumer
Total (3)
Performing (1)
Nonperforming (2)
Total
$
$
252,776
996
253,772
$
$
133,388
—
133,388
$
$
252,501
—
252,501
97
$
(In thousands)
$
43,172
—
43,172
$
$
7,604
—
7,604
$
$
6,890
89
6,979
$
$
696,331
1,085
697,416
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
____________
(1) There were $146.2 million of owner-occupied one-to-four family residential loans and $106.5 million of non-owner occupied
one-to-four family residential loans classified as performing.
(2) There were $996,000 of owner-occupied one-to-four family residential loans and no non-owner occupied one-to-four family
residential loans classified as nonperforming.
(3) Net of LIP.
December 31, 2014
One-to-Four
Family
Residential Multifamily
Commercial
Real Estate
Construction/
Land
Development
(In thousands)
Business
Consumer
Total (3)
Performing (1)
Nonperforming (2)
Total
$
$
272,735
$
120,271
$
247,534
$
24,316
$
3,783
$
7,055
830
—
434
—
—
75
273,565
$
120,271
$
247,968
$
24,316
$
3,783
$
7,130
$
$
675,694
1,339
677,033
_____________
(1) There were $160.3 million of owner-occupied one-to-four family residential loans and $112.4 million of non-owner occupied
one-to-four family residential loans classified as performing.
(2) There were $666,000 of owner-occupied one-to-four family residential loans and $164,000 of non-owner occupied one-to-four
family residential loans classified as nonperforming.
(3) Net of LIP.
Impaired loans. The loan portfolio is constantly being monitored by management for delinquent loans and changes in the
financial condition of each borrower. When an issue is identified with a borrower and it is determined that the loan needs to be
classified as nonperforming and/or impaired, an evaluation of the collateral is performed prior to the end of the financial reporting
period and, if necessary, an appraisal is ordered in accordance with the Company's appraisal policy guidelines. Based on this
evaluation, any additional provision for loan loss or charge-offs that may be needed is recorded prior to the end of the financial
reporting period.
There were no commitments to advance funds related to impaired loans at December 31, 2015, and 2014.
The following tables present a summary of loans individually evaluated for impairment at December 31, 2015, and 2014,
by the type of loan:
Recorded
Investment (1)
At or For the Year Ended December 31, 2015
Unpaid Principal
Balance (2)
(In thousands)
Related
Allowance
Loans with no related allowance:
One-to-four family residential:
Owner occupied
Non-owner occupied
Multifamily
Commercial real estate
Consumer
Total
Loans with an allowance:
One-to-four family residential:
Owner occupied
Non-owner occupied
Multifamily
Commercial real estate
Consumer
Total
Total impaired loans:
One-to-four family residential:
Owner occupied
Non-owner occupied
Multifamily
Commercial real estate
Consumer
Total
_________________
(1) Represents the loan balance less charge-offs.
(2) Contractual loan principal balance.
$
3,169
$
3,441
$
23,285
415
2,675
132
29,676
2,120
7,521
1,180
2,716
76
13,613
5,289
30,806
1,595
5,391
208
23,310
414
2,857
183
30,205
2,189
7,573
1,180
2,717
76
13,735
5,630
30,883
1,594
5,574
259
$
43,289
$
43,940
$
—
—
—
—
—
—
85
427
3
178
39
732
85
427
3
178
39
732
98
99
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents a summary of recorded investment in impaired loans, and interest income recognized on
impaired loans at December 31, 2015, 2014 and 2013 by the type of loan:
Recorded
Investment (1)
At or For the Year Ended December 31, 2014
Unpaid Principal
Balance (2)
(In thousands)
Related
Allowance
Loans with no related allowance:
One-to-four family residential:
Owner occupied
Non-owner occupied
Commercial real estate
Consumer
Total
Loans with an allowance:
One-to-four family residential:
Owner occupied
Non-owner occupied
Multifamily
Commercial real estate
Consumer
Total
Total impaired loans:
One-to-four family residential:
Owner occupied
Non-owner occupied
Multifamily
Commercial real estate
Consumer
Total
_____________
(1) Represents the loan balance less charge-offs.
(2) Contractual loan principal balance.
$
3,308
$
3,661
$
29,224
4,553
118
37,203
2,554
8,652
2,172
4,999
79
18,456
5,862
37,876
2,172
9,552
197
29,266
4,851
153
37,931
2,624
8,704
2,172
4,999
79
18,578
6,285
37,970
2,172
9,850
232
—
—
—
—
—
121
679
27
329
59
1,215
121
679
27
329
59
$
55,659
$
56,509
$
1,215
Loans with no related allowance:
One-to-four family residential:
Owner occupied
Non-owner occupied
Multifamily
Commercial real estate
Construction/land development
Consumer
Total
Loans with an allowance:
One-to-four family residential:
Owner occupied
Non-owner occupied
Multifamily
Commercial real estate
Consumer
Total
Total impaired loans:
One-to-four family residential:
Owner occupied
Non-owner occupied
Multifamily
Commercial real estate
Construction/land development
Consumer
Total
$
2015
Year Ended December 31,
2014
2013
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
(In thousands)
$
3,180
$
110
$
3,302
$
158
$
4,773
$
25,350
1,575
4,180
—
125
1,409
30
187
—
2
29,105
113
3,971
—
81
1,762
29,277
—
291
—
4
1,143
7,065
3,417
539
146
1,697
—
344
—
—
34,410
1,738
36,572
2,215
46,214
2,187
2,131
7,801
1,430
3,312
77
14,751
5,311
33,151
3,005
7,492
—
202
49,161
89
415
77
147
3
731
199
1,824
107
334
—
5
2,469
$
$
2,975
10,395
2,187
6,532
20
22,109
6,277
39,500
2,300
10,503
—
101
58,681
124
500
147
267
3
4,249
14,545
1,414
7,817
—
169
623
138
356
—
1,041
28,025
1,286
282
2,262
147
558
—
7
3,256
$
9,022
43,822
2,557
14,882
3,417
539
74,239
$
315
2,320
138
700
—
—
3,473
$
100
101
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Troubled Debt Restructurings. The following is a summary of information pertaining to TDRs:
Performing TDRs
Nonaccrual TDRs
Total TDRs
December 31,
2015
2014
(In thousands)
$
$
42,128
$
131
42,259
$
54,241
—
54,241
The accrual status of a loan may change after it has been classified as a TDR. Management considers the following in
determining the accrual status of restructured loans: (1) if the loan was on accrual status prior to the restructuring, the borrower
has demonstrated performance under the previous terms, and a credit evaluation shows the borrower's capacity to continue to
perform under the restructured terms (both principal and interest payments), the loan will remain on accrual at the time of the
restructuring; (2) if the loan was on nonaccrual status before the restructuring, and the Company's credit evaluation shows the
borrower's capacity to meet the restructured terms, the loan would remain as nonaccrual for a minimum of six months until the
borrower has demonstrated a reasonable period of sustained repayment performance (thereby providing reasonable assurance as
to the ultimate collection of principal and interest in full under the modified terms).
The following table presents for the periods indicated TDRs and their recorded investment prior to the modification and
after the modification:
Year Ended December 31,
2015
2014
Pre-
Modification
Outstanding
Recorded
Investment
Post-
Modification
Outstanding
Recorded
Investment
Number
of Loans
Pre-
Modification
Outstanding
Recorded
Investment
Post-
Modification
Outstanding
Recorded
Investment
Number
of Loans
(Dollars in thousands)
TDRs that occurred during the period:
One-to-four family residential:
Interest only payments with interest rate
concession
Principal and interest with interest rate
concession
Advancement of maturity date
Commercial real estate:
Principal and interest with interest rate
concession
Advancement of maturity date
Interest-only payments with interest rate
concession
Interest-only payments with advancement
of maturity date
6
2
2
1
2
1
1
$
1,439
$
1,439
12
$
2,522
$
2,522
426
248
775
866
496
2,004
426
248
775
866
496
2,004
6,254
6
9
—
—
2
—
29
1,174
1,722
—
—
3,470
—
$
8,888
$
1,174
1,722
—
—
3,470
—
8,888
Total
15
$
6,254
$
At December 31, 2015 and 2014, the Company had no commitments to extend additional credit to borrowers whose loan
terms have been modified in a TDR. All TDRs are also classified as impaired loans and are included in the loans individually
evaluated for impairment in the calculation of the ALLL.
