Two Thousand Fifteen
Annual Report
2015
First Northwest Bancorp
Stephen Oliver
Chairman, Board of Directors
Larry Hueth
President and Chief Executive Officer
Message to Our Shareholders
Completion and transition were our objectives in fiscal 2015. We are proud to have
completed the conversion from a mutual form of ownership to a public company in January.
We appreciate the community and shareholder support which has helped us strengthen our
community bank and will position us for the future. In conjunction with the conversion we
were able to fund the First Federal Community Foundation with a combination of cash and
stock valued at $9.7 million. We celebrated the first anniversary of our Silverdale branch in
Kitsap County, where our phenomenal staff has produced deposit growth above levels achieved
in any previous First Federal de novo branch.
Financial Performance
The company experienced a net loss of $5.1 million for the fiscal year ended June 30, 2015.
The loss was primarily the result of the costs associated with funding the First Federal
Community Foundation. Excluding those one-time foundation costs we would have reported net
income of $3.3 million* compared to $2.7 million for the fiscal year ended June 30, 2014, an
increase of 21.9%.
Total assets increased $141.5 million, or 17.8%, from $795.3 million at June 30, 2014 to
$936.8 million at June 30, 2015. The primary source of increased assets was the conversion
which raised $117.6 million in net proceeds. The proceeds of the conversion were invested
in cash and investment securities. The balance of cash and investment securities increased
from $251.2 million at June 30, 2014 to $405.6 million at June 30, 2015. It is our intent to
systematically and prudently reposition these increased assets into higher yielding loans.
Our initial branch expansion in Silverdale was a success, increasing deposit balances at our
new location by $24.3 million during the first twelve months. Total deposits for the company
increased by $46.8 million from $600.4 million at June 30, 2014 to $647.2 million at June 30,
2015.
The mutual to stock conversion also strengthened our balance sheet, increasing equity 135.4%
to $190.7 million at June 30, 2015 from $81.0 million at June 30, 2014. Our capital ratios
continue to substantially exceed the regulatory requirements for a well-capitalized financial
institution.
The Future
Our strategic plans focus on positioning the company for the future. These plans include
geographic diversification, investing in technology and prudent risk management, all of which
are intended to increase shareholder value. These commitments by the Board, management
and staff reflect our continuing dedication to the communities we serve, delivering the best
banking experience anywhere with a home town touch.
Sincerely,
Stephen Oliver
Chairman, Board of Directors
Laurence J. Hueth
President and Chief Executive Officer
*This is a non-GAAP measure calculated by taking the net loss of $5.1 million calculated on a GAAP basis
and adding back the charitable contribution, net of tax, of $8.3 million to arrive at net income of $3.3 million.
Differences may occur due to rounding.
$936.8
Community Lending Program
$795.3
$784.5
Our Pledge to Provide
“You believed in us and we believe in you.”
Total Assets
as of June 30
Dollars in millions
$771.9
$748.9
Through our 2015 mutual to stock conversion process, you supported us by
voting to approve our stock conversion which generated additional capital. We are
proud to now pledge those
resources in Commercial,
Consumer and Construction
lending through a new
special lending program.
“First Federal is focused on understanding our business and
delivering exceptional results. Great people - great bank!”
~ JWJ Group - John Johnson
First Federal will provide funding to qualified businesses and individuals within our
footprint. Our goal is to provide the financial tools necessary to assist in increased
productivity, growth and revenue for our local businesses.
Our parked car was totaled by a hit and run driver. First Federal came through for
us during this stressful time. Obtaining an auto loan through First Federal was the
quickest and most efficient loan process ever.
~Cheryl Baumann
First Federal also provides personal lending products to fit consumer needs. We
strive to provide competitive interest rates.
Our Commitment
We are committed to strengthening our communities. Since 1923 we have
provided the finest in banking services and solutions. We are one of the largest
employers on the Olympic Peninsula, supporting economic growth and development
to our communities. We reinvest in the growth and success of our local businesses
and people.
“First Federal supported our vision for our new medical clinic by providing financing when timing
for finding financing was difficult. Our clinic now serves over 14,000 patients and is a leader in
healthcare delivery in Clallam County. We have a great community partnership with First Federal.”
~ Jamestown Family Health Clinic - Diane Gange, CFO
2011
2012
2013
2014
2015
Total Equity
as of June 30
Dollars in millions
$190.7
$81.0
$78.6
$77.2 $77.3
2011
2012
2013
2014
2015
Total Loans
as of June 30
Dollars in millions
$496.2
$487.9
$449.4
$424.2
$400.7
2011
2012
2013
2014
2015
Net Income (Loss)
year ended June 30
Dollars in thousands
$3,895
$2,668
$2,318
2011
2012
2013
2014
2015
($1,960)
($5,090)
Innovative Technology
Interactive Teller Machines (ITM): Technology is moving forward and so are we with options to manage your
finances your way. For some customers, virtual banking may be the wave of the future, but for others the branch
network will continue to be important. Our goal is to combine personal/business banking and innovative, efficient
technology. Mon - Fri 7:00am - 7:00pm Sat 9:00am - 1:00pm
Apple Pay: The First Federal Visa card and Apple Pay will change the way you pay. With a single touch you can
securely and privately pay at hundreds of thousands of stores and participating apps.
Product Solutions
Personal and Business Banking: Our focus is on serving, and our banking products are designed to meet your
real day-to-day financial needs.
Commercial/Mortgage/Consumer Lending: You have many lending options at First Federal, and we’ll explore
them with you—then put together the combination of terms and rate that fits you best.
Investment Services: At First Federal Investment Services, we know that the savings and investment decisions that you make today will impact your
financial future.
Providing a two way video option with
local representatives who manage:
• Withdrawals & Check Cashing
• Deposits & Transfers
• Loan Payments
• Inquiries and more!
Complimentary Services
First Federal Visa® Debit Card with UChoose Rewards® and MoneyPass® network. Enjoy the rewards program to earn points for your every day
shopping and the MoneyPass ATM Surcharge Free Network for the freedom to get cash without the ATM Fee.
Online Banking with Bill Pay, Finance Works, PopMoney and Funds Transfer. Keep track of your finances with an overview of all your accounts
within Online Banking. You can also pay bills and track your spending. Need to make a transfer? It’s easy with immediate transfers from your internal
accounts, and you can also make external transfers using PopMoney and Funds Transfer.
Mobile Banking with Mobile Deposit. The First Federal Mobile Banking App is a great way to manage your accounts, make transfers and even deposit
your check just by taking a picture.
Awards/Recognition/Accomplishments
First Northwest Bancorp FNWB
January 2015, First Federal Savings and Loan Association of Port Angeles completed its mutual to stock conversion.
ABA NASDAQ Community Bank Index
First Northwest Bancorp announced on July 3, 2015 that it has been added to the prestigious ABA NASDAQ Community
Bank Index, the nation’s most broadly represented stock index for community banks. The index includes approximately
3,763 community banks with more than $199 billion in market capitalization.
Bauer Financial 5-Star Rating
First Federal was rated 5-Stars in 2015 by Bauer Financial. A 5-Star rating is considered “superior,” the
highest rating possible.
Best Place to Bank
First Federal was again voted “Best Place to Bank” in Clallam and Jefferson Counties, ”Best Customer Service” in Clallam
and Jefferson Counties and “Best Financial Advisor” in Clallam and Jefferson Counties by the 2015 Peninsula Daily News’
Best of the Peninsula.
Community Foundation
The First Federal Community Foundation was established and funded as part of the conversion. In August 2015 the Foundation awarded $441,000 in
inaugural gifts to organizations in Clallam, Jefferson and Kitsap Counties.
“We are so pleased with the formation of the First Federal Community Foundation and look forward to providing additional
support in the communities First Federal serves”
~Karen McCormick, Executive Director & Board Member, First Federal Community Foundation
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2015
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number: 001-36741
FIRST NORTHWEST BANCORP
(Exact name of registrant as specified in its charter)
Washington
(State or other jurisdiction of incorporation or organization)
46-1259100
(I.R.S. Employer I.D. Number)
105 West 8th Street, Port Angeles, Washington
(Address of principal executive offices)
98362
(Zip Code)
Registrant's telephone number, including area code:
(360) 457-0461
Common Stock, par value $0.01 per share
(Title of Class)
The Nasdaq Stock Market LLC
(Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes
No
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
No
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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Accelerated filer
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
No
As of September 25, 2015, there were issued and outstanding 13,100,360 shares of the registrant’s common stock, which are traded on the NASDAQ
Global Market under the symbol “FNWB.” The registrant was not a reporting company as of the end of its last completed second fiscal quarter.
The aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the closing price of such stock as
of January 29, 2015, was $129.8 million. (The exclusion from such amount of the market value of the shares owned by any person shall not be
deemed an admission by the registrant that such person is an affiliate of the registrant.)
Portions of the registrant's Proxy Statement for the 2015 Annual Meeting of Shareholders are incorporated by reference into Part III.
DOCUMENTS INCORPORATED BY REFERENCE
FIRST NORTHWEST BANCORP
2015 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Forward-Looking Statements
Available Information
PART I
Item 1. Business
General
Market Area
Lending Activities
Asset Quality
Investment Activities
Deposit Activities and Other Sources of Funds
Subsidiary and Other Activities
Competition
Employees
How We Are Regulated
Taxation
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
General
Our Business and Operating Strategy
Critical Accounting Policies
New Accounting Pronouncements
Comparison of Financial Condition at June 30, 2015 and June 30, 2014
Comparison of Results of Operations for the Years Ended June 30, 2015 and June 30, 2014
Comparison of Financial Condition at June 30, 2014 and June 30, 2013
Comparison of Results of Operations for the Years Ended June 30, 2014 and June 30, 2013
Average Balances, Interest and Average Yields/Cost
Rate/Volume Analysis
Asset and Liability Management and Market Risk
Liquidity Management
Off-Balance Sheet Activities and Commitments
Contractual Obligations
Commitments and Off-Balance Sheet Arrangements
(Table of Contents continued on following page)
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Capital Resources
Effect of Inflation and Changing Prices
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
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
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As used in this report, the terms, “we,” “our,” and “us,” and “Company” refer to First Northwest Bancorp and its
consolidated subsidiary, unless the context indicates otherwise. When we refer to “First Federal” or the “Bank” in
this report, we are referring to First Federal Savings and Loan Association of Port Angeles, the wholly owned
subsidiary of First Northwest Bancorp.
3
Forward-Looking Statements
Certain matters in this Form 10-K, including information included or incorporated by reference, constitute
forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-
looking statements are not statements of historical fact, are based on certain assumptions and are generally identified
by the use of words such as “believes,” “expects,” “anticipates,” “estimates” or similar expressions. Forward-looking
statements include, but are not limited to:
(cid:127)
(cid:127)
(cid:127)
(cid:127)
statements of our goals, intentions and expectations;
statements regarding our business plans, prospects, growth and operating strategies;
statements regarding the quality of our loan and investment portfolios; and
estimates of our risks and future costs and benefits.
These forward-looking statements are subject to significant risks and uncertainties. Actual results may differ
materially from those contemplated by the forward-looking statements due to, among others, the following factors:
(cid:127)
(cid:127)
(cid:127)
changes in general economic conditions, either nationally or in our market area, that are worse than expected;
the credit risks of our lending activities, including changes in the level and trend of loan delinquencies and
write-offs and changes in our allowance for loan losses and provision for loan losses that may be impacted
by deterioration in the housing and commercial real estate markets;
fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations
in real estate values in our market area;
(cid:127)
a decrease in the secondary market demand for loans that we originate for sale;
(cid:127) management's assumptions in determining the adequacy of the allowance for loan losses;
(cid:127)
our ability to control operating costs and expenses, especially new costs associated with our operation as a
public company;
(cid:127) whether our management team can implement our operational strategy including but not limited to our loan
growth;
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
our ability to successfully integrate any newly acquired assets, liabilities, customers, systems, and
management personnel 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 success in opening new branches;
increases in premiums for deposit insurance;
the use of estimates in determining fair value of certain of our assets, which estimates may prove to be
incorrect and result in significant declines in valuation;
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;
increased competitive pressures among financial services companies;
our ability to attract and retain deposits;
changes in consumer spending, borrowing and savings habits;
our ability to successfully manage our growth in compliance with regulatory requirements;
results of examinations of us by the Washington State Department of Financial Institutions, Department
of Banks, the Federal Deposit Insurance Corporation, Federal Reserve Bank of San Francisco, or other
regulatory authorities, including the possibility that any such regulatory authority may, among other
things, require us to increase our reserve for loan losses, write-down assets, change our regulatory capital
position or affect our ability to borrow funds or maintain or increase deposits, which could adversely
affect our liquidity and earnings;
4
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
legislative or regulatory changes that adversely affect our business, including the effects of the Dodd-
Frank Act and Basel III, changes in regulatory policies and principles, or the interpretation of regulatory
capital or other rules;
adverse changes in the securities markets;
changes in accounting policies and practices, as may be adopted by the financial institutions regulatory
agencies, the Public Company Accounting Oversight Board or the Financial Accounting Standards
Board;
costs and effects of litigation, including settlements and judgments;
inability of key third-party vendors to perform their obligations to us; and
other economic, competitive, governmental, regulatory and technical factors affecting our operations,
pricing, products and services and other risks described elsewhere in our filings with the Securities and
Exchange Commission, including this Form 10-K.
These developments could have an adverse impact on our financial position and our results of operations.
Any of the forward looking statements that we make in this report and in other public statements we make may turn
out to be wrong because of inaccurate assumptions we might make, because of the factors illustrated above or because
of other factors that we cannot foresee. Any forward-looking statements are based upon management’s beliefs and
assumptions at the time they are made. We undertake no obligation to publicly update or revise any forward-looking
statements included or incorporated by reference in this document or to update the reasons why actual results could
differ from those contained in such statements, whether as a result of new information, future events or otherwise. In
light of these risks, uncertainties and assumptions, the forward-looking statements discussed in this report might not
occur, and you should not put undue reliance on any forward-looking statements.
Available Information
The Company provides a link on its investor information page at www.ourfirstfed.com to the Securities and Exchange
Commission’s (“SEC”) website (www.sec.gov) for purposes of providing copies of its annual report to shareholders,
Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and press releases. Other
than an investor’s own internet access charges, these filings are available free of charge and also can be obtained by
calling the SEC at 1-800-SEC-0330. The information contained on the Company’s website is not included as part of,
or incorporated by reference into, this Annual Report on Form 10-K.
5
PART I
Item 1. Business
General
First Northwest Bancorp (or the “Company”), a Washington corporation, was formed on August 14, 2012
for the purpose of becoming the bank holding company for First Federal Savings and Loan Association of Port
Angeles ("First Federal” or the “Bank”) in connection with First Federal’s mutual to stock conversion. The mutual to
stock conversion was completed on January 29, 2015, through the sale and issuance of 13,100,360 shares of
common stock by First Northwest Bancorp, including 933,360 shares contributed to our foundation, the First
Federal Community Foundation ("Foundation"), established in connection with the mutual to stock conversion. The
primary focus of the Foundation is to promote and support charitable services, affordable housing initiatives, local
community development projects, and local economic development initiatives in the Bank's primary market areas.
The Foundation was also funded with a $400,000 charitable contribution made by the Bank.
At June 30, 2015, we had total assets of $936.8 million, total deposits of $647.2 million and total
stockholders' equity of $190.7 million. First Northwest Bancorp’s business activities generally are limited to passive
investment activities and oversight of its investment in First Federal. Accordingly, the information set forth in this
report, including consolidated financial statements and related data, relates primarily to First Federal.
As a bank holding company, First Northwest Bancorp is subject to regulation by the Board of Governors of
the Federal Reserve System (“Federal Reserve”). First Federal changed its charter from a federal mutual savings
and loan association to a Washington State chartered mutual savings bank effective November 30, 2011, and is
examined and regulated by the Washington State Department of Financial Institutions, Division of Banks (“DFI”)
and by the Federal Deposit Insurance Corporation (“FDIC”). First Federal is required to have certain reserves set by
the Federal Reserve and is a member of the Federal Home Loan Bank of Des Moines (“FHLB” or “FHLB of Des
Moines”), which is one of the 11 regional banks in the Federal Home Loan Bank System (“FHLB System”).
First Federal is a community-based savings bank primarily serving the North Olympic Peninsula region of
Washington through its nine full-service banking offices. Eight branches are located within Clallam and Jefferson
counties and one in Kitsap County. In addition, we have a loan production office in Bellingham, Washington that
will become a full-service branch once construction of the building is completed, which is expected to be during the
second fiscal quarter ending December 31, 2015. We relocated our branch in Kitsap County in July 2014 and plan to
continue to grow our franchise by adding up to four de novo full service branch offices, including the new branch in
Bellingham, in contiguous counties in the Puget Sound region over the next three years.
We offer a wide range of products and services focused on the lending and depository needs of the
communities we serve. Historically, lending activities have been primarily directed toward the origination of first
lien one- to four-family mortgage loans, and, to a lesser extent, commercial and multi-family real estate loans,
construction and land loans (including lot loans), commercial business loans, and consumer loans, consisting
primarily of home equity loans and lines of credit. During the past decade, recognizing our need to adapt to
changing market conditions, we have revised our operating strategy to diversify our loan portfolio, expand our
deposit product offerings and enhance our infrastructure. We have increased the origination of commercial real
estate and multi-family real estate loans and decreased reliance on originating and retaining longer-term, fixed-rate,
residential mortgage loans. Since 2010, we have generally sold most newly originated and refinanced, conforming
single-family owner-occupied mortgage loans into the secondary market, although in 2012, we began selectively
retaining 30-year fixed-rate mortgages in the portfolio in an effort to enhance our net interest income. We have
historically offered traditional consumer and business deposit products, including transaction accounts, savings and
money market accounts and certificates of deposit for individuals, businesses and nonprofit organizations. Deposits
are our primary source of funds for our lending and investing activities. Although we intend to expand primarily
through internal growth, we will also consider prudent acquisitions of other financial institutions and bank branches
in the Puget Sound region.
The executive office of the Company is located at 105 West 8th Street, Port Angeles, Washington 98362,
and its telephone number is (360) 457-0461.
6
Market Area
We conduct our operations out of our main administrative office and eight full-service branch offices in
northwestern Washington for a total of nine full service branches. The administrative office is located in Port
Angeles, in Clallam County, Washington. Seven of our branch offices are located in Clallam County, one branch
office is located in Jefferson County and one branch office is located in Kitsap County. We also have a loan
production office that is located in Bellingham, in Whatcom County, Washington.
Clallam County has a population of approximately 72,715 and estimated median family income of $46,033
according to the latest information available from the U.S. Census Bureau. The economic base in Clallam County
has been historically dependent on marine services, forest products, agriculture, technology, tourism and education
industries. The primary employers in Clallam County include the Olympic Medical Center, Peninsula College, the
Port Angeles School District, Clallam County government, Seven Cedars (casino, golf course and other retail
businesses), Clallam Bay Corrections Center, Nippon Paper Group and the Westport Shipyard. According to the U.S.
Bureau of Labor Statistics, the unemployment rate for Clallam County was 7.6% at June 30, 2015, compared to
7.7% at June 30, 2014; and State of Washington average of 5.3% and national average of 5.3% at June 30, 2015. The
average sales price of a residential home in Clallam County was $228,000 for the quarter ended June 30, 2015, a
1.8% increase compared to the quarter ended June 30, 2014, according to Paragon Olympic Listing Service.
Residential sales volume increased 17% for the quarter ended June 30, 2015 as compared to June 30, 2014 and
inventory levels at June 30, 2015, are projected to be seven months according to Paragon.
Jefferson County has a population of approximately 30,228 and estimated median family income of
$30,228 according to the latest information available from the U.S. Census Bureau. The economic base in Jefferson
County has historically been dependent on several industry segments, including arts and culture, maritime and boat
building, small-scale manufacturing, and tourism. Another industry that supports the economic base is agriculture,
which has recently increased, with several successful local farmers and a local food co-op with sales over $10
million. The primary employers in Jefferson County include Port Townsend Paper, Jefferson Healthcare, Port
Townsend School District, the Port Authority of Port Townsend and related marine trade, and the Jefferson County
government. According to the U.S. Bureau of Labor Statistics, the unemployment rate for Jefferson County was
6.9% at June 30, 2015, compared to 7.4% at June 30, 2014. The average sales price of a residential home in
Jefferson County was $279,000 for the quarter ended June 30, 2015, a 2.1% decrease compared to the quarter ended
June 30, 2014, according to Northwest Multiple Listing Service (NMLS). Residential sales volume increased 21.3%
for the quarter ended June 30, 2015 as compared to June 30, 2014 and inventory levels at June 30, 2015, are
projected to be eight months according to NMLS.
Kitsap County has a population of approximately 254,183 and estimated median family income of $62,413
according to the latest information available from the U.S. Census Bureau. The economic base of Kitsap County is
largely supported by the Kitsap Naval Base and other military related employment through the United States Navy.
Other private industries that support the economic base are healthcare, retail and tourism. The primary employers in
Kitsap County include the Harrison Medical Center, Walmart, and Port Madison Enterprises, which owns and
operates the Clearwater Casino and Resort, gas stations and other retail operations. According to the U.S. Bureau of
Labor Statistics, the unemployment rate for Kitsap County was 5.6% at June 30, 2015, compared to 5.9% at June 30,
2014. The average sales price of a residential home in Kitsap County was $306,000 for the quarter ended June 30,
2015, a 9.7% increase compared to the quarter ended June 30, 2014, according to NMLS. Residential sales volume
increased 12.4% for the quarter ended June 30, 2015 as compared to June 30, 2014 and inventory levels at June 30,
2015, are projected to be four months according to NMLS.
In addition to our historical market area consisting of Clallam, Jefferson and Kitsap counties, our business
plan includes the intent to extend our operations further into the Puget Sound Region of Washington. The Puget
Sound region dominates the economy of the Pacific Northwest and is broadly defined as the area surrounding the
inlet of the Pacific Ocean that extends into the northwestern section of the state of Washington. The population of
this additional region (beyond our current market area) approximates 4.4 million, or 62.3% of the state's population.
The market area is a mix of urban, suburban and rural areas, with the Seattle metropolitan area harboring a well-
developed urban area along the western portion of Puget Sound. The region extends from Whatcom County in the
north on the Canadian border to Thurston and Pierce counties to the south. Other key metropolitan areas within the
Puget Sound region include Bellingham (Whatcom County), Burlington (Skagit County), Everett (Snohomish
County), Tacoma (Pierce County) and Olympia, the state capital (Thurston County).
Key employment sectors include aerospace, military, information technology, clean technology,
biotechnology, education, logistics, international trade and tourism. The region is well known for the long-term
7
presence of The Boeing Corporation and Microsoft, two major industry leaders. The military presence includes a
number of large installations serving the U.S. Air Force, Army and Navy. Given the employment profile, the
region's workforce is generally highly educated. Washington's geographic proximity to the Pacific Rim along with a
deep water port has made it a center for international trade as well, which contributes significantly to the regional
economy (one in three jobs in Washington is tied to foreign exports). The Washington ports make Washington the
fourth largest exporting state in the nation, and the top five trading partners with Washington include China, Mexico,
Canada, Japan and Korea. Tourism has also developed into a major industry for the area, due to the scenic beauty,
temperate climate, and easy accessibility. Maritime industry employment, supported by the trade and fishing
industries, is also an important employment sector.
The regional economy has had a historical dependence on the aerospace industry which has had periods of
strong growth, as well as reductions in activity. Over the past few years, growth rates have been steady and long-
term growth trends are favorable as the market area continues to maintain a highly educated and motivated
workforce, and the Puget Sound region remains a desirable place to live. In the most recent periods, similar to
national trends, most of the Puget Sound region has largely recovered from the prior issues related to home value
declines, foreclosure rates, and other real estate related problems that were a result of the national recession of
2007-2009.
For a discussion regarding the competition in our primary market area, see “Competition.”
Lending Activities
General. First Federal’s principal lending activities are concentrated in first lien one- to four-family
mortgage loans and commercial and multi-family real estate loans. First Federal also makes construction and land
loans (including lot loans), commercial business loans, and consumer loans, consisting primarily of home-equity
loans and lines of credit. A substantial portion of our loan portfolio is secured by real estate, either as primary or
secondary collateral.
8
:
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Loan Portfolio Analysis
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4
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5
9
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1
4
0
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3
,
7
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5
6
,
0
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4
$
The following table represents information concerning the composition of our loan portfolio, including loans held for sale, by the type of loan at the dates indicated:
$
2
7
1
,
8
4
2
$
%
1
.
8
4
3
2
5
2
4
2
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256,806
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33,086
(
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19,127
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36,387
8,198
44,585
14,764
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493,991
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A
840
(1,957)
110
7,111
$
487,887
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T
Real estate:
One- to four-family
Multi-family
Commercial real estate
Construction and land
Total real estate loans
Consumer:
Home equity
Other consumer
Total consumer loans
Commercial business loans
Total loans
Less:
Deferred fees and discounts
loans, net
Loans held for sale
Allowance for loan losses
Total loans, net
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(Premium) discount on purchased
%
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.
0
0
1
1
4
4
,
4
0
5
%
0
.
0
0
1
1
9
9
,
3
9
4
27,928
93,056
15,493
384,649
2
6
42,497
8
13,029
55,526
17,746
0
622
4
8
(428)
400
7,974
%
2
.
4
5
2015
1
6
.
3
.
0
2
4
3
.
.
0
4
8
3
9
.
8
.
2
1
.
2
1
9
3
.
2014
.
%
0
0
0
1
June 30,
2013
2012
2011
Percent
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
8
2
9
,
7
2
6
5
0
3
9
,
3
9
4
,
5
1
9
4
6
,
4
8
3
7
9
4
,
2
4
9
2
0
3
1
,
6
2
5
5
5
,
6
4
7
7
1
,
(Dollars in thousands)
0
2
1
0
2
2
4
6
9
7
5
4
)
8
2
4
(
,
52.0% $
242,523
48.1% $
248,172
215,661
52.6% $
239,318
55.6%
6.7
25.4
9
3.8
8
.
87.9
.
4
5
2
1
4
.
5
.
6
8
0
0
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1
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0
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9
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,
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,
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45,100
128,028
9
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.
20,497
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5
.
3
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1
.
2
.
0
0
1
436,148
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7
9
6
,
0
1
1
6
7
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0
5
40,064
4
6
0
,
10,697
0
4
50,761
2
3
5
,
7.9
7
1
2.1
10.0
%
0
.
2
5
3.0
4
7
5
6
2
100.0%
.
.
17,532
3.5
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3
.
9
.
7
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4
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1
.
504,441
1
9
.
.
0
3
100.0%
4
7
9
7
,
3
5
3
,
9
4
4
54.2% $
$
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20.3
3.4
84.0
3
1
6
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0
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1
(
,
2
7
9.3
0
8
2.8
,
4
8
1
6
9
4
,
12.1
$
17,175
79,965
22,689
335,490
51,155
11,083
62,238
3.9
12,259
4.2
19.5
5.6
81.9
12.4
2.7
15.1
3.0
17,088
74,810
23,595
9
354,811
54,960
13,092
68,052
7,946
3.9
17.3
5.5
82.3
12.8
3.1
15.9
1.8
457,921
100.0%
409,987
100.0%
430,809
100.0%
6
0
8
,
6
5
2
$
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,
8
5
8
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,
4
4
4
6
7
,
4
1
862
7
8
3
,
6
3
(1,290)
613
8,072
$
496,184
$
449,353
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$
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8
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2
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1
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5
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5
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7
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2
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2
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6
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3
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9
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1
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3
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9
9
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3
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3
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3
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8
3
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6
2
4
.
9
5
.
0
9
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9
6
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1
6
7
6
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4
5
5
4
5
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3
1
2
4
1
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3
3
5
4
2
,
5
8
0
6
,
6
0
1
3
4
7
,
8
3
5
8
8
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1
8
2
6
,
0
4
6
8
3
,
6
2
8
5
,
8
4
1
5
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7
3
2
2
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1
%
0
.
0
0
1
9
0
8
,
0
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4
%
0
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0
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1
7
8
9
,
9
0
4
7
9
5
2
2
0
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1
5
7
2
8
2
7
,
4
3
6
5
7
5
9
8
1
4
0
9
3
,
7
7
8
1
,
4
2
4
$
9
5
6
,
0
0
4
$
The following table shows the composition of our loan portfolio, including loans held for sale, in dollar amounts and in percentages by fixed rates and adjustable rates at the
dates indicated:
d
n
a
t
n
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c
r
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P
1
.
3
1
6
.
5
9
.
0
1
3
.
0
9
.
9
2
0
.
7
4
.
0
4
.
7
0
.
1
3
.
8
3
5
.
0
4
.
9
1
.
3
1
.
4
5
3
.
2
4
.
2
7
.
4
9
.
2
7
.
1
6
%
0
.
0
0
1
3
1
0
2
,
0
3
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4
1
0
2
5
1
0
2
t
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$
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T
:
d
e
t
a
c
i
d
n
i
s
e
t
a
d
Fixed-rate loans:
Real estate:
One- to four-family
Multi-family
Commercial real estate
Construction and land
Total real estate loans
Consumer:
Home equity
Other consumer
Total consumer loans
Commercial business loans
Total fixed-rate loans
Adjustable-rate loans:
Real estate:
One- to four-family
Multi-family
Commercial real estate
Construction and land
Total adjustable-rate loans
Consumer:
Home equity
Other consumer
Total consumer loans
Total real estate loans
s
n
a
o
L
e
t
a
R
-
e
l
b
Commercial business loans
a
t
s
u
j
d
A
d
n
a
e
t
a
R
-
d
Allowance for loan losses
e
x
i
F
Loans held for sale
Total loans, net
Total loans
Less:
Deferred fees and discounts
(Premium) discount on purchased loans, net
%
1
.
1
4
)
s
d
n
a
s
u
o
h
t
n
i
Amount
s
r
a
l
l
o
D
(
%
182,409
4
.
4
3
7,979
36,880
14,132
241,400
4
1
4
,
3
7
1
8,741
6,986
$
15,727
%
5,900
8
.
6
3
263,027
9
0
4
74,397
,
2
8
25,107
1
88,743
$
4,995
193,242
27,646
1,212
28,858
8,864
230,964
y
l
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:
s
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t
a
r
-
d
e
x
i
F
m
493,991
a
f
-
r
u
o
f
840
o
t
:
e
t
a
t
s
e
-
e
(1,957)
n
l
O
a
110
e
R
7,111
0
1
7
9
2015
2
2
,
,
8
2
8
1
6
3
2
5
2
1
,
,
3
4
4
1
Percent
0
4
9
,
7
4
2
7
6
3
,
0
1
5
2
4
1
3
7
,
,
1
1
1
2
Amount
2
1
2014
1
,
3
1
4
6
7
,
2
8
2
Percent
2
0
9
,
9
5
7
3
6
,
5
2
June 30,
9
0
2013
7
,
6
3
1
0
0
3
4
8
3
,
,
9
1
4
Amount
0
4
3
8
1
6
,
,
2
1
3
Percent
4
1
8
,
3
3
4
3
6
,
4
7
1
5
2
1
9
,
,
5
7
7
5
Amount
1
4
2
2
6
2012
)
8
2
4
(
0
0
4
4
7
9
,
7
Percent
3
5
3
,
9
4
4
2011
Amount
Percent
$
(Dollars in thousands)
$
5
.
0
1
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$
2017
2018
2019
2020 to 2022
2023 to 2026
2027 to 2030
414
103
149
357
2,094
10,729
56,597
2031 and beyond
186,363
Total
$256,806
.
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g
2,852
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4.33% $125,623
g
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A
_______
(1) Excludes deferred fees and discounts of $840,000.
(2) Includes demand loans, loans having no stated maturity, overdraft loans and loans held for sale.
d
o
i
r
e
p
f
o
W
5
The following table illustrates the contractual maturity of our loan portfolio at June 30, 2015. Mortgages that have adjustable or renegotiable interest
rates are shown as maturing in the period during which the contract is due. The total amount of loans due after June 30, 2016 that have fixed interest rates is
$256.9 million, while the total amount of loans due after such date that have adjustable interest rates is $225.3 million. The table does not reflect the effects of
unpredictable principal prepayments.
%
6
8
4
%
3
9
2
0
5
0
9
1
7
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4
1
1
2
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.
One- to Four-
Family
,
0
3
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Weighted
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o
Average
i
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f
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p
Rate
Amount
7
1
2
0
8
7
6
8
8
6
6
6
3
Construction
9
,
,
5
6
1
4
8
4
,
1
2
7
8
3
,
6
3
$
and Land
Home Equity
Other Consumer
s
e
t
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Multi-family
4
7
3
1
3
Commercial Real
t
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Amount
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Amount
Weighted
Rate
Average
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Rate
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6
6
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Amount
Rate
Amount
Weighted
Average
Rate
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4
2
6
0
9
0
5
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0
4
6
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3
2
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6
3
7
(Dollars in thousands)
6
6
9
5
4
9
,
,
,
2
5
2
,
7
2
1
9
1
$
503
3.00% $ 6,658
5.38% $
$
624
5.12% $
Weighted
Average
Commercial
Business
Weighted
Average
Total (1)
Weighted
Average
1
1
Amount
Rate
Amount
Rate
Amount
Rate
6.93% $ 1,303
9.83% $ 2,188
5.04% $ 11,764
5.65%
5.21
6.57
5.14
5.02
4.90
4.71
5.50
496
1,389
1,104
2,410
701
113
682
6.33
5.68
5.65
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Geographic Distribution of our Loans
A
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The following table shows at June 30, 2015 the geographic distribution of our loan portfolio in dollar amounts and percentages.
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Real estate loans:
One- to four-family
Multi-family
Commercial real estate
Construction and land
Total real estate loans
Consumer loans:
Home equity
Other consumer
Total consumer loans
Commercial business loans
Total loans
281,193
56.9% $ 155,422
____________
(1) Includes Clallam and Jefferson counties.
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398,466
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12
One- to Four-Family Real Estate Lending. At June 30, 2015, one- to four-family residential mortgage
loans totaled $256.8 million, or 52.0%, of our gross loan portfolio. At that date, $36.2 million, or 14.1%, of our one-
to four-family residential mortgage loan portfolio consisted of loans secured by properties outside the state of
Washington. We originate both fixed and adjustable-rate loans, which can be sold in the secondary market or
retained in our residential portfolio based on our asset objectives. Residential loans are underwritten to secondary
market standards or to other acceptable underwriting standards, which may not meet all of Federal Home Loan
Mortgage Corporation ("Freddie Mac") and Federal National Mortgage Association ("Fannie Mae") eligibility
requirements.
Fixed-rate residential mortgages are offered with repayment terms between 10 and 30 years, and we use
Freddie Mac posted daily pricing, as well as other economic considerations, to establish pricing for our residential
mortgage loans. Adjustable-rate residential mortgage products with similar amortization terms are also offered;
however, the interest rate is typically fixed for an initial period. For example, the interest rate and payment will
remain fixed between one to seven years with annual adjustments thereafter. Future interest rate adjustments are
usually limited to increases or decreases of no more than 2% per adjustment and carry a typical lifetime cap of 5% to
6% above the initial interest rate, with no borrower prepayment restrictions. Currently, we are retaining adjustable-
rate mortgages that we originate in our portfolio.
Borrower demand for adjustable-rate mortgage loans typically increases when borrowers expect lower
mortgage rates in the future. Adjustable-rate mortgage loans could increase credit risk because as interest rates rise,
the borrower’s payments rise, increasing the potential for default. In addition, adjustable-rate mortgages may be
offered with an initial discounted rate, which may be less than the fully indexed rate and lower than comparable
fixed-rate loans, which could also contribute to a higher risk of delinquency, default and foreclosure when the
interest rate and payment on the loan adjusts. To mitigate and balance this risk for both the borrower and First
Federal, these loans usually contain both periodic and lifetime interest rate caps that limit the amount of payment
changes. In addition, depending on market conditions, we may underwrite the borrower at a higher interest rate and
payment amount than the initial discount rate. We do not offer adjustable-rate mortgages with deep discount teaser
rates. At June 30, 2015, the average interest rate on our adjustable-rate mortgage loans was approximately 4.9%
over the fully indexed rate. As of June 30, 2015, we had $74.4 million, or 15.1%, of adjustable-rate residential
mortgage loans in our residential loan portfolio.
Residential loans are evaluated at the time they are originated using underwriting criteria that meet the
Freddie Mac Loan Prospector guidelines other than loans guaranteed by the Department of Veterans Affairs, which
we began originating in July 2013. This underwriting process considers a variety of factors including, but not
limited to, credit history, debt to income ratios, property type, loan to value ratio and occupancy. For loans with
over 80% loan to value ratios, we typically require private mortgage insurance, which reduces our loan to value risk
exposure in the event of a default on the loan and liquidation of the collateral for repayment. Other tools we use to
reduce credit risk include, but are not limited to, title insurance, hazard insurance and flood insurance as required
under current regulations. Residential mortgage loans which require appraisals are appraised by independent fee
appraisers approved by First Federal. Fee appraisers submit documentation to First Federal to complete a formal
review in conjunction with loan approval.
In connection with the new rules issued by the Consumer Financial Protection Bureau ("CFPB"), which
includes a definition for “qualified mortgage” loans based on the borrower’s ability to repay the loan, we believe
that generally all of the mortgage loans approved by First Federal meet this standard. As indicated above, we have
historically evaluated all of our residential loans at the time they are originated using underwriting criteria that meet
the Freddie Mac Loan Prospector guidelines. This process helps to reduce our risk in approving loans that do not
meet the definition of being considered a qualified mortgage loan under CFPB standards.
First Federal does not actively engage in subprime lending, either through advertising, marketing,
underwriting and/or risk selection, and has no established program to originate or purchase subprime loans to be
held in its portfolio.
Commercial and Multi-Family Real Estate Lending. At June 30, 2015, $125.6 million, or 25.4%, and
$33.1 million, or 6.7%, of our total loan portfolio was secured by commercial and multi-family real estate property,
respectively. At June 30, 2015, we have identified $40.9 million of our commercial real estate portfolio as owner-
occupied commercial real estate, of which $3.9 million, $13.2 million, and $23.8 million are included in the real
estate retail, real estate health care, and other owner-occupied commercial real estate categories, respectively. The
remaining $117.8 million is secured by income producing, or non-owner-occupied, commercial real estate, of which
$33.1 million, $38.6 million, $11.6 million, $19.8 million, and $14.7 million are included in the multi-family, real
13
estate retail, real estate health care, real estate hospitality, and other non-owner-occupied commercial real estate,
respectively. Our commercial real estate loans include, but are not limited to, loans secured by retail strip centers,
hotels and motels, medical and professional office buildings, office/warehouse, self-storage facilities, combination
gas stations and convenience stores, and assisted living facilities located within our market areas. Substantially all
of our commercial real estate and multi-family loans are primarily secured by properties located in Washington
State.
These loans are generally priced at a higher rate of interest than one- to four-family residential loans, as
these loans have higher loan balances, are more difficult to evaluate and monitor, and involve a greater degree of
risk than one- to four-family residential loans. Repayment on loans secured by commercial or multi-family
properties is dependent on successful management or utilization of the land and improvements by the property
owner to create gross revenues and sufficient net operating income to meet the debt service requirements and
provide a return to the owner. Changes in economic and real estate market conditions can affect net operating
income, capitalization rates, and ultimately the valuation and marketability of the collateral. As a result, we analyze
market data including, but not limited to, vacancy rates, absorption percentages, leasing rates and competing projects
under development. Interest rate, occupancy and capitalization rate stress testing are required as part of our
underwriting analysis. If the borrower is a corporation, we generally require and obtain personal guarantees from
the corporate principals, which include underwriting of their personal financial statements, tax returns, cash flows
and individual credit reports, which provides us with additional support and a secondary source for repayment of the
debt.
We offer both fixed- and adjustable-rate loans on commercial and multi-family real estate, which may
include balloon loans. As of June 30, 2015, we had $88.7 million in adjustable-rate commercial real estate loans and
$25.1 million in adjustable-rate multi-family loans. Commercial and multi-family real estate loans with adjustable
rates generally adjust after an initial period of three years. These loans generally have maturity dates between three
and 10 years. Amortization terms are generally limited to terms up to 25 years on commercial real estate loans and
up to 30 years on multi-family loans. Adjustable-rate multi-family residential and commercial real estate loans are
generally priced to market indices with appropriate margins, which may include the U.S. Constant Maturity
Treasury Rate, LIBOR, The Wall Street Journal prime rate, or other acceptable index. Substantially all adjustable-
rate commercial and multi-family real estate loans are subject to a floor rate, and the weighted average floor rate on
these loans was 4.44% at June 30, 2015. Of all of the adjustable-rate commercial loans, 87% are subject to a ceiling
rate, and the weighted average ceiling rate on those loans was 8.49% at June 30, 2015.
The maximum loan to value ratio for commercial and multi-family real estate loans is typically limited to
80% of the appraiser opinion of market value or determined by the income to debt service ratio, which is 1.20x for
non-owner-occupied properties and 1.10x for owner-occupied properties. In addition, aggregate debt service ratios,
including the guarantor’s cash flow and the borrower’s other projects, are required by policy to have a minimum
income to debt service ratio of 1.20x. We require independent appraisals or evaluations on all loans secured by
commercial real estate from an approved appraisers list.
We require most of our commercial and multi-family real estate loan borrowers to submit annual financial
statements and/or rent rolls on the subject property. These properties may also be subject to annual inspections with
pictures to support that appropriate maintenance is being performed by the owner/borrower. All commercial real
estate loans over $750,000 are reviewed at least annually along with each commercial real estate borrower and, as
applicable, each guarantor. The loan and its borrowers and/or guarantors are subject to an annual risk certification
verifying that the loan is properly risk rated based upon covenant compliance and other terms as provided for in the
loan agreements. While this process does not prevent loans from becoming delinquent, it provides us with the
opportunity to better identify problem loans in a timely manner and to work with the borrower prior to the loan
becoming delinquent.
14
The following table provides information on multi-family and commercial real estate loans by type at the
dates indicated:
Multi-family
Real estate retail
Real estate health care
Real estate hospitality
Other non-owner-occupied commercial real estate
Other owner-occupied commercial real estate
Total
2015
Amount
Percent
June 30,
2014
Amount
(Dollars in thousands)
Percent
2013
Amount
Percent
$ 33,086
42,526
24,804
20,185
14,675
23,433
$158,709
20.9% $ 45,100
59,378
26.8
15.6
12.7
9.2
13,995
21,289
16,924
26.0% $ 27,928
23.1%
34.3
8.1
12.3
9.8
43,596
15,316
3,320
12,705
36.0
12.7
2.7
10.5
14.8
16,442
100.0% $173,128
9.5
18,119
100.0% $120,984
15.0
100.0%
If we foreclose on a multi-family or commercial real estate loan, the marketing and liquidation period to
convert the real estate asset to cash can be a lengthy process with substantial holding costs. In addition, vacancies,
deferred maintenance, repairs and market stigma can result in prospective buyers expecting sale price concessions to
offset their real or perceived economic losses for the time it takes them to return the property to profitability.
Depending on the individual circumstances, initial charge-offs and subsequent losses on commercial real estate
loans can be unpredictable and substantial.
The average outstanding loan size in our commercial real estate portfolio was $679,000 as of June 30,
2015. We generally target individual commercial real estate loans between $250,000 and $10.0 million to small and
mid-size owners and investors in our market areas as well as other parts of Washington. We will also make
commercial real estate loans in other states if we have a pre-existing relationship with the borrower.
Our three largest commercial and multi-family borrowing relationships at June 30, 2015 consisted of an
$11.6 million relationship secured primarily by a hotel located in King County; an $11.6 million relationship secured
by an assisted living facility in King County; and an $8.7 million relationship secured primarily by a retail shopping
center located in Island County, whereby the original commitment was made in October 2012 for $15.0 million of
which $5.8 million was participated with two other lenders. At June 30, 2015, we had 38 additional commercial
loan relationships above $3.0 million, ranging from $3.3 million to $7.2 million, aggregating $88.6 million. At
June 30, 2015, these loans were all performing in accordance with their repayment terms.
Construction and Land Lending. At June 30, 2015, our construction and land loans were $19.1 million,
or 3.8% of the total loan portfolio. First Federal offers an “all-in-one” residential adjustable-rate custom
construction loan product, which upon completion of the construction phase may be placed in our loan portfolio. We
also originate construction loans for certain commercial real estate projects. These projects include, but are not
limited to, multi-family, retail, office/warehouse and office buildings. Underwriting criteria on these loans include,
but are not limited to, minimum debt service coverage requirements of 1.20x or better, loan to value limitations, pre-
leasing requirements, construction cost over-run contingency reserves, interest and absorption period reserves,
occupancy, capitalization rates and interest rate stress testing, as well as other underwriting criteria.