TDRs resulted in no charge-offs to the ALLL for the years ended December 31, 2015 and 2014. For the year ended
December 31, 2015 and 2014, there were no payment defaults on loans modified as TDRs within the previous 12 months.
Credit Quality Indicators. The Company utilizes a nine-point risk rating system and assigns a risk rating for all credit
exposures. The risk rating system is designed to define the basic characteristics and identify risk elements of each credit extension.
Credits risk rated 1 through 5 are considered to be “pass” credits. Pass credits can be assets where there is virtually no credit risk,
such as cash secured loans with funds on deposit with the Bank. Pass credits also include credits that are on the Company's watch
list, where the borrower exhibits potential weaknesses, which may, if not checked or corrected, negatively affect the borrower’s
financial capacity and threaten their ability to fulfill debt obligations in the future. Credits classified as special mention are risk
rated 6 and possess weaknesses that deserve management’s close attention. Special mention assets do not expose the Company to
sufficient risk to warrant adverse classification in the substandard, doubtful or loss categories. Substandard credits are risk rated
7. An asset is considered substandard if it is inadequately protected by the current net worth and payment capacity of the borrower
or of any collateral pledged. Substandard assets include those characterized by the distinct possibility that the Company will sustain
some loss if the deficiencies are not corrected. Assets classified as doubtful are risk rated 8 and have all the weaknesses inherent
in those credits classified as substandard with the added characteristic that the weaknesses present make collection or liquidation
in full highly questionable and improbable, on the basis of currently existing facts, conditions and values. Assets classified as loss
are risk rated 9 and are considered uncollectible and cannot be justified as a viable asset for the Company. As of December 31,
2015, and 2014, the Company had no loans rated as doubtful or loss.
The following tables represent a summary of loans at December 31, 2015, and 2014 by type and risk category:
One-to-
Four
Family
Residential Multifamily
December 31, 2015
Commercial
Real Estate
Construction/
Land
Development
(In thousands)
Business
Consumer
Total (1)
Risk Rating:
Pass
Special mention
Substandard
$
247,239
$
133,388
$
248,196
$
43,172
$
7,604
$
6,702
$ 686,301
3,840
2,693
—
—
3,809
496
—
—
—
—
188
89
7,837
3,278
Total
$
253,772
$
133,388
$
252,501
$
43,172
$
7,604
$
6,979
$ 697,416
_____________
(1) Net of LIP.
Risk Rating:
Pass
Special mention
Substandard
Total
______________
(1) Net of LIP.
One-to-
Four
Family
Residential Multifamily
December 31, 2014
Commercial
Real Estate
Construction /
Land
Development
(In thousands)
Business
Consumer
Total (1)
$
$
263,094
4,157
6,314
273,565
$
$
116,891
1,416
1,964
120,271
$
$
235,841
10,529
1,598
247,968
$
$
24,316
—
—
24,316
$
$
3,783
—
—
3,783
$
$
6,833
—
297
7,130
$ 650,758
16,102
10,173
$ 677,033
Certain executive officers and directors have loans with the Bank. The aggregate dollar amount of these loans outstanding
to related parties is summarized as follows:
102
103
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Balance at beginning of year
Additions
Repayments
Balance at end of year
Note 4 - Other Real Estate Owned
Year Ended December 31,
2015
2014
2013
(In thousands)
$
$
138
$
—
(20)
118
$
548 $
—
(410)
138 $
498
353
(303)
548
The following table is a summary of OREO activity for the periods indicated:
Balance at beginning of year
Loans transferred to OREO
Capitalized (reimbursed) improvements
Gross proceeds from sale of OREO
Gain (loss) on sale of OREO
Market value adjustments
Balance at end of year
Year Ended December 31,
2015
2014
2013
(In thousands)
9,283
$
11,465
$
141
—
(6,246)
526
(41)
3,663
$
1,823
120
(3,646)
(86)
(393)
9,283
$
17,347
6,485
75
(13,151)
1,112
(403)
11,465
$
$
OREO includes properties acquired by the Company through foreclosure and deed in lieu of foreclosure. OREO at
December 31, 2015 consisted of $3.5 million in commercial real estate properties and $173,000 in construction/land development
projects.
Note 5 - Premises and Equipment
Premises and equipment consisted of the following at December 31, 2015, and 2014:
Land
Buildings and improvements
Leasehold improvements
Furniture, fixtures and equipment
Computer hardware and software
Construction in process
Less accumulated depreciation and amortization
Total premises and equipment, net
December 31,
2015
2014
(In thousands)
$
1,914
$
17,820
391
3,638
1,883
235
25,881
(8,174)
17,707
$
$
1,914
17,820
—
3,399
969
7
24,109
(7,375)
16,734
Depreciation and amortization expense was $809,000 for the year ended December 31, 2015 and $755,000 and $799,000
for the years ended December 31, 2014 and 2013, respectively.
Note 6 - Fair Value
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date.
The Company determines the fair values of its financial instruments based on the fair value hierarchy which requires an
entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair values. Observable
inputs reflect market data obtained from independent sources, while unobservable inputs reflect its estimate for market assumptions.
Valuation inputs refer to the assumptions market participants would use in pricing a given asset or liability using one of
the three valuation techniques. Inputs can be observable or unobservable. Observable inputs are those assumptions that market
participants would use in pricing the particular asset or liability. These inputs are based on market data and are obtained from an
independent source. Unobservable inputs are assumptions based on the Company's own information or estimate of assumptions
used by market participants in pricing the asset or liability. Unobservable inputs are based on the best and most current information
available on the measurement date.
All inputs, whether observable or unobservable, are ranked in accordance with a prescribed fair value hierarchy:
(cid:127) Level 1 - Quoted prices for identical instruments in active markets.
(cid:127) Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in
markets that are not active; and model-derived valuations whose inputs are observable.
(cid:127) Level 3 - Instruments whose significant value drivers are unobservable.
The tables below present the balances of assets and liabilities measured at fair value on a recurring basis (there were no
transfers between Level 1, Level 2 and Level 3 recurring measurements during the periods presented):
December 31, 2015
Fair Value
Measurements
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs (Level 3)
(In thousands)
Available-for-sale investments:
Mortgage-backed investments:
Fannie Mae
Freddie Mac
Ginnie Mae
Municipal bonds
U.S. Government agencies
Corporate bonds
$
$
50,321
$
— $
50,321
$
26,137
13,732
12,064
13,542
13,769
129,565
$
—
—
—
—
—
— $
26,137
13,732
12,064
13,542
13,769
129,565
$
—
—
—
—
—
—
—
104
105
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents quantitative information about Level 3 fair value measurements for financial instruments
measured at fair value on a nonrecurring basis.