Construction loan applications require the borrower to provide architectural and working plans, a material
specifications list, detailed cost breakdown and a construction contract. Construction loan advances are based on
progress payments for “work in place” based on detailed line item construction budgets. Independent construction
inspectors are used to evaluate the construction draw request relative to the progress and “work in place.” Our
construction administrator reviews all construction projects, inspection reports and construction loan advance
requests to ensure they are appropriate and in compliance with all loan conditions. Other risk management tools
include title insurance, date down endorsements and periodic lien inspections prior to the payment of construction
loan advances. In some cases, general contractors may be required to provide sub-contractor lien releases for any
work performed prior to the filing of our deed of trust or prior to each construction loan advance.
Land acquisition, development and construction loans are available on a limited basis to local contractors
and developers for the purpose of holding and/or developing residential building sites and homes when market
conditions warrant such activity. Land acquisition loans are secured by a first lien on the property and are generally
limited to 65% of the acquisition price or the appraised value, whichever is less. Development land loans are
15
generally limited to 75% of the discounted appraised value based on the projected lot sale absorption rate and
associated carry and liquidation costs of the developed lots and homes. Underwriting criteria for acquisition and
development loans include, but are not limited to, evidence of preliminary plat approval, compliance with state and
Federal environmental protection and disclosure laws, engineering plans, detailed cost breakdowns and marketing
plans. These loans have been limited to projects within the Puget Sound region. Other risk management tools
include, but are not limited to, title insurance, feasibility and market absorption reports, environmental
questionnaires, and other supplementary information as may be required to determine if the project and proposed
lots represent acceptable collateral for timely repayment of the loan. The success of land acquisition, development
and construction lending is largely dependent upon future sales for repayment of the loan. Economic and market
conditions can be unpredictable and can have a significant adverse impact on the value and marketability of the
collateral for land acquisition, development and construction loans.
We also originate individual lot loans, which are secured by a first lien on the property, for borrowers who
are planning to build on the lot within the next five years. Generally, these loans have a maximum loan to value ratio
of 75% for improved lands (legal access, water and power) and 50% to 65% for unimproved land. The interest rate
on these loans is fixed with a 20-year amortization and a five-year term. At June 30, 2015, individual lot loans
totaled $11.9 million or 2.4% of the total loan portfolio.
At the dates indicated, the composition of our construction and land portfolio was as follows:
June 30,
2015
2014
2013
2012
(In thousands)
One- to four-family residential
Multi-family residential
Commercial real estate
Land
Total construction and land
$
$
3,438
3,358
400
11,931
19,127
$
$
2,385
4,363
1,474
12,275
20,497
$
$
1,020
—
167
14,306
15,493
$
$
2,457
—
3,300
16,932
22,689
Most of our construction and land loans are secured by properties located in Clallam, Jefferson or Kitsap
counties, Washington, and we have, to a lesser extent, originated construction and land loans in the counties
surrounding the Puget Sound.
Construction lending for custom construction as well as speculative construction requires additional
underwriting measures to effectively manage the construction process and future collateral value. Valuations on
construction loans are based on the assumption that the finished improvements will be built in strict accordance with
plans and specifications submitted to us at the time of the loan application. The appraiser must take into
consideration the proposed design and market appeal of the improvements, based on current market conditions and
demand for homes, although the improvements may not be completed for six to 12 months or longer, depending on
the complexity of the plans and specifications and market conditions.
Numerous variables can adversely affect the value and marketability of the collateral, as well as the
borrower’s ability to complete the project and repay the debt. For example, unknown site issues can be discovered
at the time of excavation, design problems, voluntary and involuntary cost over-runs, economic and market
conditions, contractor expertise, professional capacity, unexpected injuries, lawsuits and other unpredictable health
and financial changes can occur, which could compromise timely completion of the project and repayment of the
debt.
Under certain circumstances we may have to declare a default, foreclose and sell the project “as is” to
another party, typically at a discount, for assuming the responsibility and unknown risk of taking on a failed project
or we may choose to complete the project and assume the market risk of selling the project at a future market price,
which may or may not enable us to fully recover unpaid loan funds and associated construction and liquidation
costs.
Consumer Lending. We offer a variety of consumer loans, including home equity loans and lines of
credit, new and used automobile loans, loans on other miscellaneous vehicles including recreational vehicles, travel
trailers and motorcycles, and personal lines of credit. At June 30, 2015, home equity loans and lines of credit totaled
16
$36.4 million, or 7.4% of the loan portfolio. Our interest rates on home equity loans are risk priced adjusted based
on credit score, loan to value and overall credit quality of the applicant. Home equity loans are made for, among
other purposes, the improvement of residential properties, weatherization, and other consumer needs. Some of these
loans are secured by first liens; however, the majority of these loans are secured by a second deed of trust on the
residential property. Fixed-rate, fully-amortizing home equity loans are available up to a maximum loan amount of
$250,000 with repayment periods ranging from seven to 15 years. We also offer a home equity line of credit product,
which was revised in 2013 to address concerns about a borrower's ability to repay or refinance the remaining
principal balance at maturity. Previously, home equity lines of credit were originated as interest only for the term of
the loan, usually 15 to 20 years, with the remaining principal balance due, in the form of a balloon payment, at the
end of the term, up to a maximum of $250,000. Our new home equity product has a five year, interest-only term
with the remaining balance at the end of the term, which may be up to a maximum of $250,000, fully amortized over
a period of 15 years. Home equity lines of credit are tied to the prime rate during the interest-only period. Home
equity loans and lines of credit have greater risk than one- to four-family residential mortgage loans because they are
secured by mortgages subordinated to the existing first mortgage on the property, which we may or may not hold,
and do not have private mortgage insurance coverage.
We also offer a weatherization loan program guaranteed by either the City of Port Angeles or the Clallam
County Public Utility District. The purpose of these loans is to promote energy conservation by weatherizing homes
and providing a low interest rate program for consumers to achieve lower energy costs and tax rebates. These are
one-year adjustable-rate loans indexed to LIBOR.
We offer several options for vehicle purchase or refinance with a maximum term of up to 84 months
depending on the age and condition of the vehicle. Loan rates for auto lending, as well as all other consumer loans,
are priced based on the specific loan type and the risk involved. Direct and indirect lending sources are used to
originate auto loans, which includes online as well as in person applications at our branch locations.
We make indirect auto loans through an auto dealer loan program with two local franchised car dealerships
for new and used cars. We have provided our underwriting criteria and pricing to the dealers but require further
underwriting review and final approval prior to funding. At June 30, 2015, we had $575,000 of loans originated
through the local dealer program. In addition to the local program, at June 30, 2015, we also had $508,000 of auto
loans to borrowers located outside the state of Washington and $920,000 of auto loans to borrowers located inside
the state of Washington that were originated through an internet-based origination service whose contract was
terminated in February 2015.
Consumer loans represent additional and unique underwriting risks because of the mobility and rapidly
depreciating nature of consumer assets such as automobiles, RVs, boats and trailers in contrast to real estate based
collateral. If a borrower defaults, repossession and liquidation of the collateral may not provide sufficient sales
proceeds to satisfy the outstanding loan balance. Many factors account for potential loan losses on consumer loans,
a number of which are largely outside the control of the lenders and include deferred maintenance, damages,
depreciation and borrowers who relocate to other states. While subsequent legal actions and judgments against
defaulted borrowers may be appropriate, such collection efforts and costs may not always be warranted and are
evaluated after determining the cost of such collection efforts and the probability of any future loan recovery. 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, illness or personal bankruptcy. Furthermore, the application of various
federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be
recovered on these loans.
Commercial Business Lending. As of June 30, 2015, commercial business loans totaled $14.8 million, or
3.0% of our loan portfolio. These loans are primarily originated as loans to business borrowers, which include lines
of credit, term loans and letters of credit. These loans are typically secured by business assets and are used for
general business purposes, including seasonal and permanent working capital, equipment financing, capital, and
general investments. Loan terms vary from one to seven years. The interest rates on such loans are generally
floating rates indexed to LIBOR, The Wall Street Journal prime rate or other acceptable indices depending on
prevailing economic and market conditions. A typical requirement for us to extend business credit is for the
borrower to have a business deposit relationship with us which, in most cases, includes multiple accounts and related
services from which we realize low cost deposits plus service and ancillary fee income.
Commercial business loans typically have shorter maturity terms and higher interest spreads than real estate
loans, but generally involve more credit risk because of the type and nature of the collateral. We are focusing our
efforts on small-to-medium sized, privately-held companies with local or regional businesses that operate in our
17
market area. Our commercial business lending policy includes credit file documentation and analysis of the
borrower’s background, capacity to repay the loans and the adequacy of the borrower’s capital, as well as an
evaluation of other conditions affecting the borrower. Analysis of the borrower’s past, present and future cash flows,
as well as the collateral pledged as security is also an important aspect of our credit analysis. We generally obtain
personal guarantees on our commercial business loans.
Primary repayment of our commercial loans is often dependent on cash flows of the borrower, which may
be unpredictable due to normal business cycles, industry changes, and economic and political conditions.
Furthermore, collateral securing these loans may fluctuate in value based on market conditions or other factors. Our
commercial business loans are originated primarily based on the identified cash flow of the borrowing entity and
secondarily on the underlying collateral and revenue provided by the borrower and guarantors. Most often, this
collateral consists of real estate, accounts receivable, inventory or equipment. Secondary sources of repayment and/
or recovery for most of these loans are based on the liquidation of the pledged collateral, and may include
enforcement of personal guaranties. Secondary underwriting and collection efforts may include accounts receivable,
or other third party payments, whereby availability of funds for repayment of these loans may be substantially
dependent on the ability of the borrower or a third party to collect amounts due from its customers. In addition,
collateral secured by business assets may become functionally or economically obsolete, which can become
problematic from a valuation, collection and liquidation perspective.
Loan Solicitation and Processing. Our loan originations are obtained from a variety of sources, including
existing or walk-in customers, business development by our relationship managers (“RMs”), and referrals from our
directors, business owners, investors, entrepreneurs, builders, realtors, existing customers and other professional
third parties, including brokers. Loan originations are further supported by lending services offered through our
internet website, direct mail, advertising, cross-selling, employees’ community service and in the case of auto loans,
through dealers or web-based established third-party internet solicitors. All of our consumer loan products,
including residential mortgage loans, secured and unsecured consumer loans are processed through our centralized
processing and underwriting center. Commercial business loans, including commercial and multi-family real estate
loans, are processed by the RMs, assistants and credit underwriters with formalized credit presentations submitted to
our senior loan committee for approval. The senior loan committee consists of the president/chief executive officer,
chief financial officer, chief credit officer, chief banking officer, director of lending, and commercial credit
administrator. Exceptions to our loan policies are fully disclosed to the approving authority, either individual or
senior loan committee prior to commitment. Exceptions are reported to the board of directors monthly. During the
years ended June 30, 2015 and 2014, there were twenty-seven exceptions and seven exceptions, respectively.
Lending Authority. Our board of directors has delegated loan approval authority as follows: Overdrafts
may be approved by select named positions up to $10,000. The chief credit officer along with an underwriter or the
mortgage and consumer credit administrator can approve mortgage loans up to $500,000. Mortgage loans in
amounts over $500,000 up to $2.9 million require the approval of the senior loan committee. At June 30, 2015, any
loan or relationship in excess of $3.0 million required the approval of the board loan asset/quality committee. As of
August 31, 2015, the lending limit requiring board loan approval was increased to $5.0 million with a corresponding
lending authority change of up to $4.9 million from $2.9 million for the senior loan committee.
Commercial loan approvals require two or more signatures from Credit Administration, Production
Administration, and Executive Administration personnel. Either the chief credit officer or the commercial credit
administrator, who are authorized individually to approve commercial loan relationships up to $300,000 and
$200,000, respectively, must approve all loans. The chief banking officer or director of lending are authorized
individually to approve commercial loans relationships up to $200,000, and the chief executive officer or chief
financial officer are authorized individually to approve commercial loans up to $100,000. Approval is required from
two of the three levels, regardless of the loan relationship amount, and their approval authorities can be aggregated
not to exceed $500,000. The approval of any commercial loan relationship in excess of $500,000 and up to $2.9
million requires the approval of the two officers stated above with further approval required from the Bank's senior
loan committee. Commercial loan relationships of $3.0 million or more require approval by the senior loan
committee and then the majority of the board loan committee. In certain circumstances, the chief credit officer,
individually, or the commercial credit administrator and the chief banking officer together, may approve Automated
Clearing House and Remote Deposit Capture transactions up to any amount. In addition, where there is an existing
relationship with a commercial borrower with loans outstanding in excess of $3.0 million, the board loan committee
has the authority to authorize the senior loan committee to approve additional commercial loans to this borrower in
excess of $3.0 million, with the total amount of such loans not to exceed $300,000.
18
The board loan/asset quality committee and full board continue to provide direction through policy
approval and oversight for key credit risk management, such as lending to percentage of capital, loans to one
borrower limits, and underwriting criteria. The board loan committee reviews all loan approvals by the senior loan
committee each quarter. The board of directors will also review the approvals of the board loan/asset quality
committee. The board loan/asset quality committee will also review all policy exceptions, concentrations of credit
and compliance with all lending policies. The board loan/asset quality committee meets at least quarterly to discuss
asset quality, loan production, and policy compliance, as well as to review industry trends.
Washington law provides that Washington chartered savings banks, such as First Federal, are subject to the
same loans to one borrower restrictions as Washington chartered commercial banks, which restricts total loans and
extensions of credit by a bank to 20% of its unimpaired capital and surplus. As a result, under Washington law, First
Federal would be limited to loans to one borrower of $27.4 million at June 30, 2015. First Federal, however, has
elected to restrict its loans to one borrower to no more than 15% of its unimpaired capital plus surplus, which was
$18.5 million at June 30, 2015, or $13.0 million, whichever is less, unless specifically approved by the board loan/
asset quality committee as an exception to policy. Under this policy, at June 30, 2015, First Federal’s limit on loans
to one borrower was $13.0 million. Subsequent to June 30, 2015, First Federal increased its loans to one borrower
limit from $13.0 million to $15.0 million. At June 30, 2015, there were 41 loans, or $120.5 million, with
relationships over $3.0 million. No relationship over $3.0 million was past-due, on nonaccrual status, or was
accounted for as a troubled debt restructuring ("TDR") as of June 30, 2015. The following table provides a summary
of our five largest relationships at June 30, 2015.
Total Commitment
(In thousands)
$11,617
11,568
8,704
7,408
7,158
Number of Loans in
Relationship
3
1
2
2
4
Primary Collateral Type
Commercial Real Estate
Commercial Real Estate
Commercial Real Estate
Multi-family Real Estate
Commercial Real Estate
Loan Originations, Servicing, Purchases and Sales. We originate mortgage, consumer, multi-family and
commercial real estate, and commercial business loans for our portfolio utilizing fixed- and adjustable-rate loan
products. We also purchase whole and participation loans on a servicing retained or released basis, including loans
that may be located outside our primary market areas. Our ability to originate sufficient loan volume to meet our
asset and liability management objectives is limited within our historical market as a result of consumer demand,
population demographics and economic conditions. During the past few years, we, like many other financial
institutions, have experienced significant prepayments on loans due to prevailing economic conditions and low
interest rates. In periods of economic uncertainty, the ability of financial institutions, including us, to originate real
estate loans is substantially reduced, which results in a decrease in interest income. During the years ended June 30,
2015, 2014 and 2013, our total originations were $104.5 million, $113.5 million and $175.0 million, respectively.
The North Olympic Peninsula region, which represents our largest concentration of depositors and
borrowers, has experienced limited population growth, and the region's unemployment rate is higher than both the
state and national unemployment rates. As a result, we have recently begun to opportunistically originate and
purchase loans outside of these areas in the counties surrounding the Puget Sound, and we may purchase loans with
different credit and underwriting criteria than those we originate organically.
During the years ended June 30, 2015, 2014 and 2013 we purchased $26.1 million, $39.9 million and $43.0
million of loans, respectively. Loan pools purchased in the past three years consisted primarily of single family
residential properties located in Washington, California, Kentucky and Ohio. We have also purchased commercial
real estate secured by properties located in California, multi-family real estate secured by properties located in
Washington and participated in a commercial real estate loan secured by a property in eastern Washington.
Purchased loans, loan pools, and participations are underwritten by our credit administration department, evaluated
for credit risk, and approved by the appropriate loan committee(s) prior to purchase, according to our lending
authority guidelines.
At June 30, 2015, we had approximately $76.0 million of one- to four-family mortgage loans, $23.0 million
of multi-family loans, $63.8 million of commercial real estate loans, and $5.5 million of construction and land loans
secured by properties located outside of the North Olympic Peninsula region and Kitsap and Whatcom counties.
19
Included in the one- to four-family residential loans are $12.7 million and $17.5 million of one- to four-family
mortgages in the states of California and Ohio, respectively. Also included in these amounts are multi-family and
commercial real estate loans of $12.7 million and $58.3 million, respectively, located primarily in King, Pierce and
Snohomish counties around the Puget Sound region of Washington. For more information see Item 1.A. Risk
Factors -“Slower growth in our primary market area has led us to originate and purchase loans outside of our market
area which could affect the level of our nonperforming loans.”
We actively sell residential first mortgage loans in the secondary market, and we currently service all loans
sold but have, in the past, also sold loans with the servicing released. The majority of all residential mortgages we
originate are fixed-rate mortgages, which primarily are sold to the secondary market at the time of origination to
improve our interest rate risk. In 2012, we began selectively adding 30 year fixed-rate mortgages to our loan
portfolio in an effort to enhance our net interest income. During the years ended June 30, 2015, 2014 and 2013, we
sold $22.5 million, $28.8 million and $46.8 million of residential mortgage loans, respectively. Our secondary
market relationship is primarily with Freddie Mac. These sales allow for a servicing fee on loans when the servicing
is retained by us. Most one- to four-family loans sold by us are sold with servicing retained. Loans in general are
sold on a non-recourse basis, whenever possible, subject to a provision for repurchase upon breach of representation,
warranty or covenant. Sales of real estate loans through secondary market conduits can be beneficial to us since
these sales generate income at the time of sale, produce future servicing income, provide funds for additional
lending, and assist us in managing our interest rate risk.
During fiscal 2008, we sold loans with “life of the loan” recourse provisions to Freddie Mac, requiring us
to repurchase the loan if it defaults. The remaining balance of loans serviced for others with life of the loan recourse
provisions was $7.4 million at June 30, 2015. Two loans were repurchased during the year ended June 30, 2015 for
$335,000, one loan was repurchased during the year ended June 30, 2014 for $239,000 and one loan was
repurchased during the year ended June 30, 2013 for $150,000. Additionally, beginning in May 2013, the Freddie
Mac has required loans guaranteed by the United States Department of Agriculture to be sold with 'life of the loan"
recourse provisions. We earned mortgage servicing income of $561,000, $606,000, and $659,000 for the years
ended June 30, 2015, 2014 and 2013, respectively. At June 30, 2015, we were servicing $213.9 million of residential
mortgage loans for Freddie Mac and other secondary market purchasers. These mortgage servicing rights had a fair
value at June 30, 2015, of $1.8 million. See Note 6 of the Notes to Consolidated Financial Statements included in
Item 8, "Financial Statements and Supplementary Data," of this Form 10-K.
Gains, losses and transfer fees on sales of one- to four-family loans and participations are recognized at the
time of the sale. Our net gain on sales of residential loans was $548,000, $762,000 and $1.6 million for the years
ended June 30, 2015, 2014 and 2013, respectively.
20
The following table shows our loan origination, sale and repayment activities for the periods indicated
(includes loans held for sale):
2015
Year Ended June 30,
2014
(In thousands)
2013
Originations by type:
Fixed-rate:
One- to four-family
Multi-family
Commercial real estate
Construction and land
Home equity
Other consumer
Commercial business
Total fixed-rate
Adjustable-rate:
One- to four-family
Multi-family
Commercial real estate
Construction and land
Home equity
Other consumer
Commercial business
Total adjustable-rate
Total loans originated
Purchases by type:
One- to four-family
Multi-family
Commercial real estate
Total loans purchased
Sales and Repayments:
One- to four-family loans sold
Commercial real estate loans sold
Total loans sold
$
56,191
$
36,626
$
—
—
8,204
798
1,609
1,148
67,950
3,276
—
20,151
8,461
1,931
9
2,675
36,503
104,453
26,078
21
—
26,099
22,540
—
22,540
132
3,745
1,103
1,489
2,127
1,271
46,493
3,263
—
49,180
5,328
1,221
3
8,053
67,048
113,541
18,477
20,463
993
39,933
28,769
5,865
34,634
Total principal repayments, charge-offs and transfers to
real estate owned and repossessed assets
Total reductions
Net loan activity
118,462
141,002
(10,450)
$
72,320
106,954
46,520
$
$
84,723
397
16,037
398
269
5,658
12,023
119,505
4,242
8,041
26,693
10,104
1,839
1
4,600
55,520
175,025
37,405
58
5,544
43,007
46,798
—
46,798
123,300
170,098
47,934
Loan Origination and Other Fees. Loan origination fees generally represent a percentage of the principal
amount of the loan that is paid by the borrower. Accounting standards 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 as income at the time of prepayment. We had
$840,000, $862,000 and $622,000 of net deferred loan fees and costs at June 30, 2015, 2014 and 2013. In addition,
we receive fees for loan commitments, late payments and miscellaneous services.
Asset Quality
Management of asset quality is accomplished by internal controls, monitoring and reporting of key risk
indicators, and both internal and independent third party loan reviews. The primary objective of our loan review
process is to measure borrower performance and assess risk for the purpose of identifying loan weakness in order to
minimize loan loss exposure. From the time of loan origination through final repayment, all loans are assigned a
risk rating based on pre-determined criteria and levels of risk. The risk rating is monitored annually for most loans,
and may change during the life of the loan as appropriate.
21
Internal and independent third party loan reviews vary by loan type, as well as the nature and complexity of
the loan. Some loans may warrant detailed individual review, while other loans may have less risk based upon size,
or be of a homogeneous nature reducing the need for detailed individual analysis. Assets with these characteristics,
such as consumer loans and loans secured by residential real estate, may be reviewed on the basis of risk indicators
such as delinquency or credit rating. In cases of significant concern, a total re-evaluation of the loan and associated
risks are documented by completing a loan risk assessment and action plan. Some loans may be re-evaluated in
terms of their fair market value or net realizable value in order to determine the likelihood of potential loss exposure
and, consequently, the adequacy of specific and general loan loss reserves.
We generally assess late fees or penalty charges on delinquent loans of five percent of the monthly payment
amount due. Substantially all first lien residential fixed-rate and adjustable-rate mortgage loan payments are due on
the first day of the month; however, a borrower is given a 15-day grace period to make the loan payment. When a
mortgage loan borrower fails to make a required payment when it is due, we institute collection procedures. The
first notice is mailed to the borrower on the 16th day requesting payment and assessing a late charge. Efforts to
contact the borrower by telephone generally also begin upon the 16th day of delinquency. If a satisfactory response
is not obtained, continual follow-up contacts are attempted until the loan has been brought current. Before the 90th
day of delinquency, attempts to interview the borrower are made to establish the cause of the delinquency, determine
whether the cause is temporary, assess the attitude of the borrower toward repayment of the debt, and attempt to
reach a mutually satisfactory arrangement for curing the default. If the borrower is chronically delinquent and all
reasonable means of obtaining payments have been exercised, we will pursue all permissible remedies according to
the terms of the security instruments and applicable law. In the event of an unsecured loan, we will either seek legal
action against the borrower or refer the loan to an outside collection agency.
The following table shows our delinquent loans by type of loan and number of days delinquent as of
June 30, 2015.
Loans Delinquent For:
60-89 Days
90 Days and Over
Total Loans Delinquent
60 Days or More
Number Amount
Percent of
Loan
Category
Number Amount
Percent of
Loan
Category
Number Amount
Percent of
Loan
Category
Real estate loans:
One- to four-family
Construction and land
Total real estate loans
Consumer loans:
Home equity
Other
Total consumer loans
Total loans
7
3
10
1
13
14
24
$ 1,230
114
1,344
15
89
104
$ 1,448
0.5
0.6
0.3
—
1.1
0.2
0.3
(Dollars in thousands)
7
1
8
11
12
23
31
$
704
23
727
98
10
108
835
$
0.3
0.1
0.2
0.3
0.1
0.2
0.2
14
4
18
12
25
37
55
$ 1,934
0.8%
137
2,071
113
99
212
0.7
0.5
0.3
1.2
0.5
$ 2,283
0.5%
At June 30, 2015, our total loan delinquencies of 60 days or more were $2.3 million, or 0.5% of our total
loan portfolio, compared to $2.6 million, or 0.5%, and $4.0 million, or 0.9%, at June 30, 2014 and 2013,
respectively. Delinquent loans other than nonperforming and impaired loans were $479,000, $489,000 and
$571,000 at June 30, 2015, 2014 and 2013, respectively.
Nonperforming Assets. The following table sets forth information with respect to our nonperforming
assets and troubled debt restructurings. The troubled debt restructurings include nonperforming and performing
loans. Nonperforming assets includes all nonperforming loans as well as real estate owned and repossessed assets.
Nonperforming assets as a percent of total assets was 0.7% at June 30, 2015, compared to 0.9% and 1.5% at June 30,
2014 and 2013, respectively. At each of the dates indicated, there were no loans delinquent more than 90 days that
were accruing interest.
22
Nonaccruing loans:
Real estate loans:
One- to four-family
Commercial real estate
Construction and land
Total real estate loans
Consumer loans:
Home equity
Other
Total consumer loans
Total nonaccruing loans
Real estate owned:
One- to four-family
Commercial real estate
Construction and land
Total real estate loans
Home equity
Total real estate owned
Repossessed automobiles and
recreational vehicles
Total nonperforming assets
TDR loans:
One- to four-family
Multi-family
Commercial real estate
Construction and land
Total real estate loans
Home equity
Other consumer
Commercial business
Total restructured loans
2015
2014
June 30,
2013
(Dollars in thousands)
2012
2011
$
4,232
$
147
159
4,538
181
164
345
4,883
493
1,368
—
1,861
—
1,861
53
6,797
4,923
629
1,363
—
6,915
428
—
403
7,746
$
$
$
$
$
$
3,543
1,913
127
5,583
340
41
381
5,964
524
—
220
744
—
744
66
6,774
5,939
728
4,456
—
$
$
$
5,643
2,823
236
8,702
1,062
100
1,162
9,864
1,920
195
119
2,234
—
2,234
31
12,129
6,318
280
4,701
—
11,123
11,299
615
—
426
12,164
740
2
308
12,349
$
$
$
$
$
5,410
3,626
132
9,168
882
102
984
10,152
2,546
41
233
2,820
—
2,820
45
13,017
4,946
287
2,894
—
8,127
742
30
—
8,899
$
$
$
$
5,041
5,008
769
10,818
883
290
1,173
11,991
3,630
632
134
4,396
—
4,396
79
16,466
4,798
—
3,140
—
7,938
594
61
—
8,593
Nonaccrual and 90 days or more past due
loans as a percentage of total loans
Nonperforming TDR loans included in
total nonaccruing loans and total
restructured loans above
1%
1.2%
2.2%
2.5%
2.8%
$
5,676
$
3,536
$
5,263
$
4,107
$
5,279
For the years ended June 30, 2015 and 2014, gross interest income which would have been recorded had
the nonaccruing loans been current in accordance with their original terms amounted to $184,000, and $196,000,
respectively. The amount that was included in interest income on impaired loans was $473,000, $774,000 and
$516,000, respectively, for the years ended June 30, 2015, 2014 and 2013.
Other Loans of Concern. In addition to the nonperforming assets set forth in the table above, as of
June 30, 2015, there were 88 accruing loans totaling $11.2 million with respect to which known information about
the possible credit problems of the borrowers have caused management to have concerns as to the ability of the
borrowers to comply with present loan repayment terms and which may result in the future inclusion of such items
in the nonperforming asset categories. These loans have been considered in management's determination of our
allowance for loan losses.
23
Real Estate Owned and Repossessed Property. Real estate we acquire as a result of foreclosure, deed in
lieu, or non-merger deed in lieu of foreclosure is classified as real estate owned until it is sold. When the property is
acquired, it is recorded at the lower of its cost, which is the unpaid principal balance of the related loan, or the fair
market value of the property less selling costs. Other repossessed collateral, including automobiles, are also
recorded at the lower of cost or fair market value. As of June 30, 2015, First Federal had four properties in real
estate owned with an aggregate book value of $1.9 million. Of the four properties owned, the largest was a $1.4
million commercial real estate property, which was subsequently sold, and the remaining $493,000 consisted of
three single family residential properties. Our real estate owned properties are all located in Washington. The
properties included in real estate owned are listed with a real estate broker for sale, included in the multiple listing
service, and are actively being marketed.
Restructured Loans. According to Generally Accepted Accounting Principles ("GAAP"), we are required
to account for certain loan modifications or restructurings as a TDR. In general, the modification or restructuring of
a debt is considered a TDR if we, for economic or legal reasons related to a borrower’s financial difficulties, grant a
concession to the borrower under more favorable terms and conditions than we would grant to an ordinary bank
customer under a normal course of business standard.
General loan restructures and modifications not considered as TDR loans may include lowering interest
rates, extending the maturity date, deferring or re-amortizing monthly payments or other concessions. These general
loan restructures and modifications are made on a case-by-case basis provided that such concessions are not below
market rates nor considered material and outside of the terms and conditions granted to other borrowers under
normal course of business standards.
Adversely classified loans which are subsequently modified and placed in nonaccrual status must remain in
nonaccrual status for a period of not less than six months with consecutive satisfactory payment performance and be
further supported by current financial information and analysis which demonstrates the borrowers have the financial
capacity to meet future debt service before being returned to accrual status.
As of June 30, 2015, we had 58 loans with an aggregate principal balance of $7.7 million which we have
identified as TDR loans, of which $2.1 million were performing in accordance with their revised payment terms and
on accrual status. TDR loans are placed on accrual status after a sustained period of payment performance after
modification, usually six months or longer. Included in the allowance for loan losses at June 30, 2015, is a reserve of
$272,000 related to these loans in conformance with GAAP. As of June 30, 2015, there were $5.7 million of TDR
loans on nonaccrual, all of which were restructured or modified prior to June 30, 2014, whose accrual status
continues to be evaluated by management and that remain on non-accrual due to a lack of sustained payment
performance after modification. Nonaccruing TDR loans are classified as substandard and the appropriate loss
history and qualitative factors determine the allowance. Accruing TDR loans may be classified special mention or
pass depending upon verified repayment sources, collateral values and repayment history. The amount of the
allowance is determined based on the current risk rating and the amount that is needed determines the amount that is
needed to fund the reserve.
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 when material conditions are identified which
raise issues about the financial capacity, collateral or other conditions which may compromise the borrower’s
promise and ability to satisfactorily perform under the terms of the loan. Substandard assets considered impaired
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 as impaired with the
added characteristic that the weaknesses present make near term collection or liquidation highly questionable and
improbable. Assets classified as loss are those considered uncollectible and of such little value that their
continuance as assets with the establishment of a specific loss reserve is not warranted.
In accordance with Accounting Standards Codification ("ASC") 310 and ASC 450, when we classify
problem assets as substandard, doubtful, and loss, we conduct individual loan and collateral analysis to establish a
specific loan loss allowance in an amount we deem prudent, based on the unique circumstances of each loan. Our
Credit Administration, and senior management review the analysis and approve the specific loan loss allowance for
these loans.
General reserve loan loss allowances represent loss allowances which have been established to recognize
the inherent risk associated with lending activities, but which, unlike specific allowances on impaired loans, have
not been specifically allocated to particular problem assets. When an insured institution identifies a problem asset as
24
an unavoidable and imminent loss, it is required to partially or fully charge-off such assets in the period in which
they are deemed uncollectible. Assets that do not currently expose us to sufficient risk to warrant classification as
substandard or doubtful but possess identified weaknesses are classified by us as either watch or special mention
assets. Our determination as to the classification of our assets and the amount of our valuation allowances is subject
to review by the DFI and the FDIC, who can order specific charge-offs or the establishment of additional loan loss
allowances.
We review, at least quarterly, the problem assets in our portfolio to determine whether any assets require
reclassification. On the basis of our review, as of June 30, 2015, we had classified loans of $9.9 million and $6.3
million of special mention loans. The amount classified represented 5.2% of equity capital and 1.1% of assets at
that date.
The following table shows the aggregate amounts of our classified assets at the dates indicated.
Loans:
Substandard loans
Doubtful loans
Total classified assets
2015
June 30,
2014
(In thousands)
2013
$
$
9,851
—
9,851
$
$
13,943
—
13,943
$
$
21,515
156
21,671
Included in our classified loans at June 30, 2015 were $1.3 million of loans made to not-for-profit
organizations. We continue to work with these nonprofit entities to improve their finances and encourage ongoing
debt repayment.
25
n
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a
t
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7
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$
%
7
.
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$
%
0
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%
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.
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North Olympic
S
n
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Peninsula
n
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% of Total in
n
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Category
s
o
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A
Amount
The following table shows at June 30, 2015, the geographic distribution of our classified assets in dollar amounts and percentages.
1
.
3
5
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2
9
.
1
2
.
1
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.
1
9
.
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%
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%
0
.
2
Real estate loans:
One- to four-family
$
Multi-family
Commercial real estate
Construction and land
Total real estate loans
Consumer loans:
Home equity
Other consumer
Total consumer loans
Commercial business loans
Total loans
$
n
o
t
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n
i
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s
a
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3.0% $
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%
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3.1% $
f
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A
Other Western
Washington
Other Washington
4
4
Amount
3
,
5
9
2
6
% of Total in
7
3
Category
2
7
5
4
,
1
7
6
6
,
7
Amount
1
3
8
% of Total in
Category
6
8
2
7
1
1
,
1
Total in
Washington State
8
5
Amount
4
% of Total in
2
4
Category
2
,
9
All Other States
Total
Amount
% of Total in
Category
Amount
% of Total in
Category
2.4% $
609
1.7% $
1.9
1.2
1.2
1.9
2.3
3.7
2.5
3.1
—
—
—
609
—
—
—
—
—
—
—
1.7
—
—
—
—
5,953
629
1,457
6
2
237
8,276
831
286
1,117
2.3%
1.9
1.2
1.2
1.9
2.3
3.5
2.5
458
3.1
2.0% $
609
1.7% $
9,851
2.0%
(Dollars in thousands)
$
167
%
9
.
4
—
—
—
2
7
1
167
$
%
3
.
13
0
22
35
7
6
1
$
—
%
0
.
3
—
—
0.3% $
9
—
.
0
—
—
—
—
—
—
—
—
—
—
0.1
—
0.5
2.8
1.0
—
—
2
7
1
1
.
0
7
6
1
1
.
6
9
.
8
9
3
8
3
5
.
0
8
.
2
3
1
2
2
172
—
—
—
172
39
38
77
—
7
.
6
1
0
.
3
8
.
1
1
.
3
4
.
2
5
.
3
4.9% $
5,344
2
.
7
—
—
—
7
7
0.9
0
.
6.1
1
8.9
7.2
5
3
—
5
.
2
—
629
1,457
237
—
7,667
—
831
286
1,117
—
458
5
.
5
202
0.1% $
249
1.2% $
9,242
5
0
0
,
5
$
y
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m
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9
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7
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26
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s
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T
Allowance for Loan Losses. Management recognizes that loan losses may occur over the life of a loan
and the allowance for loan losses must be maintained at a level necessary to absorb specific losses on impaired loans
and probable losses inherent for the total loan portfolio. Monthly, our chief credit officer prepares a report of the
allowance for loan losses and establishes the provision for credit losses based on the risk composition of our loan
portfolio, delinquency levels, loss experience, economic conditions, regulatory examination results, seasoning of the
loan portfolios, and other factors related to the collectability of the loan portfolio. This allowance for loan losses
report is reviewed monthly by our Asset Quality Committee consisting of the chief credit officer, chief banking
officer, chief financial officer and chief executive officer. The qualitative factors, which have an impact on the
allowance for loan losses, are approved by Management on a quarterly basis. Quarterly, the allowance for loan
losses with the adjusted qualitative factors is reviewed by the board of director's board loan asset quality committee
and presented for approval to the full board of directors. The allowance is increased by the provision for loan losses,
which is charged against current period operating results, and decreased by the amount of actual loan charge-offs,
net of recoveries.
We believe the quantitative and qualitative analysis necessary to calculate accounting estimates for loan
loss reserves is a critical process; however, we also recognize that economic, market, industry and political changes
can adversely affect loan quality. Unpredictable personal events or other undisclosed information by individual
borrowers can occur at any time, which can result in immediate significant changes in, as well as management’s
assumptions about, probable losses inherent in the loan portfolio. The impact of such events can quickly deplete the
allowance and potentially require increased provisions to replenish the allowance, which could negatively affect
current and future earnings.
Our methodology for analyzing the allowance for loan losses consists of two components: general and
specific allowances. The formula for the general loan loss reserve allowance is determined by applying an estimated
quantified loss percentage, as well as qualitative factors, to various groups of loans. The loss percentages are
generally based on various historical measures such as the amount and type of classified loans, past due ratios, loss
experience, and economic conditions, which could affect the collectability of the respective loan types. Qualitative
factors and adjustments to the loan loss reserve calculations are largely subjective but also include objective
variables such as unemployment rates, falling or rising real estate values, real estate and retail sales, demographics
and other known material economic indicators. A specific allowance is established when management believes the
borrower’s financial and/or collateral condition has materially deteriorated to a point of impairment and loss is
highly probable.
The allowance for loan losses was $7.1 million at June 30, 2015, compared to $8.1 million and $8.0 million
at June 30, 2014 and 2013, respectively. The fluctuation was a result of the changes in asset quality reflected in our
delinquent, nonperforming, and classified loans, together with our recognition of qualitative factors which reflect the
challenges that exist in our primary market areas within which we do business. Our actual loss history has improved
as further time has elapsed since the significant charge-offs taken in 2011 and 2012 and we recover from the recent
recession. First Federal uses a three year loss history as part of its allowance for loan losses methodology. We
continually monitor local, regional, and national economic trends.
We define a loan as being impaired when, based on current information and events, it is probable we will
be unable to collect amounts due under the contractual terms of the loan agreement. Large groups of smaller
balance homogeneous loans such as residential mortgage loans and consumer loans are grouped together for
impairment analysis and reserve calculation. All other loans are evaluated for impairment on an individual basis. In
the process of identifying loans as impaired, management takes into consideration factors which include payment
history, collateral value, financial condition of the borrower, and the probability of collecting scheduled payments in
the future. Minor payment delays and insignificant payment shortfalls typically do not result in a loan being
classified as impaired. The significance of payment delays and shortfalls is considered by management on a case-
by-case basis, after taking into consideration the totality of circumstances surrounding the loans and borrowers,
including payment history and amounts of any payment shortfall, length and reason for delay, and likelihood of
return to stable performance.
In determining the allowance for loan losses, management utilizes the valuation shown in the most recent
appraisal obtained, unless additional information is known, which can result in additional adjustments to the
valuation of collateral pledged.
Appraisals or evaluations may be updated subsequent to the time of origination, whenever management
identifies a loan as impaired or potentially being impaired. Events which may trigger an updated appraisal or
evaluation include, but are not limited to, borrower delinquency, material technical defaults, annual review of
27
borrower’s financial condition, property tax and/or assessment delinquency, deferred maintenance or other
information known or discovered by us.
Impaired collateral dependent loans require a current appraisal and analysis to determine the net value of
the collateral for loan loss reserve purposes. Our policy is to update these appraisals every 12 months as long as the
loan and collateral remains impaired, except for smaller balance, homogeneous loans, which are applied a reserve
according to their risk weighting and loan class. Certain types of collateral, depending on market conditions, may
require more frequent appraisals, updates or evaluations. When the results of the impairment analysis indicate a
potential loss, the loan is classified as substandard and a specific reserve amount is established or adjusted to reflect
any further deterioration in the value of the collateral that may occur prior to liquidation or reinstatement. The
impairment analysis takes into consideration the primary, secondary, and tertiary sources of repayment, whether
impairment is likely to be temporary in nature or liquidation is anticipated.
The allowance for loan losses was $7.1 million, or 1.4% of total loans outstanding, as of June 30, 2015,
compared to $8.1 million and $8.0 million, or 1.6% and 1.7%, respectively, of total loans outstanding as of June 30,
2014 and June 30, 2013, respectively. The level of the loan loss reserve allowance as of June 30, 2015, is based on
our current qualitative and quantitative methodology, which includes best efforts identification of loans which may
have loss potential in the foreseeable future; however, actual losses may vary from the estimates. Management will
continue to review the adequacy of the allowance for loan losses and make adjustments to the allowance for loan
losses based on loan growth, economic conditions, charge-offs and portfolio composition. For the years ended
June 30, 2015, 2014 and 2013, the provision for loan losses was $0, $1.3 million and $1.4 million, respectively.
As of June 30, 2015, we had impaired loans of $10.8 million, compared to $14.7 million and $17.3 million
at June 30, 2014 and 2013, respectively.
Management believes that our allowance for loan losses as of June 30, 2015, was adequate to absorb the
known and inherent risks of loss in the loan portfolio at that date. While management believes the estimates and
assumptions used in its determination of the adequacy of the allowance are reasonable, there can be no assurance
that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future
provisions will not exceed the amount of past provisions or that any increased provision that may be required will
not adversely impact our financial condition and results of operations. In addition, the determination of the amount
of our allowance for loan losses is subject to review by bank regulators, as part of the routine examination process,
which may result in the establishment of additional reserves based upon their judgment of information available to
them at the time of their examination.
28
3
2
The following table summarizes the distribution of our allowance for loan losses at the dates indicated.
2
3
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$ 7,111
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2015
Percent
of loans
4
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category
to total
%
1
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4
Percent
of loans
in each
category
8
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to total
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,
,
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(Dollars in thousands)
$
—
5
.
3
Percent
of loans
in each
category
8
5
8
3
to total
3
2
2012
2011
Percent
of loans
in each
category
to total
Amount
Percent
of loans
in each
category
to total
Amount
52.0% $ 3,408
s
n
a
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6.7
t
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388
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—
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48.1% $ 3,667
0
4
4
.
.
.
2
5
7
230
8.9
5
2
7
.
6
8
.
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.
3
54.2% $ 3,464
—
6.1
78
%
0
.
0
0
1
8
9
9
6
3
3
1,321
297
1,562
453
223
2
5
0
,
1
1
2
3
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5
2
3
4
1
,
3
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7.9
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—
$
1
5
2
9
5
7
1
1
1
,
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20.3
3.4
9.3
2.8
3.9
—
876
230
1,773
395
574
—
100.0% $ 7,390
$
52.6% $ 2,025
4.2
73
19.5
5.5
12.5
2.7
3.0
—
962
502
666
166
294
40
100.0% $ 4,728
55.5%
4.0
17.4
5.5
12.8
3.0
1.8
—
100.0%
235
100.0% $ 8,072
221
100.0% $ 7,974
:
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29
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T
Allocated at end of period to:
One- to four- family
Multi-family
Commercial real estate
Construction and land
Home equity
Other consumer
Commercial business
Unallocated
Total
The following table sets forth an analysis of our allowance for loan losses:
2015
2014
June 30,
2013
(Dollars in thousands)
2012
2011
Allowance at beginning of period $
8,072
$
7,974
$
7,390
$
4,728
$
6,420
Charge-offs:
One- to four-family
Multi-family
Commercial real estate
Construction and land
Home equity
Other consumer
Commercial business
Total charge-offs
Recoveries:
One- to four-family
Multi-family
Commercial real estate
Construction and land
Home equity
Other consumer
Commercial business
Total recoveries
Net charge-offs
Provision for loan losses
(430)
—
—
(49)
(325)
(178)
(177)
(662)
—
(125)
(35)
(434)
(181)
(10)
(548)
(2,482)
—
—
(222)
(463)
(169)
—
—
(577)
(314)
(1,465)
(301)
(364)
(890)
(2)
(194)
(1,274)
(283)
(152)
(115)
(1,159)
(1,447)
(1,402)
(5,503)
(2,910)
84
—
—
17
48
46
3
198
(961)
—
92
—
—
2
86
42
16
238
(1,209)
1,307
8,072
180
—
269
—
27
106
28
610
95
—
—
—
7
47
46
188
1
13
49
3
19
19
195
292
(792)
1,376
7,974
$
(5,308)
7,970
7,390
(2,618)
926
$
4,728
$
Balance at end of period
$
7,111
$
Net charge-offs as a percentage of
average loans outstanding
Net charge-offs as a percentage of
average nonperforming assets
Allowance as a percentage of
nonperforming loans
Allowance as a percentage of total
loans
0.2%
0.3%
0.2%
1.3%
0.6%
14.0%
13%
6.2%
36.0%
14.0%
145.6%
135.3%
80.8%
72.8%
39.4%
1.4%
1.6%
1.7%
1.8%
1.1%
Average consolidated loans, net
Average total loans
$
$
491,497
498,227
$
$
474,222
482,276
$
$
423,294
432,431
$
$
412,262
418,954
$ 447,677
$ 454,736
30
Investment Activities
General. Under Washington 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, and obligations of states and their political subdivisions.