Fair
Value
Valuation
Technique(s)
December 31, 2015
Unobservable Input(s)
(Dollars in thousands)
Range
(Weighted Average)
Impaired Loans $ 42,557 Market approach
Appraised value discounted by market or
borrower conditions
0.0% - 2.1% (0.3%)
OREO
$
3,663 Market approach
Appraised value less selling costs
0.0% -13.6% (1.0%)
Fair
Value
Valuation
Technique(s)
December 31, 2014
Unobservable Input(s)
(Dollars in thousands)
Range
(Weighted Average)
Impaired Loans $ 54,365 Market approach
Appraised value discounted by market or
borrower conditions
0.0% - 45.8% (2.2%)
OREO
$
9,283 Market approach
Appraised value less selling costs
0.0% - 19.4% (3.3%)
December 31, 2014
Fair Value
Measurements
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs (Level 3)
(In thousands)
Available-for-sale investments:
Mortgage-backed investments:
Fannie Mae
Freddie Mac
Ginnie Mae
Municipal bonds
U.S. Government agencies
Corporate bonds
$
$
40,916
$
— $
40,916
$
21,946
26,013
644
16,816
14,039
—
—
—
—
—
21,946
26,013
644
16,816
14,039
120,374
$
— $
120,374
$
—
—
—
—
—
—
—
The estimated fair value of Level 2 investments is based on quoted prices for similar investments in active markets,
identical or similar investments in markets that are not active, and model-derived valuations whose inputs are observable.
The tables below present the balances of assets and liabilities measured at fair value on a nonrecurring basis at December
31, 2015, and 2014.
December 31, 2015
Quoted Prices
in
Active Markets
for Identical
Assets (Level 1)
Significant
Other
Observable
Inputs (Level 2)
Significant
Unobservable
Inputs
(Level 3)
Fair Value
Measurements
Impaired loans (included in loans receivable, net)(1) $
OREO
Total
$
42,557
3,663
46,220
$
$
(In thousands)
— $
—
— $
— $
—
— $
42,557
3,663
46,220
_______________
(1) Total value of impaired loans is net of $732,000 of specific reserves on performing TDRs.
December 31, 2014
Quoted Prices
in
Active Markets
for Identical
Assets (Level 1)
Significant
Other
Observable
Inputs (Level 2)
Significant
Unobservable
Inputs
(Level 3)
Fair Value
Measurements
Impaired loans (included in loans receivable, net)(1) $
OREO (2)
Total
$
54,444
9,283
63,727
$
$
(In thousands)
— $
—
— $
— $
—
— $
54,444
9,283
63,727
________________
(1) Total value of impaired loans is net of $1.2 million of specific reserves on performing TDRs.
OREO properties are measured at the lower of their carrying amount or fair value, less costs to sell. Fair values are
generally based on third party appraisals of the property, resulting in a Level 3 classification. In cases where the carrying amount
exceeds the fair value, less costs to sell, an impairment loss is recognized.
106
107
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The carrying amounts and estimated fair values of financial instruments at December 31, 2015, and 2014, were as follows:
December 31, 2015
Fair Value Measurements Using:
Carrying Value
Estimated
Fair Value
Level 1
Level 2
Level 3
(In thousands)
Financial Assets:
Cash on hand and in banks
$
5,713
$
5,713
$
5,713
$
Interest-earning deposits
Investments available-for-sale
Loans receivable, net
FHLB stock
Accrued interest receivable
Financial Liabilities:
Deposits
Certificates of deposit, retail
Certificates of deposit, brokered
Advances from the FHLB
Accrued interest payable
99,998
129,565
685,072
6,137
2,968
285,416
323,840
66,151
125,500
135
99,998
129,565
693,480
6,137
2,968
285,416
324,135
66,947
125,466
135
99,998
—
—
—
—
285,416
—
—
—
—
— $
—
129,565
—
6,137
2,968
—
324,135
66,947
125,466
135
—
—
—
693,480
—
—
—
—
—
—
—
December 31, 2014
Fair Value Measurements Using:
(cid:127)
(cid:127)
(cid:127)
Investments available-for-sale: The fair value of all investments excluding FHLB stock was based upon quoted market
prices for similar investments in active markets, identical or similar investments in markets that are not active, and
model-derived valuations whose inputs are observable.
Loans receivable: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values
are based on carrying values. The fair value of fixed-rate loans is estimated using discounted cash flow analysis,
utilizing interest rates that would be offered for loans with similar terms to borrowers of similar credit quality. As a
result of current market conditions, cash flow estimates have been further discounted to include a credit factor. The
fair value of nonperforming loans is estimated using the fair value of the underlying collateral.
Liabilities: The fair value of deposits with no stated maturity, such as statement savings, NOW, and money market
accounts, is equal to the amount payable on demand. The fair value of certificates of deposit is based on the discounted
value of contractual cash flows using current interest rates for certificates of deposit with similar remaining maturities.
The fair value of FHLB advances is estimated based on discounting the future cash flows using current interest rates
for debt with similar remaining maturities.
(cid:127) Off balance sheet commitments: No fair value adjustment is necessary for commitments made to extend credit, which
represents commitments for loan originations or for outstanding commitments to purchase loans. These commitments
are at variable rates, are for loans with terms of less than one year and have interest rates which approximate prevailing
market rates, or are set at the time of loan closing.
Fair value estimates are based on existing balance sheet financial instruments without attempting to estimate the value
of anticipated future business. The fair value has not been estimated for assets and liabilities that are not considered financial
instruments.
Note 7 - Accrued Interest Receivable
Carrying Value
Estimated
Fair Value
(In thousands)
Level 1
Level 2
Level 3
Accrued interest receivable consisted of the following at December 31, 2015 and 2014:
Financial Assets:
Cash on hand and in banks
$
5,920
$
5,920
$
5,920
$
Interest-earning deposits
Investments available-for-sale
Loans receivable, net
FHLB stock
Accrued interest receivable
Financial Liabilities:
Deposits
Certificates of deposit, retail
Certificates of deposit, brokered
Advances from the FHLB
Accrued interest payable
98,129
120,374
663,938
6,745
3,265
201,539
358,159
54,429
135,500
142
98,129
120,374
678,676
6,745
3,265
201,539
359,049
55,229
135,392
142
98,129
—
—
—
—
201,539
—
—
—
—
— $
—
120,374
—
6,745
3,265
—
359,049
55,229
135,392
142
—
—
—
678,676
—
—
—
—
—
—
—
Fair value estimates, methods, and assumptions are set forth below for the Company's financial instruments:
(cid:127) Financial instruments with book value equal to fair value: The fair value of financial instruments that are short-term
or reprice frequently and that have little or no risk are considered to have a fair value equal to book value. These
instruments include cash on hand and in banks, interest-bearing deposits, accrued interest receivable, and accrued
interest payable.
(cid:127) FHLB stock: FHLB stock is not publicly-traded, however, it may be redeemed on a dollar-for-dollar basis, for any
amount the Bank is not required to hold, subject to the FHLB’s discretion. The fair value is therefore equal to the book
value.
Loans receivable
Investments
Interest-earning deposits
Note 8 - Deposits
Deposit accounts consisted of the following at December 31, 2015, and 2014:
Noninterest-bearing
NOW
Statement savings
Money market
Certificates of deposit, retail
Certificates of deposit, brokered
$
$
$
$
108
109
December 31,
2015
2014
(In thousands)
2,467
$
493
8
2,968
$
2,879
382
4
3,265
December 31,
2015
2014
$
(In thousands)
29,392
16,261
28,327
211,436
323,840
66,151
675,407
$
14,354
20,752
23,901
142,532
358,159
54,429
614,127
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2015, scheduled maturities of certificates of deposit were as follows:
Outstanding advances consisted of the following at December 31, 2015, and 2014:
December 31,
2016
2017
2018
2019
2020
thereafter
Amount
(In thousands)
134,663
88,147
66,726
82,203
12,174
6,078
389,991
$
$
Deposits included public funds of $16.0 million and $15.9 million at December 31, 2015 and 2014, respectively.
Certificates of deposit equal to or exceeding the FDIC insured amount of $250,000 included in deposits at December 31,
2015 and 2014, were $72.5 million and $79.8 million, respectively. Interest expense on these certificates totaled $769,000, $821,000,
and $1.2 million for the years ended December 31, 2015, 2014, and 2013, respectively.
Included in deposits are accounts of $1.8 million and $2.7 million at December 31, 2015, and 2014, respectively which
are controlled by management, members of the Board of Directors, and related entities.
Interest expense on deposits for the periods indicated was as follows:
NOW
Statement savings
Money market
Certificates of deposit, retail
Certificates of deposit, brokered
Note 9 - Other Borrowings
Year Ended December 31,
2015
18
40
603
3,574
1,243
5,478
2014
(In thousands)
23
$
30
311
4,388
311
5,063
$
$
$
2013
30
31
291
6,442
—
6,794
$
$
At December 31, 2015, and 2014, the Bank maintained credit facilities with the FHLB totaling $342.5 million and $227.3
million, respectively. Outstanding advances totaled $125.5 million at December 31, 2015 and carried a weighted-average interest
rate of 0.97%. At December 31, 2014, outstanding advances totaled $135.5 million with a weighted-average interest rate of 0.95%.
The credit facility was collateralized by a market value of $162.8 million of single-family residential mortgages, $134.1 million
of commercial real estate loans and $68.2 million of multifamily loans under a blanket lien arrangement at December 31, 2015.
At December 31, 2014, the credit facility was collateralized by a market value of $171.7 million of single-family residential
mortgages, $105.8 million of commercial real estate loans, and $74.2 million of multifamily loans under a blanket lien arrangement.
The Bank also had $35.0 million unused line-of-credit facilities with other financial institutions at December 31, 2015, with interest
payable at the then stated rate.
December 31, 2015
Principal Balance
(Dollars in thousands)
Fixed Interest Rate
34,000
20,000
10,000
20,000
20,000
6,500
5,000
10,000
125,500
0.81
0.70
1.02
0.84
0.87
1.52
1.76
1.70
Maturity Date
03/2016
05/2016
10/2016
11/2016
04/2017
06/2018
11/2018
05/2019
$
$
Note 10 - Benefit Plans
The Company participates in the Pentegra Defined Benefit Plan for Financial Institutions (“The Pentegra DB Plan”), a
tax-qualified defined-benefit pension plan that covers substantially all employees after one year of continuous employment. Pension
benefits vest over a period of five years of credited service. The Pentegra DB Plan’s Employer Identification Number is 13-5645888
and the Plan Number is 333. The Pentegra DB Plan operates as a multi-employer plan for accounting purposes and as a multiple-
employer plan under the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code. There are no collective
bargaining agreements in place that require contributions to the Pentegra DB Plan.
The Pentegra DB Plan is a single plan under Internal Revenue Code Section 413(c) and, as a result, all of the assets stand
behind all of the liabilities. Accordingly, under the Pentegra DB Plan, contributions made by a participating employer may be used
to provide benefits to participants of other participating employers.
As of March 31, 2013, the Pentegra DB Plan was frozen, eliminating all future benefit accruals for employees. Each
employee's accrued benefit was determined as of March 31, 2013.
The funding target is the present value of all benefits that have accrued as of the first day of the current plan year (July
1). Because interest rates used to calculate the present value of all benefits (6.28% for 2015 and 6.49% for 2014) is significantly
higher than current market rates, the funding target does not represent the Company's actual liability upon withdrawal from
participation in the Pentegra DB Plan, which is significantly larger than the funding target. The table below presents the funded
status (market value of plan assets divided by funding target) of the plan as of July1:
Source
First Financial Northwest's Plan(1)
2015
2014
Valuation Report
Valuation Report
102.8%
105.3%
_________________
(1) Market value of plan assets reflects any contributions received through June 30, 2015, or 2014, respectively.
Total contributions made to the Pentegra DB Plan, as reported on Form 5500, equal $190.8 million and $136.5 million
for the plan years ending June 30, 2014 and June 30, 2013, respectively. The Company's contributions to the Pentegra DB Plan
are not more than 5% of the total contributions to the Pentegra DB Plan. The Company's policy is to fund pension costs as accrued.
110
111
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Total contributions during the years ended December 31, 2015, 2014, and 2013 were:
Shares held by the ESOP at December 31, 2015, and 2014, are as follows:
2015
2014
2013
Date Paid
Amount
Date Paid
Amount
Date Paid
Amount
11/2015
$
540,000
9/25/2014
11/28/2014
Total
$
540,000
Total
$
$
8,735
539,932
9/18/2013
12/5/2013
12/20/2013
548,667
Total
$
$
26,328
43,979
159,080
229,387
Allocated shares
Unallocated shares
Total ESOP shares
931,040
761,760
1,692,800
Fair value of unallocated shares
$
10,634
$
818,187
874,613
1,692,800
10,530
December 31,
2015
2014
(Dollars in thousands, except share data)
The Company has post-employment agreements with certain key officers to provide supplemental retirement benefits.
The Company recorded $101,000, $170,000 and $159,000 of deferred compensation expense for the years ended December 31,
2015, 2014, and 2013, respectively.
The Company has a savings plan under Section 401(k) of the Internal Revenue Code, covering substantially all employees
after 90 days of continuous employment. Under the plan, employee contributions up to 6% will be matched 50% by the Company.
Such matching becomes vested over a period of five years of credited service. Employees may make investments in various stock,
money market, or fixed income plans. The Company contributed $192,000, $161,000 and $155,000 to the plan for the years ended
December 31, 2015, 2014, and 2013, respectively.
The Company provides an ESOP for the benefit of substantially all employees. The ESOP borrowed $16.9 million from
First Financial Northwest and used those funds to acquire 1,692,800 shares of First Financial Northwest's stock at the time of the
initial public offering at a price of $10.00 per share. The loan matures on October 8, 2022 and has a fixed interest rate of 4.88%.
Shares purchased by the ESOP with the loan proceeds are held in a suspense account and are allocated to ESOP participants
on a pro rata basis as principal and interest payments are made by the ESOP to First Financial Northwest. The loan is secured by
shares purchased with the loan proceeds and will be repaid by the ESOP with funds from the Company's discretionary contributions
to the ESOP and earnings on the ESOP assets. Annual principal and interest payments of $1.6 million were made by the ESOP
during 2015, 2014, and 2013.
As shares are committed to be released from collateral, the Company reports compensation expense equal to the daily
average market prices of the shares and the shares become outstanding for EPS computations. The compensation expense is accrued
throughout the year.
A summary of key transactions for the ESOP for the periods indicated follows:
In June 2008, First Financial Northwest shareholders approved the First Financial Northwest 2008 Equity Incentive Plan
(“Plan”). The Plan provides for the grant of stock options, restricted stock, and stock appreciation rights.
Total compensation expense for the Plan for the years ended December 31, 2015, 2014, and 2013 was $440,000, $384,000,
and $1.4 million, respectively. The related income tax benefit was $154,070, $134,000 and $496,000 for the years ended
December 31, 2015, 2014, and 2013, respectively.
Stock Options
The Plan authorized the grant of stock options amounting to 2,285,280 shares to Company directors, advisory directors,
officers, and employees. Option awards are granted with an exercise price equal to the market price of First Financial Northwest's
common stock at the grant date. These option awards have a vesting period of five years, with 20% vesting on the anniversary
date of each grant date, and a contractual life of ten years. Any unexercised stock options will expire ten years after the grant date,
or sooner in the event of the award recipient’s death, disability or termination of service with the Company. First Financial Northwest
has a policy of issuing new shares from authorized but unissued common stock upon the exercise of stock options. At December 31,
2015, remaining options for 591,756 shares of common stock were available for grant under the Plan.