Our chief financial officer has the basic responsibility for the management of our investment portfolio, in
consultation with our chief executive officer, and the direction and guidance of the board of directors. Various
factors are considered when making investment decisions, including the marketability, maturity and tax
consequences of the proposed investment. 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
deposit inflows, and the anticipated demand for funds from deposit withdrawals and loan originations and purchases.
The general objective of our investment portfolio is to provide sufficient liquidity to fund lending 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.
Securities. At June 30, 2015, total investment securities increased $128.4 million, or 55.3%, to $360.6
million at June 30, 2015, from $232.2 million at June 30, 2014, primarily as a result of cash received from the
Company's initial stock offering and increases in customer deposits that were deployed into earning assets during the
year ended June 30, 2015. U.S. government agency issued mortgage-backed securities ("MBS agency") comprised
the largest portion, at 61.7%, of our investment portfolio at June 30, 2015, followed by U.S. Small Business
Administration securities ("SBA") at 9.8%, municipal bonds at 9.0%, corporate issued asset-backed securities
("ABS corporate") securities at 8.2%, agency bonds at 6.6%, U.S. government agency issued asset-backed securities
("ABS agency") at 2.6%, and corporate issued mortgage-backed securities ("MBS corporate") at 2.2%. MBS agency
securities also comprised the largest change in the investment portfolio, increasing $53.7 million during the year,
followed by increases in ABS corporate securities of $29.6 million, agency bonds of $23.8 million, municipal bonds
of $9.1 million, MBS corporate of $8.0 million, and SBA securities of $5.2 million, partially offset by a decrease in
ABS agency securities of $938,000. The duration of the total investment securities portfolio remained the same at
4.7 years at June 30, 2015 and 2014.
The issuers of MBS agency securities held in our portfolio, which include Fannie Mae, Freddie Mac, and
Ginnie Mae, and certain issuers of agency bonds held in our portfolio, which include the U.S. Treasury, FHLB, and
Fannie Mae, as well as the U.S. Small Business Administration, guarantee the timely principal and interest payments
in the event of default. ABS agency bonds held in our portfolio also include securities issued by Sallie Mae Student
Loan Trust and CIT Education Loan Trust, which are backed by student loans in a subordinate tranche where
payment is not guaranteed by the issuer. The underlying student loans are reinsured by the U.S. Department of
Education, which mitigates a significant portion of their risk of loss. Municipal bonds consist of a mix of taxable and
non-taxable, revenue and general obligation bonds issued by various local and state government entities that use
their revenue-generating and taxing authority as a source of repayment of their debt. The state of the issuers of our
municipal bonds, in which we hold more than 10% of our municipal bond portfolio at June 30, 2015, include
Washington state at 31.3%, New York at 17.2%, Florida at 15.8%, Texas at 11.7%, and Alabama at 10.9%. We
believe our municipal bonds are considered investment grade, and we monitor their credit quality on an ongoing
basis.
ABS and MBS corporate securities have no guarantees in the event of default and therefore warrant
continued monitoring for credit quality. Our MBS corporate securities consist of fixed and variable rate mortgages
issued by various corporations, and our ABS corporate securities consist of a mix of variable rate collateralized loan
obligations in managed funds which we believe have sufficient subordination to mitigate the risk of loss on these
investments. Monitoring of these securities may include, but is not limited to, reviewing credit quality standards
such as delinquency, subordination, and credit ratings. We believe all our corporate securities are considered
investment grade.
As a member of the FHLB, we had an average balance of $9.5 million in stock of the FHLB for the year
ended June 30, 2015. We received $12,000 and $10,000 in dividends from the FHLB during the years ended
June 30, 2015 and 2014, and none during the year ended June 30, 2013.
31
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,
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1
The table below sets forth information regarding the composition of our securities portfolio and other investments at the dates indicated. At June 30,
t
a
2015, our securities portfolio did not contain securities of any issuer with an aggregate book value in excess of 10% of our equity capital, excluding those issued
by the United States Government or its agencies.
r
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Securities available-for-sale:
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U.S. Treasury and government agency issued bonds (Agency bonds)
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Maturity of Securities. The composition and contractual maturities of our investment portfolio at June 30, 2015 and June 30, 2014, excluding FHLB
—
3
7
6
7
8
9
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8
9
1
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5
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stock, are indicated in the following table. The yields on municipal bonds have not been computed on a tax equivalent basis.
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Over 1 year to 5 years
7
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Weighted
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,
8
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Average
2
Yield
Amortized
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Over 10 years
Total Securities
Amortized
Cost
Weighted
Average
Yield
Amortized
Cost
Weighted
Average
Yield
Fair
Value
June 30, 2015
8
3
1
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Over 5 to 10 years
4
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Average
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$
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%
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169,327
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39,260
44,939
2.66% $
17,387
2.71% $
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—
1.73
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1.76
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29,634
33,955
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297,957
15,149
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45,500
61,524
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1.84
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2.18
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2.87
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3
3
23,774
9,201
29,634
34,328
176,877
7,952
299,040
15,553
877
46,080
62,510
Total securities
0.98% $
11,132
1.53% $
50,875
2.26% $ 296,174
2.31% $ 359,481
2.27% $ 361,550
%
6
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Securities held to maturity:
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Over 5 to 10 years
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Cost
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Value
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—
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—
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$
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—
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—
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8,671
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2.75% $
7,316
3.27% $
7,418
3.27% $
7,525
—
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—
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10,585
26,408
125,624
169,933
15,014
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27,510
43,234
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132,363
178,972
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4
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16,120
1.97% $ 213,167
2.11% $ 230,256
2.11% $ 232,954
—
—
—
—
—
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34
The Company may hold certain investment securities in an unrealized loss position that are not considered
other than temporarily impaired or OTTI. At June 30, 2015, there were 54 investment securities with $2.1 million of
unrealized losses and a fair value of approximately $157.7 million. At June 30, 2014, there were 23 investment securities
with $1.0 million of unrealized losses and a fair value of approximately $72.9 million.
Deposit Activities and Other Sources of Funds
General. Deposits, borrowings and loan repayments are the major sources of our funds for lending and
other investment purposes. Scheduled loan repayments are a relatively stable source of funds, while deposit inflows
and outflows and loan prepayments are influenced significantly by general interest rates and market conditions.
Borrowings from the FHLB are used to supplement the availability of funds from other sources and also as a source
of term funds to assist in the management of interest rate risk.
Our deposit composition reflects a mixture with certificates of deposit accounting for 22.9% of the total
deposits at June 30, 2015, and interest and noninterest-bearing checking, savings and money market accounts
comprising the balance of total deposits. We rely on marketing activities, convenience, customer service and the
availability of a broad range of deposit products and services to attract and retain customer deposits. We did not
have any brokered deposits at June 30, 2015.
Deposits. Deposits are attracted from within our market area through the offering of a broad selection of
deposit instruments, including checking accounts, money market deposit accounts, savings accounts and certificates
of deposit with a variety of rates. 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 structure and deposit mix, our customer preferences and the profitability of acquiring
customer deposits compared to alternative sources.
Deposit Activity. The following table sets forth our total deposit activities for the periods indicated.
Beginning balance
Net deposits
Interest credited
Ending balance
Net increase
Percent increase
2015
Year Ended June 30,
2014
(Dollars in thousands)
$
$
$
600,399
45,096
1,669
647,164
46,765
$
$
$
595,044
3,818
1,537
600,399
5,355
$
$
$
2013
583,238
9,838
1,968
595,044
11,806
7.8%
0.9%
2.0%
35
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(
Types of Deposits. The following table sets forth the dollar amount of deposits in the various types of deposits programs we offered at the dates
indicated.
4
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2015
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2
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4
4
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7
9
8
1
1
June 30,
2
9
6
,
3
3
1
2014
9
9
3
,
0
0
6
Percent
Percent
$
Amount
8
6
.
.
1
3
1
1
1
.
5
3
of Total
6
.
1
1
1
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7
7
4
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0
Amount
—
—
of Total
%
0
—
.
(Dollars in thousands)
0
0
1
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2
2
2013
Amount
Percent
of Total
6
3
16.6% $
103,467
17.2% $
101,995
17.2%
l
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Transactions and Savings Deposits:
T
f
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t
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t
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0
2
Savings accounts
Money market accounts
Total transaction and savings
deposits
107,748
76,142
9
7
88,129
2
1
1
2
,
,
8
7
227,217
8
2
2
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0
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69,241
5
—
84,394
—
209,605
3
8
6
,
5
8
2
9
,
7
4
1
6
3
2
,
9
9
4
499,236
$
77.1
466,707
Certificates:
0.00 – 0.99%
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2.00 – 2.99%
3.00 – 3.99%
4.00 – 4.99%
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5.00 and over
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Total certificates
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75,040
67,200
5,683
—
5
—
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647,164
s
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11.6
10.4
0.9
—
—
—
22.9
91,023
32,539
8,844
902
197
187
133,692
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%
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100.0% $
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9
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9
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o
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9
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600,399
9
9
.
4
–
–
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.
0
0
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36
11.5
4
14.1
6
1
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7
34.9
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6
77.7
$
58,962
82,883
198,774
442,614
15.2
112,276
23,416
10,053
3,119
3,389
177
152,430
595,044
5.4
1.5
0.2
—
—
22.3
100.0% $
s
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9.9
13.9
33.4
74.4
18.9
3.9
1.7
0.5
0.6
—
25.6
100.0%
Deposit Flow. The following table sets forth the balances of savings deposits in the various types of savings accounts offered by First Federal at the
$
dates indicated.
Amount
Savings accounts
$ 88,129
Transaction accounts
183,890
Money-market
accounts
Fixed-rate certificates
which mature in the
year ending :
Within 1 year
After 1 year but
within 2 years
After 2 years but
within 5 years
Certificates
227,217
71,474
33,336
42,912
maturing thereafter
206
Total
$647,164
2013
$
Percent
%
of
0
.
Total
0
0
1
Increase/
(Decrease)
Amount
2012
Percent
of
Total
Increase/
(Decrease)
Amount
(Dollars in thousands)
13.9% $
4,876
$ 78,007
13.4% $
4,075
$ 73,932
2011
Percent
of
Total
Increase/
(Decrease)
7
3
13.1% $
(1,882)
27.1
33.4
18,340
142,617
5,927
192,847
24.5
33.1
15,516
127,101
23,082
169,765
22.6
30.2
14,154
6,141
15.9
(15,492)
109,875
18.8
(22,603)
132,478
23.6
857
4.3
5.4
—
(7,769)
33,452
6,033
26,236
(109)
204
5.7
4.5
—
(1,059)
34,511
2,102
24,134
(273)
477
6.1
4.3
0.1
(5,719)
(7,354)
(22)
5,355
$595,044
100.0% $
11,806
$583,238
100.0% $
20,840
$562,398
100.0% $
6,175
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June 30,
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34
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S
Deposit Maturities. The following table sets forth the rate and maturity information of our time deposit
certificates at June 30, 2015.
0.00-
0.99%
1.00-
1.99%
2.00-
2.99%
3.00-
3.99%
4.00-
4.99%
5.00%
or higher
Total
Percent of
Total
Certificate accounts
maturing in quarter ending:
(Dollars in thousands)
September 30, 2015
$ 20,736
$
December 31, 2015
March 31, 2016
June 30, 2016
September 30, 2016
December 31, 2016
March 31, 2017
June 30, 2017
September 30, 2017
December 31, 2017
March 31, 2018
June 30, 2018
Thereafter
12,985
16,307
7,674
4,907
4,730
3,386
1,814
1,128
521
428
424
—
681
71
217
7,778
7,775
2,037
1,737
6,287
1,679
5,901
5,467
3,677
23,893
$
1,317
$
— $
957
1,732
1,014
653
10
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
5
—
—
—
—
—
—
—
—
—
—
—
—
$
— $ 22,739
15.3%
—
—
—
—
—
—
—
—
—
—
—
—
14,013
18,256
16,466
13,335
6,777
5,123
8,101
2,807
6,422
5,895
4,101
9.5
12.3
11.1
9.0
4.6
3.5
5.5
1.9
4.3
4.0
2.8
23,893
16.2
Total
$ 75,040
$ 67,200
$
5,683
$
— $
5
$
— $ 147,928
100.0%
Percent of total
50.8%
45.4%
3.8%
—%
—%
—%
100.0%
Jumbo Certificates. The following table indicates the amount of our jumbo certificates of deposit by time
remaining until maturity as of June 30, 2015. Jumbo certificates of deposit are certificates in amounts of $100,000
or more.
3 Months
or Less
Over
3 to 6
Months
Maturity
Over
6 to 12
Months
(In thousands)
Over 12
Months
Total
Certificates of deposit less than $100,000
$
12,089
$
Certificates of deposit of $100,000 or more
10,650
6,756
7,257
$
17,537
$
27,836
$
64,218
17,185
48,618
83,710
Total certificates
$
22,739
$
14,013
$
34,722
$
76,454
$ 147,928
The Federal Reserve requires First Federal to maintain reserves on transaction accounts or non-personal
time deposits. These reserves may be in the form of cash or noninterest-bearing deposits with the Federal Reserve
Bank of San Francisco. Negotiable order of withdrawal (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 the reserve
requirements, as are any non-personal time deposits at a savings bank. As of June 30, 2015, our deposit with the
Federal Reserve Bank of San Francisco and vault cash exceeded our reserve requirements.
Borrowings. Although customer deposits are the primary source of funds for our lending and investment
activities, we have used advances from the FHLB, including short-term Cash Management Advance Promissory
Notes ("CMA borrowings") and longer term advances to supplement our supply of lendable funds, to meet short-
38
term deposit withdrawal requirements and also to provide longer-term funding to better match the duration of
selected loan and investment maturities.
Depending upon the retail banking activity and the availability of excess post-conversion capital that may
be provided to us, we will consider and may undertake additional leverage strategies within applicable regulatory
requirements or restrictions. These borrowings would be expected to primarily consist of FHLB advances.
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 and other assets (principally securities
which are obligations of, or guaranteed by, the U.S. Government) 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 committed credit facility with the FHLB and currently have pledged loan and security
collateral to support a borrowing capacity of $205.7 million at June 30, 2015. We had outstanding advances from the
FHLB of $89.9 million leaving a remaining borrowing capacity of $115.8 million. In April 2013, we restructured
substantially all of our FHLB advances by extending maturities and taking advantage of the lower interest rate
environment. This is reflected in the lower weighted average interest rate on FHLB advances for the years ended
June 30, 2015 and 2014, compared to the year ended June 30, 2013.
Included in borrowings at June 30, 2015, is a fixed-rate promissory note in the amount of $109,000 held by
Craft3 Development IV, LLC, a subsidiary of First Federal (the “Craft 3 Promissory Note”). Simple interest of 4.5%
per annum is calculated on the outstanding principal balance and is due monthly. The entire unpaid principal balance
plus remaining interest due is payable on September 1, 2015.
The following tables set forth information regarding our borrowings at the end of and during the periods
indicated. The tables include both long- and short-term borrowings.
Maximum balance:
FHLB advances
CMA borrowings
Craft3 Promissory Note
Average balances:
FHLB advances
CMA borrowings
Craft3 Promissory Note
Weighted average interest rate:
FHLB advances
CMA borrowings
Craft3 Promissory Note
Balance outstanding at end of period:
FHLB advances
CMA borrowings
Craft3 Promissory Note
Total borrowings
2015
June 30,
2014
(Dollars in thousands)
2013
$
$
$
$
89,924
1,000
109
89,924
83
109
3.24%
0.29
4.50
89,924
—
109
90,033
$
$
$
$
39
99,924
31,000
109
96,591
7,967
109
3.26%
0.29
4.50
89,924
15,100
109
105,133
$
$
$
$
99,924
1,500
109
99,924
125
109
3.99%
0.46
4.50
99,924
—
109
100,033
Weighted average interest rate at end of
period:
FHLB advances
CMA borrowings
Craft3 Promissory Note
Subsidiary and Other Activities
2015
June 30,
2014
(Dollars in thousands)
2013
3.24%
0.29
4.50
3.24%
0.30
4.50
3.28%
—
4.50
First Federal has one subsidiary, North Olympic Peninsula Services, Inc. (“NOPS”), which is wholly-
owned and has been inactive for approximately ten years. We made an initial capital investment on May 19, 1982 in
NOPS of $25,000 and an additional capital investment on May 7, 1985 of $475,000. As of June 30, 2015
we had not made any subsequent investment in NOPS.
NOPS was established for the purpose of conducting various activities including, but not limited to: (i) the
acquisition, development, improvement and management of real or personal property; (ii) the origination, sale,
purchase, and servicing of secured and unsecured loans; (iii) providing services to financial institutions and other
corporate entities, including serving as an insurance agent or broker; acting as a partner, member, associate, or
manager of any partnership, limited partnership, joint venture, trust or other enterprise.
In addition, NOPS owns a building located at 139 West First Street, Port Angeles, Washington, that is
adjacent to First Federal’s Downtown Port Angeles branch located at 141 West First Street, Port Angeles,
Washington. At June 30, 2015, the building was valued at $205,000. The one-story building, including a small
basement area, is approximately 4,668 square feet and all of the space is currently rented to First Federal for use as
office space and storage. The current lease between NOPS and First Federal has a three year term and a rental rate of
$5.14 per square foot. First Federal has no plans to utilize NOPS in the future in any capacity and has authorized
management to dissolve this subsidiary.
In 2008, First Federal partnered with Craft3, Inc., a Washington nonprofit corporation, to form two limited
liability companies for the purpose of participating in the new markets tax credit program (“NMTC”). First Federal
made an initial capital investment of 99.99% in Craft3 Development, IV, LLC (“Craft3 Development”) for $4.9
million in the form of $2.4 million of debt and $2.5 million of equity. Craft3 Development then made a 100%
equity investment of $4.9 million into another company, Craft3 Investment IV, LLC (“Craft3 Investment”). Craft3
Investment distributed those funds in the form of a loan to the Downtown Ambulatory Health Center, LLC for
construction of a medical facility in Port Angeles, Washington. First Federal participated in the NMTC program until
its expiration in June 2015 and realized tax credits totaling $1.9 million over the seven year period, the full amount
of allowable tax credits.
It is expected that Craft3 Development and Craft3 Investment will be dissolved in the next twelve months,
and the loan to the Downtown Ambulatory Health Center, LLC will be refinanced with First Federal or another
lender. If the loan to the Downtown Ambulatory Health Center LLC cannot be traditionally refinanced, it will be
treated as a troubled debt and evaluated by First Federal’s credit department for further collection and possible
workout. At the time of the dissolution of Craft3 Development and Craft3 Investment, it is expected that First
Federal will receive a $4.6 million reimbursement for its debt and equity contributions. The $293,000 difference
between the amount of First Federal's investment ($4.9 million) and the amount of the expected reimbursement
($4.6 million) was amortized over the new markets tax period of seven years.
Competition
We face competition in originating loans. Competition in originating real estate loans comes primarily
from other savings institutions, commercial banks, credit unions, life insurance companies and mortgage bankers.
40
Other savings institutions, commercial banks, credit unions and finance companies provide vigorous competition in
consumer lending, including our indirect lending. Commercial business competition is primarily from commercial
banks, some of which have a nationwide presence. We compete by delivering high-quality, personal service to our
customers that result in a high level of customer satisfaction.
We attract our deposits through our branch office system. Competition for those deposits is principally
from other savings institutions, commercial banks and credit unions located in the same community, as well as
mutual funds and other alternative investments. We compete for these deposits by offering excellent service and a
variety of deposit accounts at competitive rates. Based on the most recent branch data provided by the FDIC, as of
June 30, 2015, First Federal’s share of bank, savings bank and savings and loan association deposits in Clallam and
Jefferson counties was 35.8% and 18.8%, respectively.
Our market area has a high concentration of financial institutions, many of which are branches of large
money center and regional banks. These include large national lenders that have greater resources and may offer
services that we do not provide.
Employees
At June 30, 2015, we had 157 full-time equivalent employees. Our employees are not represented by any
collective bargaining group. We consider our employee relations to be good.
Executive Officers
The following is a description of the principal occupation and employment of the executive officers of the
Company and the Bank during at least the past five years (ages are presented as of June 30, 2015):
Laurence J. Hueth, age 52, is President and Chief Executive Officer of the Company and First Federal,
positions he has held since March 2013 after serving in an interim capacity following management changes in
December 2012. He has served on the First Federal Board of Directors since 2010. Mr. Hueth joined First Federal
in 2008 and was promoted to Senior Vice President, Chief Financial Officer in March 2009. He assumed
responsibility for operational and risk areas, serving as Chief Operating Officer from 2011 to 2012. Mr. Hueth has
over 30 years of progressive responsibility in finance and risk management areas within the banking industry. Prior
to joining First Federal, Mr. Hueth was employed for 15 years at PFF Bank & Trust located in Pomona, California
where he held positions in finance, treasury and risk management, including serving as Vice President, Operational
Risk Manager and Bank Treasurer from 2005 until November 2008. Mr. Hueth is active with numerous charitable
and civic organizations in Clallam and Jefferson counties.
Regina M. Wood, age 44, is Executive Vice President and Chief Financial Officer of the Company and
First Federal positions she has held since March 2013. Prior to that, she served as interim Chief Financial Officer
and Vice President of First Federal from December 2012 through March 2013 and Vice President, Controller of First
Federal from August 2006 to December 2012. Ms. Wood was the Controller of the Central Washington Grain
Growers, Inc. from 2002 to 2006 and Assistant Controller from 1999 to 2002. Ms. Wood is a certified public
accountant licensed in the state of Washington.
Jeffrey S. Davis, age 49, is Executive Vice President and Chief Operating Officer of First Federal, a
position he has held since February 25, 2015, after serving as Senior Vice President and Bank Operations Officer of
First Federal since his employment on September 1, 2014. Prior to joining First Federal, Mr. Davis had been
employed since 2007 by First Merchants Corporation, Muncie, Indiana, and served in various capacities, most
recently serving as Senior Vice President - Director of Retail Administration & Product Management since 2010.
Prior to that, he served as First Vice President - Transaction Services of First Merchants Corporation from 2007 until
2010.
Christopher A. Donohue, age 59, is Executive Vice President and Chief Credit Officer of First Federal, a
position he has held since April 2013. Prior to joining First Federal, Mr. Donohue worked at the Bank of Nevada
from August 2012 as a Vice President-Senior Assets Officer. He worked from September 2010 to September 2011
with the Bank of George as a Senior Vice President and Credit Administrator. Prior to working with the Bank of
George, Mr. Donohue worked for five years with SouthwestUSA Bank, attaining the position in 2007 of Executive
Vice President and Chief Credit Officer, until its FDIC receivership in 2010. These banks are or were located in Las
Vegas, Nevada.
41
Kelly A. Liske, age 38, is Executive Vice President and Chief Banking Officer of First Federal, a position
she has held since July 2013. Ms. Liske served as a Commercial Relationship Manager and Vice President for First
Federal from July 2011 to July 2013. Prior to that she served as the Branch Manager, Assistant Vice President for
First Federal’s Port Townsend Branch from 2006 until 2011.
HOW WE ARE REGULATED
The following is a brief description of certain laws and regulations applicable to First Northwest Bancorp
and First Federal. The descriptions of laws and regulations included herein do not purport to be complete and are
qualified in their entirety by reference to the actual laws and regulations. Legislation is introduced from time to time
in the United States Congress or the Washington State Legislature that may affect the operations of First Northwest
Bancorp and First Federal. In addition, the regulations governing us may be amended from time to time. Any such
legislation or regulatory changes in the future could adversely affect our operations and financial condition by the
FDIC, DFI, Federal Reserve and the CFPB.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which was
enacted in July 2010, imposed new restrictions and an expanded framework of regulatory oversight for financial
institutions, including depository institutions and their holding companies. Among other changes, the Dodd-Frank
Act established the CFPB as an independent bureau of the Federal Reserve Board. 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. First Federal is subject to consumer protection regulations issued by the
CFPB, but as a smaller financial institution, we are generally subject to supervision and enforcement by the FDIC
and the DFI with respect to our compliance with consumer financial protection laws and CFPB regulations.
Many aspects of the Dodd-Frank Act are subject to rulemaking by the federal banking agencies, which has
not been completed and will not take effect for some time, and will take effect over several years, making it difficult
to anticipate the overall financial impact of the Dodd-Frank Act on First Northwest Bancorp, First Federal and the
financial services industry more generally.
Regulation of First Federal
General. First Federal, as a state-chartered savings bank, is subject to applicable provisions of Washington
law and to regulations and examinations of the DFI. As an insured institution, it also is subject to examination and
regulation by the FDIC, which insures the deposits of First Federal to the maximum permitted by law. During these
state or federal regulatory examinations, the examiners may require First Federal to provide for higher general or
specific loan loss reserves, which can impact our capital and earnings. This regulation of First Federal is intended
for the protection of depositors and the deposit insurance fund of the FDIC and not for the purpose of protecting
shareholders of First Federal or First Northwest Bancorp. First Federal is required to maintain minimum levels of
regulatory capital and is subject to some limitations on the payment of dividends to First Northwest Bancorp. See "–
Capital Requirements" and "– Dividends."
Federal and State Enforcement Authority and Actions. As part of its supervisory authority over
Washington-chartered savings banks, the DFI may initiate enforcement proceedings to obtain a cease-and-desist
order against an institution believed to have engaged in unsafe and unsound practices or to have violated a law,
regulation, or other regulatory limit, including a written agreement. The FDIC also has the authority to initiate
enforcement actions against insured institutions for similar reasons and may terminate the deposit insurance if it
determines that an institution has engaged in unsafe or unsound practices or is in an unsafe or unsound condition.
Both these agencies may utilize less formal supervisory tools to address their concerns about the condition,
operations or compliance status of a savings bank.
Regulation by the Washington Department of Financial Institutions. State law and regulations govern
First Federal'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. As a state savings bank, First Federal must pay semi-annual assessments, examination costs and
certain other charges to the DFI.
Washington law generally provides the same powers for Washington savings banks as federally and other-
state chartered savings institutions and banks with branches in Washington, subject to the approval of the DFI.
Washington law allows Washington savings banks to charge the maximum interest rates on loans and other
extensions of credit to Washington residents which are allowable for a national bank in another state if higher than
42
Washington limits. In addition, the DFI may approve applications by Washington savings banks to engage in an
otherwise unauthorized activity if the DFI determines that the activity is closely related to banking and First Federal
is otherwise qualified under the statute. This additional authority, however, is subject to review and approval by the
FDIC if the activity is not permissible for national banks.
Insurance of Accounts and Regulation by the FDIC. The deposit insurance fund of the FDIC insures
deposit accounts in First Federal up to $250,000 per separately insured depositor. As insurer, the FDIC imposes
deposit insurance premiums and is authorized to conduct examinations of, and to require reporting by, FDIC-insured
institutions. Our deposit insurance premiums for the year ended June 30, 2015, were $544,000.
Under the FDIC’s risk-based assessment system, insured institutions are assigned to one of four risk
categories based on supervisory evaluations, regulatory capital levels and certain other risk factors. Rates are based
on each institution’s risk category and certain specified risk adjustments, whereby stronger institutions pay lower
rates while riskier institutions pay higher rates. Assessments are based on an institution’s average consolidated total
assets minus average tangible equity with an assessment rate schedule ranging from 2.5 to 45 basis points. The
FDIC has authority to increase insurance assessments, and any significant increases would have an adverse effect on
the operating expenses and results of operations of First Federal. Management cannot predict what assessment rates
will be in the future.
Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged 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 condition imposed by the FDIC. We do not currently know of any practice,
condition or violation that may lead to termination of our deposit insurance.
Prompt Corrective Action. Federal statutes establish a supervisory framework 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, which include a risk-based capital measure, a leverage ratio capital measure and certain other factors. The
federal banking agencies have adopted regulations that implement this statutory framework. Under these
regulations, an institution is treated as well capitalized if its ratio of total capital to risk-weighted assets is 10% or
more, its ratio of core capital to risk-weighted assets is 6% or more, its ratio of core capital to adjusted total assets
(leverage ratio) is 5% or more, and it is not subject to any federal supervisory order or directive to meet a specific
capital level. In order to be adequately capitalized, an institution must have a total risk-based capital ratio of not less
than 8%, a core capital to risk-weighted assets ratio of not less than 4%, and a leverage ratio of not less than 4%. 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. 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 Federal to comply with applicable capital requirements would, if unremedied, result in 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 June 30, 2015, First Federal was categorized as “well
capitalized” under the new regulatory capital requirements described below to be considered "well capitalized." For
additional information, see Note 11 of the Notes to Consolidated Financial Statements included in Item 8, "Financial
Statements and Supplementary Data," of this Form 10-K.
Capital Requirements. In early July 2013, the Federal Reserve Board and the FDIC approved revisions to
their capital adequacy guidelines and prompt corrective action rules that implement the revised standards of the
Basel Committee on Banking Supervision, commonly called Basel III, and address relevant provisions of the Dodd-
Frank Act. “Basel III” refers to two consultative documents released by the Basel Committee on Banking
Supervision in December 2009, the rules text released in December 2010, and loss absorbency rules issued in
January 2011, which include significant changes to bank capital, leverage and liquidity requirements.
The rules include new risk-based capital and leverage ratios, which became effective January 1, 2015, and
revised the definition of what constitutes “capital” for purposes of calculating those ratios. The new minimum
capital level requirements applicable to First Northwest Bancorp and First Federal are: (i) a new common equity Tier
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1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8%
(unchanged from current rules); and (iv) a Tier 1 leverage ratio of 4% for all financial institutions. In addition, the
rules assign a higher risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual status
and to certain commercial real estate facilities that finance the acquisition, development or construction of real
property.
The rules also establish a “capital conservation buffer” of 2.5% above the new regulatory minimum capital
requirements, which must consist entirely of common equity Tier 1 capital and would result in the following
minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total
capital ratio of 10.5%. The new capital conservation buffer requirement will be phased in beginning in January 2016
at 0.625% of risk-weighted assets and would increase by that amount each year until fully implemented in January
2019. A financial institution would be subject to limitations on paying dividends, engaging in share repurchases, and
paying discretionary bonuses if its capital level falls below the buffer amount. These limitations would establish a
maximum percentage of eligible retained income that could be utilized for such actions.
As of June 30, 2015, First Federal’s Tier 1 capital (leverage) ratio was 14.53% and its total risk-based
capital ratio was 25.01%. For additional information, see Note 11 of the Notes to Consolidated Financial Statements
contained in Item 8, "Financial Statements and Supplementary Data," of this Form 10-K.
For all of these capital requirements, there are a number of changes in what constitutes regulatory capital,
some of which are subject to a two-year transition period. These changes include the phasing-out of certain
instruments as qualifying capital. First Federal does not have any of these instruments as a result of First Federal’s
total assets being below the $15 billion threshold. Under the new requirements for total capital, Tier 2 capital is no
longer limited to the amount of Tier 1 capital included in total capital. Mortgage servicing rights, certain deferred tax
assets and investments in unconsolidated subsidiaries over designated percentages of common stock will be
deducted from capital, subject to a two-year transition period. In addition, Tier 1 capital will include accumulated
other comprehensive income, which includes all unrealized gains and losses on available for sale debt and equity
securities, subject to a two-year transition period; however, during the first quarter of 2015 First Federal took
advantage of the one-time option to permanently opt-out of the inclusion of accumulated other comprehensive
income in its capital calculations to reduce the impact of market volatility on its regulatory capital levels.
The new requirements also include changes in the risk-weightings of assets to better reflect credit risk and
other risk exposures. 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 cancelable; a 250% risk weight
(up from 100%) for mortgage servicing and deferred tax assets that are not deducted from capital; and increased
risk-weightings (0% to 600%) for equity exposures. 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.
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 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.
Federal Home Loan Bank System. First Federal is a member of the FHLB of Des Moines following the
voluntary merger of the FHLB of Seattle with and into the FHLB of Des Moines effective May 31, 2015. As a
member, First Federal is required to purchase and maintain stock in the FHLB of Des Moines. At June 30, 2015,
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First Federal had $4.8 million in FHLB of Des Moines stock, which was in compliance with this requirement. Each
FHLB serves as a reserve or central bank for its members within its assigned region, and it is funded primarily from
proceeds derived from the sale of consolidated obligations of the Federal Home Loan Bank System. Each FHLB
makes loans or advances to members in accordance with policies and procedures, established by its Board of
Directors, subject to the oversight of the Federal Housing Finance Board. All advances from the FHLB of Des
Moines are required to be fully secured by sufficient collateral as determined by the FHLB of Des Moines, and all
long-term advances are required to provide funds for residential home financing. At June 30, 2015, First Federal had
$89.9 million of outstanding advances from the FHLB of Des Moines. See Item 1, "Business – Deposit Activities
and Other Sources of Funds – Borrowings."
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 affected adversely 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 Federal's FHLB of Des Moines stock may result in a corresponding reduction in its capital.
Activities and Investments of Insured State-Chartered Financial Institutions. Federal law generally
limits the activities and equity investments of FDIC insured, state-chartered banks to those that are permissible for
national banks. An insured state bank is not prohibited from, among other things, (1) acquiring or retaining a
majority interest in a subsidiary, (2) investing as a limited partner in a partnership, the sole purpose of which is
direct or indirect investment in the acquisition, rehabilitation or new construction of a qualified housing project,
provided that such limited partnership investments may not exceed 2% of the bank’s total assets, (3) acquiring up to
10% of the voting stock of a company that solely provides or reinsures directors’ 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 if certain requirements are met.
Washington State has enacted a law regarding financial institution parity. Primarily, the law affords
Washington-chartered commercial banks the same powers as Washington-chartered savings banks. In order for a
bank to exercise these powers, it must provide 30 days' notice to the Director of the Washington Division of
Financial Institutions and the Director must authorize the requested activity. In addition, the law provides that
Washington-chartered commercial banks may exercise any of the powers that the Federal Reserve has determined to
be closely related to the business of banking and the powers of national banks, subject to the approval of the
Director in certain situations. Finally, the law provides additional flexibility for Washington-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.
Dividends. Dividends from First Federal constitute the major source of funds for dividends in future
periods that may be paid by First Northwest Bancorp to shareholders. The amount of dividends payable by First
Federal to First Northwest Bancorp depends upon First Federal’s earnings and capital position; is limited by federal
and state laws, regulations and policies; and is subject to prior regulatory approval. According to Washington law,
First Federal 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. Dividends on First Federal’s capital stock may not be paid in an aggregate amount greater than
the aggregate retained earnings of First Federal without the approval of the Director of the DFI.
The amount of dividends actually paid during any one period will be strongly affected by First Federal’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.
Affiliate Transactions. Federal laws strictly limit the ability of banks to engage in certain transactions
with their affiliates, including their bank holding companies. Transactions deemed to be a “covered transaction”
under Section 23A of the Federal Reserve Act and between a subsidiary bank and its parent company or the nonbank
subsidiaries of the bank holding company are limited to 10% of the bank subsidiary’s capital and surplus and, with
respect to the parent company and all such nonbank subsidiaries, to an aggregate of 20% of the bank subsidiary’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
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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 non-affiliates.
Community Reinvestment Act. First Federal is subject to the provisions of the Community Reinvestment
Act of 1977 (CRA), which 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 a bank’s record is made available to the public.
Further, a bank’s CRA performance rating must be considered in connection with a bank’s application, among other
things, to establish a new branch office that will accept deposits; to relocate an existing office; or to merge or
consolidate with, or acquire the assets or assume the liabilities of, a federally regulated financial institution. First
Federal received a “satisfactory” rating during its most recent CRA examination.
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 Federal is
subject to FDIC regulations implementing the privacy protection provisions of the GLBA. These regulations require
First Federal to disclose its privacy policy, including informing consumers of its information sharing practices and
informing consumers of its 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 asked 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 which 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 Federal, that have made loans secured by properties with
potential hazardous waste contamination (such as petroleum contamination) could be subject to liability for cleanup
costs, which costs often substantially exceed the value of the collateral property.
Federal Reserve System. The Federal Reserve Board requires that all depository institutions maintain
reserves on transaction accounts or non-personal time deposits. These reserves may be in the form of cash or
noninterest-bearing deposits with the regional Federal Reserve Bank. Negotiable order of withdrawal (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 the reserve requirements, as are any non-personal time deposits at a savings
bank. As of June 30, 2015, First Federal's deposit with the Federal Reserve Bank and vault cash exceeded its reserve
requirements.
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 Federal is subject to consumer protection regulations issued by the
CFPB, but as financial institutions with assets of less than $10 billion, First Federal is generally subject to
supervision and enforcement by the FDIC and the DFI with respect to compliance with consumer financial
protection laws and CFPB regulations.
First Federal 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 the list set forth below is not
exhaustive, these 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
Federal 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.
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Regulation and Supervision of First Northwest Bancorp
General. First Northwest Bancorp is a bank holding company registered with the Federal Reserve and the
sole shareholder of First Federal. Bank holding companies are subject to comprehensive regulation by the Federal
Reserve under the Bank Holding Company Act of 1956, as amended (“BHCA”), and the regulations promulgated
thereunder. This regulation and oversight is generally intended to ensure that First Northwest Bancorp limits its
activities to those allowed by law and that it operates in a safe and sound manner without endangering the financial
health of First Federal.
As a bank holding company, First Northwest Bancorp is required to file quarterly and annual reports with
the Federal Reserve and any additional information required by the Federal Reserve and is subject to regular
examinations by the Federal Reserve. The Federal Reserve also has extensive enforcement authority over bank
holding companies, including 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.
The Bank Holding Company Act. Under the BHCA, First Northwest Bancorp is supervised by the
Federal Reserve. The Federal Reserve has a policy that a bank holding company is required to serve as a source of
financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound
manner. In addition, the Federal Reserve provides that bank holding companies should serve as a source of strength
to its subsidiary banks by being prepared to use available resources to provide adequate capital funds to its
subsidiary banks during periods of financial stress or adversity, and should maintain the financial flexibility and
capital raising capacity to obtain additional resources for assisting its subsidiary banks. A bank holding company's
failure to meet its obligation to serve as a source of strength to its subsidiary banks will generally be considered by
the Federal Reserve to be an unsafe and unsound banking practice or a violation of the Federal Reserve's
regulations, or both.
Under the BHCA, the Federal Reserve may approve the ownership of shares by a bank holding company in
any company the activities of which the Federal Reserve has determined to be so closely related to the business of
banking or managing or controlling banks as to be a proper incident thereto. These activities generally include,
among others, 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.
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. A bank holding company that meets certain supervisory and financial standards and
elects to be designed as a financial holding company may also engage in certain securities, insurance and merchant
banking activities and other activities determined to be financial in nature or incidental to financial activities. 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.
Regulatory Capital Requirements. The Federal Reserve has adopted capital guidelines pursuant to which
it assesses the adequacy of capital in examining and supervising a bank holding company and in analyzing
applications under the BHCA. These guidelines apply on a consolidated basis to bank holding companies with $1.0
billion or more in assets, or with fewer assets but certain risky activities, and on a bank-only basis to other
companies. These bank holding company capital adequacy guidelines are similar to those imposed on First Federal
by the FDIC. For a bank holding company with less than $1.0 billion in total consolidated assets, the capital
guidelines typically apply on a bank only basis and the Federal Reserve expects the holding company's subsidiary
banks to be well capitalized under the prompt corrective action regulations. In July 2013, the Federal Reserve and
the FDIC approved revisions to their capital adequacy guidelines and prompt corrective action rules to implement
the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act. For additional information, see
the section above entitled “- Regulation of First Federal - Capital Regulation” and Note 11 of the Notes to
Consolidated Financial Statements included in Item 8., "Financial Statements and Supplementary Data," of this
Form 10-K.
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Interstate Banking. The Federal Reserve must approve an application of a bank holding company to
acquire control of, or acquire all or substantially all of the assets of, a bank located in a state other than the holding
company's home state, without regard to whether the transaction is prohibited by the laws of any state. The Federal
Reserve may not approve the acquisition of a bank that has not been in existence for the minimum time period, not
exceeding five years, specified by the law of the host state. Nor may the Federal Reserve approve an application if
the applicant controls or would control more than 10% of the insured deposits in the United States or 30% or more
of the deposits in the target bank's home state or in any state in which the target bank maintains a branch. Federal
law does not affect the authority of states to limit the percentage of total insured deposits in the state that may be
held or controlled by a bank holding company to the extent such limitation does not discriminate against out-of-state
banks or bank holding companies. Individual states may also waive the 30% state-wide concentration limit
contained in the federal law.
The federal banking agencies are authorized to approve interstate merger transactions without regard to
whether the transaction is prohibited by the law of any state, unless the home state of one of the banks adopted a law
prior to June 1, 1997, which applies equally to all out-of-state banks and expressly prohibits merger transactions
involving out-of-state banks. Interstate acquisitions of branches will be permitted only if the law of the state in
which the branch is located permits such acquisitions. Interstate mergers and branch acquisitions will also be
subject to the nationwide and statewide insured deposit concentration amounts described above.
Restrictions on Dividends. First Northwest Bancorp's ability to declare and pay dividends is subject to the
Federal Reserve limits and Washington law, and it may depend on its ability to receive dividends from First Federal.
A policy of the Federal Reserve limits the payment of a cash dividend by a bank holding company if the
holding company's net income for the past year is not sufficient to cover both the cash dividend and a rate of
earnings retention that is consistent with capital needs, asset quality and overall financial condition. A bank holding
company that does not meet any applicable capital standard would not be able to pay any cash dividends under this
policy. A bank holding company not subject to consolidated capital requirements is expected not to pay dividends
unless its debt-to-equity ratio is less than 1:1, and it meets certain additional criteria. The Federal Reserve also has
indicated that it would be inappropriate for a company experiencing serious financial problems to borrow funds to
pay dividends.
Except for a company that meets the well-capitalized standard for bank holding companies, is well
managed, and is not subject to any unresolved supervisory issues, a bank holding company is required to give the
Federal Reserve prior written notice of any purchase or redemption of its outstanding equity securities if the gross
consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases
or redemptions during the preceding 12 months, is equal to 10.0% or more of the company's consolidated net worth.
The Federal Reserve may disapprove such a purchase or redemption if it determines that the proposal would
constitute an unsafe or unsound practice or would violate any law, regulation or regulatory order, condition, or
written agreement. A bank holding company is considered well-capitalized if on a consolidated basis it has a total
risk-based capital ratio of at least 10.0% and a Tier 1 risk-based capital ratio of 6.0% or more, and is not subject to
an agreement, order, or directive to maintain a specific level for any capital measure.
In addition, during the 12 months following the conversion and stock offering, or until January 29, 2016,
First Northwest Bancorp may not make any distributions of capital without the written approval of the Federal
Reserve and the written non-objection of the DFI. In addition, any material deviations from, or changes to, the
business plan are subject to the prior written approval of the Regional Director of the FDIC-San Francisco.
Under Washington corporate law, First Northwest Bancorp generally may not pay dividends if after that
payment it would not be able to pay its liabilities as they become due in the usual course of business, or its total
assets would be less than the sum of its total liabilities.
Stock Repurchases. Any repurchases of our common stock during the three year period following the
conversion is subject to the prior approval of the DFI and other bank regulatory agencies, as applicable. A bank
holding company, except for certain “well-capitalized” and highly rated bank holding companies, is required to give
the Federal Reserve prior written notice of any purchase or redemption of its outstanding equity securities if the
gross consideration for the purchase or redemption, when combined with the net consideration paid for all such
purchases or redemptions during the preceding twelve months, is equal to 10% or more of its consolidated net
worth. The Federal Reserve may disapprove such a purchase or redemption if it determines that the proposal would
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constitute an unsafe or unsound practice or would violate any law, regulation, Federal Reserve order or any
condition imposed by, or written agreement with, the Federal Reserve.
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 Northwest Bancorp will become subject to
and that are discussed above under “- Regulation of First Federal - Capital Regulations.” In addition, among other
changes, the Dodd-Frank Act requires public companies, like First Northwest Bancorp, 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.
Federal Securities Law. The stock of First Northwest Bancorp is registered with the SEC under the
Securities Exchange Act of 1934, as amended. As a result, First Northwest Bancorp is subject to the information,
proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.
First Northwest Bancorp stock held by persons who are affiliates of First Northwest Bancorp may not be
resold without registration unless sold in accordance with certain resale restrictions. Affiliates are generally
considered to be officers, directors and principal shareholders. If First Northwest Bancorp meets specified current
public information requirements, each affiliate of First Northwest Bancorp will be able to sell in the public market,
without registration, a limited number of shares in any three-month period.
The SEC has adopted regulations and policies under the Sarbanes-Oxley Act of 2002 that apply to First
Northwest Bancorp as a registered company under the Securities Exchange Act of 1934. The stated goals of these
Sarbanes-Oxley requirements are to increase corporate responsibility, provide for enhanced penalties for accounting
and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and
reliability of corporate disclosures pursuant to the securities laws. The SEC and Sarbanes-Oxley-related regulations
and policies include very specific additional disclosure requirements and new corporate governance rules. 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.