The fair value of each option award is estimated on the grant date using a Black-Scholes model that uses the assumptions
noted in the table below. The dividend yield is based on the current quarterly dividend in effect at the time of the grant. Historical
employment data is used to estimate the forfeiture rate. In previous years, First Financial Northwest elected to use a weighted-
average of its peers’ historical stock price information in conjunction with its own stock price history due to the limited amount
of history available regarding its stock price. Now that sufficient stock price information is available regarding its stock, First
Financial Northwest is utilizing the historical volatility of its stock price over a specified period of time for the expected volatility
assumption. First Financial Northwest bases the risk-free interest rate on the U.S. Treasury Constant Maturity Indices in effect on
the date of the grant. First Financial Northwest elected to use the simplified method permitted by the Securities and Exchange
Commission to calculate the expected term by setting the expected life at a midpoint of the vesting term of an option and the
contractual term.
Year Ended December 31,
2014
2013
2015
ESOP contribution expense
Dividends on unallocated ESOP shares used to reduce ESOP contribution
$
(In thousands)
1,216
$
197
$
1,400
210
1,087
132
112
113
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value of options granted was determined using the following weighted-average assumptions as of the grant date
for the periods indicated.
Annual dividend yield
Expected volatility
Risk-free interest rate
Expected term
Weighted-average grant date fair value per option granted
$
4.74
$
4.13
$
3.70
Vested
10.0 years
10.0 years
8.1 years
Nonvested at December 31, 2013
Year Ended December 31,
2015
2014
2013
1.77%
35.30
2.23
1.86%
37.27
2.44
1.35%
34.05
2.18
Nonvested at December 31, 2012
Granted
Vested
Forfeited
A summary of the Company’s stock option plan awards activity for the year ended December 31, 2015 follows:
Weighted-
Average
Exercise Price
Shares
Weighted-
Average
Remaining
Contractual
Term in Years
Aggregate
Intrinsic
Value
Outstanding at December 31, 2014
929,260
$
Granted
Exercised
Outstanding at December 31, 2015
Expected to vest assuming a 3% forfeiture rate over
the vesting term
Exercisable at December 31, 2015
80,000
(125,000)
884,260
876,400
622,260
9.51
12.98
7.48
10.11
10.10
9.72
— $
—
—
4.93
4.90
3.46
—
—
—
3,403,707
3,380,786
2,639,687
As of December 31, 2015, there was $926,000 of total unrecognized compensation cost related to nonvested stock options
granted under the Plan. The cost is expected to be recognized over the remaining weighted-average vesting period of 3.6 years.
Restricted Stock Awards
The Plan authorized the grant of restricted stock awards amounting to 914,112 shares to directors, advisory directors,
officers and employees. Compensation expense is recognized over the vesting period of the awards based on the fair value of the
stock at the grant date. The restricted stock awards’ fair value is equal to the value on the grant date. Shares awarded as restricted
stock vest ratably over a five-year period beginning at the grant date with 20% vesting on the anniversary date of each grant date.
At December 31, 2015, remaining restricted awards for 74,478 shares were available to be issued. Shares that have been awarded
but have not yet vested are held in a reserve account until they are vested.
A summary of changes in nonvested restricted stock awards for the period ended December 31, 2015, follows:
Nonvested Shares
Shares
Weighted-Average
Grant Date
Fair Value
244,847
$
25,000
(156,047)
(10,400)
103,400
(27,800)
75,600
(27,800)
47,800
46,366
8.95
10.88
9.72
9.12
8.24
7.64
8.47
7.64
8.95
Nonvested at December 31, 2014
Vested
Nonvested at December 31, 2015
Expected to vest assuming a 3% forfeiture rate over the vesting term
As of December 31, 2015 there was $358,000 of total unrecognized compensation costs related to nonvested shares
granted as restricted stock awards. The cost is expected to be recognized over the remaining weighted-average vesting period of
2.0 years. The total fair value of shares vested during the years ended December 31, 2015, and 2014 were $212,000 and $212,000,
respectively.
Note 11 - Federal Income Taxes
The components of income tax expense (benefit) for the periods indicated are as follows:
Current
Deferred
Total income tax expense (benefit)
Year Ended December 31,
2015
2014
2013
(In thousands)
$
$
717
4,170
4,887
$
$
254
5,602
5,856
$
$
199
(13,742)
(13,543)
A reconciliation of the tax provision (benefit) based on the statutory corporate rate of 35% during the years ended
December 31, 2015, 2014 and 2013 on pretax income is as follows:
Income tax expense at statutory rate
Income tax effect of:
Tax exempt interest, net
Change in valuation allowance
Benefit of lower federal tax bracket
Other, net
Total income tax expense (benefit)
Year Ended December 31,
2015
2014
2013
$
4,917
(In thousands)
5,790
$
$
3,823
(38)
(112)
(39)
159
4,887
$
(8)
19
—
55
5,856
$
(21)
(17,329)
—
(16)
(13,543)
$
114
115
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under GAAP, a valuation allowance is required to be recognized if it is “more likely than not” that a portion of the
deferred tax asset will not be realized. In order to support a conclusion that a valuation allowance is not needed, management
evaluates both positive and negative evidence under the "more likely than not" standard. The weight given to the potential effect
of negative and positive evidence should be commensurate with the extent to which the strength of the evidence can be objectively
verified. As of December 31, 2015, it was determined the full deferred tax asset would be realized in future periods and a valuation
allowance would not be necessary.
Note 12 - Regulatory Capital Requirements
Under Federal regulations, pre-conversion retained earnings are restricted for the protection of pre-conversion depositors.
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory and, possibly, additional discretionary actions by regulators
that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and
the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative
measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices.
The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk
weightings and other factors. Prompt corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts
and ratios (set forth in the table that follows) of total and Tier 1 capital to risk-weighted assets (as defined in the regulations) and
of Tier 1 capital to average assets.
As of December 31, 2015, according to the most recent notification from the FDIC, the Bank was categorized as well-
capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since the notification
that management believes have changed the Bank's category.
The net deferred tax asset, included in the accompanying consolidated balance sheets, consisted of the following at the
dates indicated:
Deferred tax assets:
Net operating loss carryforward
Charitable contributions
ALLL
Reserve for unfunded commitments
Deferred compensation
Net unrealized loss on investments available for sale
Alternative minimum tax credit carryforward
Employee benefit plans
Net capital loss on investments
OREO market value adjustments
Accrued expenses
Deferred tax assets before valuation allowance
Valuation allowance
Total deferred tax assets
Deferred tax liabilities:
FHLB stock dividends
Loan origination fees and costs
Net unrealized gain on investments available for sale
Fixed assets
Other, net
Total deferred tax liabilities
Deferred tax assets, net
December 31,
2015
2014
2013
(In thousands)
$
— $
3,052
$
7
3,257
187
646
—
1,375
1,051
—
213
510
7,246
—
7,246
2
3,599
128
688
—
1,939
1,535
450
414
165
11,972
(450)
11,522
7,441
27
4,454
121
698
463
1,685
1,701
431
392
285
17,698
(431)
17,267
$
1,255
$
1,337
$
1,337
870
44
299
222
744
432
472
199
592
—
365
138
$
$
2,690
4,556
$
$
3,184
8,338
$
$
2,432
14,835
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences
between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. These calculations are based on many complex factors
including estimates of the timing of reversals of temporary differences, the interpretation of federal income tax laws, and a
determination of the differences between the tax and the financial reporting basis of assets and liabilities. Actual results could
differ significantly from the estimates and interpretations used in determining the current and deferred income tax assets and
liabilities.
The Company utilized its remaining federal net operating loss carryforward during 2015 and a portion of the remaining
capital loss carryforward. The unused capital loss carryforward expired on December 31, 2015. At this date, the Company had an
alternative minimum tax credit carryforward totaling $1.4 million, with no expiration date.
As a result of the bad debt deductions taken in years prior to 1988, retained earnings includes accumulated earnings of
approximately $4.5 million, on which federal income taxes have not been provided. If, in the future, this portion of retained
earnings is used for any purpose other than to absorb losses on loans or on property acquired through foreclosure, federal income
taxes may be imposed at the then-prevailing corporate tax rates. The Bank does not contemplate that such amounts will be used
for any purpose that would create a federal income tax liability; therefore no provision has been made.
116
117
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ending December 31,
Future Minimum Lease Payments
2016
2017
2018
2019
2020
Thereafter
Total
$
$
107,000
133,000
140,000
147,000
140,000
17,000
684,000
Legal Proceedings. The Company and its subsidiaries are from time to time defendants in and are threatened with various
legal proceedings arising from their regular business activities. Management, after consulting with legal counsel, is of the opinion
that the ultimate liability, if any, resulting from these pending or threatened actions and proceedings will not have a material effect
on the financial statements of the Company.
Employment Contracts and Severance Agreements. The Company has change in control severance agreements with key
officers that offer specified terms of salary coverage. In addition, the Company has employment contracts with certain executives
that include specified terms of salary coverage as a result of involuntary termination due to change in control or other circumstances.
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Bank’s actual capital amounts and ratios at December 31, 2015, and 2014, are presented in the following table.
Actual
Amount
Ratio
For Capital Adequacy
Purposes
Amount
Ratio
(Dollars in thousands)
To be Well Capitalized
Under Prompt Corrective
Action Provisions
Amount
Ratio
December 31, 2015:
Total risk-based capital
Bank only
Parent company
$
121,237
179,551
17.62% $
25.94
55,058
55,369
8.00% $
8.00
68,823
69,211
10.00%
10.00
Tier 1 risk-based capital
Bank only
Parent company
Common equity tier 1
capital
Bank only
Parent company
Tier 1 leverage capital
Bank only
Parent company
December 31, 2014: (1)
Total risk-based capital
112,613
170,877
16.36
24.69
41,294
41,527
112,613
170,877
112,613
170,877
16.36
24.69
11.61
17.55
30,970
31,145
38,787
38,952
6.00
6.00
4.50
4.50
4.00
4.00
55,058
55,369
44,735
44,987
48,484
48,484
8.00
8.00
6.50
6.50
5.00
5.00
Bank only
$
116,053
19.56% $
47,469
8.00% $
59,336
10.00%
Tier 1 risk-based capital
Bank only
108,596
18.30
23,734
4.00
35,602
6.00
Tier 1 leverage capital
Bank only
108,596
11.79
36,849
4.00
46,061
5.00
_____________
(1) As a small bank holding company, First Financial Northwest was not required to file regulatory ratios until the first quarter of
2016. Ratios were calculated voluntarily during 2015 in preparation of the filing requirement.
Note 13 - Commitments and Contingencies
Financial Instruments with Off-Balance-Sheet Risk. In the normal course of business, the Company makes loan
commitments, typically unfunded loans and unused lines of credit, to accommodate the financial needs of its customers. These
arrangements have credit risk essentially the same as that involved in extending loans to customers and are subject to the Company's
normal credit policies, including collateral requirements, where appropriate. Commitments to extend credit are agreements to lend
to customers in accordance with predetermined contractual provisions. These commitments are for specific periods or, may contain
termination clauses and may require the payment of a fee. The total amounts of unused commitments do not necessarily represent
future credit exposure or cash requirements, in that commitments can expire without being drawn upon. Unfunded commitments
to extend credit totaled $66.4 million and $43.9 million at December 31, 2015, and 2014, respectively.
Lease Commitments. First Financial Northwest Bank has entered into lease commitments for branch space in Mill Creek,
Washington and Edmonds, Washington. The following table sets forth, at December 31, 2015, the Bank's commitment for future
lease payments under our operating leases:
118
119
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14 - Parent Company Only Financial Statements
Presented below are the condensed balance sheets, income statements and statements of cash flows for First Financial
Northwest.
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST FINANCIAL NORTHWEST, INC.
Condensed Balance Sheets
FIRST FINANCIAL NORTHWEST, INC.
Condensed Statements of Cash Flows
Assets
Cash and cash equivalents
Interest-bearing deposits
Investment in subsidiaries
Receivable from subsidiaries
Deferred tax assets, net
Other assets
Total assets
Liabilities and Stockholders' Equity
Liabilities:
Payable to subsidiaries
Other liabilities
Total liabilities
Stockholders' equity
Total liabilities and stockholders' equity
December 31,
2015
2014
(In thousands)
$
27
$
50,311
117,223
3,178
23
106
97
64,374
114,412
1,589
1,124
51
$
170,868
$
181,647
$
84
$
111
195
170,673
$
170,868
$
116
119
235
181,412
181,647
FIRST FINANCIAL NORTHWEST, INC.
Condensed Income Statements
Year Ended December 31,
2015
2014
2013
(In thousands)
Operating income:
Interest income:
Interest-bearing deposits with banks
Other income
Total operating income
Operating expenses:
Other expenses
Total operating expenses
Loss before provision for federal income taxes and equity in undistributed
earnings of subsidiaries
Federal income tax benefit
Loss before equity in undistributed loss of subsidiaries
Equity in undistributed earnings of subsidiaries
Net income
$
$
143
2
145
$
26
8
34
1,440
1,440
(1,295)
(601)
(694)
9,854
1,475
1,475
(1,441)
(573)
(868)
11,555
$
9,160
$
10,687
$
27
12
39
1,756
1,756
(1,717)
(619)
(1,098)
25,563
24,465
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash from operating
activities:
Equity in undistributed earnings of subsidiaries
Dividends received from subsidiary
ESOP, stock options, and restricted stock compensation
Change in deferred tax assets, net
Change in receivables from subsidiaries
Change in payables to subsidiaries
Change in other assets
Changes in other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Investments in subsidiaries
ESOP loan repayment
Net cash provided in investing activities
Cash flows from financing activities:
Proceeds from exercise of stock options
Proceeds for vested awards
Repurchase and retirement of common stock
Dividends paid
Net cash used by financing activities
Net (decrease) increase in cash
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Year Ended December 31,
2015
2014
2013
(In thousands)
$
9,160
$
10,687
$
24,465
(9,854)
6,785
—
1,101
(1,608)
(32)
(55)
(8)
5,489
—
1,115
1,115
935
282
(18,717)
(3,237)
(20,737)
(14,133)
64,471
50,338
$
$
(11,555)
72,300
13
(540)
8
50
(16)
(130)
70,817
—
1,054
1,054
3,611
282
(17,566)
(2,938)
(16,611)
55,260
9,211
64,471
$
(25,563)
14,491
48
(584)
(12)
66
119
(38)
12,992
71
1,011
1,082
3,023
1,508
(28,090)
(1,895)
(25,454)
(11,380)
20,591
9,211
120
121
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15 - Earnings Per Share
The following table presents a reconciliation of the components used to compute basic and diluted EPS for the periods
indicated.
Net income
Earnings allocated to participating securities
Earnings allocated to common shareholders
Basic weighted-average common shares outstanding
Dilutive effect of stock options
Dilutive effect of restricted stock grants
Diluted weighted-average common shares outstanding
Basic earnings per share
Diluted earnings per share
Year Ended December 31,
2015
2014
2013
(Dollars in thousands, except share data)
9,160
(31)
9,129
$
$
10,687
(52)
10,635
$
$
24,465
(150)
24,315
13,528,393
14,747,086
16,580,882
136,670
20,919
116,624
23,488
28,985
—
13,685,982
14,887,198
16,609,867
0.67
0.67
$
$
0.72
0.71
$
$
1.47
1.46
$
$
$
$
Potential dilutive shares are excluded from the computation of EPS if their effect is anti-dilutive. Options to purchase an
additional 225,000, 205,000, and 1,311,433 were not included in the computation of diluted EPS at December 31, 2015, 2014,
and 2013, respectively, because the incremental shares under the treasury stock method of calculation resulted in them being
antidilutive.
Note 17 - Summarized Consolidated Quarterly Financial Data (Unaudited)
The following table presents summarized consolidated quarterly data for each of the last three years.