Federal Taxation
TAXATION
General. First Northwest Bancorp and First Federal 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 Northwest Bancorp or First Federal. First Federal is no longer subject
to U.S. federal income tax examinations by tax authorities for years ended before June 30, 2012. See Note 9 of the
Notes to Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data," of
this Form 10-K.
First Northwest Bancorp anticipates that it will file a consolidated federal income tax return with First
Federal commencing with the first taxable year after completion of the conversion. Accordingly, it is anticipated
that any cash distributions made by First Northwest Bancorp to its shareholders would be considered to be taxable
dividends and not as a
return of capital to shareholders for federal and state tax purposes.
Method of Accounting. For federal income tax purposes, First Federal currently reports its income and
expenses on the accrual method of accounting and uses a fiscal year ending on June 30 for filing its federal income
tax return.
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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. First
Federal has been subject to the alternative minimum tax, and at June 30, 2015 has credits for carryover of
approximately $14,475.
Corporate
Deduction. First Northwest Bancorp may eliminate from its income
dividends received from First Federal as a wholly owned subsidiary of First Northwest Bancorp if it elects to file a
consolidated return with First Federal. 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 payor of the dividend. Corporations which own less than 20% of
the stock of a corporation distributing a dividend may deduct 70% of dividends received or accrued on their behalf.
Charitable Contribution Carryovers. The Company may carryforward charitable contributions to the
succeeding five taxable years. The utilization of the charitable contribution carryforward may not exceed 10% of
taxable income as defined by the federal taxation laws. At June 30, 2015, the Company had a charitable
contribution carryforward for federal income tax purposes of $9.3 million. This carryforward was generated from
the Company’s creation of the First Federal Community Foundation to which it contributed 933,360 shares of its
common stock and $400,000 in cash in connection with the mutual to stock conversion. Management does not fully
expect to utilize the benefit over the five year carryforward period and has recorded a reserve on the portion of the
related deferred tax asset estimated to expire unused.
Washington Taxation
First Federal is subject to a business and occupation tax imposed under Washington law at the rate of 1.5%
of gross receipts. Interest received on loans secured by mortgages or deeds of trust on residential properties and
certain investment securities are exempt from this tax.
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Item 1A. Risk Factors.
Our increased emphasis on commercial real estate lending subjects us to various risks that could adversely
impact our results of operations and financial condition.
Since June 30, 2011, we have increased the amount of our commercial real estate and multi-family loans
from $91.9 million, or 21.2%, of our total loan portfolio to $158.7 million, or 32.1% of our total loan portfolio, at
June 30, 2015. We intend to continue to increase, subject to market demand, our origination and purchase of
commercial real estate loans.
Our increased focus on this type of lending has increased our risk profile relative to traditional one- to four-
family lenders. Commercial real estate loans are intended to enhance the average yield of our earning assets;
however, they do involve a different level of risk of delinquency or collection than generally associated with one- to
four-family loans for a number of reasons. The repayment of commercial real estate loans typically is dependent on
the successful operation and income stream of the borrowers’ business, or the ability to lease the property at
sufficient rates, and the value of the real estate securing the loan as collateral, which can be significantly affected by
economic conditions. These loans also involve larger balances to a single borrower or groups of related borrowers.
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 single one- to four-family residential mortgage loan. Since
commercial real estate loans generally have large balances, deterioration in the quality of commercial loans may
result in the need to significantly increase our provision for loan losses and charge-offs will likely be larger on a per
loan basis compared to consumer loans. As a result, deterioration of this portfolio could materially adversely affect
our future earnings. Collateral evaluation and financial statement analysis in these types of loans also requires a
more detailed analysis at the time of loan underwriting and on an ongoing basis. Finally, if we foreclose on a
commercial real estate loan, our holding period for the collateral is typically longer than for a one- to four-family
residence because the secondary market for most types of commercial real estate is not readily liquid, which results
in less opportunity to mitigate credit risk by selling part or all of our interest in these assets. At June 30, 2015, we
had $147,000 of nonperforming commercial real estate loans and no nonperforming multi-family loans in our
portfolio.
The unseasoned nature of our commercial loan portfolio may result in errors in judging its collectability,
which may lead to additional provisions for loan losses or charge-offs, which would hurt our profits.
Our commercial loan portfolio, which includes loans secured by commercial and multi-family real estate as
well as business assets, has increased from $99.8 million, or 23.2% of total loans, at June 30, 2011, to $173.5
million, or 35.1% of total loans, at June 30, 2015. Included in our commercial loan portfolio at June 30, 2015, were
$18.2 million of purchased loans and loan participations. A large portion of our commercial loan portfolio is
unseasoned, meaning they were originated recently. Our limited experience with these borrowers does not provide
us with a significant payment history pattern. Further, First Federal has not experienced a downturn in economic
conditions with these borrowers. As a result, it is difficult to predict the future performance of this part of our loan
portfolio. These borrowers may develop delinquency or charge-off levels above our historical experience, which
could adversely affect our future performance.
We have a concentration of large loans outstanding to a limited number of borrowers that increases our risk
of loss.
First Federal has extended significant amounts of credit to a limited number of borrowers, largely in
connection with high-end residential real estate and commercial and multi-family real estate loans. At June 30, 2015,
the aggregate amount of loans, including unused commitments, to First Federal's five largest borrowers (including
related entities) amounted to approximately $45.5 million, or 9.2% of total loans. The largest 20 borrowers at
June 30, 2015 totaled $117.2 million, or 23.7% of total loans. At such date, none of the loans to First Federal's 20
largest borrowers were nonperforming loans.
A high concentration of credit to a limited number of borrowers increases the risk in First Federal's loan
portfolio. In the event that one or more of these borrowers is not able to service the contractual repayment, the
potential loss to First Federal is more likely to have a material adverse impact on our business, financial condition
and results of operations.
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Slower growth in our primary market area has led us to originate and purchase loans outside of our market
area which could affect the level of our nonperforming loans.
We currently have full service offices on the North Olympic Peninsula and in Kitsap County and a lending
office in Whatcom County. The North Olympic Peninsula region, which represents our largest concentration of
depositors and borrowers, has experienced limited population growth, and the region's unemployment rate is higher
than both the state and national unemployment rates. As a result, we have recently begun to opportunistically
originate and purchase loans outside of these areas in the counties surrounding the Puget Sound, and we may
purchase loans with different credit and underwriting criteria than those we originate organically. At June 30, 2015,
we had approximately $76.0 million of one- to four-family mortgage loans, $23.0 million of multi-family loans and
$63.8 million of commercial real estate loans secured by properties located outside of the North Olympic Peninsula
region and Whatcom and Kitsap counties. Included in the one- to four-family residential loans are $12.7 million and
$17.5 million of one- to four-family mortgages in the states of California and Ohio, respectively. We also have
multi-family and commercial real estate loans of $19.1 million and $71.8 million, respectively, located primarily in
Kitsap, King, Pierce and Snohomish counties around the Puget Sound region of Washington. We have not
experienced significant loan delinquencies with these out of market area loans; however, declines in economic
conditions or real estate values in these markets could significantly adversely affect the level of our nonperforming
loans and our results of operations.
We are dependent on key personnel and the loss of one or more of those key persons may materially and
adversely affect our prospects.
We rely heavily on the efforts and abilities of our executive officers, and certain other key management
personnel, which make up our management team. The ability to attract, retain and season this management team
presents risks to executing our business plan. In the past we have had significant turnover in our management team.
The senior management team has been working together for two years. Our president and chief executive officer,
Laurence J. Hueth, the former chief financial officer of First Federal, was appointed to his position in January 2013.
Mr. Hueth joined First Federal in December 2008. Regina M. Wood, the former controller of First Federal, was
appointed chief financial officer in March 2013. Ms. Wood joined First Federal in August 2006. In addition, our
chief credit officer, Christopher A. Donohue, joined First Federal in April 2013. From 2005 through 2013, Mr.
Donohue worked in various lending and asset resolution positions for several banks located in Nevada. In August
2013, Kelly A. Liske, was appointed our chief banking officer. Ms. Liske joined First Federal in 2006 as branch
manager in Port Townsend and was later promoted to commercial relationship manager before becoming chief
banking officer. In addition, Jeffrey S. Davis, our executive vice president and chief operating officer, joined First
Federal on September 1, 2014, as senior vice president and bank operations officer and was appointed as executive
vice president and chief operating officer on February 25, 2015. In March 2015, Mr. Davis was also put in charge of
Human Resources following the resignation of Elaine T. Gentilo, Senior Vice President/Chief People Officer of First
Federal.
Our current management team was instrumental in completing the conversion and developing and
implementing our current operational strategy. While we believe our current management team has the knowledge
and experience to continue to effectively implement this operational strategy, we recognize that these individuals
will need time to develop a cohesive and unified senior management team, which could delay the implementation of
our operational strategy. The loss of the services of any of our current management team could have a material
adverse impact on our operations because we would most likely have to search outside of First Federal for qualified
replacements. This search may be prolonged as our current market area is considered remote. This characteristic
may make it more difficult for us to find qualified replacements willing to relocate to a smaller community like ours.
Changes in our current management team and their responsibilities may be disruptive to our business and
operations and could have a material adverse effect on our business, financial condition and results of operations.
While we believe that our relationship with our management team is good, we cannot guarantee that all members of
our management team will remain with our organization or successfully transition into their new roles.
Adverse economic conditions in the market areas we serve could adversely impact our earnings and could
increase the credit risk associated with our loan portfolio.
Our customer base has been historically concentrated in the North Olympic Peninsula region of
Washington, in particular Clallam, Jefferson and Kitsap counties. We recently expanded our lending area to include
other counties surrounding the Puget Sound and to a lesser extent other parts of Washington. In the most recent
economic downturn, this region, as well as much of the rest of the state of Washington, experienced substantial
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home price declines, increased foreclosures and above average unemployment rates. Continued weakness or further
deterioration of economic conditions in the market areas we serve could result in the following consequences, any of
which could have a materially adverse impact on our business, financial condition and results of operations:
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
loan delinquencies, problem assets and foreclosures may increase;
demand for our products and services may decline, possibly resulting in a decrease in our total loans or
assets;
collateral for loans made may decline further in value, exposing us to increased risk of loss on existing
loans and reducing customers’ borrowing power;
the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to
us; and
the amount of our deposits may decrease and the composition of our deposits may be adversely affected.
There are local factors that may have further adverse impact on the economies in our primary market areas.
For example, a study that was released in early 2012 found that areas of the Port Angeles harbor contained high
concentrated levels of pollution. Clean up requirements and associated costs could materially affect local businesses
and the regional economy. In addition, the health care industry is a significant source of employment within the
region. Rising costs as well as changing insurance reimbursement levels have adversely affected the health care
industry in recent years. If these rising costs and adverse insurance reimbursement changes continue, many health
care organizations may be forced to reduce their operations, which could result in a reduction of the number of jobs,
which would adversely affect unemployment rates within the North Olympic Peninsula region of Washington.
Changing water rights in the state of Washington could adversely affect the value of undeveloped lots and
subsequent use for residential and commercial activity within our market area and potentially other rural
areas of the state of Washington.
Washington Department of Ecology requirements and proposals that limit the use of water in rivers and
streams, as well as the underground water in related aquifers, have increased costs for and restricted use of water in
certain parts of our market area. New water use regulations currently affect both the Dungeness Valley in the east
end of Clallam County and the Quilcene and Chimacum areas in Jefferson County, limiting daily use of water from
new wells and increasing the cost of water usage, including the requirement of permit fees to drill new wells. These
changes have had an adverse impact on the value of undeveloped lots and their subsequent use for residential or
commercial activities within our market area and similar areas throughout Washington. At June 30, 2015, we had
loans on 51 residential lots aggregating $3.3 million that we believe could be adversely affected, which may reduce
the values of these properties.
Our branching strategy will cause our expenses to increase and may negatively affect our earnings.
We are planning up to four new branch openings during the next three years. 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 branches. 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.
Our business may be adversely affected by credit risk associated with residential property.
At June 30, 2015, $293.2 million, or 59.4% of our total loan portfolio, consisted of one- to four-family
mortgage loans and home equity loans secured by residential properties. Lending on residential property is
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. Declines in residential real estate values
securing these types of loans may increase the level of borrower defaults and losses above the recent charge-off
experience on these loans. Net charge-offs of one- to four-family residential and home equity loans secured by
residential properties during fiscal years 2015, 2014 and 2013 totaled $623,000, $918,000 and $804,000,
53
respectively, or 64.8%, 75.9% and 101.5% of total net charge-offs during these periods, respectively. Further, a
significant amount of our home equity lines of credit consist of second mortgage loans. For those home equity lines
secured by a second mortgage, it is unlikely that we will be successful in recovering all or a portion of our loan
balances in the event of default unless we are prepared to repay the first mortgage loan and such repayment and the
costs associated with a foreclosure are justified by the value of the property. For these reasons we may experience
higher rates of delinquencies, default and losses on loans secured by junior liens.
Our non-owner-occupied residential real estate loans may expose us to increased credit risk.
At June 30, 2015, $27.0 million, or 5.5% of our total loan portfolio, was secured by non-owner-occupied
residential properties consisting of one- to four-family and home equity loans. Loans secured by non-owner-
occupied properties generally expose a lender to greater risk of nonpayment and loss than loans secured by owner-
occupied properties because repayment of such loans depends 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 lax property maintenance
standards, which has a negative impact on the value of the collateral properties. Furthermore, some of our non-
owner-occupied residential loan borrowers have more than one loan outstanding with us, which may expose us to a
greater risk of loss compared to an adverse development with respect to an owner-occupied residential mortgage
loan.
Repayment of our commercial business loans is often dependent on the cash flows of the borrower, which may
be unpredictable, and the collateral securing these loans may fluctuate in value.
At June 30, 2015, we had $14.8 million, or 3.0% of total loans, in commercial business loans. Commercial
business lending involves risks that are different from those associated with residential and commercial real estate
lending. Real estate lending is generally considered to be collateral based lending with loan amounts based on
predetermined loan to collateral values, with liquidation of the underlying real estate collateral being viewed as the
primary source of repayment in the event of borrower default. Our commercial business loans are primarily made
based on the cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. The
borrowers' cash flow may be unpredictable, and collateral securing these loans may fluctuate in value. Although
commercial business loans are often collateralized by equipment, inventory, accounts receivable, or other business
assets, the liquidation of collateral in the event of default is often an insufficient source of repayment because
accounts receivable may be uncollectible and inventories may be obsolete or of limited use, among other things.
A portion of our loan portfolio is serviced by third parties, which may limit our ability to foreclose on such
loans.
At June 30, 2015, $32.5 million of our one- to four-family and $2.3 million of our commercial real estate
loan portfolios were serviced by third parties. When a loan goes into default, it is the responsibility of the third-
party servicer to enforce the borrower’s obligation to repay the outstanding indebtedness. We are reliant on the
servicer to bring the loan current, enter into a satisfactory loan modification or foreclose on the property on behalf of
First Federal. We must comply with any loan modification entered into by the servicer even if we would not
otherwise agree to the modified terms, which may result in a reduction in our interest income due to the loan
modification. Delays in foreclosing on property, whether caused by restrictions under state or federal law or the
failure of a third party servicer to timely pursue foreclosure action, can increase our potential loss on such property,
due to factors such as lack of maintenance, unpaid property taxes and adverse changes in market conditions. These
delays may adversely affect our ability to limit our credit losses.
Our lending limit may restrict our growth.
Washington law provides that Washington chartered savings banks, such as First Federal, are subject to the
same loans to one borrower restrictions as Washington chartered commercial banks, which restricts total loans and
extensions of credit by a bank to 20% of its unimpaired capital and surplus. As a result, under Washington law, First
Federal would be limited to loans to one borrower of $27.4 million at June 30, 2015. First Federal, however, has
elected to restrict its loans to one borrower to no more than 15% of its unimpaired capital plus surplus, which was
$18.5 million at June 30, 2015, or $13.0 million, whichever is less, unless specifically approved by the board loan/
asset quality committee as an exception to policy. Under this policy, at June 30, 2015, First Federal’s limit on loans
to one borrower was $13.0 million. Subsequent to June 30, 2015, First Federal increased its loans to one borrower
limit from $13.0 million to $15.0 million. This amount is significantly less than that of many of our competitors and
54
may discourage potential commercial borrowers who have credit needs in excess of our loan to one borrower
lending limit from doing business with us. Our loan to one borrower restriction also impacts the efficiency of our
commercial lending operation because it lowers our average loan size, which means we have to generate a higher
number of transactions to achieve the same portfolio volume. We can accommodate larger loans by selling
participations in those loans to other financial institutions, but this strategy is not most efficient or always available.
We may not be able to attract or maintain clients seeking larger loans or may not be able to sell participations in
these loans on terms we consider favorable.
Our allowance for loan losses may prove to be insufficient to absorb losses in our loan portfolio.
We 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 allowance for loan losses, we review our loans
and our loss and delinquency experience, and we evaluate economic conditions. If our assumptions are incorrect, our
allowance for loan losses may not be sufficient to cover probable incurred losses in our loan portfolio, resulting in
additions to our allowance for loan losses through the provision for losses on loans which is charged against income.
Additionally, pursuant to our growth strategy, as we increase the amount of our commercial real estate and
expand the types of collateral that will securitize these loans, the unseasoned nature of these loans will increase the
risk that our allowance may be insufficient to absorb losses without significant additional provisions. Material
additions to our allowance could materially decrease our net income. In addition, bank regulatory agencies
periodically review our allowance for loan losses and may require an increase in the provision for possible loan
losses or the recognition of further loan charge-offs, based on judgments different than those of management. In
addition, if charge-offs in future periods exceed the allowance for loan losses we will need additional provisions to
replenish the allowance for loan losses. Any additional provisions will result in a decrease in net income and
possibly capital, and may have a material adverse effect on our financial condition and results of operations.
If our nonperforming assets increase, our earnings will be adversely affected.
At June 30, 2015, our nonperforming assets, which consist of nonaccruing loans and real estate owned, were
$6.8 million, or 0.7% of total assets. Our nonperforming assets adversely affect our net income in various ways:
(cid:127) we record interest income on a cash basis only for nonaccrual loans and any nonperforming investment
securities and we do not record interest income for real estate owned;
(cid:127) we must provide for probable loan losses through a current period charge to the provision for loan losses;
(cid:127)
noninterest expense increases when we write down the value of properties in our real estate owned portfolio
to reflect changing market values or recognize other-than-temporary impairment on nonperforming investment
securities;
there are legal fees associated with the resolution of problem assets, as well as carrying costs, such as taxes,
insurance, and maintenance fees related to our real estate owned; and
the resolution of nonperforming assets requires the active involvement of management, which can distract
them from more profitable activity.
(cid:127)
(cid:127)
If additional borrowers become delinquent and do not pay their loans and we are unable to successfully
manage our nonperforming assets, our losses and troubled assets could increase significantly, which could have a
material adverse effect on our financial condition and results of operations.
Our securities portfolio may be negatively impacted by fluctuations in market value and interest rates.
Our securities portfolio may be impacted by fluctuations in market value, potentially reducing accumulated
other comprehensive income and/or earnings, both of which could adversely affect the value of our equity. 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, and if this evaluation
shows impairment to the actual or projected cash flows associated with one or more securities, a potential loss to
earnings and/or a decline in other comprehensive income may occur. There can be no assurance that declines in market
value will not result in other-than-temporary impairments of these assets, which would lead to accounting charges that
could have a material adverse effect on our net income and capital levels.
55
If our real estate owned is not properly valued or declines further in value, our earnings could be reduced.
We obtain updated valuations in the form of appraisals and tax assessed values when a loan has been
foreclosed and the property taken in as real estate owned and at certain other times during the asset’s holding period.
Our net book value of 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, or if property values decline, the fair value of
our real estate owned may not be sufficient to recover our carrying value in such assets, resulting in the need for
additional charge-offs. In addition, bank regulators periodically review our real estate owned and may require us to
recognize further charge-offs. Significant charge-offs to our real estate owned could have a material adverse effect
on our financial condition and results of operations.
We are subject to interest rate risk.
Our earnings and cash flows are largely dependent upon our net interest income. Interest rates are highly
sensitive to many factors that are beyond our control, including general economic conditions and policies of various
governmental and regulatory agencies, 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.
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.
Decreased volumes and lower gains on sales of mortgage loans sold could adversely impact our noninterest
income.
We originate and sell one- to four-family mortgage loans. Our mortgage banking income is a significant
portion of our noninterest income. We generate gains on the sale of one- to four-family mortgage loans pursuant to
programs currently offered by Freddie Mac and other secondary market purchasers. Any future changes in their
purchase programs, our eligibility to participate in such programs, the criteria for loans to be accepted or laws that
significantly affect the activity of such entities could, in turn, materially adversely affect our results of operations.
Further, in a rising or higher interest rate environment, our originations of mortgage loans may decrease, resulting in
fewer loans that are available to be sold to investors. This would result in a decrease in mortgage banking revenues
and a corresponding decrease in noninterest income. In addition, our results of operations are affected by the
amount of noninterest expense associated with mortgage banking activities, such as salaries and employee benefits,
occupancy, equipment and data processing expense and other operating costs. During periods of reduced loan
demand, our results of operations may be adversely affected to the extent that we are unable to reduce expenses
commensurate with the decline in loan originations.
If we are unable to effectively integrate new personnel hired to carry out our business plan our business may
be adversely affected.
We have recently hired a number of experienced bankers, and we expect to hire additional personnel in
order to successfully implement our business plan. The difficulties in hiring and training new personnel include
integrating personnel with different business backgrounds and combining different corporate cultures, while
retaining other key employees. The process of integrating personnel could cause an interruption of, or loss of
momentum in, our operations and the loss of customers and key personnel. In addition, we may not realize expected
revenue increases and other projected benefits from the increased emphasis in these areas. Any delays or difficulties
56
encountered in connection with integrating and growing this portion of our operations could have an adverse effect
on our business and results of operations or otherwise adversely affect our ability to achieve anticipated results.
Our consideration of whole bank or branch acquisitions may expose us to financial, execution and
operational risks that could adversely affect us.
We plan to evaluate supplementing organic growth by acquiring other financial institutions or their
businesses that we believe will help us fulfill our strategic objectives and enhance our earnings. There are risks
associated with this strategy, however, including the following:
(cid:127) We may be exposed to potential asset quality issues or unknown or contingent liabilities of the financial
institutions, businesses, assets and liabilities we acquire. If these issues or liabilities exceed our estimates,
our results of operations and financial condition may be materially negatively affected;
(cid:127) Our growth initiatives may require us to recruit experienced personnel to assist in such initiatives, which
will increase our compensation costs. The failure to identify, hire and retain such personnel would place
significant limitations on our ability to execute our growth strategy;
(cid:127) Our strategic efforts may divert resources or management’s attention from ongoing business operations and
may subject us to additional regulatory scrutiny;
(cid:127) The acquisition of other entities generally requires integration of systems, procedures and personnel of the
acquired entity into our company to make the transaction economically successful. This integration process
is complicated and time consuming and can also be disruptive to the customers of the acquired business. If
the integration process is not conducted successfully and with minimal effect on the acquired business and
its customers, we may not realize the anticipated economic benefits of particular acquisitions within the
expected time frame, and we may lose customers or employees of the acquired business. We may also
experience greater than anticipated customer losses even if the integration process is successful;
(cid:127) To finance a future acquisition, we may borrow funds, thereby increasing our leverage and diminishing our
liquidity, or raise additional capital, which could dilute the interests of our existing shareholders; and
(cid:127) We expect our income will increase following our acquisitions; however, we also expect our general and
administrative expenses to increase.
We operate in a highly competitive industry.
We face substantial competition in all areas of our operations from a variety of different competitors, many
of which are larger and may have more financial resources. These competitors primarily include national, regional
and internet banks within the various markets in which we operate. We also face competition from many other types
of financial institutions, including savings and loans, credit unions, mortgage banking finance companies, brokerage
firms, insurance companies and other financial intermediaries. The financial services industry could become even
more competitive as a result of legislative, regulatory and technological changes and continued consolidation. Also,
technology has lowered barriers to entry and made it possible for nonbanks to offer products and services
traditionally provided by banks, such as automatic transfer and automatic payment systems. Competitors in these
nonbank sectors may have fewer regulatory constraints and may have lower cost structures. Additionally, due to
their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of
products and services as well as better pricing for those products and services than we can.
Failure to perform in any of these areas could significantly weaken our competitive position, which could
adversely affect our growth and profitability and result in a material adverse effect on our financial condition and
results of operations.
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 the plan sponsor requires us to make additional contributions, we could
incur a substantial expense which would negatively impact our earnings.
We participate in the Pentegra Defined Benefit Plan for Financial Institutions, a multiple employer pension
plan for the benefit of our employees. Effective February 1, 2006, we did not allow additional employees to
participate in this plan. On January 31, 2010, we froze the future accrual of benefits under this plan with respect to
participating employees. In connection with our decision to freeze our benefit accruals under the plan, and since
then, we continue to evaluate costs associated with withdrawing from the plan. Based upon the value of the plan’s
assets, if we had chosen to withdraw from the plan as of June 30, 2015, we would have incurred an additional
expense of up to approximately $8.6 million.
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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
additional contributions to the plan in excess of the contributions that we are regularly required to make, or obtain a
letter of credit in favor of the plan, if our financial condition declines to the point that it triggers certain criteria
contained 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.
Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, or other laws and regulations could result in
fines or sanctions and limit our ability to get regulatory approval of acquisitions and new branches.
The USA PATRIOT 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 and limit our ability to get regulatory approval of acquisitions and new branch
locations. Recently, 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.
We operate in a highly regulated environment and may be adversely affected by changes in laws and
regulations.
We are subject to extensive examination, supervision and comprehensive regulation by the FDIC as insurer
of our deposits, and by the DFI. As a bank holding company, First Northwest Bancorp is subject to examination and
supervision by the Federal Reserve. Such regulation and supervision will govern the activities in which we may
engage, primarily for the protection of depositors and the Deposit Insurance Fund. 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, require additional capital, reclassify assets, determine the adequacy of an
institution’s allowance for loan losses and determine the level of deposit insurance premiums assessed. Any change
in such regulation and oversight, whether in the form of regulatory policy, regulations, or legislation, could have a
material impact on us and our operations. Because our business is highly regulated, the laws, rules and applicable
regulations are subject to regular modification and change. Laws, rules and regulations may be adopted in the future
that could make compliance more difficult or expensive or otherwise adversely affect our business, financial
condition or prospects.
We are subject to certain risks in connection with our use of technology.
We rely heavily on in-house and third-party service providers for communications, information, operating
and financial control systems technology, including our internet banking services and data processing systems. Any
failure or interruption of these services or systems or breaches in security of these systems could result in failures or
interruptions in our customer relationship management, general ledger, deposit, loan servicing and/or loan
origination systems. 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,
or even be able to find comparable services at all that would meet our business needs.
While we have taken steps to adequately secure our computer systems, software, and networks, and assure
our vendors have adequate security over technology-based systems we outsource from them, those security
measures may not be sufficient to mitigate the risk of a cyber attack, and therefore we may be vulnerable to
breaches, unauthorized access, misuse, computer viruses, or other malicious code. A security breach could lead to
the disclosure of confidential bank or customer information contained within our or our vendor's computer systems
58
and networks and/or cause a significant disruption of service, which could subject us to litigation, financial losses,
and reputational damage.
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, and while we have policies and procedures designed to prevent such losses, there
can be no assurance that we will not incur such losses.
Item 1B. Unresolved Staff Comments
None.
59
Item 2. Properties
At June 30, 2015, we had our administrative office, eight full-service banking offices and one loan
production office with an aggregate net book value of $9.5 million. In October 2012, the loan production office in
Poulsbo, Washington became a full service branch and in July 2012 a loan production office was established in
Bellingham, Washington. On June 16, 2014, we opened a branch in Silverdale, Washington and on July 1, 2014, the
operations and customer relationships of the Poulsbo Office were transferred to the Silverdale branch and the
Poulsbo office was closed. The following table sets forth certain information concerning our offices at June 30,
2015. In the opinion of management, the facilities are adequate and suitable for our needs.
Location
Leased or
owned
Lease
expiration date
Square
footage
Net book value at
June 30, 2015 (1)
(In thousands)
18,913
$1,747
ADMINISTRATION CENTER
105 W. Eighth Street
Port Angeles, Washington 98362
BRANCH OFFICES
Downtown Port Angeles
141 W. First Street
Port Angeles, Washington 98362
Eastside
1603 E. First Street
Port Angeles, Washington 98362
Sixth Street
227 E. Sixth Street
Port Angeles, Washington 98362
Sequim Avenue
333 N. Sequim Avenue
Sequim, Washington 98382
Sequim Village Marketplace
1201 W. Washington Street
Sequim, Washington 98382
Forks
131 Calawah Way
Forks, Washington 98331
Port Townsend
1321 Sims Way
Port Townsend, Washington 98368
Bucklin Hill (2)
3035 Bucklin Hill Road
Silverdale, Washington 98383
Bellingham Loan Production
Office (3)
1313 E. Maple Street, Suite 230
Bellingham, Washington 98225
Barkley Village (4)
1270 Barkley Blvd.
Bellingham, Washington 98226
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
--
--
--
--
--
--
--
--
6,912
3,322
2,382
9,376
5,380
2,159
4,637
Leased
12/31/2018
2,200
Leased
Month-to-Month
340
Leased
12/31/2035
3,300
455
280
494
1,492
2,884
355
992
827
—
—
(1) Includes value of the land.
(2) Bucklin Hill branch opened June 16, 2014. The lease agreement is for five years beginning January 2014 with two five-year
renewal options thereafter.
(3) Established in July 2012. Lease was for a six month period from July 12, 2012 until January 31, 2013, has no specific
renewal terms and is being leased on a month-to-month basis.
(4) Lease signed in January 2015 for future Bellingham branch location. The lease agreement is for twenty years with four five-
year renewal options thereafter. Monthly payments will begin after the branch opens.
We maintain depositor and borrower customer files on an on-line basis, utilizing a telecommunications
network, portions of which are leased. The book value of all data processing and computer equipment utilized by
First Federal at June 30, 2015, was $758,000. Management has a business continuity plan in place with respect to
the data processing system, as well as First Federal’s operations.
60
Item 3. Legal Proceedings
The Company or First Federal from time to time is 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 material
adverse effect on our consolidated financial position, results of operation, or liquidity.
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
Market, Holder and Dividend Information. Our common stock is listed on The Nasdaq Stock Market
LLC’s Global Market, under the symbol “FNWB.” The common stock was issued at a price of $10.00 per share on
January 29, 2015, and the Company's common stock commenced trading on The Nasdaq Global Market on January
30, 2015. As of the close of business on September 15, 2015, there were 13,100,360 shares of common stock issued
and outstanding and we had approximately 853 shareholders of record, excluding persons or entities who hold stock
in nominee or “street name” accounts with brokers.
The following table sets forth the high and low sales prices of the Company's common stock, provided by
the Nasdaq Stock Market, for each quarter during the year ended June 30, 2015, in which the common stock was
outstanding. The Company has not paid any dividends to shareholders since its formation.
Year Ended June 30, 2015
High
Low
Third Quarter
Fourth Quarter
$
$
12.65
12.54
11.75
11.85
Under Washington law, the Company is prohibited from paying a dividend if, as a result of its payment, the
Company would be unable to pay its debts as they become due in the normal course of business, or if the Company's
total liabilities would exceed its total assets. The principal source of funds for the Company is dividend payments
from the Bank. According to Washington law, First Federal 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. Dividends on First Federal's capital stock may
not be paid in an aggregate amount greater than the aggregate retained earnings of First Federal, without the
approval of the Director of the DFI. See Item 1, “Business-How We Are Regulated,” for more information
regarding the restrictions on the Company’s and the Bank’s abilities to pay dividends.
Use of Proceeds. First Northwest Bancorp filed a Registration Statement on Form S-1 with the Securities
and Exchange Commission in connection with the conversion of the Bank and the related offering of common stock
by First Northwest Bancorp. The Registration Statement (File No. 333-185101) was declared effective by the
Securities and Exchange Commission on November 12, 2014. First Northwest Bancorp registered 13,100,360 shares
of common stock, par value $0.01 per share, pursuant to the Registration Statement for an aggregate price of
$131,003,600. The stock offering commenced on November 19, 2014. Sandler O’Neill + Partners, L.P. acted as
marketing agent for the offering. The issuance of 13,100,360 shares was completed on January 29, 2015 with the
sale of 12,167,000 shares of common stock and First Northwest Bancorp contributing 933,360 shares of common
stock to the First Federal Community Foundation (“Foundation”), the charitable foundation established by First
Federal in connection with the offering.
The expenses paid or incurred in connection with the stock offering were $4.1 million, including expenses
paid to the marketing agent of $1.4 million, and other expenses of?$2.7 million. The net proceeds resulting from the
offering after deducting all expenses related to the offering were approximately $117.6 million. First Northwest
Bancorp contributed approximately $58.4 million of the net proceeds of the offering to First Federal and $400,000 to
the Foundation. In addition, as of June 30, 2015, approximately $11.8 million of the net proceeds were used to fund
the loan to the employee stock ownership plan. First Northwest Bancorp intends to purchase an additional 95,230
61
shares for the employee stock ownership plan from the net proceeds retained with the balance invested in securities
and cash and cash equivalents. There has been no material change in the planned use of proceeds from our offering
as described in our final prospectus filed with the SEC on November 25, 2014 pursuant to Rule 424(b) under the
Securities Exchange Act of 1934, as amended.
Stock Repurchases. The Company is subject to certain regulatory restrictions on its ability to repurchase
its common stock. The Company had no stock repurchases of its outstanding common stock during the fourth
quarter of the year ended June 30, 2015.
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.
Performance Graph. Our shares of common stock began trading on the Nasdaq Stock Market LLC's
Global Market on January 30, 2015. Accordingly, no comparative stock performance information is available for
periods ending prior to this date. The following performance graph compares the Company's cumulative total
shareholder return on the Company’s Common Stock since the inception of trading on January 30, 2015 with the
cumulative total return on the NASDAQ Composite Index and a peer group of the SNL All Thrift Index for all
periods indicated. Total return assumes the reinvestment of all dividends and that the value of Common Stock and
each index was $100 on January 30, 2015. Historical stock price performance is not necessarily indicative of future
stock price performance.
Index
1/30/2015
2/28/2015
3/31/2015
4/30/2015
5/31/2015
6/30/2015
First Northwest Bancorp
$ 100.00
$ 102.79
$ 102.46
$
99.43
$ 100.99
$ 102.38
NASDAQ Composite
SNL Thrift Index
100.00
100.00
107.25
105.01
106.00
107.66
106.91
107.34
109.86
109.75
108.15
115.02
Period Ended
62
Item 6. Selected Financial Data
The following table sets forth certain information concerning our consolidated financial position
and results of operations at and for the dates indicated and have 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.
Selected Financial Condition Data:
Total assets
Cash and cash equivalents
Loans receivable, net(1)
Investment securities available-for-sale
Investment securities held to maturity
Real estate owned and repossessed assets
Deposits
Borrowings
Total equity
Selected Operations Data:
Total interest income
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision
for loan losses
Net gain on sale of loans
Net gain on sale of investment securities
Impairment losses on investment securities, net
Other noninterest income
Total noninterest income
Total noninterest expense
Income (loss) before provision (benefit) for
income taxes
Provision (benefit) for income taxes
2015
2014
June 30,
2013
(In thousands)
2012
2011
$
936,802
$ 795,292
$
784,510
$ 771,864
$ 748,851
45,030
487,887
299,040
61,524
1,914
647,164
90,033
190,681
18,960
496,184
178,972
53,244
810
600,399
105,133
80,995
22,948
449,353
214,789
49,579
2,265
595,044
100,033
78,623
42,475
400,659
218,163
57,385
2,864
583,238
100,033
77,300
35,751
424,187
198,917
37,081
4,475
562,398
100,033
77,220
Year Ended June 30,
2015
2014
2013
2012
2011
(In thousands)
$
27,487
$
26,559
$
25,795
$
26,942
$
4,592
22,895
—
4,729
21,830
1,307
22,895
20,523
548
—
—
4,159
4,707
33,046
(5,444)
(354)
762
112
—
4,116
4,990
22,105
3,408
740
6,000
19,795
1,376
18,419
1,563
70
—
3,934
5,567
21,246
2,740
422
7,140
19,802
7970
11,832
1,503
293
(419)
4,022
5,399
20,991
(3,760)
(1,800)
29,416
8,258
21,158
926
20,232
1,472
40
(829)
3,940
4,623
19,765
5,090
1,195
3,895
Net income (loss)
$
(5,090)
$
2,668
$
2,318
$
(1,960)
$
_____________
(1)
Net of allowances for loan losses, loans in process, purchase discounts and deferred loan fees.
63
Selected Financial Ratios and Other Data:
Performance ratios:
Return (loss) on assets
Return (loss) on equity
Average interest rate spread
Net interest margin(1)
Efficiency ratio(2)
Average interest-earning assets to average
At or For the Year Ended June 30,
2015
2014
2013
2012
2011
(Dollars in thousands)
(0.58)%
(3.92)
2.60
2.75
119.7
0.34 %
0.30 %
3.33
2.78
2.89
82.4
2.94
2.54
2.67
83.8
(0.26)%
(2.52)
2.67
2.79
83.3
0.52 %
5.17
2.88
3.02
76.7
interest-bearing liabilities
127.0
118.3
116.5
112.2
111.5
Asset quality ratios:
Nonperforming assets to total assets at end
of period(3)
Nonperforming loans to total gross loans(4)
Allowance for loan losses to nonperforming
loans(4)
Allowance for loan losses to gross loans receivable
Net charge-offs to average outstanding loans
Capital ratios:
Equity to total assets at end of period
Average equity to average assets
Other data:
Number of full service offices (5)
Full-time equivalent employees
0.7 %
1.0
0.9 %
1.2
145.6
1.4
0.2
135.3
1.6
0.3
1.5 %
2.2
80.8
1.7
0.2
1.7 %
2.5
2.2 %
2.8
72.8
1.8
1.3
39.4
1.1
0.6
20.4 %
14.9
10.2 %
10.1
10.0 %
10.1
10.0 %
10.2
10.3 %
10.0
9
157
10
169
9
161
8
152
8
149
__________
(1)
(2)
(3)
(4)
(5)
Net interest income divided by average interest-earning assets.
Total noninterest expense as a percentage of net interest income and total other noninterest income.
Nonperforming assets consists of nonperforming loans (which include nonaccruing loans and accruing loans more than
90 days past due), foreclosed real estate and repossessed assets.
Nonperforming loans consists of nonaccruing loans and accruing loans more than 90 days past due.
Effective July 1, 2015, our branch in Poulsbo was closed and all accounts were moved to the new location in Silverdale.
Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
First Northwest Bancorp (or the "Company") is a bank holding company which primarily engages in the
business activity of its subsidiary, First Federal Savings and Loan Association of Port Angeles ("First Federal" or the
"Bank"). First Federal is a community-oriented financial institution primarily serving the North Olympic Peninsula
region of Washington through our nine full-service banking offices. We offer a wide range of products and services
focused on the lending and depository needs of the communities we serve. Historically, lending activities have been
primarily directed toward the origination of first lien one- to four-family mortgage loans, and, to a lesser extent,
commercial and multi-family real estate loans, construction and land loans (including lot loans), commercial
business loans, and consumer loans, consisting primarily of home equity loans and lines of credit. During the past
decade, recognizing our need to adapt to changing market conditions, we have revised our operating strategy to
diversify our loan portfolio, expand our deposit product offerings and enhance our infrastructure. We have increased
the origination of commercial real estate and multi-family real estate loans, and decreased reliance on originating
and retaining longer-term, fixed-rate, residential mortgage loans. Since 2010, we have generally sold most newly
originated and refinanced, conforming single-family owner-occupied mortgage loans into the secondary market,
although in 2012, we began selectively retaining 30-year fixed-rate mortgages in the portfolio in an effort to enhance
our net interest income. We have historically offered traditional consumer and business deposit products, including
transaction accounts, savings and money market accounts and certificates of deposit for individuals, businesses and
nonprofit organizations. Deposits are our primary source of funds for our lending and investing activities.
64
As part of our planned expansion into new markets, we have secured a lease agreement for a full-service
branch located in Bellingham, Washington, which has been approved by the Federal Deposit Insurance Corporation
("FDIC") and Department of Financial Institutions of Washington ("DFI"). The lease term will be for approximately
20 years with rent payments beginning at $7,500 per month at the time of branch opening, which is estimated to be
during the quarter-ending December 31, 2015. The proposed new branch will offer similar deposit, lending, and
investment products and services and will utilize technology in the form of interactive teller machines similar to the
Silverdale, Washington full-service branch location we opened in June 2014.
On January 29, 2015, the Bank completed its mutual-to-stock conversion and became a wholly owned
subsidiary of the Company. The Company raised approximately $117.6 million in net proceeds from the sale of
12,167,000 common shares in its initial public offering. From the proceeds the Company made a capital contribution
of approximately $58.4 million to the Bank. The Company's stock trades on the NASDAQ under the ticker symbol
"FNWB."
Common shares available in the initial stock offering were oversubscribed by eligible depositors in the first
priority. As a result, the Employee Stock Ownership Plan ("ESOP"), being in the second priority eligible to purchase
stock in the initial stock offering, is filling its order of 8% of the common stock, or 1,048,029 shares, in the open
market. As of June 30, 2015, the ESOP had purchased 952,799, or 90.9%, of the total shares to be purchased at an
average net price per share of $12.38.
First Federal is significantly affected by prevailing economic conditions as well as government policies and
regulations concerning, among other things, monetary and fiscal affairs, housing and financial institutions. Deposit
flows are influenced by a number of factors, including interest rates paid on competing time deposits, available
alternative investments, account maturities, and the overall level of personal income and savings. Lending activities
are influenced by the demand for funds, the number and quality of lenders, and regional economic cycles.
Our primary source of pre-tax income is net interest income. Net interest income is the difference between
interest income, which is the income that we earn on our loans and investments, and interest expense, which is the
interest that we pay on our deposits and borrowings. Changes in levels of interest rates affect our net interest
income. A secondary source of income is noninterest income, which includes revenue we receive from providing
products and services, including service charges on deposit accounts, mortgage banking income, earnings from
bank-owned life insurance, and gains and losses from sales of securities.
An offset to net interest income is the provision for loan losses, which represents the periodic charge to
operations which is required to adequately provide for probable losses inherent in our loan portfolio. As a loan's risk
rating improves, property values increase, or recoveries of amounts previously charged off are received, a recapture
of previously recognized provision for loan losses may be added to net interest income.
The noninterest expenses we incur in operating our business consist of salaries and employee benefits and
expenses, occupancy and equipment expenses, federal deposit insurance premiums and regulatory assessments, data
processing expenses, expenses related to real estate and personal property owned and other miscellaneous expenses.
Salaries and employee benefits consist primarily of salaries and wages paid to our employees, payroll taxes,
expenses for health insurance, retirement plans and other employee benefits, including employee compensation
expenses stemming from recognition of expense related to the ESOP and the adoption of new equity benefit plans.
We cannot determine the actual amount of these new stock-related compensation and benefit expenses at this time
because applicable accounting practices require that they be based on the fair market value of the shares of common
stock at specific points in the future.
Our contribution of $400,000 in cash and $9.3 million in common stock to the First Federal Community
Foundation ("Foundation") established in connection with our conversion resulted in a pre-tax, noninterest expense
charge of $9.7 million and primarily caused our $5.1 million net loss during the year ended June 30, 2015. The
contribution to the Foundation, on a net-tax basis, was $8.3 million.
Our Business and Operating Strategy
Throughout most of our over 90-year history, we have operated as a traditional savings and loan
association, attracting deposits and investing those funds primarily in residential mortgage loans and investment
securities. During the past decade, recognizing our need to adapt to changing market conditions, we revised our
operating strategy to diversify our loan portfolio, expand our deposit product offerings and enhance our
infrastructure. Certain highlights of our operations in recent years are as follows:
65
(cid:127) Repositioning the loan portfolio. We have significantly increased the origination of commercial real estate
and multi-family real estate loans, and decreased reliance on originating and retaining longer-term, fixed-
rate, owner-occupied residential mortgage loans. This has been done to reduce our exposure to interest rate
risk, increase the yield on our loan portfolio and shorten the maturity of the loan portfolio. In addition,
given current market conditions, we are not presently emphasizing land and land development loans or
construction loans.
Reorganized and strengthened the senior management team. During the past five years, we have
experienced significant management turnover. This has resulted in a change in our senior management
team, through promotions as well as external hires. During 2013 we promoted Laurence J. Hueth from
executive vice president, chief financial officer, and chief operating officer to president and chief executive
officer, Regina M. Wood was promoted from vice president and controller to executive vice president and
chief financial officer and Kelly A. Liske was promoted from vice president and commercial relationship
manager to executive vice president and chief banking officer. Mr. Hueth, Ms. Wood, and Ms. Liske have
collectively been with First Federal for 18 years and collectively possess over 50 years industry experience.