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
(Dollars in thousands, except share data)
2015
Total interest income
Total interest expense
Net interest income
Recapture of provision for loan losses
Net interest income after recapture of provision for loan losses
Total noninterest income
Total noninterest expense
Income before provision for income taxes
Provision for federal income tax expense
Net income
Basic earnings per share
Diluted earnings per share
2014
Total interest income
Total interest expense
Net interest income
Recapture of provision for loan losses
Net interest income after recapture of provision for loan losses
Total noninterest income
Total noninterest expense
Income before provision for income taxes
Provision for federal income tax expense
Net income
Basic earnings per share
Diluted earnings per share (1)
2013
Total interest income
Total interest expense
Net interest income
Provision (recapture of provision) for loan losses
Net interest income after provision (recapture of provision) for
loan losses
Total noninterest income
Total noninterest expense
Income before provision (benefit) for income taxes
Provision (benefit) for federal income taxes
Net income
$
$
$
$
$
$
$
$
$
$
9,154
1,632
7,522
(100)
7,622
91
4,290
3,423
1,194
2,229
0.16
0.16
9,652
1,598
8,054
(500)
8,554
68
4,524
4,098
1,453
2,645
0.17
0.17
9,538
2,149
7,389
—
7,389
104
5,878
1,615
59
1,556
$
$
$
$
$
$
$
$
$
$
Basic earnings per share (1)
$
Diluted earnings per share (1)
$
(1) Basic and diluted quarterly earnings per share may not equal total due to rounding.
0.09
0.09
$
$
9,221
1,653
7,568
(500)
8,068
357
4,874
3,551
1,183
2,368
0.17
0.17
9,695
1,517
8,178
(100)
8,278
88
4,702
3,664
1,297
2,367
0.16
0.16
9,684
1,879
7,805
100
7,705
155
5,306
2,554
(13,809)
16,363
0.96
0.95
$
$
$
$
$
$
$
$
$
$
$
$
9,358
1,694
7,664
(700)
8,364
447
5,381
3,430
984
2,446
0.18
0.18
9,736
1,517
8,219
(300)
8,519
186
4,508
4,197
1,462
2,735
0.19
0.19
9,549
1,804
7,745
—
7,745
120
5,388
2,477
(135)
2,612
0.16
0.16
$
$
$
$
$
$
$
$
$
$
$
$
9,464
1,772
7,692
(900)
8,592
384
5,333
3,643
1,526
2,117
0.16
0.16
9,606
1,609
7,997
(1,200)
9,197
156
4,769
4,584
1,644
2,940
0.20
0.20
9,768
1,694
8,074
(200)
8,274
512
4,510
4,276
342
3,934
0.25
0.25
122
123
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
(i) Disclosure Controls and Procedures.
An evaluation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of
1934, as amended (the “Exchange Act”) was carried out as of December 31, 2015 under the supervision and with the participation
of our Chief Executive Officer ("CEO"), Chief Financial Officer ("CFO"), and several other members of our senior management.
The CEO (Principal Executive Officer) and CFO (Principal Financial Officer) concluded that, as of December 31, 2015, First
Financial Northwest's disclosure controls and procedures were effective in ensuring that information we are required to disclose
in the reports we file or submit under the Exchange Act is (1) recorded, processed, summarized, and reported within the time
periods specified in the SEC’s rules and forms, and (2) accumulated and communicated to First Financial Northwest management,
including its CEO and CFO, as appropriate to allow timely decisions regarding required disclosure, specified in the SEC’s rules
and forms.
(a) Management's report on internal control over financial reporting.
First Financial Northwest's management is responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934. First Financial Northwest's internal control
system is designed to provide reasonable assurance to our management and the Board of Directors regarding the preparation and
fair presentation of published financial statements for external purposes in accordance with generally accepted accounting
principles.
This process includes policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions of First Financial Northwest; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of First Financial Northwest are being made only in accordance with authorizations of
management and directors of First Financial Northwest; and (iii) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of First Financial Northwest's assets that could have a material effect on
the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements, and can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
Furthermore, because of changes in conditions, the effectiveness of internal control may vary over time.
First Financial Northwest's management assessed the effectiveness of First Financial Northwest's internal control over
financial reporting as of December 31, 2015. In making this assessment, management used the criteria set forth by the Committee
of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013 Framework). Based
on that assessment, First Financial Northwest's management believes that, as of December 31, 2015, First Financial Northwest's
internal control over financial reporting is effective based on those criteria.
Moss Adams LLP, an independent registered public accounting firm, has audited the Company's consolidated financial
statements and the effectiveness of our internal control over financial reporting as of December 31, 2015, which is included in
Item 8. Financial Statements and Supplementary Data.
(b) Attestation report of the registered public accounting firm.
The “Report of Independent Registered Public Accounting Firm” included in Item 8 of this Annual Report on Form 10-
K is incorporated herein by reference.
(c) Changes in internal control over financial reporting.
There were no significant changes in First Financial Northwest’s internal control over financial reporting during First
Financial Northwest’s most recent fiscal quarter that have materially affected or are reasonably likely to materially affect, First
Financial Northwest’s internal control over financial reporting.
Item 9B. Other Information
There was no information to be disclosed by us in a report on Form 8-K during the fourth quarter of fiscal 2015 that was
not so disclosed.
Item 10. Directors, Executive Officers and Corporate Governance
PART III
The information required under the section captioned "Proposal 1 - Election of Directors" in First Financial Northwest's
Definitive Proxy Statement for the 2016 Annual Meeting of Shareholders ("Proxy Statement") is incorporated herein by reference.
For information regarding the executive officers of First Financial Northwest and the Bank, see the information contained
herein under the section captioned "Item 1. Business - Personnel - Executive Officers of the Registrant."
Audit Committee Financial Expert
Through December 31, 2015, our Audit Committee was composed of Directors Gary F. Kohlwes (Chairman), Gary F.
Faull and Joann E. Lee. As of January 1, 2016, as part of the normal rotation of Directors, Roger H. Molvar replaced Gary F.
Kohlwes as a member of the Audit Committee and became the Chairman. Each member of the Audit Committee is “independent”
as defined in listing standards of The Nasdaq Stock Market LLC. Our Board of Directors has designated Director Joann E. Lee
as the Audit Committee financial expert, as defined in the SEC’s Regulation S-K. Director Joann E. Lee is independent as that
term is used in Item 407(d)(5)(i)(B) of SEC’s regulation S-K.
Code of Business Conduct and Ethics
A copy of the Code of Business Conduct and Ethics is available on our website at www.ffnwb.com under Investor Relations
– Corporate Overview – Governance Documents. Additionally, any material amendments to, or waiver from a provision of the
Code of Business Conduct and Ethics will be posted to the same website.
Compliance with Section 16(a) of the Exchange Act
The information required by this item under the section captioned "Section 16 (a) Beneficial Ownership Reporting
Compliance" in the Proxy Statement is incorporated herein by reference.
Item 11. Executive Compensation
The information required by this item under the sections captioned "Executive Compensation" and "Directors'
Compensation" in the Proxy Statement are incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
(a) Security Ownership of Certain Beneficial Owners and Management.
The information required by this item under the section captioned "Security Ownership of Certain Beneficial Owners and
Management" in the Proxy Statement is incorporated herein by reference.
(b) Security Ownership of Management.
The information required by this item under the section captioned "Security Ownership of Certain Beneficial Owners and
Management" in the Proxy Statement is incorporated herein by reference.
124
125
(c) Change In Control
PART IV
First Financial Northwest is not aware of any arrangements, including any pledge by any person of securities of First Financial
northwest, the operation of which may at a subsequent date result in a change in control of First Financial Northwest.
(d) Equity Compensation Plan Information
The following table summarizes share and exercise price information about First Financial Northwest's equity compensation
plans as of December 31, 2015.
Number of securities to
be issued upon exercise
of outstanding options,
warrants, and rights
Weighted-average
exercise price of
outstanding options,
warrants, and rights
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
(a)
(b)
(c)
884,260
$
N/A
884,260
$
10.11
N/A
10.11
591,756
N/A
591,756
Plan category
Equity compensation plans (stock
options) approved by security holders:
2008 Equity Incentive Plan(1)
Equity compensation plans not
approved by security holders
Total
___________________
(1) The restricted shares granted under the 2008 Equity Incentive Plan were purchased by First Financial Northwest in open
market transactions and subsequently issued to First Financial Northwest's directors and certain employees. As of December
31, 2015, there were 839,634 restricted shares granted pursuant to the 2008 Equity Incentive Plan and 74,478 shares were
available for future grants of restricted stock.
Item 13. Certain Relationships and Related Transactions and Director Independence
The information required by this item under the sections captioned "Meetings and Committees of the Board of Directors
and Corporate Governance Matters - Corporate Governance - Transactions with Related Persons," and "Meetings and Committees
of the Board of Directors and Corporate Governance Matters - Corporate Governance - Director Independence" in the Proxy
Statement are incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
The information required by this item under the section captioned "Proposal 4- Ratification of Appointment of Independent
Auditor" in the Proxy Statement is incorporated herein by reference.
Item 15. Exhibits and Financial Statement Schedules
(a) Exhibits
3.1
3.2
10.1
10.2
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
14
21
23
31.1
31.2
32.1
32.2
101
Articles of Incorporation of First Financial Northwest (incorporated by reference to Exhibit 3.1 to the Company’s
Registration Statement on Form S-1 (333-143539))
Amended and Restated Bylaws of First Financial Northwest (incorporated by reference to Exhibit 3.2 to the
Company’s Current Report on Form 8-K filed on August 21, 2015)
Amended Employment Agreement between First Financial Northwest Bank and Joseph W. Kiley III (incorporated
by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on December 5, 2013)
Form of Change in Control Severance Agreement for Executive Officers (incorporated by reference to Exhibit10.1
to the Company’s Current Report on Form 8-K filed on September 9, 2014)
Form of Supplemental Executive Retirement Agreement entered into by First Financial Northwest Bank with
Victor Karpiak, Harry A. Blencoe, Robert H. Gagnier, and Joseph W. Kiley III (incorporated by reference to
Exhibit 10.4 to the Company’s Registration Statement on Form S-1 (333-143539))
2008 Equity Incentive Plan (incorporated by reference to Appendix A to the Company’s proxy statement filed on
April 15, 2008)
Forms of incentive and non-qualified stock option award agreements (incorporated by reference to Exhibit 10.8 to
the Company’s Current Report on Form 8-K filed on July 1, 2008)
Form of restricted stock award agreement (incorporated by reference to Exhibit 10.9 to the Company’s Current
Report on Form 8-K filed on July 1, 2008)
Settlement Agreement and Mutual Release with the Stilwell Group (incorporated by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed on December 20, 2012)
Amendment No. 1 to the Settlement and Mutual Release Agreement with the Stilwell Group (incorporated by
reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 17, 2013)
Amendment No. 2 to the Settlement and Mutual Release Agreement with the Stilwell Group (incorporated by
reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 26, 2013)
Employment Agreement between First Financial Northwest Bank and Richard P. Jacobson (incorporated by
reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on December 5, 2013)
Separation Agreement and General Release between Herman L. Robinson and First Financial Northwest Bank
dated November 9, 2015 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
filed on November 25, 2015)
Form of Second Separation Agreement and General Release between Herman L. Robinson and First Financial
Northwest Bank(incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on
November 25, 2015)
Code of Business Conduct and Ethics (posted on the Company’s website at www.ffnwb.com pursuant to Regulation
S-K §229.406(c))
Subsidiaries of the Registrant
Consent of Independent Registered Public Accounting Firm- Moss Adams LLP
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
The following materials from First Financial Northwest’s Annual Report on Form 10-K for the year ended
December 31, 2015, formatted in Extensible Business Reporting Language (XBRL): (1) Consolidated Balance
Sheets; (2) Consolidated Income Statements; (3) Consolidated Statements of Comprehensive Income; (4)
Consolidated Statements of Stockholders' Equity; (5) Consolidated Statements of Cash Flows; and (6) Notes to
Consolidated Financial Statements.
___________
Copies of these exhibits are available upon written request to Investor Relations, First Financial Northwest, Inc., 201 Wells
Avenue South, Renton, Washington 98057.
126
127
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
Signature
Title
Date
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates indicated.
Date: March 10, 2016
FIRST FINANCIAL NORTHWEST, INC.
By: /s/Joseph W. Kiley III
Joseph W. Kiley III
President and Chief Executive Officer
/s/Gary F. Kohlwes
Gary F. Kohlwes
/s/Joseph W. Kiley III
Joseph W. Kiley III
/s/Richard P. Jacobson
Richard P. Jacobson
/s/Christine A. Huestis
Christine A. Huestis
/s/Gary F. Faull
Gary F. Faull
/s/Joann E. Lee
Joann E. Lee
/s/Roger H. Molvar
Roger H. Molvar
/s/Kevin D. Padrick
Kevin D. Padrick
/s/Daniel L. Stevens
Daniel L. Stevens
Chairman of the Board and Director
March 10, 2016
President, Chief Executive Officer and Director
March 10, 2016
(Principal Executive Officer)
Chief Financial Officer and Director
March 10, 2016
(Principal Financial Officer)
Vice President and Controller
(Principal Accounting Officer)
Director
Director
Director
Director
Director
March 10, 2016
March 10, 2016
March 10, 2016
March 10, 2016
March 10, 2016
March 10, 2016
128
129
1.09%
1.04%
0.96%
1.20%
1.10
1.00
0.90
0.86%
0.88%
0.72%
0.80
0.70
0.60
0.50
$0.25 - 1bn
$1 - 3bn
$3 - 5bn
$5 - 10bn
$10 - 20bn
FFNW Peer Group
[This page intentionally left blank]
1,800,000
1,600,000
1,400,000
1,200,000
1,000,000
800,000
600,000
400,000
200,000
0
3.00
2.80
2.60
2.40
2.20
2.00
2.95%
2.86%
2.63%
2.67%
2.73%
2.17%
$0.25 - 1bn
$1 - 3bn
$3 - 5bn
$5 - 10bn
$10 - 20bn
FFNW Peer Group
1,654,547
$9.97
$10.71
$10.88
$10.90
$10.91
$12.00
$11.95
$11.40
$12.37
$12.54
992,840
571,651
501,820
327,112
274,081
268,300
396,757
402,657
454,103
$4.00
Q2 2013
Q3 2013
Q4 2013
Q2 2014
Shares Purchased (left scale)
Q3 2014
Q4 2014
Q1 2015
Q2 2015
Q3 2015
Q4 2015
Weighted Average Price (right scale)
$2.00
$0.00
$14.00
$12.00
$10.00
$8.00
$6.00
FFNW Annual Report Wrap 2015.indd 4
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20.0
15.0
10.0
5.0
0.0
(5.0)
(10.0)
(15.0)
Dec-14
Jan-15 Feb-15 Mar-15
Apr-15 May-15
Jun-15
Jul-15
Aug-15
Sep-15
Oct-15
Nov-15
Dec-15
FFNW
KRE
S&P 500
Western US Peers
74.0%
66.0%
67.3%
80.0%
75.0
70.0
65.0
60.0
55.0
50.0
62.0%
59.5%
59.8%
$0.25 - 1bn
$1 - 3bn
$3 - 5bn
$5 - 10bn
$10 - 20bn
FFNW Peer Group
6
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FFNW Annual Report Wrap 2015.indd 1
3/25/2016 3:40:42 PM