Christopher A. Donohue was hired as executive vice president and chief credit officer with over 30 years
industry experience outside of the state of Washington. Jeffrey S. Davis was hired during fiscal 2015 and
currently holds the position of Executive Vice President and Chief Operations Officer with over 25 years
industry experience. The senior management team consists of nine individuals, and these individuals are
primarily responsible for the design and implementation of our business plan.
Selling residential mortgage loans into the secondary market. Since 2009, we have generally sold most
newly originated and refinanced, conforming single-family owner-occupied mortgage loans into the
secondary market on a servicing retained or servicing released basis. This strategy has helped to reduce our
exposure to interest rate risk and increase our noninterest income. After reducing the retention of one- to
four-family residential loans, in 2012 we began selectively adding non-conforming 30-year fixed-rate
mortgages to the portfolio in an effort to meet increasing consumer demand as well as to enhance our net
interest income.
(cid:127) Adding new deposit capabilities. Historically, we have offered traditional consumer and business deposit
products. Over the past several years, we have added remote deposit capture, consumer and business on-
line banking and consumer mobile banking capabilities. At our new Kitsap County branch location, we
implemented interactive tellers machines, allowing our customers to conduct business with a teller through
the video monitor. The board and management remain committed to maintaining competitive deposit
products and services.
(cid:127) Enhancing our infrastructure. Over the past several years, we have focused on upgrading our
infrastructure, both in terms of equipment and personnel, in order to support our changing lending and
deposit capabilities and position ourselves for growth.
Our objective is to develop First Federal into an independent high performing bank focused on meeting the
needs of individuals, small businesses and community organizations in the Puget Sound region through exceptional
service and competitive products. After the conversion and offering, we intend to implement these strategies to
achieve our objective:
(cid:127)
Increasing our portfolio of higher yielding commercial loans. Through increased loan originations and
purchases, we intend to increase our loan to deposit ratio and the percentage of our loan portfolio consisting
of higher-yielding commercial real estate and commercial business loans. These loan categories offer
higher risk-adjusted returns, shorter maturities and more sensitivity to interest rate fluctuations than
traditional fixed-rate, one- to four-family residential loans. Our commercial real estate, commercial
business and multi-family real estate loans have increased from $99.8 million, or 23.2% of total loans, at
June 30, 2011, to $173.5 million, or 35.1% of total loans, at June 30, 2015. The increase resulted in part
from developing relationships with new loan referral sources, including our board of directors and loan
brokers, pursuing loan purchase and participation opportunities, competing successfully in new and
existing markets, and benefiting from the improvement of the economy in northwestern Washington.
(cid:127) Maintaining our focus on asset quality. We believe that strong asset quality is a key to our long-term
financial success. We are focused on monitoring existing performing loans, resolving nonperforming loans
and selling foreclosed assets. Nonperforming assets have decreased from $16.5 million at June 30, 2011, to
$6.8 million at June 30, 2015. The level of our nonperforming assets has been reduced through write-
downs, collections, modifications and sales of real estate owned and repossessed assets. We have taken
proactive steps to resolve our nonperforming loans, including negotiating repayment plans, forbearances,
loan modifications and loan extensions with our borrowers when appropriate. We have also accepted short
payoffs on delinquent loans, particularly when such payoffs result in a smaller loss to us than foreclosure.
We also retain the services of independent firms to periodically review segments of our loan portfolio and
66
provide comments regarding our loan policies and procedures. Given current market conditions, we are not
presently emphasizing land and land development loans or construction loans. Our exposure to these
categories of loans has declined to $19.1 million at June 30, 2015 compared to $23.6 million at June 30,
2011.
(cid:127) Attracting core deposits and other deposit products. Our strategy is to emphasize relationship banking
with our customers to obtain a greater share of their deposits, with specific emphasis on their core
transaction accounts. We believe this emphasis will help to increase our level of core deposits and locally-
based retail certificates of deposit. In addition to our retail branches, we maintain state-of-the-art
technology-based products, such as on-line personal financial management, business online banking,
business remote deposit products, mobile remote deposit services through smartphones and tablets,
account-to-account transfer services between First Federal and other banks, and person to person funds
transfer through smartphones and tablets that enable us to compete effectively with banks of all sizes. We
recently enhanced our integrated mobile banking platform by introducing applications for both
smartphones and tablets and we have begun implementing a new branching structure that includes extended
banking hours through the use of interactive teller machines.
(cid:127) Expanding our market presence and capturing business opportunities resulting from changes in the
competitive environment. By delivering high quality, customer-focused products and services, we believe
we can attract additional borrowers and depositors and thus increase our market share and revenue
generation in our primary market area. As the local economy continues to recover and loan demand
strengthens, we also believe that opportunities will exist in the Puget Sound region to expand our franchise.
We are planning up to four new branch openings in the contiguous counties in the Puget Sound region
during the next three years. We also expect that community bank consolidation will continue to take place
and we may consider acquiring individual branches or other banks. We do not, however, currently have any
understandings or agreements regarding any specific acquisitions and will be disciplined when evaluating
and deciding on future acquisitions, recognizing that there may also be opportunity for increasing our
market share as a result of customer dissatisfaction from other transactions or changes in strategy of market
competitors. Our primary focus for expansion will be in the Northwest Washington markets we know and
understand, although we may consider opportunities that arise in other parts of Western Washington.
(cid:127) Hiring experienced employees with a customer sales and service focus. Our goal is to compete by
relying on the strength of our customer service and relationship building. We believe that our ability to
continue to attract and retain banking professionals who have a significant knowledge of existing and new
market areas, possess strong business banking sales and service skills, and maintain a focus on community
relationships will enhance our success. We intend to hire additional lenders and business development
officers who are established in their communities to enhance our market position and add profitable growth
opportunities.
Critical Accounting Policies
We have certain accounting policies that are important to the assessment of our financial condition, since they
require management to make difficult, complex or subjective judgments, some of which may relate to matters that are
inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in
facts and circumstances. Facts and circumstances which could affect these judgments include, but are not limited to,
changes in interest rates, changes in the performance of the economy and changes in the financial condition of borrowers.
Our accounting policies are discussed in detail in Note 1 of the Notes to Consolidated Financial Statements included in
"Item 8. Financial Statements and Supplementary Data."
The following represent our critical accounting policies:
Allowance for Loan Losses. The allowance for loan losses is the amount estimated by management as necessary
to cover losses inherent in the loan portfolio as of balance sheet date. The allowance is established through the provision
for loan losses, which is charged to income. Determining the amount of the allowance for loan losses necessarily involves
a high degree of judgment. Among the material estimates required to establish the allowance are: the likelihood of default;
the loss exposure at default; the amount and timing of future cash flows on impaired loans; the value of collateral; and the
determination of loss factors to be applied to the various elements of the portfolio. All of these estimates are susceptible to
significant change. Management reviews, and the board of directors approves, at least quarterly, the level of the allowance
and the provision for loan losses based on past loss experience, current economic conditions and other factors related to
the collectability of the loan portfolio. Although we believe that we use the best information available to establish the
allowance for loan losses, future adjustments to the allowance may be necessary if economic or other conditions differ
substantially from the assumptions used in making the evaluation. In addition, the FDIC and the DFI, as an integral part
67
of their examination process, periodically review our allowance for loan losses and may require us to recognize
adjustments to the allowance based on their judgment about information available at the time of their examination. A large
loss could deplete the allowance and require increased provisions for loan losses to replenish the allowance, which would
adversely affect earnings. See Note 3 of the Notes to Consolidated Financial Statements contained in "Item 8. Financial
Statements and Supplementary Data."
Mortgage Servicing Rights. We record mortgage servicing rights on loans originated and subsequently sold into
the secondary market. We stratify our capitalized mortgage servicing rights based on the type, term and interest rates of
the underlying loans. Mortgage servicing rights are initially recognized at fair value. The value is determined through a
discounted cash flow analysis, which uses interest rates, prepayment speeds and delinquency rate assumptions as inputs.
All of these assumptions require a significant degree of management judgment. If our assumptions prove to be incorrect,
the value of our mortgage servicing rights could be negatively affected. See Notes 1 and 6 to the Notes to Consolidated
Financial Statements included in "Item 8. Financial Statements and Supplementary Data."
Income Taxes. Management makes estimates and judgments to calculate certain tax liabilities and to determine
the recoverability of certain deferred tax assets, which arise from temporary differences between the tax and financial
statement recognition of revenues and expenses. We also estimate a valuation allowance for deferred tax assets if, based
on the available evidence, it is more likely than not that some portion or all of the recorded deferred tax assets will not be
realized in future periods. These estimates and judgments are inherently subjective. In evaluating the recoverability of
deferred tax assets, management considers all available positive and negative evidence, including past operating results,
recent cumulative losses - both capital and operating - and the forecast of future taxable income, both capital gains and
operating. In determining future taxable income, management makes assumptions for the amount of taxable income, the
reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These
assumptions require judgments about future taxable income and are consistent with the plans and estimates to manage our
business. Any reduction in estimated future taxable income may require us to record a valuation allowance against
deferred tax assets. An increase in the valuation allowance would result in additional income tax expense in the period and
could have a significant impact on future earnings.
Real Estate Owned and Repossessed Assets. Real estate owned and repossessed assets include real estate and
personal property acquired through foreclosure or repossession, and may include in-substance foreclosed properties. In-
substance foreclosed properties are those properties for which the institution has taken physical possession, regardless of
whether formal foreclosure proceedings have taken place. At the time of foreclosure, foreclosed real estate is recorded at
the fair value less estimated costs to sell, which becomes the property’s new cost basis. Any write-downs based on the
asset’s fair value at date of acquisition are charged to the allowance for loan losses. After foreclosure, valuations are
periodically performed by management and property held for sale is carried at the lower of the new cost basis or fair value
less estimated costs to sell. Impairment losses on property to be held and used are measured as the amount by which the
carrying amount of a property exceeds its fair value.
Fair Value. Fair values of financial instruments are estimated using relevant market information and other
assumptions. 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 these estimates.
New Accounting Pronouncements
For a discussion of new accounting pronouncements and their impact on the Company, see Note 1 of the Notes
to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data."
Comparison of Financial Condition at June 30, 2015 and June 30, 2014
Assets. Total assets increased $141.5 million, or 17.8%, to $936.8 million at June 30, 2015, from $795.3
million at June 30, 2014, primarily due to an increase of $128.4 million, or 55.3%, in total investment securities to
$360.6 million at June 30, 2015, as a result of deploying $117.6 million received from the Company's initial stock
offering and an increase of $26.1 million in total cash and due from banks during the year. Net loans, excluding
loans held for sale, decreased $8.3 million, or 1.7%, to $487.9 million at June 30, 2015, from $496.2 million at
June 30, 2014.
Gross loans, excluding loans held for sale, decreased $9.9 million, or 2.0%, to $493.9 million at June 30,
2015, from $503.8 million at June 30, 2014. The decline in the portfolio was primarily the result of a reduction in
68
commercial, construction and land, and consumer loans. Commercial loans, including commercial real estate, multi-
family, and commercial business loans, decreased $17.2 million, or 9.0%, to $173.5 million at June 30, 2015 from
$190.7 million at June 30, 2014. Total consumer loans decreased $6.2 million, or 12.2%, to $44.6 million at June 30,
2015 from $50.8 million at June 30, 2014. These declines were primarily the result of a combination of prepayments
and regular amortization outpacing the amount of new originations during the year. We continue to reduce our
reliance on purchased commercial and multi-family real estate loans and focus on organic growth in these portfolios
of loans; however, we may from time to time evaluate loan purchases to supplement our loan growth and increase
our yield on interest earning assets. Partially offsetting these declines during the year ended June 30, 2015 was an
increase in one- to four-family residential loans of $14.8 million, or 6.1%, primarily the result of purchase loan
activity.
During the year ended June 30, 2015, the Company originated $104.5 million of loans, of which $76.2
million, or 72.9%, were originated in the North Olympic Peninsula, $26.1 million, or 25.0%, in the Puget Sound
region of Washington, and $2.2 million, or 2.1%, in other areas in Washington. In addition to loans originated during
the year ended June 30, 2015, the Company purchased two pools of one- to four-family residential loans totaling
$25.6 million located in the Puget Sound region of Washington.
Our allowance for loan losses declined $961,000, or 11.9%, from $8.1 million at June 30, 2014 to $7.1
million at June 30, 2015, and the allowance for loan losses as a percentage of total loans declined 20 basis points
from 1.6% at June 30, 2014, to 1.4% at June 30, 2015. The allowance remained relatively stable as the result of
improving asset quality and decreases in nonperforming and classified loans during the year ended June 30, 2015.
Loans receivable, including loans held for sale, consisted of the following at the dates indicated:
June 30, 2015
June 30, 2014
(In thousands)
Real Estate:
One- to four-family
Multi-family
Commercial real estate
Construction and land
Total real estate loans
Consumer:
Home equity
Other consumer
Total consumer loans
Commercial business loans
Total loans
Less:
Net deferred loan fees
Premium on purchased loans, net
Loans held for sale
Allowance for loan losses
Total loans receivable, net
$
256,806
$
33,086
125,623
19,127
434,642
36,387
8,198
44,585
14,764
493,991
840
(1,957)
110
7,111
487,887
$
$
242,523
45,100
128,028
20,497
436,148
40,064
10,697
50,761
17,532
504,441
862
(1,290)
613
8,072
496,184
Nonperforming loans decreased $1.1 million, or 18.3%, to $4.9 million at June 30, 2015, from $6.0 million
at June 30, 2014. During the year ended June 30, 2015, nonperforming commercial real estate loans decreased $1.8
million, and nonperforming home equity loans decreased $159,000, partially offset by increases of $689,000 in one-
to four-family residential loans, $32,000 in construction and land loans, and $123,000 in other consumer loans.
Nonperforming loans to total loans declined to 1.0% at June 30, 2015 from 1.2% at June 30, 2014. Real estate
owned and repossessed assets increased $1.1 million to $1.9 million at June 30, 2015, from $810,000 at June 30,
2014. The decrease in nonperforming commercial real estate loans and increase in real estate owned and repossessed
assets was primarily the result of the transfer of a $1.4 million commercial real estate loan to real estate owned
during the year ended June 30, 2015. Our allowance for loan losses was $7.1 million and $8.1 million, or 1.4% and
69
1.6% of gross loans receivable, at June 30, 2015 and June 30, 2014, respectively. The allowance for loan losses as a
percentage of nonperforming loans increased 7.6% from 135.3% at June 30, 2014 to 145.6% at June 30, 2015.
At June 30, 2015, there were $7.7 million in restructured loans, of which $2.1 million were performing in
accordance with their modified payment terms and returned to accrual status. Classified loans decreased by $4.0
million, or 28.8%, to $9.9 million at June 30, 2015, from $13.9 million at June 30, 2014.
The following table represents nonperforming assets and troubled debt restructurings ("TDRs") at the dates
indicated.
June 30, 2015
June 30, 2014
(In thousands)
$
4,232
$
Nonaccruing loans:
Real estate loans:
One- to four-family
Commercial real estate
Construction and land
Total real estate loans
Commercial business loans:
Consumer loans:
Home equity
Other
Total consumer loans
Total nonaccruing loans
Real estate owned:
One- to four-family
Commercial real estate
Construction and land
Total real estate owned
Repossessed automobiles and recreational vehicles
Total nonperforming assets
TDR loans:
One- to four-family
Multi-family
Commercial real estate
Total real estate loans
Home equity
Commercial business
Total restructured loans
Nonaccrual and 90 days or more past due loans as a
percentage of total loans
Nonperforming TDRs included in total nonaccruing
loans and total restructured loans above
$
$
$
$
70
147
159
4,538
—
181
164
345
4,883
493
1,368
—
1,861
53
6,797
4,923
629
1,363
6,915
428
403
$
$
7,746
$
3,543
1,913
127
5,583
—
340
41
381
5,964
524
—
220
744
66
6,774
5,939
728
4,456
11,123
615
426
12,164
1.0%
1.2%
5,676
$
3,536
At June 30, 2015, total investment securities increased $128.4 million, or 55.3%, to $360.6 million at
June 30, 2015, from $232.2 million at June 30, 2014, primarily as a result of cash received from the Company's
initial stock offering and increases in customer deposits that were deployed into earning assets during the year ended
June 30, 2015. Mortgage-backed securities represent the largest portion of our investment securities portfolio and
totaled $230.3 million at June 30, 2015, an increase of $61.6 million, or 36.5%, from $168.7 million at June 30,
2014. Other investment securities, including municipal bonds, were $130.2 million at June 30, 2015, an increase of
$66.7 million, or 105.0% from $63.5 million at June 30, 2014. From the net proceeds received from our initial stock
offering and additional available cash on hand during the year, we purchased $138.0 million of investment securities
consisting of a combination of fixed rate securities of $107.9 million, or 78.2%, and adjustable rate securities of
$30.1 million, or 21.8%. Of the fixed rate securities, $10.2 million consisted of laddered maturity U.S. Treasury
notes which will mature in approximate $500,000 increments starting in September 2015 and each of the six months
thereafter through February 2025. Other fixed rate securities consist of $5.0 million Agency bond securities, $70.7
million of U.S. government agency issued mortgage-backed securities ("Agency MBS"), $10.0 million of Small
Business Association ("SBA") securities, $7.6 million of municipal securities, and one corporate issued mortgage-
backed security ("Corporate MBS") of $4.4 million. Adjustable rate securities consisted of $14.8 million corporate
asset-backed securities ("Corporate ABS"), $4.7 million of Corporate MBS, and $10.6 million Agency MBS.
Investment securities and mortgage-backed securities purchased fall within the policy types and dollar limits as set
by First Federal's investment policy. Corporate MBS and Corporate ABS require additional monitoring by the Bank
for credit quality and risk-weighting on at least a quarterly basis to detect underlying credit issues that may require
attention as these investments do not have guarantees of payment in the event of default. The duration of the total
investment securities portfolio remained the same at 4.7 years at June 30, 2015 and 2014.
Liabilities. Total liabilities increased $31.8 million, or 4.5%, to $746.1 million at June 30, 2015, from
$714.3 million at June 30, 2014. This increase was primarily the result of deposit account balances increasing $46.8
million, or 7.8%, to $647.2 million at June 30, 2015, from $600.4 million at June 30, 2014. Transaction, savings, and
money market account deposits increased $32.5 million, or 7.0%, to $499.2 million at June 30, 2015 from $466.7
million at June 30, 2014, while certificates of deposit increased $14.2 million, or 10.6%, during this period.
Increases in deposits were primarily the result of targeted promotional efforts on money market and certificates of
deposits in new and existing market areas.
Borrowings, consisting primarily of long term advances from the Federal Home Loan Bank, decreased
$15.1 million, or 14.4%, from $105.1 million at June 30, 2014 to $90.0 million at June 30, 2015, as Federal Home
Loan Bank cash management advances were repaid. Total borrowings at June 30, 2015 consisted primarily of long
term advances from the FHLB.
Equity. Total equity increased $109.7 million, or 135.4%, to $190.7 million at June 30, 2015, from $81.0
million at June 30, 2014. The increase was primarily the result of an increase to capital from the initial stock offering
of $126.9 million, partially offset by a $5.1 million net loss and $11.8 million of unearned ESOP shares purchased in
the open market during the year ended June 30, 2015.
Comparison of Results of Operations for the Years Ended June 30, 2015 and June 30, 2014
General. The Company had a net loss for the year ended June 30, 2015 of $5.1 million, or $0.42 per share,
compared to net income of $2.7 million for the year ended June 30, 2014, a decrease of $7.8 million, or 288.9%. The
net loss during the year ended June 30, 2015, was primarily due to the Company contributing $400,000 in cash and
$9.3 million in common stock to the Foundation, resulting in a pre-tax noninterest expense charge of $9.7 million.
Net Interest Income. Net interest income increased $1.1 million to $22.9 million for the year ended
June 30, 2015, from $21.8 million for the year ended June 30, 2014. The increase was primarily the result of an
increase in interest income as cash received from the initial public stock offering and increased customer deposits
was deployed into the investment portfolio.
Net interest margin decreased 14 basis points to 2.75% for the year ended June 30, 2015, from 2.89% for
the fiscal year 2014, primarily due to an increase in the average balance of investment and mortgage-backed
securities and cash and cash equivalents yielding lower rates compared to the loan portfolio, coupled with a decrease
in average loan yields during the year ended June 30, 2015. Of the $1.1 million increase in net interest income
during the year ended June 30, 2015 compared to fiscal year 2014, $1.8 million was the result of an increase in
volume partially offset by a $746,000 decline from change in rates. The cost of average interest-bearing liabilities
decreased four basis points to 0.70% for the year ended June 30, 2015, compared to 0.74% for the prior fiscal year,
71
due primarily to the decreased cost of FHLB borrowings and a decline in the average balance of certificates of
deposit.
Interest Income. Total interest income increased $928,000, or 3.5%, to $27.5 million for the year ended
June 30, 2015 from $26.6 million for the comparable period in 2014. Interest income increased primarily due to
increases in the average balance and in the yield on investment and mortgage-backed securities as additional cash
flows were deployed into the investment securities and mortgage-backed securities portfolios. During the year ended
June 30, 2015, average loan yields decreased 23 basis points compared to the year ended June 30, 2014, as higher
yielding loans continued to pay off and were replaced with loans at lower interest rates. This resulted in interest
income on loans receivable decreasing $320,000, to $22.0 million for the year ended June 30, 2015 from $22.4
million for the year ended June 30, 2014, despite an increase in the average balance of loans receivable of $17.3
million during fiscal year 2015.
Interest income on investment securities increased $701,000 to $1.9 million for the year ended June 30,
2015 compared to $1.1 million for the year ended June 30, 2014. The average balance of investment securities
increased $27.1 million to $88.8 million for the year ended June 30, 2015 compared to $61.6 million for the year
ended June 30, 2014. The yield on investment securities for the year ended June 30, 2015 increased twenty-two
basis points.
Interest income on mortgage backed securities increased $473,000 primarily due to an increase of 25 basis
points in average yields to 1.91% for the year ended June 30, 2015 from 1.66% for the year ended June 30, 2014 and
an increase in the average balance of $1.0 million compared to the prior year.
The following table compares average earning asset balances, associated yields, and resulting changes in
interest income for the periods shown:
2015
Year Ended June 30,
2014
Loans receivable, net
Investment securities
Mortgage-backed securities
FHLB stock
Cash and due from banks
Average
Balance
Outstanding
$
491,497
88,764
181,727
9,463
61,154
Yield
4.49 %
2.08
1.91
0.13
0.18
Average
Balance
Outstanding
(Dollars in thousands)
Yield
Increase/
(Decrease) in
Interest Income
$
474,222
61,620
180,743
10,268
27,596
$
4.72 %
1.86
1.66
0.10
0.15
(320)
701
473
2
72
928
Total interest-earning assets
$
832,605
3.30
$
754,449
3.52
$
Interest Expense. Total interest expense decreased $137,000, or 2.9%, to $4.6 million for the year ended
June 30, 2015, compared to $4.7 million for the year ended June 30, 2014, primarily due to a $269,000, or 8.4%,
decline in borrowing costs. Deposit costs increased $132,000, or 8.6%, primarily due to an increase in the average
balance of money market accounts of $14.5 million coupled with an increase in the average rate paid of three basis
points, which resulted in an $82,000 increase in interest paid on money market accounts during the year ended
June 30, 2015.
The average balance of interest-bearing deposits increased $31.8 million, or 6.0%, to $565.0 million for the
year ended June 30, 2015 from $533.2 million for the year ended June 30, 2014. This increase was attributable to
increases in the average balances of savings accounts of $19.0 million, money market accounts of $14.5 million and
transaction accounts of $2.8 million, partially offset by a decrease in the average balance of certificates of deposit of
$4.5 million. With rates at historically low levels there has been little incentive for depositors to extend maturities
and reduce the liquidity associated with savings and money market products by renewing maturing certificates of
deposit. The average cost of all deposit products increased to 0.30% for the year ended June 30, 2015 from 0.29%
for the year ended June 30, 2014. Borrowing costs declined $269,000 to $2.9 million for the year ended June 30,
2015 from $3.2 million for the last fiscal year primarily due to the maturity of $10.0 million long-term FHLB
advances.
72
The following table details average balances, cost of funds and the change in interest expense for the periods
shown:
Year Ended June 30,
2015
2014
Savings accounts
Transaction accounts
Money market accounts
Certificates of deposit
Borrowings
Average
Balance
Outstanding
$
102,696
106,130
217,901
138,287
90,730
Total interest-bearing liabilities
$
655,744
Average
Balance
Outstanding
Rate
(Dollars in thousands)
$
83,686
0.05 %
$
103,333
203,375
142,775
104,698
$
637,867
0.01
0.17
0.79
3.05
0.74
$
Rate
0.04 %
0.01
0.20
0.86
3.22
0.70
Increase/
(Decrease)
in Interest
Expense
—
—
82
50
(269)
(137)
Provision for Loan Losses. There was no provision for loan losses during the year ended June 30, 2015,
compared to $1.3 million for the year ended June 30, 2014. This was primarily due to improving asset quality as
reflected in the decrease in classified loans. The decrease in classified loans is attributed to the improving economic
conditions allowing some borrowers to better their financial condition. The improvement in net charge-offs reflects
the improvement in real estate values in our market areas.
The following table details activity and information related to the allowance for loan losses for the periods
shown:
Year Ended June 30,
2015
2014
Provision for loan losses
Net (charge-offs) recoveries
Allowance for loan losses
Allowance for losses as a percentage of total gross loans receivable at the
end of this period
Total nonaccruing loans
Allowance for loan losses as a percentage of nonaccrual loans at end of
period
Nonaccrual and 90 days or more past due loans as a percentage of total
loans
Total loans
(Dollars in thousands)
— $
$
(961)
7,111
1.4%
4,883
145.6%
1.0%
1,307
(1,209)
8,072
1.6%
5,964
135.3%
1.2%
$
493,991
$
504,441
While management believes the estimates and assumptions used in its 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. In addition, the determination of the amount of our allowance for loan losses is subject to review by
bank regulators, as part of the routine examination process, which may result in the establishment of additional
reserves based upon their judgment of information available to them at the time of their examination.
Noninterest Income. Noninterest income decreased $283,000 to $4.7 million for the year ended June 30,
2015 from $5.0 million for the year ended June 30, 2014 primarily due to the absence of any gain on sale of investment
securities, and a decrease in the gain on sale of loans of $214,000 during the year ended June 30, 2015, compared to
fiscal year 2014. Reduced gain on sale of loans was attributable to a reduction in loan sales activity in the fiscal year
2015 compared to fiscal year 2014 as we retained more loans in our portfolio in order to increase interest income rather
than selling eligible loans into the secondary market.
73
The following table provides a detailed analysis of the changes in the components of noninterest income for
the periods shown:
Year Ended June 30,
Increase (Decrease)
2015
2014
Amount
Percent
(Dollars in thousands)
Loan and deposit service fees
$
3,404
$
3,447
$
Mortgage servicing fees, net of amortization
Net gain on sale of loans
Net gain on sale of investment securities
Increase in cash surrender value of bank-owned life
insurance
Other income
305
548
—
102
348
284
762
112
94
291
(43)
21
(214)
(112)
8
57
(1.2)%
7.4
(28.1)
(100.0)
8.5
19.6
Total noninterest income
$
4,707
$
4,990
$
(283)
(5.7)%
Noninterest Expense. Noninterest expense increased $10.9 million, or 49.5%, to $33.0 million for the year
ended June 30, 2015, compared to $22.1 million for the year ended June 30, 2014. This increase in noninterest
expense was primarily due to the funding of the Foundation, which resulted in an increase in noninterest expense of
$9.7 million. Compensation and benefits increased $1.1 million, and data processing and occupancy and equipment
expense increased $321,000 and $5,000, respectively, partially offset by a $233,000 decline in real estate owned and
repossessed assets expense, net. Compensation and benefits during the year ended June 30, 2015 increased
compared to the comparable period in 2014 as a result of certain market rate and merit increase adjustments for
employees and management and increased employee benefits expenses, including expenses related to the ESOP.
The following table provides an analysis of the changes in the components of noninterest expense for the
periods shown:
Compensation and benefits
Real estate owned and repossessed assets expenses,
net
Data processing
Occupancy and equipment
Supplies, postage, and telephone
Regulatory assessments and state taxes
Advertising
Charitable contributions
Professional fees
FDIC insurance premium
Other
Total
Year Ended June 30,
Increase
(Decrease)
2015
2014
Amount
Percent
(Dollars in thousands)
$
12,703
$
11,614
$
1,089
9.4%
165
2,521
3,058
663
334
433
9,870
1,063
544
1,692
398
2,200
3,053
695
381
425
183
945
551
1,660
(233)
321
5
(32)
(47)
8
9,687
118
(7)
32
(58.5)
14.6
0.2
(4.6)
(12.3)
1.9
5,293.4
12.5
(1.3)
1.9
$
33,046
$
22,105
$
10,941
49.5%
Provision for Income Tax. An income tax benefit of $354,000 was recorded for the year ended June 30, 2015
compared to an income tax expense of $740,000 for the year ended June 30, 2014. This was generally due to a decrease
in income before taxes of $8.9 million. Under current Federal income tax regulations, charitable contribution deductions
are limited to 10% of taxable income. Accordingly, the $9.7 million contribution will create a carry-forward for income
tax purposes with a deferred tax asset and related valuation allowance for financial statement purposes.
74
Comparison of Financial Condition at June 30, 2014 and June 30, 2013
Assets. Total assets increased $10.8 million, or 1.4%, to $795.3 million at June 30, 2014, from $784.5
million at June 30, 2013. Loans receivable, net, increased $46.8 million, or 10.4%, to $496.2 million at June 30,
2014, from $449.4 million at June 30, 2013. Securities decreased $32.2 million, or 12.2%, to $232.2 million at June
30, 2014, from $264.4 million at June 30, 2013, and cash and cash equivalents decreased by $3.9 million, or 17.0%,
to $19.0 million at June 30, 2014 from $22.9 million at June 30, 2013.
Gross loans, excluding loans held for sale, increased $46.3 million, or 10.1%, to $503.8 million at June 30,
2014, from $457.5 million at June 30, 2013. The portfolio growth was primarily a result of a $51.5 million, or
13.4%, increase in real estate secured loans to $436.1 million at June 30, 2014, from $384.6 million at June 30,
2013. The portfolio of commercial real estate loans increased during the year ended June 30, 2014, by $34.9 million,
or 37.5%, to $128.0 million at June 30, 2014, from $93.1 million at June 30, 2013. At June 30, 2014, $76.1 million,
or 59.5% of such loans, were secured by properties outside the North Olympic Peninsula region. Multi-family loans
increased by $17.2 million, or 61.5%, to $45.1 million at June 30, 2014, as compared to $27.9 million at June 30,
2013. At June 30, 2014, $40.6 million, or 90.0% of such loans, were secured by properties outside the North
Olympic Peninsula region. Commercial business loans decreased slightly by $214,000, or 1.2%, to $17.5 million at
June 30, 2014, from $17.7 million at June 30, 2013, while construction and land loans increased $5.0 million, or
32.3%, to $20.5 million at June 30, 2014, from $15.5 million at June 30, 2013, reflecting the stabilizing of one- to
four-family real estate values in the North Olympic Peninsula region. These increases were partially offset by a
decrease in one- to four-family residential loans of $5.7 million, or 2.3%, to $242.5 million at June 30, 2014, from
$248.2 million at June 30, 2014.
During the year ended June 30, 2014, we originated $113.5 million and purchased $39.9 million of loans.
Of loans originated, $56.4 million, or 49.6%, were originated on the North Olympic Peninsula compared to $35.0
million, or 30.8%, in the Puget Sound region and $22.0 million, or 19.4%, in other areas. Purchased loans included
$18.5 million of one- to four-family jumbo loans secured by properties located in California, $20.5 million of multi-
family real estate loans secured by properties primarily located in the Puget Sound region of Washington and a
$993,000 commercial real estate participation secured by property located in Eastern Washington.
Our allowance for loan losses was $8.1 million, or 1.6% of gross loans receivable at June 30, 2014,
compared to $8.0 million, or 1.7% of gross loans receivable at June 30, 2013. The increase in the allowance was
primarily the result of portfolio growth, partially offset by improving asset quality as evidenced by decreases in
nonperforming and classified loans during the year ended June 30, 2014. Classified loans decreased by $7.8 million,
or 35.9%, to $13.9 million at June 30, 2014, from $21.7 million at June 30, 2013.
Nonperforming loans decreased $3.9 million, or 39.5%, to $6.0 million at June 30, 2014, from $9.9 million
at June 30, 2013, as asset quality improved in all loan categories. Nonperforming loans to total loans decreased to
1.2% at June 30, 2014, from 2.2% at June 30, 2013. Real estate owned and repossessed assets decreased $1.5
million to $810,000 at June 30, 2014, from $2.3 million at June 30, 2013 as a result of decreased foreclosure activity
and sales of foreclosed assets during the period. At June 30, 2014, we had $12.2 million in TDRs, of which $8.6
million were performing in accordance with their revised terms and returned to accrual status. See “Item 1.
Business – Asset Quality” for additional information.
At June 30, 2014, the securities portfolio represented 29.2% of total assets, compared to 33.7% at June 30,
2013, as proceeds from repayment and sales of securities were redeployed into loans. Mortgage-backed securities
represented the largest portion of our investment portfolio and were $168.7 million at June 30, 2014, a decrease of
$30.5 million, or 15.3%, from $199.2 million at June 30, 2013. Other investment securities, including municipal
bonds, were $63.5 million at June 30, 2014, a decrease of $1.7 million, or 2.6%, from $65.2 million at June 30,
2013.
Liabilities. Total liabilities increased $8.4 million, or 1.2%, to $714.3 million at June 30, 2014, from
$705.9 million at June 30, 2013, primarily due to deposit account balances increasing $5.4 million, or 0.9%, to
$600.4 million at June 30, 2014, from $595.0 million at June 30, 2013, and borrowings increasing $5.1 million, or
5.1%, from $100.0 million at June 30, 2013, to $105.1 million at June 30, 2014.
We believe our deposit growth was attributable to our customers seeking the safety afforded by insured
deposits along with our success in attracting deposits from community organizations. Transaction, savings and
money market accounts increased $24.1 million, or 5.4%, to $466.7 million at June 30, 2014, from $442.6 million at
June 30, 2013, while certificates of deposit declined $18.7 million, or 12.3%, during this period. The change in the
75
mix of deposits reflects the continued impact of the historically low interest rate environment as depositors preferred
the liquidity of savings and money market products as compared to time deposits.
Total borrowings were comprised primarily of advances from FHLB. The increase in borrowings during
fiscal year 2014 was attributable to the utilization of short-term FHLB advances to support our daily short-term cash
needs, such as fluctuations in customer deposits, lending activities, loan prepayments and operating expenses.
Equity. Total equity increased $2.4 million, or 3.1%, to $81.0 million at June 30, 2014, from $78.6 million
at June 30, 2013. The increase was primarily a result of $2.7 million in net income partially offset by a decline in
other comprehensive income associated with mark to market adjustments on the investment portfolio.
Comparison of Results of Operations for the Years Ended June 30, 2014 and June 30, 2013
General. Net income for the year ended June 30, 2014, was $2.7 million, compared to a net income of
$2.3 million for the year ended June 30, 2013. The increase in net income resulted from a $2.0 million increase in
net interest income and a $69,000 decrease in the provision for loan losses, partially offset by a $577,000 decline in
noninterest income, an $859,000 increase in noninterest expense and an increase of $318,000 in income tax expense.
Net Interest Income. Net interest income increased $2.0 million to $21.8 million for the year ended June
30, 2014, from $19.8 million for the year ended June 30, 2013. The increase was primarily a result of a reduction in
interest expense.
Our net interest margin increased 22 basis points to 2.89% for the year ended June 30, 2014, from 2.67%
for the same period in 2013, primarily due to the $50.9 million, or 12.0%, increase in average net loans receivable
and the reduction in our average cost of funds. The average yield on interest-earning assets increased four basis
points, as increases in the yield on our investment portfolio more than offset a 46 basis point decrease in yield on our
loan portfolio. The redistribution of earning assets from investments to loans also improved our earning asset yield.
The cost of average interest-bearing liabilities decreased 20 basis points to 0.74% for the year ended June 30, 2014,
compared to 0.94% for the prior fiscal year, due to a reduction in rates paid on FHLB advances and customer
deposits. Our funding costs have limited opportunity for further downward rate adjustments.
Interest Income. Total interest income increased $764,000, or 3.0%, to $26.6 million for the year ended
June 30, 2014, from $25.8 million for the comparable period in 2013. Interest income on loans increased $432,000,
or 2.0%, during the year ended June 30, 2014, reflecting an increase of $50.9 million in the average balance of net
loans receivable outstanding for the year ended June 30, 2014, compared to the comparable period in 2013. During
the year ended June 30, 2014, average loan yields decreased 46 basis points as higher yielding loans continued to
pay off and were replaced with loans at lower interest rates.
Interest income on investment securities increased $248,000 to $1.1 million for the year ended June 30,
2014, compared to $901,000 for the year ended June 30, 2013. The average balance of our investment securities
increased $1.0 million to $61.6 million for the year ended June 30, 2014, compared to $60.6 million for the year
ended June 30, 2013. The yield on investment securities for the year ended June 30, 2014 increased 37 basis points
due to slowing prepayment activity, which reduced premium amortization, and higher reinvestment rates available in
2014.
Interest income on mortgage-backed securities increased by $91,000, primarily due to slowing amortization
of premiums along with the reinvestment of repayments and proceeds from sales of such securities into higher
yielding mortgage-backed securities.
The following table compares average earning asset balances, associated yields, and resulting changes in
interest income for the year ended June 30, 2014 and 2013:
76
2014
Year Ended June 30,
2013
Average
Balance
Outstanding
$
$
474,222
61,620
180,743
10,268
27,596
754,449
Yield
4.72 %
1.86
1.66
0.10
0.15
3.52
Average
Balance
Outstanding
(Dollars in thousands)
Yield
Increase/
(Decrease) in
Interest Income
$
$
423,294
60,581
211,731
10,642
36,037
742,285
5.18 %
1.49
1.37
—
0.16
3.48
$
$
432
248
91
10
(17)
764
Loans receivable, net
Investment securities
Mortgage-backed securities
FHLB stock
Cash and due from banks
Total interest-earning assets
Interest Expense. Total interest expense decreased $1.3 million, or 21.2%, to $4.7 million for the year
ended June 30, 2014, compared to $6.0 million for the year ended June 30, 2013, primarily due to a restructuring of
$89.9 million in FHLB advances in April 2013. The restructuring lengthened maturities by 47 months and
decreased the average rate paid by 73 basis points to 3.26% for the year ended June 30, 2014, from 3.99% for the
year ended June 30, 2013. Deposit costs decreased $431,000, or 21.9%, primarily due to a maturity of $18.6 million
in higher cost certificates of deposit and increases in the average balances for lower cost interest-bearing transaction
accounts of $4.2 million, savings accounts of $3.8 million, and money market accounts of $6.6 million. With rates
at historically low levels there has been little incentive for depositors to renew certificates or extend maturities. The
average cost of all deposit products decreased for the year ended June 30, 2014, with certificates of deposit declining
by 17 basis points to 0.79% from 0.96% for the year ended June 30, 2013, while the cost of money market deposits
decreased by one basis point to 0.17% for the year ended June 30, 2014, from 0.18% for the year ended June 30,
2013. The average balance of interest-bearing deposits decreased $4.0 million, or 0.8%, to $533.2 million for the
year ended June 30, 2014 from $537.2 million for the year ended June 30, 2013. Borrowing costs declined $840,000
to $3.2 million for the year ended June 30, 2014 from $4.0 million for the same period last year due to a 98 basis
point reduction in the average rate paid on borrowings.
The following table details average balances, cost of funds, and the change in interest expense for the years
ended June 30, 2014 and 2013:
Year Ended June 30,
2014
2013
Average
Balance
Outstanding
Rate
Average
Balance
Outstanding
Rate
(Dollars in thousands)
Increase/
(Decrease)
in Interest
Expense
Savings accounts
Transaction accounts
Money market accounts
Certificates of deposit
Borrowings
Total interest-bearing liabilities
$
$
83,686
0.05 %
$
79,872
103,333
203,375
142,775
104,698
637,867
0.01
0.17
0.79
3.05
0.74
99,170
196,809
161,359
100,113
637,323
$
0.07 %
0.01
0.18
0.96
4.03
0.94
$
$
(21)
—
1
(411)
(840)
(1,271)
Provision for Loan Losses. The provision for loan losses decreased $69,000, or 5.0%, to $1.3 million for
the year ended June 30, 2014, compared to $1.4 million for the year ended June 30, 2013. This was primarily due to
improving asset quality as reflected in the decrease in nonaccrual and 90 days or more past due loans as a percent of
total loans, from 2.2% of the loan portfolio at June 30, 2013 to 1.2% of the loan portfolio at June 30, 2014. The
improvements in delinquencies and nonaccrual loans are attributed to improving economic conditions allowing
some borrowers to improve their financial condition. This reduction in the provision for loan losses was partially
offset by additional reserves needed to cover a higher average loans receivable balance and $1.2 million of net
charge-offs during fiscal 2014.
77
The following table details activity and information related to the allowance for loan losses for the years
ended June 30, 2014 and 2013:
Provision for loan losses
Net (charge-offs) recoveries
Allowance for loan losses
Allowance for losses as a percentage of total gross loans receivable at the
end of this period
Total nonaccruing loans
Nonaccrual and 90 days or more past due loans as a percentage of total
loans
Allowance for loan losses as a percentage of nonperforming loans at end of
period
Total loans
At or For the Year
Ended June 30,
2014
2013
(Dollars in thousands)
$
$
1,307
(1,209)
8,072
1.6%
5,964
1.2%
135.3%
1,376
(792)
7,974
1.7%
9,864
2.2%
80.8%
$
504,441
$
457,921
Noninterest Income. Noninterest income decreased $577,000, or 10.4%, to $5.0 million for the year ended
June 30, 2014, from $5.6 million for the year ended June 30, 2013. The decrease in noninterest income during the
2014 fiscal year was due primarily to the impact of interest rates. Rising rates at the end of 2013 caused a reduction
in loan refinance activity, affecting our ability to generate gains on sales of loans, and the general level of interest rates
also reduced the returns on bank-owned life insurance. The following table provides an analysis of the changes in the
components of noninterest income for the years ended June 30, 2014 and 2013:
Loan and deposit service fees
Mortgage servicing fees, net of
amortization
Net gain on sales of loans
Net gain on sale of investment securities
Increase in cash surrender value of bank-owned life
insurance
Other income
Year
Ended June 30,
Increase (Decrease)
2014
2013
Amount
Percent
(Dollars in thousands)
$
3,447
$
3,353
$
94
2.8 %
284
762
112
94
291
5
1,563
70
316
260
279
(801)
42
(222)
31
(577)
5,580.0
(51.2)
60.0
(70.3)
11.9
(10.4) %
Total noninterest income
$
4,990
$
5,567
$
Loan and deposit service fees increased $94,000, or 2.8%, to $3.4 million for the year ended June 30, 2014
due to increases in transactional deposit accounts between these periods. Net gain on sale of investment securities
was $112,000 for the year ended June 30, 2014 as selected securities with lower yields were sold to fund higher
yielding investments. Decreases in the gain on sale of loans and the increase in mortgage servicing fees net of
amortization during the year ended June 30, 2014, compared to the 2013 fiscal year, were attributable to reduced
origination activity and the retention of a limited amount of 30-year fixed rate single family residential loans to the
portfolio, reducing the opportunity to generate loan sale revenue. In addition, the increase in cash surrender value of
our bank-owned life insurance declined $222,000 to $94,000 for the year ended June 30, 2014, from $316,000 for
the same period last year as a result of the declining yields of the underlying investments as funds were reinvested at
lower interest rates.
Noninterest Expense. Noninterest expense increased $859,000, or 4.0%, to $22.1 million for the year
ended June 30, 2014, compared to $21.2 million for the year ended June 30, 2013. This increase was primarily due
to an increase in compensation and benefits expense of $1.1 million, or 10.6%, to $11.7 million for the year ended
June 30, 2014, compared to $10.6 million for the comparable period in 2013. Additional staffing has been added in
connection with our branch expansion into Kitsap County and loan production office expansion into Whatcom
78
County. We have also increased our staffing in the credit administration and production areas to increase our loan
production and to improve our approval time for loans. As a result, full-time equivalent employees increased to 169
at June 30, 2014, from 161 at June 30, 2013. Compensation was further increased as deferral of compensation
expense related to the origination of loans declined during fiscal 2013 and, to a lesser extent, increased contributions
were made to our defined benefit retirement plan. Our efficiency ratio was 82.4% for the year ended June 30, 2014,
compared to 83.8% for the year ended June 30, 2013. The following table provides an analysis of the changes in the
components of noninterest expense:
Compensation and benefits
Real estate owned and repossessed assets expenses,
net
Data processing
Occupancy and equipment
Supplies, postage, and telephone
Regulatory assessments and state taxes
Advertising
Professional fees
FDIC insurance premiums
Other
Total
At or For the Year
Ended June 30,
Increase
(Decrease)
2014
2013
Amount
Percent
(Dollars in thousands)
$
11,683
$
10,560
$
1,123
10.6 %
398
2,200
3,053
695
381
608
945
551
1,591
244
1,956
2,881
802
384
522
1,477
680
1,740
$
22,105
$
21,246
$
154
244
172
(107)
(3)
86
(532)
(129)
(149)
859
63.1
12.5
6.0
(13.3)
(0.8)
16.5
(36.0)
(19.0)
(8.6)
4.0 %
We also had an increase in expense for data processing of $244,000 for the year ended June 30, 2014 due
to costs associated with our branch expansion and the related cost increases attributed to increased transaction
activity associated with deposit accounts, including mobile and internet banking. Occupancy and equipment
expense increased $172,000 during the period, primarily due to branch expansion and other improvements. These
increases were offset by a $532,000 reduction in professional fees that resulted from the recognition of fees related
to the postponement of the conversion during the year ended June 30, 2013. Expenses associated with real estate
owned and repossessed assets for the year ended June 30, 2014 reflect normal operating expenses related to
repossession, disposition and foreclosure activity.
Provision (Benefit) for Income Tax. An income tax expense of $740,000 was recorded for net income for
the year ended June 30, 2014, compared to an income tax expense of $422,000 for the year ended June 30, 2013. This
was due to an increase in income before taxes of $668,000 as well as a change in the mix of taxable and non-taxable
income as more taxable net interest income was realized and non-taxable earnings related to the increase in the cash
surrender value of bank-owned life insurance decreased.
79
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The following table sets forth, for the periods indicated, information regarding average balances of assets and liabilities as well as the total dollar amounts
liabilities, resultant yields, interest rate spread, net interest
o
of interest income from average
t
margin (otherwise known as net yield on
presented is the weighted average yield on interest-earning assets, rates paid on interest-bearing liabilities and the resultant spread at June 30, 2015. Income and all
average balances are monthly average balances, which management deems to be not materially different than daily averages. Nonaccruing loans have been
s
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included in the table as loans carrying a zero yield.
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assets to average interest-bearing liabilities. Also
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A
Rate/Volume Analysis
The following table presents the dollar amount of changes in interest income and interest expense for major
components of interest-earning assets and interest-bearing liabilities. It distinguishes between the changes related to
outstanding balances and due to the changes in interest rates. For each category of interest-earning assets and interest-
bearing liabilities, information is provided on changes attributable to (i) changes in volume (i.e., changes in volume
multiplied by old rate) and (ii) changes in rate (i.e., changes in rate multiplied by old volume). For purposes of this table,
changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the
change due to volume and the change due to rate.
Year Ended
Year Ended
June 30, 2015 vs. 2014
June 30, 2014 vs. 2013
Increase (Decrease)
Due to
Volume
Rate
Total
Increase
(Decrease)
Increase (Decrease)
Due to
Volume
Rate
Total
Increase
(Decrease)
(In thousands)
Interest earning assets:
Loans receivable
Investment and mortgage-backed securities
FHLB stock
Other(1)
$
815
521
(1)
50
Total interest-earning assets
$ 1,385
Interest-bearing liabilities:
Savings accounts
Interest-bearing transaction accounts
Money market accounts
Certificates of deposit
Borrowings
$
10
—
25
(35)
(426)
Total interest-bearing liabilities
$
(426) $
$ (1,135) $
653
3
22
(457) $
$
(320)
1,174
2
72
928
$ 2,639
(410)
—
(14)
$ 2,215
$ (2,207) $
749
10
(3)
$ (1,451) $
432
339
10
(17)
764
$
(10) $
—
— $
—
57
85
157
289
$
82
50
(269)
(137)
3
7
12
(178)
185
$
(24) $
(7)
(11)
(233)
(1,025)
$ (1,300) $
(21)
—
1
(411)
(840)
(1,271)
$
29
Net change in interest income
$ 1,811
$
(746) $
1,065
$ 2,186
$
(151) $
2,035
(1) Includes interest-bearing deposits (cash) at other financial institutions.
Asset and Liability Management and Market Risk
Risk Management Overview. Managing risk is an essential part of successfully managing a financial
institution. Our Enterprise Risk Management committee reports key risk indicators to the board of directors through
the Audit Committee. The most prominent risk exposures management monitors are: strategic, credit, interest rate,
liquidity, operational, compliance, reputational and legal risk. We utilize the services of outside firms to assist us in
our asset and liability management and our analysis of market risk.
Interest Rate Risk Management. We manage the interest rate sensitivity of interest-bearing liabilities and
interest-earning assets in an effort to minimize the adverse effects of changes in the interest rate environment.
Except for certain adjustable-rate home equity lines of credit and commercial real estate loans that are tied to the
prime rate, the twelve month constant maturity treasury, or the London Interbank Offered Rate ("LIBOR"), deposit
accounts typically reprice more quickly in response to changes in market interest rates than mortgage loans because
of their shorter maturities. As a result, sharp increases in interest rates may adversely affect earnings. Typically,
decreases in interest rates beneficially affect our earnings in the short term, but with the Federal Reserve Board
maintaining the federal funds rate near zero for a prolonged period, decreases in interest rates adversely affect
earnings due to prepayments and refinancing associated with loans and investment securities, which are then
reinvested in lower yielding assets, reducing interest income. In contrast, First Federal has little or no long-term
ability to reduce funding costs associated with deposits and borrowings. To increase earnings in the short-term,
81
management has recently begun adding a limited amount of fixed-rate conforming residential mortgage loans to the
loan portfolio.
We currently do not participate in hedging programs, interest rate swaps or other activities involving the
use of derivative financial instruments to manage interest rate risk.
Interest Rate Sensitivity Analysis. Management uses an interest rate sensitivity analysis to review our
level of interest rate risk. This analysis measures interest rate risk by computing changes in the present value of our
cash flows from assets, liabilities and off-balance sheet items in the event of a range of assumed changes in market
interest rates. The present value of equity is equal to the market value of assets minus the market value of liabilities,
with adjustments made for off-balance sheet items. This analysis assesses the risk of loss in market risk sensitive
instruments in the event of a sudden and sustained 100 to 300 basis point increase or a 100 basis point decrease in
market interest rates with no effect given to any future steps that management might take to counter the impact of
that interest rate movement. The following table presents the change in the present value of First Federal’s equity at
June 30, 2015, that would occur in the event of an immediate change in interest rates based on management’s
assumptions.
Basis Point
Change in
Interest
Rates
June 30, 2015
Economic Value of Equity
$ Amount
$ Change
(Dollars in thousands)
% Change
+ 300
+ 200
+ 100
0
- 100
$
$
161,061
169,154
176,905
182,943
170,643
(21,882)
(13,789)
(6,038)
—
(12,300)
(12.0)%
(7.5)
(3.3)
—
(6.7)
EVE
Ratio
%
19.6%
19.9
20.2
20.3
18.5
Using the same assumptions as above, the sensitivity of our projected net interest income for the year ended
June 30, 2015, is as follows:
June 30, 2015
Projected Net Interest Income
$ Amount
$ Change
(Dollars in thousands)
% Change
$
$
21,263
22,402
23,347
24,186
23,388
(2,923)
(1,784)
(839)
—
(798)
(12.1)%
(7.4)
(3.5)
—
(3.3)
Basis Point
Change in
Interest
Rates
+ 300
+ 200
+ 100
0
- 100
Assumptions made by management relate to interest rates, loan prepayment rates, deposit decay rates, and
the market values of certain assets under differing interest rate scenarios, among others. As with any method of
measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the foregoing
tables. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they
may react in different degrees to changes in market interest rates. Also, 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 may
lag behind changes in market rates. Additionally, certain assets have features, such as rate caps or floors, which
restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a change
82
in interest rates, expected rates of prepayments on loans and early withdrawals from certificates could deviate
significantly from those assumed in calculating the table.
Liquidity Management
Liquidity is the ability to meet current and future financial obligations of a short-term and long-term nature.
Our primary sources of funds consist of deposit inflows, loan repayments, maturities and sales of securities and
borrowings from the FHLB. While maturities and scheduled amortization of loans and securities are usually
predictable sources of funds, deposit flows, calls of investment securities and borrowed funds, and prepayments on
loans and investment securities are greatly influenced by general interest rates, economic conditions and
competition, which can cause those sources of funds to fluctuate.
Management regularly adjusts our investments in liquid assets based upon an assessment of the expected
loan demand, expected deposit flows, the yields available on interest-earning deposits and securities, and the
objectives of our interest-rate risk and investment policies.
Our most liquid assets are cash and cash equivalents followed by available for sale securities. The levels of
these assets depend on our operating, financing, lending and investing activities during any given period. At June 30,
2015, cash and cash equivalents totaled $45.0 million. Securities classified as available-for-sale, whose aggregate
market value exceeds cost, provide additional sources of liquidity and had a market value of $299.0 million at
June 30, 2015. We have pledged collateral to support borrowings from the FHLB of $90.0 million. We have also
established a borrowing arrangement with the Federal Reserve Bank of San Francisco; however, no collateral has
been pledged as of June 30, 2015.
At June 30, 2015, we had $4.2 million in loan commitments outstanding, and an additional $39.2 million in
undisbursed loans and standby letters of credit.
Certificates of deposit due within one year of June 30, 2015 totaled $71.5 million, or 48.3% of certificates
of deposit. The large percentage of certificates of deposit that mature within one year reflects customers' hesitancy to
invest their funds for longer periods at historically low interest rates. Management believes, based on past
experience, that a significant portion of our certificates of deposit will be renewed or rolled into money market
accounts. If these maturing deposits are not renewed, however, we will be required to seek other sources of funds,
including other certificates of deposit and borrowings. We have the ability to attract and retain deposits by adjusting
the interest rates offered. Depending on market conditions, we may be required to pay higher rates on such deposits
or other borrowings than we currently pay on certificates of deposit. In addition, we believe that our branch network,
which is presently comprised of nine full-service retail banking offices located throughout our primary market area,
and the general cash flows from our existing lending and investment activities, will afford us sufficient long-term
liquidity. For additional information, see the Consolidated Statements of Cash Flows in Item 8 of this Form 10-K.
Off-Balance Sheet Activities
In the normal course of operations, First Federal engages in a variety of financial transactions that are not
recorded in the financial statements. These transactions involve varying degrees of off-balance sheet credit, interest
rate and liquidity risks. These transactions are used primarily to manage customers’ requests for funding and take the
form of loan commitments and lines of credit. For the year ended June 30, 2015 and the year ended June 30, 2014,
we engaged in no off-balance sheet transactions likely to have a material effect on the financial condition, results of
operations or cash flows.
83
Contractual Obligations
At June 30, 2015, our scheduled maturities of contractual obligations were as follows:
Within
1 Year
After 1 Year
Through
3 Years
After 3 Years
Through
5 Years
(In thousands)
Beyond
5 Years
Total
Balance
Certificates of deposit
$
71,474
$
52,561
$
23,687
$
206
$
147,928
FHLB advances
Operating leases
Borrower taxes and insurance
Deferred compensation
—
128
932
83
6,924
53,000
286
—
162
206
—
—
30,000
1,395
—
75
89,924
2,015
932
320
Total contractual obligations
$
72,617
$
59,933
$
76,893
$
31,676
$
241,119
Commitments and Off-Balance Sheet Arrangements
The following table summarizes our commitments and contingent liabilities with off-balance sheet risks as
of June 30, 2015:
Amount of Commitment
Expiration - Per Period
Total
Amounts
Committed
Due in
One
Year
(In thousands)
Commitments to originate loans:
Fixed-rate
Adjustable-rate
Unfunded commitments under lines of credit
or existing loans
Standby letters of credit
Total
$
$
403
$
3,780
38,956
201
43,340
$
403
3,780
38,956
201
43,340
Capital Resources
First Federal is subject to minimum capital requirements imposed by the FDIC. Capital adequacy
requirements are quantitative measures established by regulation that require First Federal to maintain minimum
amounts and ratios of capital.
Effective January 1, 2015 (with some changes transitioned into full effectiveness over two to four years),
First Federal became subject to new capital adequacy requirements adopted by the FDIC which created a new
required ratio for common equity Tier 1 (“CET1”) capital, increased the minimum Tier 1 risk-based capital ratio,
changed the risk-weightings of certain assets for purposes of the risk-based capital ratios, created an additional
capital conservation buffer over required risk-based capital ratios, and changed what qualifies as capital for purposes
of meeting these various capital requirements. Failure to meet minimum capital requirements can initiate certain
mandatory and possibly additional discretionary actions by bank regulators that, if undertaken, could have a direct
material effect on the Company’s financial statements.
In addition to the capital requirements, there are a number of changes in what constitutes regulatory capital,
subject to transition periods. These changes include the phasing-out of certain instruments as qualifying capital, of
which First Federal has none. Mortgage servicing rights and deferred tax assets over designated percentages of
CET1 are deducted from capital, subject to a four-year transition period ending December 31, 2017. CET1 consists
of Tier 1 capital less all capital components that are not considered common equity. In addition, Tier 1 capital
includes accumulated other comprehensive income, which includes all unrealized gains and losses on available for
84
sale debt and equity securities, subject to a transition period ending December 31, 2017. Because of our asset size,
we are not considered an advanced approaches banking organization and have elected to permanently opt-out of the
inclusion of unrealized gains and losses on available for sale debt and equity securities in our Tier 1 capital
calculations.
The new requirements also include changes in the risk-weighting of assets to better reflect credit risk and
other risk exposure. 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 cancelable (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, and total capital ratios, First Federal will have to maintain a
capital conservation buffer consisting of additional CET1 capital equal to 2.5% of risk-weighted assets above the
required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and
paying discretionary bonuses based on percentages of eligible retained income that could be utilized for such
actions. This new capital conservation buffer requirement is to be phased in over a period of four years starting with
an increase of 0.625% beginning in January 2016 and increasing by the same amount each year until the full 2.5%
becomes effective in January 2019.
Under the new standards, in order to be considered well-capitalized, First Federal must have a CET1 risk-
based ratio of 6.5% (new), a Tier 1 risk-based ratio of 8% (increased from 6%), a total risk-based capital ratio of
10% (unchanged) and a leverage ratio of 5% (unchanged)
At June 30, 2015, First Federal exceeded all regulatory capital requirements. Consistent with our goals to
operate a sound and profitable organization, our policy is for First Federal to maintain a “well-capitalized” status
under the capital categories of the FDIC. Based on capital levels at June 30, 2015, First Federal was considered to be
well-capitalized.
The following table shows the capital ratios of First Federal at June 30, 2015.
Actual
Minimum Capital
Requirements
Minimum Required
to Be Well-Capitalized
Under Prompt
Corrective
Action Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
(Dollars in thousands)
$ 129,618
14.5% $ 35,695
4.0% $
44,618
5.0%
129,618
129,618
136,443
23.8
23.8
25.0
24,549
32,733
43,643
4.5
6.0
8.0
35,460
43,643
54,554
6.5
8.0
10.0
Tier 1 Capital to total adjusted assets(1)
Common Equity Tier 1 Capital to risk-
weighted assets(2)
Tier 1 Capital to risk-weighted assets(2)
Total Capital to risk-weighted assets(2)
______________
(1) Based on adjusted average assets of $892.4 million.
(2) Based on risk-weighted assets of $545.5 million.
Bank holding companies are subject to capital adequacy requirements of the Federal Reserve under the
Bank Holding Company Act of 1956, as amended, and the regulations of the Federal Reserve. For a bank holding
company with less than $1.0 billion in assets, the capital guidelines apply on a bank only basis and the Federal
Reserve expects the holding company's subsidiary banks to be well-capitalized under the prompt corrective action
regulations.
Effect of Inflation and Changing Prices. The consolidated financial statements and related financial data
presented in this report have been prepared according to generally accepted accounting principles in the United
States, which require the measurement of financial and operating results in terms of historical dollars without
considering the change in the relative purchasing power of money over time due to inflation. The primary impact of
inflation on our operations is reflected in increased operating costs and the effect that general inflation may have on
both short-term and long-term interest rates. Unlike most industrial companies, virtually all the assets and liabilities
85
of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact
on a financial institution's performance than do general levels of inflation. Although inflation expectations do affect
interest rates, interest rates do not necessarily move in the same direction or to the same extent as the prices of goods
and services.
Recent Accounting Pronouncements
See Note 1 of the Notes to Consolidated Financial Statements contained in Item 8 of this Form 10-K.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Our market risk arises principally from interest rate risk inherent in our lending, investing, deposit and
borrowing activities. Management actively monitors and manages its interest rate risk exposure. In addition to other
risks that we manage in the normal course of business, such as credit quality and liquidity, management considers
interest rate risk to be a significant market risk that could potentially have a material effect on our financial
condition and result of operations. 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
Item 1. Financial Statements
Index to Consolidated Financial Statements
Page
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets, June 30, 2015 and 2014
Consolidated Statements of Operations For the Years
Ended June 30, 2015, 2014 and 2013
Consolidated Statements of Comprehensive (Loss) Income For the Years
Ended June 30, 2015, 2014 and 2013
Consolidated Statements of Changes in Stockholders’ Equity For the Years
Ended June 30, 2015, 2014 and 2013
Consolidated Statements of Cash Flows For the Years
Ended June 30, 2015, 2014 and 2013
Notes to Consolidated Financial Statements
87
88
89
90
91
92
94
86
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
First Northwest Bancorp and Subsidiary
Port Angeles, Washington
We have audited the accompanying consolidated balance sheets of First Northwest Bancorp and
Subsidiary (the “Company”) as of June 30, 2015 and 2014, and the related consolidated statements of
operations, comprehensive (loss) income, stockholders’ equity, and cash flows for each of the years in
the three‐year period ended June 30, 2015. These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
the standards of the Public Company Accounting Oversight
We conducted our audits in accordance with
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose
of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes 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, as well as evaluating the
overall consolidated financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the consolidated financial position of First Northwest Bancorp and Subsidiary as of June 30,
2015 and 2014, and the results of their operations and their cash flows for each of the years in the three‐
year period ended June 30, 2015, in conformity with accounting principles generally accepted in the
United States of America.
Everett, Washington
September 24, 2015
FIRST NORTHWEST BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
ASSETS
Cash and due from banks
Interest-bearing deposits in banks
Investment securities available for sale, at fair value
Investment securities held to maturity, at amortized cost
Loans held for sale
Loans receivable (net of allowance for loan losses of $7,111 and $8,072)
Federal Home Loan Bank (FHLB) stock, at cost
Accrued interest receivable
Premises and equipment, net
Mortgage servicing rights, net
Bank-owned life insurance, net
Real estate owned and repossessed assets
Prepaid expenses and other assets
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Borrowings
Deferred tax liability, net
Accrued interest payable
Accrued expenses and other liabilities
Advances from borrowers for taxes and insurance
Total liabilities
Commitments and Contingencies (Note 13)
Stockholders' Equity
Preferred stock, $0.01 par value, authorized 5,000,000 shares,
no shares issued or outstanding
Common stock, $0.01 par value, authorized 75,000,000 shares;
issued and outstanding 13,100,360 at June 30, 2015, and
none at June 30, 2014
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income, net of tax
Unearned employee stock ownership plan (ESOP) shares
Total stockholders' equity
June 30,
2015
2014
$
10,590
$
34,440
299,040
61,524
110
487,887
4,807
2,546
12,580
1,187
18,168
1,914
2,009
14,228
4,732
178,972
53,244
613
496,184
10,047
2,272
12,287
1,266
18,066
810
2,571
$
$
936,802
$
795,292
647,164
$
90,033
—
265
7,727
932
746,121
—
131
126,809
74,573
750
(11,582)
190,681
600,399
105,133
1,110
262
6,355
1,038
714,297
—
—
—
79,663
1,332
—
80,995
Total liabilities and stockholders' equity
$
936,802
$
795,292
See accompanying notes to the consolidated financial statements.
88
FIRST NORTHWEST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
INTEREST INCOME
Interest and fees on loans receivable
Interest on mortgage-backed and related securities
Interest on investment securities
Interest-bearing deposits and other
FHLB dividends
Total interest income
INTEREST EXPENSE
Deposits
Borrowings
Total interest expense
Net interest income
PROVISION FOR LOAN LOSSES
Net interest income after provision for loan losses
NONINTEREST INCOME
Loan and deposit service fees
Mortgage servicing fees, net
Net gain on sale of loans
Net gain on sale of investment securities
Increase in cash surrender value of bank-owned life insurance
Other income
Total noninterest income
NONINTEREST EXPENSE
Compensation and benefits
Real estate owned and repossessed assets, net
Data processing
Occupancy and equipment
Supplies, postage, and telephone
Regulatory assessments and state taxes
Advertising
Charitable contributions
Professional fees
FDIC insurance premium
Other
Total noninterest expense
Year Ended June 30,
2015
2014
2013
$
22,046
$
22,366
$
21,934
3,466
1,850
113
12
2,993
1,149
41
10
2,902
901
58
—
27,487
26,559
25,795
1,669
2,923
4,592
22,895
—
22,895
1,537
3,192
4,729
21,830
1,307
20,523
3,404
3,447
305
548
—
102
348
284
762
112
94
291
4,707
4,990
12,703
165
2,521
3,058
663
334
433
9,870
1,063
544
1,692
33,046
(5,444)
(354)
11,614
398
2,200
3,053
695
381
425
183
945
551
1,660
22,105
3,408
740
(5,090)
$
2,668
$
1,968
4,032
6,000
19,795
1,376
18,419
3,353
5
1,563
70
316
260
5,567
10,560
244
1,956
2,881
802
384
522
—
1,477
680
1,740
21,246
2,740
422
2,318
(0.42)
na (1)
na (1)
(LOSS) INCOME BEFORE (BENEFIT) PROVISION FOR
INCOME TAXES
(BENEFIT) PROVISION FOR INCOME TAXES
NET (LOSS) INCOME
Basic and diluted (loss) per share
(1) Not applicable as no shares were issued and outstanding during this period.
$
$
See accompanying notes to the consolidated financial statements.
89
FIRST NORTHWEST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(In thousands)
NET (LOSS) INCOME
$
(5,090) $
2,668
$
2,318
Year Ended June 30,
2015
2014
2013
Other comprehensive loss, net of tax
Unrealized (loss) gain on securities:
Unrealized holding (loss) gain, net of taxes of
$(295), $(114), and $(488), respectively
(582)
(222)
(949)
Reclassification adjustments for (gains) losses on sale
of securities, net of taxes of $0, $(38),
and $(24), respectively
Other comprehensive loss, net of tax
—
(582)
(74)
(296)
(46)
(995)
COMPREHENSIVE (LOSS) INCOME
$
(5,672) $
2,372
$
1,323
See accompanying notes to the consolidated financial statements.
90
FIRST NORTHWEST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands, except share data)
Common Stock
Shares
Amount
Additional
Paid-in
Capital
Retained
Earnings
Unearned
ESOP
Shares
Accumulated
Other
Comprehensive
(Loss) Income,
Net of Tax
Total
Stockholders'
Equity
BALANCE, June 30, 2012
— $
— $
— $ 74,677
$
— $
2,623
$
77,300
Net income
Other comprehensive loss, net
of tax
2,318
2,318
(995)
(995)
BALANCE, June 30, 2013
— $
— $
— $ 76,995
$
— $
1,628
$
78,623
Net income
Other comprehensive loss, net
of tax
2,668
2,668
(296)
(296)
BALANCE, June 30, 2014
— $
— $
— $ 79,663
$
— $
1,332
$
80,995
Net loss
Other comprehensive loss, net
of tax
Proceeds from stock offering,
net of expenses
Purchase of ESOP shares
Allocation of ESOP shares
(5,090)
(5,090)
13,100,360
131
126,810
(1)
(11,799)
217
(582)
(582)
126,941
(11,799)
216
BALANCE, June 30, 2015
13,100,360
$
131
$ 126,809
$ 74,573
$
(11,582) $
750
$
190,681
See accompanying notes to the consolidated financial statements.
91
FIRST NORTHWEST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income
$
(5,090)
$
2,668
$
2,318
Year Ended June 30,
2015
2014
2013
Adjustments to reconcile net (loss) income to net cash from operating
activities:
Depreciation
Amortization and accretion of premiums and discounts on investments, net
Amortization of deferred loan fees, net
Amortization of mortgage servicing rights
Additions to mortgage servicing rights
Recoveries on the valuation allowance on mortgage servicing rights, net
Provision for loan losses
Gain on sale of real estate owned and repossessed assets, net
Deferred federal income taxes
Allocation of ESOP shares
Gain on sale of loans
Gain on sale of securities available for sale
Write-down on real estate owned and repossessed assets
Increase in cash surrender value of life insurance
Origination of loans held for sale
Proceeds from loans held for sale
Change in assets and liabilities:
(Increase) decrease in accrued interest receivable
Decrease (increase) in prepaid expenses and other assets
Increase (decrease) in accrued interest payable
Increase (decrease) in accrued expenses and other liabilities
Net cash from operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available for sale
Proceeds from maturities, calls, and principal repayments of securities
available for sale
Proceeds from sales of securities available for sale
Purchase of securities held to maturity
Proceeds from maturities, calls, and principal repayments of securities
held to maturity
Proceeds from FHLB stock redemption
Proceeds from sale of real estate owned and repossessed assets
Loan originations, net of repayments, write-offs, and recoveries
Purchase of premises and equipment, net
Net cash from investing activities
973
1,307
80
276
(197)
—
—
(201)
(1,001)
216
(548)
—
212
(102)
(22,037)
23,088
(274)
750
3
1,372
(1,173)
1,129
1,782
(111)
323
(154)
(1)
1,307
(25)
(356)
—
(762)
(112)
306
(94)
(28,982)
29,531
57
(1,007)
(26)
(1,880)
3,593
1,225
2,942
(678)
720
(214)
(67)
1,376
(255)
(810)
—
(1,563)
(70)
349
(316)
(46,780)
48,361
210
3,249
(28)
739
10,708
(149,036)
(34,951)
(57,947)
27,147
—
(14,897)
6,251
5,240
1,470
5,633
(1,266)
(119,458)
37,071
26,492
(5,961)
7,382
386
2,312
(49,165)
(1,972)
(18,406)
50,868
6,811
(7,274)
14,344
386
3,470
(52,357)
(469)
(42,168)
See accompanying notes to the consolidated financial statements.
92
FIRST NORTHWEST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(In thousands)
Year Ended June 30,
2015
2014
2013
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits
Proceeds from FHLB advances
Repayment of FHLB advances
Net (decrease) increase in advances from borrowers for taxes and insurance
Purchase of ESOP shares
Proceeds from issuance of common stock, net of expenses
Net cash from financing activities
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, beginning of period
CASH AND CASH EQUIVALENTS, end of period
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest on deposits and other borrowings
Income taxes
NONCASH INVESTING ACTIVITIES
Unrealized loss on securities available for sale
Loans foreclosed upon with repossession transferred to
real estate owned and repossessed assets
Transfer of securities from available for sale to held to maturity
$
$
$
$
$
$
$
46,765
$
5,355
$
116,600
(111,500)
370
—
—
11,806
89,924
(89,924)
127
—
—
10,825
11,933
(3,988)
(19,527)
17,150
(32,250)
(106)
(11,799)
126,941
146,701
26,070
18,960
45,030
$
18,960
$
22,948
42,475
22,948
4,589
330
$
$
4,755
1,120
$
$
6,028
340
(877)
$
(508)
$
(1,507)
2,585
$
— $
1,138
5,570
$
$
2,965
—
See accompanying notes to the consolidated financial statements.
93
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies
Nature of operations - First Northwest Bancorp, a Washington corporation ("First Northwest"), was formed in connection with the
conversion of First Federal Savings and Loan Association of Port Angeles ("First Federal" or the "Bank") from the mutual to the stock
form of organization. First Northwest and the Bank are collectively referred to as the "Company." The conversion and the Company's
initial stock offering were completed January 29, 2015, through the sale and issuance of 12,167,000 shares of common stock of the
Company at a price of $10.00 per share in a subscription offering. An additional 933,360 shares of Company common stock and $400,000
in cash were contributed to the First Federal Community Foundation ("Foundation"), a charitable foundation that was established in
connection with the conversion, resulting in the issuance of a total of 13,100,360 shares. First Northwest's business activities generally
are limited to passive investment activities and oversight of its investment in First Federal. Accordingly, the information set forth in this
report, including the consolidated financial statements and related data, relates primarily to the Bank.
The Bank provides commercial and consumer banking services to individuals and businesses located primarily on the Olympic Peninsula
in the State of Washington. These services include deposit and lending transactions that are supplemented with borrowing and investing
activities.
Plan of conversion and change in corporate form - On January 29, 2015, in accordance with a Plan of Conversion (Plan) adopted by
its Board of Directors and as approved by its members, the Bank converted from a mutual savings bank to a stock savings bank and
became the wholly-owned subsidiary of First Northwest, a bank holding company registered with the Board of Governors of the Federal
Reserve System ("Federal Reserve").
Deferred conversion costs of $4.1 million were deducted from the proceeds of the shares sold in the offering during the third quarter of
fiscal year 2015. The net proceeds of the issuance of capital stock were $117.6 million. From the net proceeds, First Northwest made a
capital contribution of $58.4 million to the Bank and a $400,000 cash contribution to the Foundation. The Bank intends to use this
additional capital for future lending and investment activities and for general and other corporate purposes subject to regulatory limitations.
Pursuant to the Plan, the Bank’s Board of Directors adopted an ESOP which intends to purchase in the open market 8% of the common
stock for a total of 1,048,029 shares. As of June 30, 2015, 952,799 shares, or 90.9% of the total, had been purchased. First Northwest has
allocated 17,510 shares from the total shares purchased to participants.
At the time of conversion, the Bank established a liquidation account in an amount equal to its total net worth, approximately $79.7
million, as of June 30, 2014, the latest statement of financial condition appearing in First Northwest's prospectus. The liquidation account
will be maintained for the benefit of eligible depositors who continue to maintain their accounts at the Bank after the conversion. The
liquidation account will be reduced annually to the extent that eligible depositors have reduced their qualifying deposits. Subsequent
increases will not restore an eligible holder’s interest in the liquidation account. In the event of a complete liquidation, each eligible
depositor will be entitled to receive a distribution from the liquidation account in an amount proportionate to the current adjusted qualifying
balances for accounts then held. The liquidation account balance is not available for payment of dividends, and the Bank may not pay
dividends if those dividends would reduce equity capital below the required liquidation account amount.
Use of estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United
States of America requires management to make assumptions. These assumptions result in estimates that affect the reported amounts of
assets and liabilities, revenues and expenses, disclosure of contingent assets and liabilities at the date of the financial statements, and the
reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates. Material estimates
that are particularly susceptible to significant change in the near term relate to a determination of the allowance for loan losses, mortgage
servicing rights, fair value of financial instruments, deferred tax assets and liabilities, and the valuation of impaired loans and real estate
owned and repossessed assets. Earnings per share and share calculations prior to January 29, 2015 are not meaningful as the Company
completed its stock conversion and became a public company on January 29, 2015.
The conversion has been accounted for as a change in corporate form with the historic basis of the Bank's assets, liabilities, and equity
unchanged.
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FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation and Critical Accounting Policies (continued)
Principles of consolidation - The accompanying consolidated financial statements include the accounts of First Northwest Bancorp; its
wholly owned subsidiary, First Federal; and First Federal's wholly owned subsidiary, North Olympic Peninsula Services, Inc., and majority-
owned Craft3 Development IV, LLC. North Olympic Peninsula Services, Inc. owns a building currently rented in whole to First Federal.
Craft3 is a partnership investment which offers loans qualifying under the New Markets Tax Credit rules. All material intercompany
accounts and transactions have been eliminated in consolidation.
Subsequent Events - The Company has evaluated subsequent events for potential recognition and disclosure and determined there are
no such events or transactions requiring recognition or disclosure.
Cash and cash equivalents - Cash and cash equivalents consist of currency on hand, due from banks, and interest-bearing deposits with
financial institutions with an original maturity of three months or less. The amounts on deposit fluctuate and, at times, exceed the insured
limit by the FDIC, which potentially subjects First Federal to credit risk. First Federal has not experienced any losses due to balances
exceeding FDIC insurance limits.
Restricted assets - Federal Reserve Board regulations require maintenance of certain minimum reserve balances on deposit with the
Federal Reserve Bank of San Francisco. The amount required to be on deposit was approximately $7.4 million and $4.2 million at June 30,
2015 and 2014, respectively. First Federal was in compliance with its reserve requirements at June 30, 2015 and 2014.
Investment securities - Investment securities are classified into one of three categories: (1) held-to-maturity, (2) available-for-sale, or
(3) trading. First Federal had no trading securities at June 30, 2015 or 2014. Investment securities are categorized as held-to-maturity
when First Federal has the positive intent and ability to hold those securities to maturity.
Securities that are held-to-maturity are stated at cost and adjusted for amortization of premiums and accretion of discounts, which are
recognized as adjustments to interest income.
Investment securities categorized as available for sale are generally held for investment purposes (to maturity), although unanticipated
future events may result in the sale of some securities. Available-for-sale securities are recorded at fair value, with the unrealized holding
gain or loss reported in other comprehensive income (OCI), net of tax, as a separate component of stockholders' equity. Realized gains
or losses are determined using the amortized cost basis of securities sold using the specific identification method and are included in
earnings. Dividend and interest income on investments are recognized when earned. Premiums and discounts are recognized in interest
income using the level yield method over the period to maturity.
The Company reviews investment securities for other-than-temporary impairment (OTTI) on a quarterly basis. For debt securities, the
Company considers whether management intends to sell a security or if it is likely that the Company will be required to sell the security
before recovery of the amortized cost basis of the investment, which may be maturity. For debt securities, if management intends to sell
the security or it is likely that the Company will be required to sell the security before recovering its cost basis, the entire impairment
loss would be recognized as OTTI and charged against earnings. If management does not intend to sell the security and it is not likely
that the Company 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, i.e. the difference between the present value of the cash flows
expected to be collected and fair value, is recognized as a charge to OCI. Impairment losses related to all other factors are presented as
separate categories within OCI. If there is an indication of additional credit losses, the security is re-evaluated according to the procedures
described above.
95
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies (continued)
Federal Home Loan Bank stock - First Federal’s investment in Federal Home Loan Bank of Des Moines (FHLB) stock is carried at
cost, which approximates fair value. As a member of the FHLB system, First Federal is required to maintain a minimum investment in
FHLB stock based on specific percentages of its outstanding mortgages, total assets, or FHLB advances. At June 30, 2015 and 2014,
First Federal’s minimum investment requirement was approximately $4.8 million and $4.9 million, respectively. First Federal was in
compliance with the FHLB minimum investment requirement at June 30, 2015 and 2014. First Federal may request redemption at par
value of any stock in excess of the amount First Federal is required to hold. Stock redemptions are granted at the discretion of the FHLB.
Management evaluates FHLB stock for impairment based on its assessment of the ultimate recoverability of cost rather than by recognizing
temporary declines in value. The determination of whether a decline affects the ultimate recoverability of cost is influenced by criteria
such as (1) the significance of any decline in net assets of the FHLB compared with the capital stock amount for the FHLB and the length
of time this situation has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such
payments in relation to the operating performance of the FHLB, (3) the impact of legislative and regulatory changes on institutions and,
accordingly, the customer base of the FHLB, and (4) the liquidity position of the FHLB. Based on its evaluation, First Federal did not
recognize an OTTI loss on its FHLB stock at June 30, 2015 and 2014.
Loans held for sale - Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost
or fair value. Fair value is determined based upon market prices from third-party purchasers and brokers. Net unrealized losses, if any,
are recognized through a valuation allowance by charges to earnings. Gains or losses on the sale of loans are recognized at the time of
sale and determined by the difference between net sale proceeds and the net book value of the loan less the estimated fair value of any
retained mortgage servicing rights.
Loans receivable - Loans are stated at the amount of unpaid principal, net of charge-offs, unearned income, allowance for loan loss
(ALLL) and any deferred fees or costs. Interest on loans is calculated using the simple interest method based on the month end balance
of the principal amount outstanding and is credited to income as earned. The estimated life is adjusted for prepayments.
Each loan segment and class inherently contains differing credit risk profiles depending on the unique aspects of that segment or class
of loans. For example, borrowers tend to consider their primary residence and access to transportation for employment-related purposes
as basic requirements; accordingly, many consumers prioritize making payments on real estate first-mortgage loans and vehicle loans.
Conversely, second-mortgage real estate loans or unsecured loans may not be supported by sufficient collateral; thus, in the event of
financial hardship, borrowers may tend to place less importance on maintaining these loans as current and the Bank may not have adequate
collateral to provide a secondary source of repayment in the event of default. Notwithstanding the various risk profiles unique to each
class of loan, management believes that the credit risk for all loans is similarly dependent on essentially the same factors, including the
financial strength of the borrower, the cash flow available to service maturing debt obligations, the condition and value of underlying
collateral, the financial strength of any guarantors, and other factors.
Loans are classified as impaired when, based on current information and events, it is probable that First Federal will be unable to collect
the scheduled payments of principal and interest when due, in accordance with the terms of the original loan agreement. The carrying
value of impaired loans is based on the present value of expected future cash flows discounted at each loan’s effective interest rate or,
for collateral dependent loans, at fair value of the collateral, less selling costs. If the measurement of each impaired loan’s value is less
than the recorded investment in the loan, First Federal recognizes this impairment and adjusts the carrying value of the loan to fair value
through the allowance for loan losses. This can be accomplished by charging off the impaired portion of the loan or establishing a specific
component to be provided for in the allowance for loan losses.
The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent, unless the credit is
well secured and in process of collection. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of
principal or interest is considered doubtful.
96
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies (continued)
All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest
on these loans is accounted for on the cash basis or cost recovery method until qualifying for return to accrual. Loans are returned to
accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably
assured. For those loans placed on non-accrual status due to payment delinquency, return to accrual status will generally not occur until
the borrower demonstrates repayment ability over a period of not less than six months.
Loan fees - Loan origination fees and certain direct origination costs are deferred and amortized as an adjustment to the yield of the loan
over the contractual life using the effective interest method. In the event a loan is sold, the remaining deferred loan origination fees and/
or costs are recognized as a component of gains or losses on the sale of loans.
Allowance for loan losses - First Federal maintains a general allowance for loan losses based on evaluating known and inherent risks in
the loan portfolio, including management’s continuing analysis of the factors underlying the quality of the loan portfolio. These factors
include changes in the size and composition of the loan portfolio, actual loan loss experience, and current and anticipated economic
conditions. The reserve is an estimate based upon factors and trends identified by management at the time the financial statements are
prepared.
The ultimate recovery of loans is susceptible to future market factors beyond First Federal’s control, which may result in losses or
recoveries differing significantly from those provided in the consolidated financial statements. In addition, various regulatory agencies,
as an integral part of their examination processes, periodically review First Federal’s allowance for loan losses. Such agencies may require
First Federal to recognize additional provisions for loan losses based on their judgment using information available to them at the time
of their examination.
Allowances for losses on specific problem loans are charged to income when it is determined that the value of these loans and properties,
in the judgment of management, is impaired. First Federal accounts for impaired loans in accordance with Accounting Standards
Codification (ASC) 310-10-35, Receivables—Overall—Subsequent Measurement. A loan is considered impaired when, based on current
information and events, it is probable that First Federal will be unable to collect all amounts due according to the contractual terms of
the loan agreement.
When a loan has been identified as being impaired, the amount of the impairment is measured by using discounted cash flows, except
when it is determined that the sole source of repayment for the loan is the operation or liquidation of the underlying collateral. In such
cases, impairment is measured at current fair value generally based on a current appraisal of the collateral, reduced by estimated selling
costs. When the measurement of the impaired loan is less than the recorded investment in the loan (including collected interest that has
been applied to principal, net deferred loan fees or costs, and unamortized premiums or discounts), loan impairment is recognized by
establishing or adjusting an allocation of the allowance for loan losses. Uncollected accrued interest is reversed against interest income.
If ultimate collection of principal is in doubt, all cash receipts on impaired loans are applied to reduce the principal balance. The impairment
amount for small balance homogeneous loans is calculated using the adjusted historical loss rate for the class and risk category related
to each loan, unless the loan is subject to a troubled debt restructuring ("TDR").
A TDR is a loan for which First Federal, for reasons related to the borrower’s financial difficulties, grants a concession to the borrower
that First Federal would not otherwise consider. The loan terms that have been modified or restructured due to the borrower’s financial
difficulty include, but are not limited to, a reduction in the stated interest rate; an extension of the maturity; an interest rate below market;
a reduction in the face amount of the debt; a reduction in the accrued interest; or extension, deferral, renewal, or rewrite of the original
loan terms.
The restructured loans may be classified “special mention” or “substandard” depending on the severity of the modification. Loans that
were paid current at the time of modification may be upgraded in their classification after a sustained period of repayment performance,
usually six months or longer, and there is reasonable assurance that repayment will continue. Loans that are past due at the time of
modification are classified “substandard” and placed on nonaccrual status.
97
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies (continued)
TDR loans may be upgraded in their classification and placed on accrual status once there is a sustained period of repayment performance,
usually six months or longer, and there is a reasonable assurance that repayment will continue. First Federal allows reclassification of a
troubled debt restructuring back into the general loan pool (as a non-troubled debt restructuring) if the borrower is able to refinance the
loan at then-current market rates and meet all of the underwriting criteria of First Federal required of other borrowers. The refinance must
be based on the borrower’s ability to repay the debt and no special concessions of rate and/or term are granted to the borrower.
Reserve for unfunded commitments - Management maintains a reserve for unfunded commitments to absorb probable losses associated
with 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 "Accrued expenses and other liabilities" on the consolidated balance sheets.
Real estate owned and repossessed assets - Real estate owned and repossessed assets include real estate and personal property acquired
through foreclosure or repossession, and may include in-substance foreclosed properties. In-substance foreclosed properties are those
properties for which the Bank has taken physical possession, regardless of whether formal foreclosure proceedings have taken place.
At the time of foreclosure, foreclosed real estate is recorded at the fair value less estimated costs to sell, which becomes the property’s
new cost basis. Any write-downs based on the asset’s fair value at date of acquisition are charged to the allowance for loan losses. After
foreclosure, valuations are periodically performed by management and property held for sale is carried at the lower of the new cost basis
or fair value less estimated costs to sell. Impairment losses on property to be held and used are measured as the amount by which the
carrying amount of a property exceeds its fair value. Subsequent gains, losses, and expenses recognized on the sale of these properties
are included in noninterest expense. The amounts ultimately recovered on foreclosed assets may differ substantially from the carrying
value of the assets due to future market factors beyond management's control.
Mortgage servicing rights - Originated servicing rights are recorded when mortgage loans are originated and subsequently sold with
the servicing rights retained. Servicing assets are initially recognized at fair value on the consolidated balance sheets and amortized into
non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial asset.
To determine the fair value of servicing rights, management uses a valuation model that calculates the present value of future cash flows.
Assumptions used in the valuation model include market discount rates and anticipated prepayment speeds. In addition, estimates of the
cost of servicing per loan, an inflation rate, ancillary income per loan, and default rates are used. The initial fair value relating to the
servicing rights is capitalized and amortized into noninterest income in proportion to, and over the period of, estimated future net servicing
income.
Management assesses impairment of the mortgage servicing rights based on recalculations of the present value of remaining future cash
flows using updated market discount rates and prepayment speeds. Subsequent loan prepayments and changes in prepayment assumptions
in excess of those forecasted can adversely impact the carrying value of the servicing rights. Impairment is assessed on a stratified basis
with any impairment recognized through a valuation allowance for each impaired stratum. The servicing rights are stratified based on
the predominant risk characteristics of the underlying loans: fixed-rate loans and adjustable-rate loans. The effect of changes in market
interest rates on estimated rates of loan prepayments is the predominant risk characteristic for mortgage servicing rights. The valuation
model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service,
the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds, and default rates and losses.
Mortgage servicing income represents fees earned for servicing loans. Fees for servicing mortgage loans are generally based upon a
percentage of the principal balance of the loans serviced, as well as related ancillary income such as late charges. Servicing income is
recognized as earned, unless collection is doubtful. The caption in the consolidated statement of operations “Mortgage servicing fees,
net” includes mortgage servicing income, amortization of mortgage servicing rights, the effects of mortgage servicing run-off, and
impairment.
98
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies (continued)
Income taxes - First Federal accounts for income taxes in accordance with the provisions of ASC 740-10, Income Taxes, which requires
the use of the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for their future
tax consequences, attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be recovered or settled.
Premises and equipment - Premises and equipment are stated at cost less accumulated depreciation. Depreciation is recognized and
computed on the straight-line method over the estimated useful lives as follows:
Buildings
Furniture, fixtures, and equipment
Software
Automobiles
37.5 - 50 years
3 - 10 years
3 years
5 years
Transfers of financial assets - Transfers of an entire financial asset, a group of financial assets, or a participating interest in an entire
financial asset are accounted for as sales when control over the assets has been relinquished. Control over transferred assets is deemed
to be surrendered when: (1) the assets have been isolated from First Federal, (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) First Federal does not maintain
effective control over the transferred assets through an agreement to repurchase them before their maturity. The mortgage loans that are
sold with recourse provisions are accounted for as sales until such time as the loan defaults.
Periodically, First Federal sells mortgage loans with “life of the loan” recourse provisions, requiring First Federal to repurchase the loan
at any time if it defaults. The remaining balance of such loans at June 30, 2015 and 2014, was approximately $7.4 million and $8.6
million, respectively. Of these loans, two loans were repurchased for a total of $335,000 during the year ended June 30, 2015. One loan
was also repurchased in the amount of $239,000 during the year ended June 30, 2014. There is an associated allowance of $94,000 and
$116,000 at June 30, 2015 and 2014, respectively, included in “accrued expenses and other liabilities” on the consolidated balance sheets
related to these loans.
Bank-owned life insurance - The carrying amount of life insurance approximates fair value. Fair value of life insurance is estimated
using the cash surrender value, less applicable surrender charges. The change in cash surrender value is included in noninterest income.
Off-balance-sheet credit-related financial instruments - In the ordinary course of business, First Federal has entered into commitments
to extend credit, including commitments under lines of credit, commercial letters of credit, and standby letters of credit. Such financial
instruments are recorded when they are funded.
Advertising costs - First Federal expenses advertising costs as they are incurred.
Comprehensive (loss) income - Accounting principles generally require that recognized revenue, expenses, and gains and losses be
included in net (loss) income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale
securities, are reported as a separate component of the equity section of the consolidated balance sheets, such items, along with net (loss)
income, are components of comprehensive (loss) income.
Fair value measurements - Fair values of financial instruments are estimated using relevant market information and other assumptions
(Note 14). 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 these estimates.
99
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies (continued)
Segment information - First Federal is engaged in the business of attracting deposits and providing lending services. Substantially all
income is derived from a diverse base of commercial, mortgage, and consumer lending activities and investments. The Company’s
activities are considered to be a single industry segment for financial reporting purposes.
Employee Stock Ownership Plan - The cost of shares issued to the 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 participants'
accounts. Dividends on allocated ESOP shares reduce retained earnings while dividends on unearned ESOP shares reduce debt and
accrued interest.
Earnings (loss) per Share - Basic earnings (loss) per share ("EPS") is computed by dividing net income or (loss), reduced by earnings
allocated to participating shares of restricted stock, by the weighted-average number of common shares outstanding during the period.
As ESOP shares are committed to be released they become outstanding for EPS calculation purposes. ESOP shares not committed to be
released are not considered outstanding for basic or diluted EPS calculations. The basic EPS calculation excludes the dilutive effect of
all common stock equivalents. Diluted earnings per share reflects the weighted-average potential dilution that could occur if all potentially
dilutive securities or other commitments to issue common stock were exercised or converted into common stock using the treasury stock
method.
According to the provisions of ASC 260, Earnings per Share, nonvested share-based payment awards that contain nonforfeitable rights
to dividends or dividend equivalents are participating securities and are included in the computation of EPS pursuant to the two-class
method. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock and
participating security according to dividends declared or accumulated and participation rights in undistributed earnings. At this time the
Company has no share-based payment awards.
Recently issued accounting pronouncements - In January 2015, the Financial Accounting Standards Board (FASB) issued Accounting
Standards Update (ASU) No. 2015-01, Income Statement--Extraordinary and Unusual Items (Subtopic 225-20). The ASU eliminates the
need to separately classify, present, and disclose extraordinary events. The disclosure of events or transactions that are unusual or infrequent
in nature will be included in other guidance. The amendments in this ASU are effective for annual periods, and interim periods within
those annual periods, beginning after December 15, 2015. The adoption of ASU No. 2015-1 is not expected to have a material impact on
the Company's consolidated financial statements.
In February 2015, FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, which is
intended to improve targeted areas of consolidation guidance for legal entities such as limited partnerships, limited liability corporations,
and securitization structures (collateralized debt obligations, collateralized loan obligations, and mortgage-backed security transactions).
The ASU focuses on the consolidation evaluation for reporting organizations (public and private companies and not-for-profit
organizations) that are required to evaluate whether they should consolidate certain legal entities. In addition to reducing the number of
consolidation models from four to two, the new standard simplifies the FASB Accounting Standards Codification™ and improves current
GAAP by placing more emphasis on risk of loss when determining a controlling financial interest. A reporting organization may no longer
have to consolidate a legal entity in certain circumstances based solely on its fee arrangement, when certain criteria are met, reducing
the frequency of the application of related-party guidance when determining a controlling financial interest in a variable interest entity
(VIE), changing consolidation conclusions for public and private companies in several industries that typically make use of limited
partnerships or VIEs. The ASU will be effective for periods beginning after December 15, 2015, for public companies. Early adoption
is permitted, including adoption in an interim period. The adoption of ASU 2015-02 is not expected to have a material impact on the
Company’s consolidated financial statements.
In April 2015, FASB issued ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt
Issuance Cost, which requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct
deduction from the debt liability rather than as an asset. For public business entities, the guidance in the ASU is effective for fiscal years
and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is allowed for all entities for financial
100
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies (continued)
statements that have not been previously issued. Entities would apply the new guidance retrospectively to all prior periods. The adoption
of ASU 2015-03 is not expected to have a material impact on the Company's consolidated financial statements.
In April 2015, FASB issued ASU No. 2015-05, Customer's Accounting for Fees Paid in a Cloud Computing Arrangement. The amendments
in this ASU provide guidance to customers in cloud computing arrangements about whether a cloud computing arrangement includes a
software license. If a cloud computing arrangement includes a software license, the customer should account for the software license
element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include
a software license, the customer should account for the arrangement as a service contract. The amendments are effective for annual
periods, including interim periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted. This
ASU is not expected to have a material effect on the Company's consolidated financial statements.
In June 2015, FASB issued ASU No. 2015-10, Technical Corrections and Improvements. On November 10, 2010 FASB added a standing
project that will facilitate the FASB Accounting Standards Codification (‘Codification”) updates for technical corrections, clarifications,
and improvements. These amendments are referred to as Technical Corrections and Improvements. Maintenance updates include non-
substantive corrections to the Codification, such as editorial corrections, various link-related changes, and changes to source fragment
information. This update contains amendments that will affect a wide variety of Topics in the Codification. The amendments in this ASU
will apply to all reporting entities within the scope of the affected accounting guidance and generally fall into one of four categories:
amendments related to differences between original guidance and the Codification, guidance clarification and reference corrections,
simplification, and minor improvements. In summary, the amendments in this ASU represent changes to clarify the Codification, correct
unintended application of guidance, or make minor improvements to the Codification that are not expected to have a significant effect
on current accounting practice. Transition guidance varies based on the amendments in this ASU. The amendments in this ASU that
require transition guidance are effective for fiscal years and interim reporting periods after December 15, 2015. Early adoption is permitted
including adoption in an interim period. All other amendments are effective upon the issuance of this ASU. ASU 2015-10 did not have
a material impact on the Company's consolidated financial statements.
In August 2015, FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606), which defers the effective date
of ASU No. 2014-09 one year. ASU No. 2014-09 created Topic 606 and supersedes Topic 605, Revenue Recognition. The core principle
of Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that
reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In general, the new guidance
requires companies to use more judgment and make more estimates than under current guidance, including identifying performance
obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction
price to each separate performance obligation. ASU No. 2015-14 is effective for public entities for interim and annual periods beginning
after December 15, 2017; early adoption is permitted for interim and annual periods beginning after December 15, 2016. For financial
reporting purposes, the standard allows for either full retrospective adoption, meaning the standard is applied to all of the periods presented,
or modified retrospective adoption, meaning the standard is applied only to the most current period presented in the financial statements
with the cumulative effect of initially applying the standard recognized at the date of initial application. The Company is currently
evaluating the impact of this ASU.
In August 2015, FASB issued ASU No. 2015-15, Interest - Imputation of Interest (Subtopic 835-30). This ASU added SEC requirements
for the presentation and subsequent measurement of debt issuance costs associated with line-of-credit arrangements. This is an update
to ASU No. 2015-03 issued in April 2015, which is mentioned above. For public business entities, the guidance in the ASU is effective
for fiscal years and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is allowed for all entities
for financial statements that have not been previously issued. Entities would apply the new guidance retrospectively to all prior periods.
The adoption of ASU 2015-15 is not expected to have a material impact on the Company's consolidated financial statements.
Reclassifications - Certain reclassifications have been made to the 2014 and 2013 consolidated financial statements to conform to the
2015 presentation with no effect on net income or equity.
101
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Securities
The amortized cost, gross unrealized gains and losses, and estimated fair value of securities classified as available-for-sale and held-to-
maturity at June 30, 2015, are summarized as follows:
June 30, 2015
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
(In thousands)
Available for Sale
Investment Securities
Municipal bonds
$
17,387
$
122
$
U.S. Treasury and government agency issued bonds (Agency bonds)
U.S. government agency issued asset-backed securities (ABS agency)
Corporate issued asset-backed securities (ABS corporate)
U.S. Small Business Administration securities (SBA)
23,948
9,647
29,634
33,955
10
—
—
519
(235) $
(184)
(446)
—
(146)
17,274
23,774
9,201
29,634
34,328
Total
Mortgage-Backed Securities
U.S. government agency issued mortgage-backed securities
(MBS agency)
Corporate issued mortgage-backed securities (MBS corporate)
Total
Total securities available for sale
Held to Maturity
Investment Securities
Municipal bonds
SBA
Total
Mortgage-Backed Securities
MBS agency
Total securities held to maturity
$
114,571
$
651
$
(1,011) $
114,211
$
$
$
$
$
$
$
175,239
$
2,241
$
8,147
183,386
297,957
$
$
—
2,241
2,892
$
$
(603) $
(195)
176,877
7,952
(798) $
184,829
(1,809) $
299,040
15,149
$
424
$
875
3
(20) $
(1)
15,553
877
16,024
$
427
$
(21) $
16,430
45,500
61,524
$
$
889
1,316
$
$
(309) $
46,080
(330) $
62,510
102
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Securities (continued)
The amortized cost, gross unrealized gains and losses, and estimated fair value of securities classified as available-for-sale and held-to-
maturity at June 30, 2014, are summarized as follows:
Available for Sale
Investment Securities
Municipal bonds
ABS agency
SBA
Total
Mortgage-Backed Securities
MBS agency
Total securities available for sale
Held to Maturity
Investment Securities
Municipal bonds
SBA
Total
Mortgage-Backed Securities
MBS agency
Total securities held to maturity
June 30, 2014
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
Cost
(In thousands)
7,418
$
139
$
10,585
28,355
—
600
(32) $
(445)
(11)
7,525
10,140
28,944
46,358
$
739
$
(488) $
46,609
130,654
177,012
$
$
2,078
2,817
$
$
(369) $
132,363
(857) $
178,972
15,826
$
199
$
1,080
4
(18) $
(1)
16,007
1,083
16,906
$
203
$
(19) $
17,090
36,338
53,244
$
$
692
895
$
$
(138) $
36,892
(157) $
53,982
$
$
$
$
$
$
$
$
103
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Securities (continued)
The following table shows the unrealized gross losses and fair value of the investment portfolio by length of time that individual securities
in each category have been in a continuous loss position as of June 30, 2015:
Less Than Twelve Months
Twelve Months or Longer
Total
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
(In thousands)
Available for Sale
Investment Securities
Municipal bonds
Agency bonds
ABS agency
SBA
Total
Mortgage-Backed Securities
MBS agency
MBS corporate
Total
Held to Maturity
Investment Securities
Municipal bonds
SBA
Total
Mortgage-Backed Securities
MBS agency
$
$
$
$
$
$
$
(204) $
9,809
$
(184)
—
(140)
20,792
—
11,823
(31) $
—
(446)
(6)
3,801
$
—
9,201
4,122
(235) $
(184)
(446)
(146)
13,610
20,792
9,201
15,945
(528) $
42,424
$
(483) $
17,124
$
(1,011) $
59,548
(459) $
63,631
$
(195)
4,164
(144) $
—
11,091
$
—
(603) $
(195)
74,722
4,164
(654) $
67,795
$
(144) $
11,091
$
(798) $
78,886
— $
—
— $
— $
—
— $
(20) $
(1)
1,298
$
244
(21) $
1,542
$
(20) $
(1)
(21) $
1,298
244
1,542
(272) $
14,628
$
(37) $
3,059
$
(309) $
17,687
104
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Securities (continued)
The following table shows the unrealized gross losses and fair value of the investment portfolio by length of time that individual securities
in each category have been in a continuous loss position as of June 30, 2014:
Less Than Twelve Months
Twelve Months or Longer
Total
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
(In thousands)
Available for Sale
Investment Securities
Municipal bonds
ABS agency
SBA
Total
Mortgage-Backed Securities
MBS agency
Held to Maturity
Investment Securities
Municipal bonds
SBA
Total
Mortgage-Backed Securities
MBS agency
$
$
$
$
$
$
— $
— $
(288)
—
6,088
—
(288) $
6,088
$
(32) $
(157)
(11)
(200) $
3,827
$
4,053
5,068
12,948
$
(32) $
(445)
(11)
(488) $
3,827
10,141
5,068
19,036
(24) $
14,233
$
(345) $
24,379
$
(369) $
38,612
— $
—
— $
— $
—
— $
(18) $
(1)
(19) $
1,311
260
1,571
$
$
(18) $
(1)
(19) $
1,311
260
1,571
(13) $
5,728
$
(125) $
7,921
$
(138) $
13,649
The Company may hold certain investment securities in an unrealized loss position that are not considered OTTI. At June 30, 2015, there
were 54 investment securities with $2.1 million of unrealized losses and a fair value of approximately $157.7 million. At June 30, 2014,
there were 23 investment securities with $1.0 million of unrealized losses and a fair value of approximately $72.9 million.
The unrealized losses on investments in debt securities relate principally to the general change in interest rates and illiquidity, and not
credit quality, that has occurred since the securities’ purchase dates, and such unrecognized losses or gains will continue to vary with
general interest rate level fluctuations in the future. As management does not intend to sell the securities, and it is not likely they will be
required to sell the securities before their anticipated recovery, no declines are deemed to be other than temporary.
The unrealized losses on investment and mortgage-backed securities were caused by interest rate changes. Certain investments in a loss
position are guaranteed by government entities or government sponsored entities. It is expected that securities in a loss position would
not be settled at a price less than the amortized cost of the investment. Because the decline in fair value is attributable to changes in
interest rates and not credit quality, and the Company does not intend to sell the securities and believes it is not likely it will be required
to sell these investments until a market price recovery or maturity, these investments are not considered other than temporarily impaired.
There were no OTTI losses during the years ended June 30, 2015 or 2014.
105
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Securities (continued)
The amortized cost and estimated fair value of investment and mortgage-backed securities by contractual maturity are shown in the
following tables at the dates indicated. Actual maturities may differ from contractual maturities for investments where borrowers may
have the right to call or prepay obligations with or without call or prepayment penalties.
Investment Securities
Due within one year
Due after one through five years
Due after five through ten years
Due after ten years
Mortgage-Backed Securities
Due within one year
Due after one through five years
Due after five through ten years
Due after ten years
Investment Securities
Due within one year
Due after one through five years
Due after five through ten years
Due after ten years
Mortgage-Backed Securities
Due within one year
Due after one through five years
Due after five through ten years
Due after ten years
June 30, 2015
Available-for-Sale
Held-to-Maturity
Amortized
Cost
Estimated
Fair Value
Amortized
Cost
Estimated
Fair Value
(In thousands)
7,982
$
7,982
$
10,966
28,836
66,787
10,945
28,820
66,464
$
260
165
9,921
5,678
114,571
$
114,211
$
16,024
$
— $
— $
—
5,912
177,474
—
5,988
178,841
$
32
1
6,207
39,260
183,386
$
184,829
$
45,500
$
261
166
10,126
5,877
16,430
34
1
6,303
39,742
46,080
June 30, 2014
Available-for-Sale
Held-to-Maturity
Amortized
Cost
Estimated
Fair Value
Amortized
Cost
Estimated
Fair Value
(In thousands)
— $
—
2,048
44,310
— $
—
2,119
44,490
$
250
562
3,084
13,010
46,358
$
46,609
$
16,906
$
— $
— $
— $
—
5,030
125,624
—
5,048
127,315
161
8,667
27,510
130,654
$
132,363
$
36,338
$
251
577
3,138
13,124
17,090
—
171
8,816
27,905
36,892
$
$
$
$
$
$
$
$
106
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Securities (continued)
During the year ended June 30, 2014, First Federal reclassified a $5.6 million security from the available-for-sale to the held-to-maturity
category. At the time of the transfer, the transferred security had an aggregate unrealized gain of $59,000, which is to be amortized from
accumulated other comprehensive income over the remaining life of the underlying security as an adjustment to yield.
Sales of available-for-sale securities were as follows:
2015
Year Ended June 30,
2014
(In thousands)
2013
$
— $
26,492
$
—
—
192
(80)
6,811
70
—
Proceeds
Gross gains
Gross losses
Note 3 - Loans Receivable
Loans receivable consist of the following at the dates indicated:
One- to four-family
Commercial
Consumer
Construction and land
Less:
Net deferred loan fees
(Premium) on purchased loans, net
Allowance for loan losses
$
June 30,
2015
2014
(In thousands)
$
256,696
173,473
44,585
19,127
493,881
840
(1,957)
7,111
5,994
241,910
190,660
50,761
20,497
503,828
862
(1,290)
8,072
7,644
Total loans receivable, net
$
487,887
$
496,184
107
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Loans Receivable (continued)
Loans, by the earlier of next repricing date or maturity, at the dates indicated:
Adjustable-rate loans
Due within one year
After one but within five years
After five but within ten years
After ten years
Fixed-rate loans
Due within one year
After one but within five years
After five but within ten years
After ten years
June 30,
2015
2014
(In thousands)
$
64,577
$
119,709
46,678
—
230,964
6,102
23,974
42,458
190,383
262,917
$
493,881
$
84,008
124,065
34,020
—
242,093
11,298
19,619
47,709
183,109
261,735
503,828
The adjustable-rate loans have interest rate adjustment limitations and are generally indexed to multiple indices. Future market factors
may affect the correlation of adjustable loan interest rates with the rates First Federal pays on the short-term deposits that have been
primarily used to fund such loans.
108
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Loans Receivable (continued)
The following tables summarize changes in the ALLL and the loan portfolio by segment and impairment method for the periods shown:
ALLL:
Beginning balance
Provision for loan losses
Charge-offs
Recoveries
Ending balance
Allowance by portfolio segment:
Total ALLL
General reserve
Specific reserve
Loan balance:
Total loans
General reserves (1)
Specific reserves (2)
At or For the Year Ended June 30, 2015
One- to
Four-Family Commercial
Consumer
Construction
and Land
Unallocated
Total
$
3,408
$
81
(430)
84
2,354
(680)
(177)
3
(In thousands)
$
1,678
$
104
(503)
94
$
397
(29)
(49)
17
$
235
524
—
—
8,072
—
(1,159)
198
$
$
$
3,143
$
1,500
$
1,373
$
336
$
759
$
7,111
3,143
$
1,500
$
1,373
$
2,982
161
1,381
119
1,242
131
336
318
18
$
256,696
249,290
7,406
$
173,473
171,077
2,396
$
44,585
43,786
799
19,127
18,968
159
$
$
$
759
759
—
7,111
6,682
429
— $
—
—
493,881
483,121
10,760
(1) Loans collectively evaluated for impairment included in general reserves.
(2) Loans individually evaluated for impairment included in specific reserves.
109
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Loans Receivable (continued)
The following tables summarize changes in the ALLL and loan portfolio by segment and impairment method for the periods shown:
ALLL:
Beginning balance
Provision for loan losses
Charge-offs
Recoveries
Ending balance
Allowance by portfolio segment:
Total ALLL
General reserve
Specific reserve
Loans:
Total loans
General reserves (1)
Specific reserves (2)
At or For the Year Ended June 30, 2014
One- to
Four-Family Commercial
Consumer
Construction
and Land
Unallocated
Total
(In thousands)
$
3,667
$
1,774
$
2,015
$
297
$
221
$
311
(662)
92
699
(135)
16
150
(615)
128
133
(35)
2
14
—
—
7,974
1,307
(1,447)
238
$
$
3,408
$
2,354
$
1,678
$
397
$
235
$
8,072
3,408
$
2,354
$
1,678
$
3,238
170
2,077
277
1,558
120
$
397
381
16
$
235
235
—
8,072
7,489
583
$
241,910
$
190,660
$
50,761
$
20,497
$
— $
503,828
234,300
7,610
184,895
5,765
49,843
918
20,057
440
—
—
489,095
14,733
(1) Loans collectively evaluated for impairment included in general reserves.
(2) Loans individually evaluated for impairment included in specific reserves.
ALLL:
Beginning balance
Provision for loan losses
Charge-offs
Recoveries
At or For the Year Ended June 30, 2013
One- to
Four-Family Commercial
Consumer
Construction
and Land
Unallocated
Total
$
$
3,464
571
(548)
180
$
1,528
(50)
—
296
$
(In thousands)
2,168
345
(632)
134
$
230
289
(222)
—
— $
221
—
—
7,390
1,376
(1,402)
610
Ending balance
$
3,667
$
1,774
$
2,015
$
297
$
221
$
7,974
110
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Loans Receivable (continued)
A loan is considered impaired when First Federal has determined that it may be unable to collect payments of principal or interest when
due under the contractual terms of the loan. In the process of identifying loans as impaired, management takes into consideration factors
that include payment history and status, collateral value, financial condition of the borrower, and the probability of collecting scheduled
payments in the future. Minor payment delays and insignificant payment shortfalls typically do not result in a loan being classified as
impaired. The significance of payment delays and shortfalls is considered by management on a case-by-case basis after taking into
consideration the totality of circumstances surrounding the loans and the borrowers, including payment history and amounts of any
payment shortfall, length and reason for delay, and likelihood of return to stable performance. Impairment is measured on a loan-by-loan
basis for all loans in the portfolio except smaller balance homogeneous loans and certain qualifying TDR loans.
The following table presents a summary of loans individually evaluated for impairment by portfolio segment at the dates indicated:
June 30,
2015
2014
Recorded
Investments
(Loan Balance
Less Charge-off)
Unpaid
Principal
Balance
Related
Allowance
Recorded
Investments
(Loan Balance
Less Charge-off)
Unpaid
Principal
Balance
Related
Allowance
(In thousands)
With no allowance recorded
One- to four-family
$
3,502
$
4,162
$
— $
4,103
$
4,720
$
Commercial
Consumer
Construction and land
858
209
17
1,099
332
48
Loans with no allowance recorded
4,586
5,641
With an allowance recorded
One- to four-family
Commercial
Consumer
Construction and land
Loans with an allowance recorded
Total
One- to four-family
Commercial
Consumer
Construction and land
3,904
1,538
590
142
6,174
4,157
1,537
622
166
6,482
7,406
2,396
799
159
10,760
8,319
2,636
954
214
$ 12,123
$
$
—
—
—
—
161
119
131
18
429
161
119
131
18
429
977
383
313
1,032
579
358
5,776
6,689
3,507
4,788
535
127
8,957
4,113
4,883
557
151
9,704
7,610
5,765
918
440
14,733
8,833
5,915
1,136
509
$ 16,393
$
$
—
—
—
—
—
170
277
120
16
583
170
277
120
16
583
111
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Loans Receivable (continued)
The following tables present the average recorded investment in loans individually evaluated for impairment and the related interest
income recognized for the periods shown:
Year Ended June 30,
2015
2014
2013
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
(In thousands)
With no allowance recorded
One- to four-family
$
4,018
$
162
$
5,101
$
173
$
4,968
$
Commercial
Consumer
Construction and land
Loans with no allowance recorded
With an allowance recorded
One- to four-family
Commercial
Consumer
Construction and land
Loans with an allowance recorded
Total
One- to four-family
Commercial
Consumer
Construction and land
1,853
221
237
6,329
3,223
2,086
694
185
6,188
7,241
3,939
915
422
42
10
4
218
227
78
36
14
355
389
120
46
18
3,015
601
61
8,778
3,780
3,277
786
226
8,069
8,881
6,292
1,387
287
40
18
12
243
206
283
26
16
531
379
323
44
28
3,762
486
166
9,382
5,034
2,056
1,157
248
8,495
10,002
5,818
1,643
414
$
12,517
$
573
$
16,847
$
774
$
17,877
$
151
74
28
—
253
133
64
38
28
263
284
138
66
28
516
Interest income recognized on a cash basis on impaired loans for the years ended June 30, 2015, 2014 and 2013, was $473,000, $594,000,
and $353,000, respectively.
112
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Loans Receivable (continued)
The following table presents the recorded investment in nonaccrual loans by class of loan at the dates indicated:
One- to four-family
One- to four-family Olympic Peninsula1
One- to four-family other
Commercial
Commercial real estate
Consumer
Home equity
Auto
Consumer other
Construction and land
Land and development
June 30,
2015
2014
(In thousands)
$
3,839
$
393
147
181
10
154
159
$
4,883
$
3,223
320
1,913
340
—
41
127
5,964
1 Olympic Peninsula is limited to properties located in the Washington State counties of Clallam and Jefferson in these tables.
113
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Loans Receivable (continued)
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. There were no loans past due 90 days or more and still accruing interest at June 30, 2015 and June 30, 2014.
The following table presents past due loans, net of partial loan charge-offs, by class, as of June 30, 2015:
30-59
Days
Past Due
60-89
Days
Past Due
90 Days
or More
Past Due
Total
Past Due
Current
Total
Loans
(In thousands)
One- to four-family
One- to four-family Olympic Peninsula
$
— $
1,063
$
704
$
1,767
$
166,560
$
168,327
One- to four-family other
Commercial
Multi-family
Commercial real estate
Commercial business
Consumer
Home equity
Auto
Consumer other
Construction and land
Construction
Land and development
—
—
—
—
81
36
22
—
—
167
—
—
15
50
39
—
114
—
—
—
—
98
10
—
—
23
167
88,202
88,369
—
—
—
194
96
61
—
137
33,086
125,623
14,764
33,086
125,623
14,764
36,193
3,844
4,197
7,196
11,794
36,387
3,940
4,258
7,196
11,931
$
139
$
1,448
$
835
$
2,422
$
491,459
$
493,881
114
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Loans Receivable (continued)
The following table presents past due loans, net of partial loan charge-offs, by class, as of June 30, 2014:
30-59
Days
Past Due
60-89
Days
Past Due
90 Days
or More
Past Due
Total
Past Due
Current
Total
Loans
(In thousands)
One- to four-family
One- to four-family Olympic Peninsula
$
— $
One- to four-family other
Commercial
Multi-family
Commercial real estate
Commercial business
Consumer
Home equity
Auto
Consumer other
Construction and land
Construction
Land and development
—
—
—
—
34
86
42
—
—
650
319
—
—
—
111
—
60
—
45
$
1,181
$
1,831
$
166,079
$
167,910
—
—
98
—
114
—
—
—
53
319
73,681
74,000
—
98
—
259
86
102
—
98
45,100
127,930
17,532
45,100
128,028
17,532
39,805
5,532
4,977
8,222
12,177
40,064
5,618
5,079
8,222
12,275
$
162
$
1,185
$
1,446
$
2,793
$
501,035
$
503,828
115
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Loans Receivable (continued)
Credit quality indicator - Federal regulations provide for the classification of lower quality loans and other assets, such as debt and
equity securities, as substandard, doubtful, or loss; risk ratings 6, 7, and 8 in our 8-point risk rating system, respectively. An asset is
considered substandard if it is inadequately protected by the current net worth and pay capacity of the borrower or of any collateral
pledged. Substandard assets include those characterized by the distinct possibility that First Federal 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 First Federal classifies problem assets as either substandard or doubtful, it may establish a specific allowance to address the risk
specifically or First Federal may allow the loss to be addressed in the general allowance. General allowances represent loss allowances
that have been established to recognize the inherent risk associated with lending activities but that, 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 such assets in the period in which they are deemed uncollectible. Assets that do not currently expose First Federal to sufficient
risk to warrant classification as substandard or doubtful but possess identified weaknesses are designated as either watch or special
mention assets; risk ratings 4 and 5 in our risk rating system, respectively. At June 30, 2015 and June 30, 2014, First Federal had $9.9
million and $13.9 million, respectively, of loans classified as substandard and no loans classified as doubtful or loss. Loans not otherwise
classified are considered pass graded loans and are rated 1-3 in our risk rating system.
Additionally, First Federal categorizes loans as performing or nonperforming based on payment activity. Loans that are more than 90
days past due and nonaccrual loans are considered nonperforming.
The following table represents the internally assigned grade as of June 30, 2015, by class of loans:
Pass
Watch
Special
Mention
Sub-
Standard
Total
(In thousands)
One- to four-family
One- to four-family Olympic Peninsula $
161,004
$
1,524
$
794
$
5,005
$
168,327
One- to four-family other
86,487
934
Commercial
Multi-family
Commercial real estate
Commercial business
Consumer
Home equity
Auto
Consumer other
Construction and land
Construction
Land and development
22,907
106,072
8,449
34,969
3,716
3,906
7,196
11,230
9,550
12,960
5,795
501
105
108
—
351
—
—
5,134
62
86
58
19
—
113
948
88,369
629
1,457
458
831
61
225
—
237
33,086
125,623
14,764
36,387
3,940
4,258
7,196
11,931
$
445,936
$
31,828
$
6,266
$
9,851
$
493,881
116
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Loans Receivable (continued)
The following table represents the internally assigned grade as of June 30, 2014, by class of loans:
Pass
Watch
Special
Mention
Sub-
Standard
Total
(In thousands)
One- to four-family
One- to four-family Olympic Peninsula $
156,484
$
4,154
$
2,114
$
5,158
$
167,910
One- to four-family other
72,809
203
605
383
74,000
Commercial
Multi-family
Commercial real estate
Commercial business
Consumer
Home equity
Auto
Consumer other
Construction and land
Construction
Land and development
39,879
111,319
10,369
38,224
5,442
4,732
8,025
11,341
4,337
9,471
6,514
367
135
125
197
524
—
1,570
—
778
26
94
—
47
884
5,668
649
695
15
128
—
363
45,100
128,028
17,532
40,064
5,618
5,079
8,222
12,275
$
458,624
$
26,027
$
5,234
$
13,943
$
503,828
The following table represents the credit risk profile based on payment activity as of June 30, 2015, by class of loans:
Nonperforming
Performing
Total
(In thousands)
One- to four-family
One- to four-family Olympic Peninsula
$
3,839
$
164,488
$
One- to four-family other
Commercial
Multi-family
Commercial real estate
Commercial business
Consumer
Home equity
Auto
Consumer other
Construction and land
Construction
Land and development
393
—
147
—
181
10
154
—
159
87,976
33,086
125,476
14,764
36,206
3,930
4,104
7,196
11,772
168,327
88,369
33,086
125,623
14,764
36,387
3,940
4,258
7,196
11,931
$
4,883
$
488,998
$
493,881
117
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Loans Receivable (continued)
The following table represents the credit risk profile based on payment activity as of June 30, 2014, by class of loans:
Nonperforming
Performing
Total
(In thousands)
One- to four-family
One- to four-family Olympic Peninsula
$
3,223
$
164,687
$
One- to four-family other
Commercial
Multi-family
Commercial real estate
Commercial business
Consumer
Home equity
Auto
Consumer other
Construction and land
Construction
Land and development
320
73,680
1,913
—
340
—
41
—
127
45,100
126,115
17,532
39,724
5,618
5,038
8,222
12,148
167,910
74,000
45,100
128,028
17,532
40,064
5,618
5,079
8,222
12,275
$
5,964
$
497,864
$
503,828
Troubled debt restructuring - A TDR is a loan to a borrower who is experiencing financial difficulty that has been modified from its
original terms and conditions in such a way that First Federal is granting the borrower a concession of some kind. First Federal has granted
a variety of concessions to borrowers in the form of loan modifications. The modifications granted can generally be described in the
following categories:
Rate modification - A modification in which the interest rate is changed.
Term modification - A modification in which the maturity date, timing of payments, or frequency of payments is changed.
Payment modification - A modification in which the dollar amount of the payment is changed. Interest-only modifications in which
a loan is converted to interest-only payments for a period of time are included in this category.
Combination modification - Any other type of modification, including the use of multiple categories above.
Upon identifying a receivable as a troubled debt restructuring, First Federal classifies the loan as impaired for purposes of determining
the allowance for loan losses. This requires the loan to be evaluated individually for impairment, generally based on the expected cash
flows under the new terms discounted at the loan’s original effective interest rates. For TDR loans that subsequently default, the method
of determining impairment is generally the fair value of the collateral less estimated selling costs.
118
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Loans Receivable (continued)
The following is a summary of information pertaining to TDR loans included in impaired loans at the dates indicated:
Total TDR loans
Allowance for loan losses related to TDR loans
Total nonaccrual TDR loans
June 30,
2015
2014
(In thousands)
$
$
$
7,746
272
5,676
$
$
$
12,164
363
3,536
The following table presents newly restructured and renewals or modifications of existing TDR loans by class that occurred during the
year ended June 30, 2015, by type of concession granted:
Number
of Contracts
Rate
Modification
Term
Modification
Combination
Modification
Total
Modifications
(Dollars in thousands)
Pre-modification outstanding recorded investment
One- to four-family
One- to four-family Olympic Peninsula
Commercial
Commercial business
Consumer
One- to four-family second mortgages
Post-modification outstanding recorded investment
One- to four-family
One- to four-family Olympic Peninsula
Commercial
Commercial business
Consumer
One- to four-family second mortgages
1
1
1
3
1
1
1
3
$
$
$
$
$
$
$
$
— $
— $
— $
— $
— $
— $
— $
— $
151
105
50
306
154
105
50
309
$
$
$
$
$
$
$
$
— $
— $
— $
— $
— $
— $
— $
— $
151
105
50
306
154
105
50
309
Renewals or modifications of existing TDR loans during the year ended June 30, 2015, consisted of three recorded investments with pre-
renewal balances totaling $306,000 and post-renewal balances of $309,000.
There were no TDR loans that were modified within the 12 months prior to June 30, 2015, and for which there was a payment default
during the year ended June 30, 2015.
119
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Loans Receivable (continued)
The following table presents newly restructured and renewals or modifications of existing TDR loans by class that occurred during the
year ended June 30, 2014, by type of concession granted:
Number
of Contracts
Rate
Modification
Term
Modification
Combination
Modification
Total
Modifications
(Dollars in thousands)
Pre-modification outstanding recorded investment
One- to four-family
One- to four-family Olympic Peninsula
14
$
950
$
— $
1,493
$
2,443
Commercial
Multifamily
Consumer
Home equity
Consumer other
5
2
1
—
—
—
22
$
950
$
—
29
—
29
610
44
1
610
73
1
$
2,148
$
3,127
Post-modification outstanding recorded investment
One- to four-family
One- to four-family Olympic Peninsula
14
$
947
$
— $
1,500
$
2,447
Commercial
Multifamily
Consumer
Home equity
Consumer other
1
2
1
—
—
—
18
$
947
$
—
29
—
29
597
44
1
597
73
1
$
2,142
$
3,118
During the year ended June 30, 2014, new TDR loans consisted of ten recorded investments with pre-modification balances totaling $1.9
million resulting in six post-modification investments with balances of $1.9 million. Renewals or modifications of existing TDR loans
consisted of twelve recorded investments with pre-renewal balances totaling $1.2 million and post-renewal balances of $1.2 million.
The following is a summary of TDR loans that were modified within the 12 months prior to June 30, 2014, and for which there was a
payment default during the year ended June 30, 2014.
TDR loans that subsequently defaulted
One- to four-family
One- to four-family Olympic Peninsula
Number
of Contracts
Rate
Modification
Term
Modification
Combination
Modification
Total
Modifications
(Dollars in thousands)
1
1
$
$
— $
— $
— $
— $
229
229
$
$
229
229
120
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Loans Receivable (continued)
The following table presents newly restructured and renewals or modifications of existing TDR loans by class that occurred during the
year ended June 30, 2013, by type of concession granted:
Number
of Contracts
Rate
Modification
Term
Modification
Combination
Modification
Total
Modifications
(Dollars in thousands)
Pre-modification outstanding recorded investment
One- to four-family
One- to four-family Olympic Peninsula
One- to four-family other
Commercial
Commercial real estate
Commercial business
Consumer
Home equity
Post-modification outstanding recorded investment
One- to four-family
One- to four-family Olympic Peninsula
One- to four-family other
Commercial
Commercial real estate
Commercial business
Consumer
Home equity
$
15
1
9
1
9
898
$
515
$
1,833
$
—
293
—
71
—
817
392
54
174
825
—
206
35
$
1,262
$
1,778
$
3,038
$
15
1
$
$
904
$
— $
519
$
— $
1,852
123
$
$
7
1
9
293
—
38
817
392
54
844
—
188
33
$
1,235
$
1,782
$
3,007
$
3,246
174
1,935
392
331
6,078
3,275
123
1,954
392
280
6,024
During the year ended June 30, 2013, new TDR loans consisted of 24 recorded investments with pre-modification balances totaling $4.5
million resulting in 22 post-modification investments with balances of $4.5 million. Renewals or modifications of existing TDR loans
consisted of 11 recorded investments with pre-renewal balances totaling $1.5 million and post-renewal balances of $1.5 million.
The following is a summary of TDR loans that were modified within the 12 months prior to June 30, 2013, and for which there was a
payment default during the year ended June 30, 2013.
Number
of Contracts
Rate
Modification
Term
Modification
Combination
Modification
Total
Modifications
(Dollars in thousands)
TDR loans that subsequently defaulted
One- to four-family
One- to four-family Olympic Peninsula
Consumer
Home equity
— $
— $
385
$
— $
— $
454
$
69
385
69
454
2
1
3
$
$
121
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Loans Receivable (continued)
No additional funds are committed to be advanced in connection with impaired loans at June 30, 2015.
The following table presents TDR loans by class at the dates indicated by accrual and nonaccrual status.
June 30, 2015
June 30, 2014
Accrual
Nonaccrual
Total
Accrual
Nonaccrual
Total
(In thousands)
One- to four-family
One- to four-family Olympic Peninsula
$
1,563
$
2,917
$
4,480
$
3,941
$
1,529
$
One- to four-family other
Commercial
Multi-family
Commercial real estate
Commercial business
Consumer
Home equity
281
—
147
—
79
162
443
281
188
629
1,216
403
629
1,363
403
728
2,742
426
—
1,714
—
5,470
469
728
4,456
426
349
428
510
105
615
$
2,070
$
5,676
$
7,746
$
8,628
$
3,536
$
12,164
TDR loans may be upgraded in their classification and placed on accrual status once there is a sustained period of repayment performance,
usually six months or longer, and there is a reasonable assurance that repayment will continue. First Federal allows reclassification of a
troubled debt restructuring back into the general loan pool (as a non-troubled debt restructuring) if the borrower is able to refinance the
loan at then-current market rates and meet all of the underwriting criteria of First Federal required of other borrowers. The refinance must
be based on the borrower’s ability to repay the debt and no special concessions of rate and/or term are granted to the borrower.
122
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Real Estate Owned and Repossessed Assets
The following table presents the activity in real estate owned and repossessed assets for the periods shown:
Beginning balance
Loans transferred to foreclosed assets
Sales
Write-downs
Net gain on sales
Ending balance
2015
June 30,
2014
(In thousands)
810
$
2,265
$
2,585
(1,470)
(212)
201
1,138
(2,312)
(306)
25
1,914
$
810
$
$
$
2013
2,864
2,965
(3,470)
(349)
255
2,265
The following table presents the breakout of real estate owned and repossessed assets by type as of:
One- to four-family residential properties
Land
Commercial real estate
Personal property
June 30,
2015
2014
(In thousands)
493
$
—
1,368
53
1,914
$
524
220
—
66
810
$
$
Note 5 - Premises and Equipment
Premises and equipment consist of the following at June 30, 2015 and 2014:
Land
Buildings
Building improvements
Furniture, fixtures, and equipment
Software
Automobiles
Construction in progress
Less accumulated depreciation and amortization
June 30,
2015
2014
$
$
(In thousands)
2,560
6,115
7,220
6,140
1,349
81
733
24,198
(11,618)
$
12,580
$
2,560
6,115
7,201
6,599
1,347
225
171
24,218
(11,931)
12,287
Depreciation expense was $973,000, $1.1 million, and $1.2 million for the years ended June 30, 2015, 2014, and 2013, respectively.
123
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Premises and Equipment (continued)
Operating rental payments for buildings were $126,000, $103,000, and $42,000 for the years ended June 30, 2015, 2014, and 2013,
respectively.
Operating lease commitments - The Bank has lease agreements with unaffiliated parties for three locations. The lease terms for our
two branches and one loan production office are not individually material. Lease expirations range from one to twenty years.
All lease agreements require the Bank to pay its pro-rata share of building operating expenses. The minimum annual lease payments
under non-cancelable operating leases with initial or remaining terms of one year or more through the initial lease term are as follows:
$
Twelve-month period ending:
2016
2017
2018
2019
2020
Thereafter
Total minimum payments required $
June 30,
(In thousands)
128
143
143
116
90
1,395
2,015
Note 6 - Mortgage Servicing Rights
Loans serviced for FHLB, Fannie Mae, and Freddie Mac are not included in the accompanying consolidated balance sheets. The unpaid
principal balances of serviced loans, primarily mortgage loans, were $213.9 million and $235.2 million at June 30, 2015 and 2014,
respectively.
Mortgage servicing rights for the years ended June 30 are as follows:
Balance at beginning of period
Additions
Amortization
Valuation allowance recovery
Balance at end of period
2015
2014
2013
(In thousands)
$
1,266
197
(276)
—
$
1,434
154
(323)
1
1,187
$
1,266
$
$
$
1,873
214
(720)
67
1,434
The aggregate change in valuation allowance for mortgage servicing rights for the years ended June 30 are as follows:
Balance at beginning of period
Impairments
Recoveries
Balance at end of period
2015
2014
(In thousands)
2013
— $
—
—
— $
(1) $
—
1
— $
(68)
—
67
(1)
$
$
124
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 - Mortgage Servicing Rights (continued)
The key economic assumptions used in determining the fair value of mortgage servicing rights at June 30 are as follows:
Constant prepayment rate
Weighted-average life (years)
Yield to maturity discount
2015
2014
2013
13.0%
5.7
9.9%
10.7%
6.3
10.0%
20.9%
3.9
9.8%
The fair values of mortgage servicing rights are approximately $1.8 million and $2.2 million at June 30, 2015 and 2014, respectively.
The following represents servicing and late fees earned in connection with mortgage servicing rights and is included in the accompanying
consolidated financial statements as a component of noninterest income for the years ended June 30:
Servicing fees
Late fees
Note 7 - Deposits
2015
2014
2013
(In thousands)
$
561
$
23
606
$
24
659
27
The aggregate amount of time deposits in excess of the FDIC insured limit, currently $250,000, at June 30, 2015 and 2014, was $36.3
million and $26.4 million, respectively. Deposits and weighted-average interest rates at the dates indicated are as follows:
Savings
Transaction accounts
Insured money market accounts
Certificates of deposit and jumbo certificates
Weighted-
Average Interest
Rate
June 30,
2015
Weighted-
Average Interest
Rate
June 30,
2014
(In thousands)
0.04%
0.01%
0.17%
0.94%
$
88,129
183,890
227,217
147,928
$ 647,164
0.04%
0.01%
0.18%
0.82%
$
84,394
172,708
209,605
133,692
$ 600,399
Weighted-average interest rate
0.28%
0.25%
125
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Deposits (continued)
Maturities of certificates at the dates indicated are as follows:
Within one year or less
After one year through two years
After two years through three years
After three years through four years
After four years through five years
After five years
June 30, 2015
(In thousands)
71,474
33,336
19,225
14,504
9,183
206
147,928
$
$
Deposits at June 30, 2015 and 2014, include $44.2 million and $38.1 million, respectively, in public fund deposits. Investment securities
with a carrying value of $42.7 million and $37.4 million were pledged as collateral for these deposits at June 30, 2015 and 2014,
respectively. This exceeds the minimum collateral requirements established by the Washington Public Deposit Protection Commission.
Interest on deposits by type for the periods shown was as follows:
Savings
Transaction accounts
Insured money market accounts
Certificates of deposit and jumbo certificates
Year Ended June 30,
2015
2014
2013
$
(In thousands)
$
38
10
436
1,185
$
38
10
354
1,135
$
1,669
$
1,537
$
59
10
353
1,546
1,968
Note 8 - Borrowings
FHLB Borrowings
First Federal is a member of the FHLB. As a member, First Federal has a committed line of credit of up to 40% of total assets, subject
to the amount of FHLB stock ownership and certain collateral requirements.
First Federal has entered into borrowing arrangements with the FHLB to borrow funds primarily under long-term, fixed-rate advance
agreements. First Federal also has a short-term, variable-rate revolving advance (CMA) which matures in May 2016. All borrowings are
secured by collateral consisting of single-family, home equity, and multi-family loans receivable in the amounts of $198.8 million and
$209.7 million; and investment securities with a carrying value of $7.3 million and $10.0 million, at June 30, 2015 and 2014, respectively,
pledged as collateral.
126
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Borrowings (continued)
FHLB advances outstanding at June 30, 2015 and 2014, were as follows:
June 30,
2015
2014
(In thousands)
Long-term advances
$
89,924
$
CMA advance
—
89,924
15,100
The maximum and average outstanding balances and average interest rates on CMA short-term, variable-rate advances were as follows:
2015
June 30,
2014
(In thousands)
2013
Maximum outstanding at any month-end
$
1,000
$
31,000
$
Monthly average outstanding
Weighted-average daily interest rates
Annual
Period End
Interest expense during the year
83
7,967
0.29%
0.29%
1
0.29%
0.30%
24
1,500
125
0.46%
—%
—
At June 30, 2015 and 2014, FHLB long-term, fixed-rate advances and are scheduled to mature as follows:
Weighted-Average
Interest Rate
2015
Weighted-Average
Interest Rate
2014
(In thousands)
Within one year or less
After one year through two years
After two years through three years
After three years through four years
After four years through five years
After five years
—%
—
2.71
2.65
3.15
3.80
$
$
—
—
6,924
18,000
35,000
30,000
89,924
—%
—
—
2.71
2.65
3.24
$
$
—
—
—
6,924
23,000
60,000
89,924
The maximum and average outstanding balances and average interest rates on FHLB long-term, fixed-rate advances were as follows:
Maximum outstanding at any month-end
Monthly average outstanding
Weighted-average interest rates
Annual
Period End
Interest expense during the year
2015
$
89,924
89,924
June 30,
2014
(In thousands)
99,924
$
96,591
2013
$
99,924
99,924
3.24%
3.24%
2,917
3.26%
3.24%
3,163
3.99%
3.28%
4,027
127
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Borrowings (continued)
Note Payable
At June 30, 2015, Craft3 Development IV, LLC, a subsidiary of First Federal, holds a fixed-rate promissory note from Craft3, Inc. in the
amount of $109,000. Simple interest of 4.50% per annum is calculated on the outstanding principal balance and is due monthly. The
entire unpaid principal balance plus any remaining interest due is payable prior to dissolving the partnership.
Note 9 - Federal Taxes on Income
The provision (benefit) for income taxes for the years ended June 30 is summarized as follows:
Current
Deferred
2015
2014
2013
(In thousands)
$
$
647
$
(1,001)
(354) $
$
1,096
(356)
740
$
1,232
(810)
422
A reconciliation of the tax provision (benefit) based on statutory corporate tax rates, estimated to be 34%, on pre-tax income and the
provision (benefit) shown in the accompanying consolidated statements of income for the years ended June 30 is summarized as follows:
2015
2014
2013
(In thousands)
Income taxes computed at statutory rates $
(1,851) $
Tax credits
Tax-exempt income
Bank-owned life insurance income
Deferred tax asset valuation allowance
Other, net
(195)
(218)
(35)
1,917
28
$
1,159
(195)
(357)
(32)
—
165
$
(354) $
740
$
930
(195)
(311)
(108)
—
106
422
As a result of the bad debt deductions taken in years prior to 1988, retained earnings include accumulated earnings of approximately $6.4
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 Company 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.
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.
128
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 - Federal Taxes on Income (continued)
During the year ended June 30, 2015, the Company contributed $400,000 in cash and $9.3 million in common stock to the Foundation.
Under current Federal income tax regulations, charitable contribution deductions are limited to 10% of taxable income. Accordingly, the
$9.7 million contribution created a carryforward for income tax purposes with a deferred tax asset of $3.3 million and related valuation
allowance of $1.9 million for financial statement reporting purposes. At June 30, 2015, the balance of the contribution carryforward
totaled $9.3 million. The contribution carryforward will expire in 2020. A valuation allowance is provided when it is more likely than
not that some portion or all of the deferred tax assets will not be realized. The Company evaluates whether its deferred tax assets will be
realized and adjusts the amount of its valuation allowance, if necessary. There was a valuation allowance of $1.9 million at June 30, 2015,
and no valuation allowance at June 30, 2014.
First Federal participated in the New Markets Tax Credit program for low-income communities beginning in fiscal year ended June 30,
2008, through June 2015. First Federal received tax credits of approximately $1.9 million over seven years. Tax benefits related to these
credits were recognized for financial reporting purposes in different periods than the credits are recognized in First Federal’s income tax
returns due to a yearly tax basis reduction resulting in a gain for income tax purposes at the end of the tax credit period. The financial
reporting tax credit approximated $1.3 million over the seven-year period, representing the available tax credit of $1.9 million less the
reduction of the tax gain of $655,000 calculated at First Federal’s current tax rate of 34%.
First Federal complied with the various regulatory provisions of the New Markets Tax Credit program and, therefore, will earn
approximately $296,000 of credits that will be claimed on the Company's current-year tax return. Additionally, as of June 30, 2015, there
were tax credit carryforwards of $205,000 that begin to expire in 2033.
The Company applies the provisions of FASB ASC 740 that require the application of a more-likely-than-not recognition criterion for
the reporting of uncertain tax positions on its financial statements. The Company had no unrecognized tax assets at June 30, 2015 and
June 30, 2014. During the years ended June 30, 2015 and 2014, the Company recognized no interest and penalties. The Company recognizes
interest and penalties in income tax expense. The Company files income tax returns in the U.S. federal jurisdiction and is no longer subject
to U.S. federal income tax examinations by tax authorities for years ending before June 30, 2012.
129
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 - Federal Taxes on Income (continued)
The components of net deferred tax assets and liabilities at June 30 are summarized as follows:
Deferred tax assets
Allowance for loan losses
Accrued compensation
Nonaccrual loans
Credit carryforwards
Real estate owned
Contribution carryforward
Other, net
Total deferred tax assets
Deferred tax liabilities
Deferred loan fees
Unrealized gain on securities available for sale
FHLB stock dividends
Accumulated depreciation
Deferred investment gain
Other, net
Total deferred tax liabilities
Deferred tax asset (liability), net
2015
2014
(In thousands)
$
2,483
$
2,831
313
20
205
80
3,156
—
6,257
749
369
881
1,417
562
174
4,152
2,105
253
22
467
108
—
34
3,715
605
666
1,842
1,230
482
—
4,825
(1,110)
Deferred tax asset valuation allowance
(1,917)
—
Deferred tax asset (liability), net of valuation
allowance
$
188
$
(1,110)
Note 10 - Benefit Plans
Multi-employer Pension Plan
The Bank participates in the Pentegra Defined Benefit Plan for Financial Institutions (the Pentegra DB Plan), a tax-qualified defined-
benefit pension plan that covered substantially all employees after one year of continuous employment. Pension benefits vested 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 12004. 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 Defined Benefit Plan was frozen and no new benefits were allowed
as of February 1, 2010.
130
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10 - Benefit Plans (continued)
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.
The table below presents the funded status (market value of plan assets divided by funding target) of the plan as of July 1:
Source
Our plan
2014
2013
Valuation Report
Valuation Report
105.3%
93.3%
There was no change to the funded status of the plan as of June 30, 2015. First Federal’s contributions to the Pentegra DB Plan are not
more than 5% of the total contributions to the Pentegra DB Plan. First Federal’s policy is to fund pension costs as accrued.
Total contributions during the years ended June 30 were:
2015
2014
2013
Date Paid
Amount
Date Paid
Amount
Date Paid
Amount
(In thousands)
12/26/2014
$
700
9/4/2013
$
12/31/2013
$
700
$
31
763
794
10/26/2012
$
12/10/2012
$
28
634
662
Nonqualified Deferred Compensation Plan
First Federal also sponsors a nonqualified Deferred Compensation Plan for members of the Board of Directors and eligible officer-level
employees. This plan, approved by the Board on February 1, 2012, allows eligible participants to defer and invest a portion of their
earnings in a selection of investment options identified in the plan at no expense to First Federal. All deferrals are remitted to Pentegra,
the Plan Administrator, and held in a trust. The aggregate balance held in trust at June 30, 2015 was $320,000.
The Company also has agreements with certain key officers that provide for potential payments upon retirement, disability, termination,
change in control and death.
401(k) Plan
During the year ended June 30, 1994, First Federal began participation in a multi-employer 401(k) plan funded by employees and a Bank
matching program. In December 2012, the Plan converted to a single-employer 401(k) plan. Employees may contribute up to 20% of
their pre-tax compensation to the 401(k) plan. First Federal provides matching funds of 50% limited to the first 6% of salary contributed.
First Federal's contributions were $163,000, $153,000, and $136,000 during the years ended June 30, 2015, 2014, and 2013, respectively.
Employee Stock Ownership Plan
In connection with the mutual to stock conversion, the Company established an ESOP for eligible employees of the Company and the
Bank. Employees of the Company who have been credited with at least 1,000 hours of service during a 12-month period are eligible to
participate in the ESOP.
131
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10 - Benefit Plans (continued)
Pursuant to the Plan, the ESOP intends to purchase in the open market 8% of the common stock for a total of 1,048,029 shares. As of
June 30, 2015, 952,799 shares, or 90.9% of the total, have been purchased in the open market at an average price of $12.38 per share
with funds borrowed from First Northwest. The Bank will make contributions to the ESOP in amounts necessary to amortize the ESOP
loan payable to First Northwest over a period of 20 years, bearing estimated interest at 2.44%.
Shares purchased by the ESOP with the loan proceeds are held in a suspense account and allocated to ESOP participants on a pro rata
basis as principal and interest payments are made by the ESOP to the Company. The loan is secured by shares purchased with the loan
proceeds and will be repaid by the ESOP with funds from the Bank's discretionary contributions to the ESOP and earnings on the ESOP
assets. An annual principal and interest payment of $274,000 was made by the ESOP during the year ended June 30, 2015.
As shares are committed to be released from collateral, the Company reports compensation expense equal to the average daily market
prices of the shares and the shares become outstanding for EPS computations. The compensation expense is accrued monthly throughout
the year. Dividends on allocated ESOP shares will be recorded as a reduction of retained earnings; dividends on unallocated ESOP shares
will be recorded as a reduction of debt and accrued interest.
Compensation expense related to the ESOP for the year ended June 30, 2015 was $216,000.
Shares held by the ESOP as of the dates indicated are as follows:
June 30, 2015
(Dollars in thousands)
Allocated shares
Unallocated shares
Total ESOP shares
Fair value of unallocated shares
$
17,510
935,289
952,799
11,532
Note 11 - 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 federal and state 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 the Bank’s assets, liabilities,
and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification
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 I capital to risk-weighted assets (as defined in the regulations) and of Tier 1 capital
to average assets.
132
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11 - Regulatory Capital Requirements (continued)
Effective January 1, 2015 (with some changes transitioned into full effectiveness over two to four years), the Bank is now subject to new
capital requirements which create a new required ratio for common equity Tier 1 (“CET1”) capital, increases the leverage and Tier 1
capital ratios, changes the risk-weightings of certain assets for purposes of the risk-based capital ratios, creates an additional capital
conservation buffer over the required capital ratios and changes what qualifies as capital for purposes of meeting these various capital
requirements. The Bank is required to maintain additional levels of Tier 1 common equity over the minimum risk-based capital levels
before it may pay dividends, repurchase shares or pay discretionary bonuses.
The new minimum requirements are a ratio of common equity Tier 1 capital (CET1 capital) to total risk-weighted assets the (“CET1 risk-
based ratio”) of 4.5%, a Tier 1 capital ratio of 6.0%, a total capital ratio of 8.0%, and a leverage ratio of 4.0%.
In addition to the capital requirements, there are a number of changes in what constitutes regulatory capital, subject to a certain transition
period. These changes include the phasing-out of certain instruments as qualifying capital. The Bank does not have any of these instruments.
Mortgage servicing and deferred tax assets over designated percentages of CET1 are deducted from capital, subject to a transition period
ending December 31, 2017. CET1 consists of Tier 1 capital less all capital components that are not considered common equity. In addition,
Tier 1 capital includes accumulated other comprehensive income, which includes all unrealized gains and losses on available for sale
debt and equity securities, subject to a transition period ending December 31, 2017. Because of the Bank’s asset size, the Bank is not
considered an advanced approaches banking organization and has elected to permanently opt-out of the inclusion of unrealized gains and
losses on available for sale debt and equity securities in its capital calculations.
The new requirements also include changes in the risk-weighting of assets to better reflect credit risk and other risk exposure. 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; 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 and total capital ratios, the Bank will have to maintain a capital conservation buffer consisting
of additional CET1 capital equal to 2.5% of risk-weighted assets above the required minimum levels in order to avoid limitations on
paying dividends, engaging in share repurchases, and paying discretionary bonuses based on percentages of eligible retained income that
could be utilized for such actions. This new capital conservation buffer requirement is to be phased in beginning in January 2016 at
0.625% of risk-weighted assets and increasing each year until fully implemented in January 2019.
Under the new standards, in order to be considered well-capitalized, the Bank must maintain a CET1 risk-based ratio of 6.5% (new), a
Tier 1 risk-based ratio of 8% (increased from 6%), a total risk-based capital ratio of 10% (unchanged) and a leverage ratio of 5%
(unchanged).
As of June 30, 2015, the most recent regulatory notifications categorized First Federal as “well capitalized” under the regulatory framework
for prompt corrective action. To be categorized as “well capitalized,” the Bank must maintain minimum total risk-based, Tier I risk-based,
and Tier I leverage ratios as set forth in the following table. There are no conditions or events since that notification that management
believes have changed First Federal’s category.
At periodic intervals, the DFI and FDIC routinely examine First Federal as part of its legally prescribed oversight of the banking industry.
A future examination by the DFI and FDIC could include a review of certain transactions or other amounts reported in First Federal’s
consolidated financial statements. Based on these examinations, the regulators can direct that First Federal’s consolidated financial
statements be adjusted in accordance with their findings. In view of the uncertain regulatory environment in which First Federal operates,
the extent, if any, to which a forthcoming regulatory examination may ultimately result in adjustments to the accompanying consolidated
financial statements cannot presently be determined.
At June 30, 2015 and 2014, regulatory capital for First Federal was calculated in accordance with the FDIC’s Call Report guidelines.
133
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11 - Regulatory Capital Requirements (continued)
First Federal’s actual and required capital amounts and ratios are presented in the following table:
Actual
For Capital
Adequacy Purposes
To Be Categorized
As Well Capitalized
Under Prompt Corrective
Action Provision
Amount
Ratio
Amount
Ratio
Amount
Ratio
As of June 30, 2015
Common Equity Tier 1 Capital Ratio
(Common equity tier 1 capital to risk-
weighted assets)
Tier 1 Capital Ratio
$ 129,618
23.76%
(Tier 1 capital to risk-weighted assets)
$ 129,618
23.76%
Total Capital Ratio
(Risk-based capital to risk-weighted assets)
$ 136,443
25.01%
Tier 1 Leverage Ratio
(Tier 1 capital to adjusted average assets)
$ 129,618
14.53%
As of June 30, 2014
Total capital
(to risk-weighted assets)
Core or Tier I capital
(to adjusted tangible assets)
Tier I capital
(to tangible assets)
Tier I capital
(to risk-weighted assets)
$
$
$
$
Note 12 - Related Party Transactions
85,127
19.58%
79,657
9.92%
79,657
9.92%
(In thousands)
24,549
4.50%
32,733
6.00%
43,643
8.00%
35,695
4.00%
34,776
8.00%
32,116
4.00%
$
$
$
$
$
$
35,460
6.50%
43,643
8.00%
54,554
10.00%
44,618
5.00%
43,470
10.00%
40,145
5.00%
12,043
1.50%
N/A
$
$
$
$
$
$
$
79,657
18.32%
N/A
$
26,082
6.00%
Certain directors and executive officers are also customers who transact business with First Federal. All loans and commitments included
in such transactions were made in compliance with applicable laws on substantially the same terms (including interest rates and collateral)
as those prevailing at the time for comparable transactions with other persons and do not involve more than the normal risk of collectability
or present any other unfavorable features.
134
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the activity in loans to directors and executive officers for the periods shown:
Beginning balance
Loan advances
Loan repayments
Reclassifications1
Ending balance
At or For the Year Ended June 30,
2015
2014
2013
(In thousands)
1,226
$
1,231
$
36
(49)
(396)
187
(105)
(87)
817
$
1,226
$
$
$
1,453
382
(382)
(222)
1,231
1 Represents loans that were once considered related party but are no longer considered related party
or loans that were not related party that subsequently became related party loans.
Deposits and certificates from related parties totaled $3.1 million and $3.9 million at June 30, 2015 and 2014, respectively.
Note 13 - Commitments and Contingencies
First Federal is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs
of its customers. These financial instruments generally represent a commitment to extend credit in the form of loans. The instruments
involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets.
First Federal’s exposure to credit loss, in the event of nonperformance by the other party to the financial instrument for commitments to
extend credit, is represented by the contractual notional amount of those instruments. First Federal uses the same credit policies in making
commitments as it does for on-balance-sheet instruments. Management does not anticipate any material loss as a result of these transactions.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established by the
contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many
of these commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements. First Federal evaluates each customer’s creditworthiness on a case-by-case basis. First Federal did not incur
any significant losses on its commitments for the years ended June 30, 2015 and 2014.
The following financial instruments were outstanding whose contract amounts represent credit risk at June 30:
Commitments to grant loans
Standby letters of credit
Unfunded commitments under lines of credit or existing loans
2015
2014
(In thousands)
$
4,183
$
201
38,956
191
260
38,538
135
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13 - Commitments and Contingencies (continued)
Legal contingencies - Various legal claims may arise from time to time in the normal course of business, which, in the opinion of
management, have no current material effect on First Federal’s consolidated financial statements.
Significant group concentrations of credit risk - Concentration of credit risk is the risk associated with a lack of diversification, such
as having substantial loan concentrations in a specific type of loan within First Federal’s loan portfolio, thereby exposing First Federal
to greater risks resulting from adverse economic, political, regulatory, geographic, industrial, or credit developments. Loans-to-one-
borrower are subject to the state banking regulations general limitation of 20 percent of First Federal’s equity, excluding accumulated
other comprehensive income. At June 30, 2015 and 2014, First Federal’s most significant concentration of credit risk was in loans secured
by real estate. These loans totaled approximately $471.5 million and $475.8 million, or 95.5% and 94.4%, of First Federal’s total loan
portfolio at June 30, 2015 and 2014, respectively. Real estate construction, including land acquisition and land development, commercial
real estate, multi-family, home equity, and one- to four-family residential loans are included in the total loans secured by real estate for
purposes of this calculation. After a period of decline the real estate market has begun to recover, which has helped stabilize nonperforming
loans and the allowance for loan losses.
At June 30, 2015 and 2014, First Federal’s most significant investment concentration of credit risk was with the U.S. Government, its
agencies, and Government-Sponsored Enterprises (GSEs). First Federal’s exposure, which results from positions in securities issued by
the U.S. Government, its agencies, and securities guaranteed by GSEs, was $295.4 million and $218.9 million, or 80.8% and 90.4%, of
First Federal’s total investment portfolio (including FHLB stock) at June 30, 2015 and 2014, respectively.
Note 14 - Fair Value Accounting and Measurement
Fair value is the price to sell an asset or transfer a liability in an orderly transaction between market participants in the Company’s principal
market. The Company has established and documented its process for determining the fair values of its assets and liabilities, where
applicable. Fair value is based on quoted market prices, when available, for identical or similar assets or liabilities. In the absence of
quoted market prices, management determines the fair value of the Company’s assets and liabilities using valuation models or third-party
pricing services, both of which rely on market-based parameters when available, such as interest rate yield curves, option volatilities and
credit spreads, or unobservable inputs. Unobservable inputs may be based on management’s judgment, assumptions, and estimates related
to credit quality, liquidity, interest rates, and other relevant inputs.
Any changes to valuation methodologies are reviewed by management to ensure they are relevant and justified. Valuation methodologies
are refined as more market-based data becomes available.
A three-level valuation hierarchy is used in determining fair value that is based on the transparency of the inputs used in the valuation
process. The inputs used in determining fair value in each of the three levels of the hierarchy are as follows:
Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 - Either: (i) quoted prices for similar assets or liabilities; (ii) observable inputs, such as interest rates or yield curves; or (iii)
inputs derived principally from or corroborated by observable market data.
Level 3 - Unobservable inputs.
136
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14 - Fair Value Accounting and Measurement (continued)
The hierarchy gives the highest ranking to Level 1 inputs and the lowest ranking to Level 3 inputs. The level in the fair value hierarchy
within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the overall
fair value measurement.
Qualitative disclosures of valuation techniques - Securities available for sale: where quoted prices are available in an active market,
securities are classified as Level 1. Level 1 instruments include highly liquid government bonds, securities issued by the U.S. Treasury,
and exchange-traded equity securities.
If quoted prices are not available, management determines fair value using pricing models, quoted prices of similar securities, which are
considered Level 2, or discounted cash flows. In certain cases, where there is limited activity in the market for a particular instrument,
assumptions must be made to determine their fair value. Such instruments are classified as Level 3.
Assets and liabilities measured at fair value on a recurring basis - Assets and liabilities are considered to be fair valued on a recurring
basis if fair value is measured regularly (i.e., daily, weekly, monthly, or quarterly). The following tables show the Company’s assets and
liabilities measured at fair value on a recurring basis at the dates indicated:
Securities available-for-sale
Municipal bonds
Agency bonds
ABS agency
ABS corporate
SBA
MBS agency
MBS corporate
Securities available-for-sale
Municipal bonds
ABS agency
SBA
MBS agency
June 30, 2015
Quoted Prices in
Active Markets for
Identical Assets
or Liabilities
Significant
Other
Observable
Inputs
Significant
Unobservable
Inputs
(Level 1)
(Level 2)
(Level 3)
Total
(In thousands)
$
$
— $
17,274
$
— $
—
—
—
—
—
—
23,774
9,201
29,634
34,328
176,877
7,952
—
—
—
—
—
—
17,274
23,774
9,201
29,634
34,328
176,877
7,952
— $
299,040
$
— $
299,040
June 30, 2014
Quoted Prices in
Active Markets for
Identical Assets
or Liabilities
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
(In thousands)
$
$
137
— $
7,525
$
— $
—
—
—
10,140
28,944
132,363
—
—
—
— $
178,972
$
— $
Total
7,525
10,140
28,944
132,363
178,972
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14 - Fair Value Accounting and Measurement (continued)
Assets measured at fair value on a nonrecurring basis - Assets are considered to be fair valued on a nonrecurring basis if the fair value
measurement of the instrument does not necessarily result in a change in the amount recorded on the consolidated balance sheets. Generally,
nonrecurring valuation is the result of the application of other accounting pronouncements that require assets or liabilities to be assessed
for impairment or recorded at the lower of cost or fair value.
The following tables present the Company’s assets measured at fair value on a nonrecurring basis at the dates indicated:
Impaired loans
Real estate owned and repossessed assets
Impaired loans
Real estate owned and repossessed assets
Level 1
Level 2
Level 3
Total
June 30, 2015
(In thousands)
— $
—
— $
— $
10,760
$
—
1,914
— $
12,674
$
10,760
1,914
12,674
Level 1
Level 2
Level 3
Total
June 30, 2014
(In thousands)
— $
—
— $
— $
14,733
$
14,733
—
810
810
— $
15,543
$
15,543
$
$
$
$
The following tables present the techniques used to value assets measured at fair value on a nonrecurring basis at the dates indicated:
June 30, 2015
Valuation
Technique
Unobservable Input
Range
(Weighted-Average)1
Fair Value
(In thousands)
$
Fair Value
(In thousands)
$
Impaired loans
Real estate owned and repossessed
10,760 Market comparable
Discount to appraisal
0% - 25% (2%)
assets
1 Discount to appraisal disposition value.
1,914 Market comparable
Discount to appraisal
0% - 8% (1%)
June 30, 2014
Valuation
Technique
Unobservable Input
Range
(Weighted-Average)1
Impaired loans
Real estate owned and repossessed
14,733 Market comparable
Discount to appraisal
0% - 35% (6%)
assets
1 Discount to appraisal disposition value.
810 Market comparable
Discount to appraisal
0% - 10% (1%)
138
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14 - Fair Value Accounting and Measurement (continued)
The following tables present the carrying value and estimated fair value of financial instruments at the dates indicated:
June 30, 2015
Level 1
Level 2
Level 3
Total
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
(In thousands)
Financial assets
Cash and cash equivalents
$
45,030
$
45,030
$
— $
— $
— $
— $
45,030
$
45,030
Investment securities available for
sale
Investment securities held to
maturity
Loans held for sale
Loans receivable, net
FHLB stock
Accrued interest receivable
Mortgage servicing rights, net
—
—
—
—
—
—
—
—
—
—
—
—
—
—
299,040
299,040
61,524
62,510
110
—
4,807
2,546
—
110
—
4,807
2,546
—
—
—
—
—
—
—
299,040
299,040
61,524
110
62,510
110
487,887
493,270
487,887
493,270
—
—
—
—
1,187
1,837
4,807
2,546
1,187
4,807
2,546
1,837
Financial liabilities
Demand deposits
Time deposits
Borrowings
Accrued interest payable
$
499,236
$
499,236
$
— $
— $
— $
— $
499,236
$
499,236
—
—
—
—
—
—
147,928
90,033
265
148,436
93,426
265
—
—
—
—
—
—
147,928
90,033
265
148,436
93,426
265
June 30, 2014
Level 1
Level 2
Level 3
Total
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
(In thousands)
Financial assets
Cash and cash equivalents
$
18,960
$
18,960
$
— $
— $
— $
— $
18,960
$
18,960
Investment securities available for
sale
Investment securities held to
maturity
Loans held for sale
Loans receivable, net
FHLB stock
Accrued interest receivable
Mortgage servicing rights, net
—
—
—
—
—
—
—
—
—
—
—
—
178,972
178,972
53,244
613
10,047
2,272
—
53,982
613
10,047
2,272
—
—
—
—
—
—
—
496,184
505,181
—
—
—
—
1,266
2,157
178,972
178,972
53,244
613
496,184
10,047
2,272
1,266
53,982
613
505,181
10,047
2,272
2,157
Financial liabilities
Demand deposits
Time deposits
Borrowings
Accrued interest payable
$
466,707
$
466,707
$
— $
— $
— $
— $
466,707
$
466,707
—
—
—
—
—
—
133,692
105,133
262
134,162
107,584
262
—
—
—
—
—
—
133,692
105,133
262
134,162
107,584
262
139
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14 - Fair Value Accounting and Measurement (continued)
Financial assets and liabilities other than investment securities are not traded in active markets. Estimated fair values require subjective
judgments and are approximate. The estimates of fair value in the previous table are not necessarily representative of amounts that could
be realized in actual market transactions, or of the underlying value of the Company. Fair value estimates, methods, and assumptions are
set forth below for the Company's financial instruments:
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 and
due from banks, interest bearing deposits with banks, loans held for sale, FHLB stock, accrued interest receivable, and accrued interest
payable. 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.
Securities - Fair values for investment securities are primarily measured using information from a third-party pricing service. The
pricing service uses evaluated pricing models based on market data. In the event that limited or less transparent information is provided
by the third-party pricing service, fair value is estimated using secondary pricing services or non-binding third-party broker quotes.
Loans receivable, net - Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated
by type, including fixed and variable one- to four-family residential real estate, commercial, and consumer loans. There is an accurate
and reliable secondary market for one- to four-family residential mortgage production, and available market benchmarks are used to
establish discount factors for estimating fair value for these types of loans. Commercial and consumer loans use market benchmarks
when available; however, due to the varied term structures and credit issues involved, they mainly rely on cash flow projections and
repricing characteristics within the loan portfolio. These amounts are discounted further by embedded probable losses expected to be
realized in the portfolio.
Valuations of impaired loans, real estate owned and repossessed assets are periodically performed by management, and the fair values
of these loans are carried at the fair value of the underlying collateral less estimated costs to sell. Fair value of the underlying collateral
may be determined using an appraisal performed by a qualified independent appraiser.
Mortgage servicing rights - The estimated fair value of mortgage servicing rights is based on market prices for comparable mortgage
servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future
net servicing income.
Deposits - The fair value of deposits with no stated maturity, such as non-interest bearing deposits, savings and interest checking
accounts, and money market accounts, is equal to the amount payable on demand as of June 30, 2015 and 2014. The fair value of
certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently
offered for deposits of similar remaining maturities.
Borrowings - The fair value of FHLB advances and other borrowings are calculated using a discounted cash flow method, adjusted
for market interest rates and terms to maturity.
Off-balance-sheet financial instruments - Commitments to extend credit represent all off-balance-sheet financial instruments. The
fair value of these commitments is not significant.
140
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15 - Earnings per Share
Basic earnings per share are computed by dividing income available to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts
to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in
the earnings of the entity. Basic and diluted earnings per share are the same amount at June 30, 2015 as the Company does not have any
additional potential dilutive common shares.
The following table presents a reconciliation of the components used to compute basic and diluted loss per share for the periods shown.
Numerator:
Net (loss) income
Denominator:
Year Ended June 30,
2015
2014
$
(5,090) $
2,668
Denominator for basic and diluted earnings per share -
weighted average common shares outstanding
12,165,071
na(1)
Basic and diluted loss per share
$
(0.42)
(1) Earnings per share and share calculations are not applicable (na) as the Company completed its
stock conversion and became a public company on January 29, 2015.
As of June 30, 2015, the ESOP had purchased 952,799 shares in the open market. Unallocated ESOP shares are not included as outstanding
shares for basic or diluted earnings per share calculations. As of June 30, 2015, 17,510 shares have been allocated to employees through
the ESOP while 935,289 shares remain unallocated.
141
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16 - Parent Company Only Financial Statements
Presented below are the condensed balance sheet, statement of operations, and statement of cash flows for First Northwest Bancorp.
FIRST NORTHWEST BANCORP
Condensed Balance Sheet
(In thousands)
ASSETS
June 30, 2015
Cash and due from banks
Investment securities available for sale, at fair value
Investment in bank
ESOP loan receivable
Accrued interest receivable
Deferred tax asset, net
Receivable from subsidiary
Prepaid expenses and other assets
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Stockholders' equity
Total liabilities and stockholders' equity
$
$
$
$
6,676
39,668
130,647
11,630
171
1,372
185
439
190,788
107
190,681
190,788
FIRST NORTHWEST BANCORP AND SUBSIDIARY
Condensed Statement of Operations
(In thousands)
Year Ended
June 30, 2015
Operating income:
Interest and fees on loans receivable
Interest on mortgage-backed and related securities
Interest on investment securities
Total operating income
Operating expenses:
Charitable contributions
Other expenses
Total operating expenses
Loss before benefit from federal income taxes and equity in
undistributed earnings of subsidiary
Federal income tax benefit
Loss before equity in undistributed income in subsidiary
Equity in undistributed earnings of subsidiary
Net loss
142
$
$
106
24
114
244
9,734
89
9,823
(9,579)
(1,335)
(8,244)
3,139
(5,105)
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST NORTHWEST BANCORP AND SUBSIDIARY
Condensed Statement of Cash Flows
(In thousands)
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash from operating activities:
Equity in undistributed earnings of subsidiary
Amortization of premiums and accretion of discounts on
investments, net
Change in deferred tax assets, net
Change in receivable from subsidiary
Change in other assets
Change in other liabilities
Net cash used by operating activities
Cash flows from investing activities:
Purchase of securities available for sale
Proceeds from maturities, calls, and principal repayments of
securities available for sale
Investment in subsidiary
ESOP loan origination, net of repayments
Net cash used by investing activities
Cash flows from financing activities:
Proceeds from issuance of common stock, net of expenses
Net cash provided by financing activities
Net increase in cash
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
NONCASH INVESTING ACTIVITIES
Unrealized loss on securities available for sale
Year Ended June 30,
2015
$
(5,105)
(3,139)
80
(1,239)
(185)
(611)
107
(10,092)
(41,106)
967
(58,404)
(11,630)
(110,173)
126,941
126,941
6,676
—
6,676
(393)
$
$
143
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17 - Summarized Consolidated Quarterly Financial Data (Unaudited)
The following table presents summarized consolidated quarterly data for each of the last two years.
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
(In thousands, except share data)
2015
Total interest income
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan
losses
Total noninterest income
Total noninterest expense
Income (loss) before provision for (benefit
from) federal income tax expense
Provision for (benefit from) federal income tax
expense
Net income (loss)
Basic earnings (loss) per share
Diluted earnings (loss) per share
2014
Total interest income
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan
losses
Total noninterest income
Total noninterest expense
Income before provision for federal income tax
expense
Provision for federal income tax expense
Net income
Basic earnings (loss) per share
Diluted earnings (loss) per share
$
$
na (1)
na (1)
$
$
6,630
1,107
5,523
—
5,523
1,142
5,517
1,148
299
849
$
na (1)
na (1)
$
6,361
1,231
5,130
433
4,697
1,142
4,966
873
193
680
$
na (1)
na (1)
$
na (1)
na (1)
(1) Not applicable as no shares were issued during these periods.
6,717
1,116
5,601
—
5,601
979
5,442
1,138
256
882
6,590
1,212
5,378
(1)
5,379
1,159
5,346
1,192
335
857
$
$
$
$
$
$
na (1)
na (1)
$
6,891
1,162
5,729
—
5,729
1,293
15,761
(8,739)
(1,160)
(7,579) $
(0.62) $
(0.62) $
$
6,754
1,172
5,582
367
5,215
1,160
5,824
551
92
459
$
na (1)
na (1)
7,249
1,207
6,042
—
6,042
1,293
6,326
1,009
251
758
0.06
0.06
6,854
1,114
5,740
508
5,232
1,529
5,969
792
120
672
144
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures: An evaluation of the Company’s disclosure controls and
procedures (as defined in Section 13a-15(e) of the Securities Exchange Act of 1934 (the “Act”)) was carried out under
the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and several
other members of the Company’s senior management as of the end of the period covered by this report. The Company’s
Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures
in effect as of June 30, 2015 were effective in ensuring that the information required to be disclosed by the Company
in the reports it files or submits under the Act was (i) accumulated and communicated to the Company’s management
(including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and forms.
(b) Exemption from Management’s Report on Internal Control over Financial Reporting for the Fiscal Year Ended
June 30, 2015: This Annual Report on Form 10-K does not include a report of management’s assessment regarding
internal control over financial reporting or an attestation report of our independent registered public accounting firm
due to a transition period established by the rules of the SEC for newly public companies.
(c) Changes in Internal Controls: There have been no changes in the Company’s internal control over financial
reporting during the year ended June 30, 2015 that have materially affected, or are reasonably likely to materially affect,
the Company’s internal control over financial reporting.
The Company intends to continually review and evaluates the design and effectiveness of its disclosure controls and
procedures and to improve its controls and procedures over time and to correct any deficiencies that it may discover
in the future. The goal is to ensure that senior management has timely access to all material financial and non-financial
information concerning the Company's business. While the Company believes the present design of its disclosure
controls and procedures is effective to achieve its goal, future events affecting its business may cause the Company to
modify its disclosure controls and procedures. The Company does not expect that its disclosure controls and procedures
and internal control over financial reporting will prevent every error or instance of fraud. A control procedure, no
matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of
the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that
breakdowns in controls or procedures can occur because of simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or more people, or by management override
of the control. The design of any control procedure is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential
future conditions; over time, controls become inadequate because of changes in conditions, or the degree of compliance
with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure,
misstatements due to error or fraud may occur and not be detected.
Item 9B. Other Information
Not applicable.
145
Item 10. Directors, Executive Officers and Corporate Governance
PART III
The information contained under the section captioned “ Proposal 1 – Election of Directors” in the Company’s proxy
statement, a copy of which will be filed with the SEC no later than 120 days after the Company’s year end (the “Proxy
Statement”) is incorporated herein by reference.
For information regarding the executive officers of the Company and the Bank, see the information contained herein
under the section captioned “Item 1. Business – Employees – Executive Officers.”
Audit Committee Financial Expert. The Audit Committee of the Company is composed of Directors Jennifer Zaccardo
(Chairperson), David Blake, Lloyd Eisenman, Richard Kott, and Norman Tonina. Each member of the Audit Committee
is “independent” as defined in the Nasdaq Stock Market listing standards. The Board of Directors has determined that
Ms. Zaccardo meets the definition of “audit committee financial expert,” as defined by the SEC.
Code of Ethics. The Board of Directors has adopted a Code of Ethics for the Company’s officers (including its senior
financial officers), directors and employees. The Code is applicable to the Company’s principal executive officer and
senior financial officers. The Company’s Code of Ethics is posted on its website at www.ourfirstfed.com.
Compliance with Section 16(a) of the Exchange Act. The information contained under the section captioned “Section
16(a) Beneficial Ownership Reporting Compliance” is included in the Company’s Proxy Statement and is incorporated
herein by reference.
Nomination Procedures. There have been no material changes to the procedures by which shareholders may recommend
nominees to the Company's Board of Directors.
Item 11. Executive Compensation
The information contained in the section captioned “Executive Compensation” and "Directors' Compensation" in the
Proxy Statement is 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.
The information contained in 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 contained in the section captioned “Security Ownership of Certain Beneficial Owners and
Management” in the Proxy Statement is incorporated herein by reference.
(c) Changes In Control
The Company is not aware of any arrangements, including any pledge by any person of securities of the Company,
the operation of which may at a subsequent date result in a change in control of the Company.
(d) Equity Compensation Plan Information
The Company has not established any equity compensation plans as of June 30, 2015.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Related Transactions. The information contained in the section captioned “Meetings and Committees of the
Board of Directors and Corporate Governance Matters – Corporate Governance – Transactions with Related Persons”
in the Proxy Statement is incorporated herein by reference.
146
Director Independence. The information contained in the section captioned “Meetings and Committees of
the Board of Directors and Corporate Governance Matters – Corporate Governance – Director Independence” in the
Proxy Statement is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
The information contained under the section captioned “Proposal 5 – Ratification of Appointment of
Independent Auditor” is included in the Company’s Proxy Statement and is incorporated herein by reference.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a)
1. Financial Statements.
For a list of the financial statements filed as part of this report see Part II – Item 8.
2. Financial Statement Schedules.
All schedules have been omitted as the required information is either inapplicable or contained in the Consolidated
Financial Statements or related Notes contained in Part II, Item 8 of this Form 10-K.
3. Exhibits:
Exhibits are available from the Company by written request.
3.1
3.2
4.1
10.1
10.2
10.3
10.4
10.5
10.6
14
21
31.1
31.2
32
101
Articles of Incorporation, as amended (1)
Bylaws (1)
Form of Stock Certificate of the Company (1)
Form of Employee Severance Compensation Plan (1)
401(k) Retirement Plan (1)
Severance Agreement with Elaine T. Gentilo (2)
Form of Employment Agreement with Laurence J. Hueth, Regina M. Wood, Christopher A. Donohue,
Kelly A. Liske and Jeffrey S. Davis (3)
First Federal Fiscal Year 2016 Cash Incentive Plan (4)
Form of Participation Agreement under the First Federal Fiscal Year 2016 Cash Incentive Plan (4)
Code of Ethics (5)
Subsidiaries of Registrant
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 and Chief Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act
The following materials from First Northwest Bancorp's Annual Report on Form 10-K for the year ended
June 30, 2015, formatted in Extensible Business Reporting Language (XBRL): (1) Consolidated Balance
Sheets; (2) Consolidated Statements of Operations; (3) Consolidated Statements of Comprehensive (Loss)
Income; (4) Consolidated Statements of Changes in Stockholders' Equity; (5) Consolidated Statements of
Cash Flows; and (6) Notes to Consolidated Financial Statements
___________________
(1)
(2)
(3)
(4)
(5)
Filed as an exhibit to the Company’s Registration Statement on Form S-1, as amended (File No. 333-185101) and
incorporated herein by reference.
Filed as an exhibit to the Company's Current Report on Form 8-K filed May 14, 2015 (File No. 001-36741) and
incorporated herein by reference.
Filed as an exhibit to the Company's Current Report on Form 8-K filed August 3, 2015 (File No. 001-36741) and
incorporated herein by reference.
Filed as an exhibit to the Company's Current Report on Form 8-K filed August 27, 2015 (File No. 001-36741) and
incorporated herein by reference.
The Company elects to satisfy Regulation S-K §229.406(c) by posting its Code of Ethics on its website at
www.ourfirstfed.com.
Copies of these exhibits are available upon written request to Investor Relations, First Northwest Bancorp, 105 West
8th Street, Port Angeles, Washington 98362.
147
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.
SIGNATURES
September 25, 2015
FIRST NORTHWEST BANCORP
By: /s/Laurence J. Hueth
Laurence J. Hueth
President, Chief Executive Officer and Director
(Duly Authorized Representative)
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.
By: /s/Laurence J. Hueth
Laurence J. Hueth
President, Chief Executive Officer and Director
(Principal Executive Officer)
September 25, 2015
By: /s/Regina M. Wood
Regina M. Wood
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
September 25, 2015
By: /s/Stephen E. Oliver
September 25, 2015
Stephen E. Oliver
Chairman of the Board and Director
By: /s/David A. Blake
September 25, 2015
David A. Blake
Director
By: /s/Richard G. Kott
September 25, 2015
Richard G. Kott
Director
By: /s/Lloyd J. Eisenman
September 25, 2015
Lloyd J. Eisenman
Director
By: /s/Cindy H. Finnie
September 25, 2015
Cindy H. Finnie
Director
148
By: /s/David T. Flodstrom
September 25, 2015
David T. Flodstrom
Director
By: /s/Jennifer Zaccardo
September 25, 2015
Jennifer Zaccardo
Director
By: /s/Norman J. Tonina, Jr.
September 25, 2015
Norman J. Tonina, Jr.
Director
By: /s/Craig Curtis
September 25, 2015
Craig Curtis
Director
149
Annual Meeting
The annual meeting of shareholders will be held at the Red
Lion Hotel Olympic Room at 221 North Lincoln Street, Port
Angeles, WA 98362 on Monday, November 16, 2015 at
10:00am, Pacific Time.
Website Address
www.ourfirstfed.com
Special Counsel
Breyer & Associates PC
8180 Greensboro Drive, Suite 785
McLean, VA 22102
Independent Registered
Public Accounting Firm
Moss Adams LLP
2707 Colby Avenue, Suite 801
Everett, WA 98201
Transfer Agent
Computershare
P.O. BOX 30170
College Station, TX 77842-3170
(866) 289-7521
Board of Directors
Stephen E. Oliver, Chairman
David A. Blake, Vice Chairman
Craig A. Curtis
Lloyd J. Eisenman
Cindy H. Finnie
David T. Flodstrom
Laurence J. Hueth
Richard G. Kott
Norman J. Tonina, Jr.
Jennifer Zaccardo
First Northwest
Bancorp Offi cers
Laurence J. Hueth, President and Chief Executive Officer
Regina M. Wood, Executive Vice President, Chief Financial
Officer and Treasurer
Joyce L. Ruiz, Senior Vice President and Chief
Administrative Officer/Corporate Secretary
Market Information
First Northwest Bancorp is traded on the NASDAQ Global
Select Market under the symbol FNWB
Financial Information
Requests for copies of our Form 10-K and Forms 10-Q filed with
the Securities and Exchange Commission should be directed in
writing to:
Regina M. Wood
Executive Vice President
Chief Financial Officer and Treasurer
First Northwest Bancorp
P.O. BOX 351
Port Angeles, WA 98362
Corporate Profi le
First Northwest Bancorp (the “Corporation”), a Washington
corporation, was organized for the purpose of becoming the
holding company for First Federal Savings and Loan Association
of Port Angeles (the “Bank” or “First Federal”), upon the
Bank’s conversion from a mutual to a stock savings bank
(“Conversion”). The Conversion was completed in January
2015. The Corporation does not engage in any significant
activity other than holding the stock of the Bank. First Federal
is a community-based savings bank primarily serving Western
Washington through its full-service banking offices and loan
production office, which are located within Clallam, Jefferson,
Kitsap and Whatcom counties, Washington. First Federal’s
business consists of attracting deposits from the public and
utilizing those deposits to originate loans.
First Federal Offi cers
Laurence J. Hueth, President and Chief Executive Officer
Regina M. Wood, Executive Vice President, Chief Financial
Officer and Treasurer
Jeffrey S. Davis, Executive Vice President and
Chief Operations Officer
Christopher A. Donohue, Executive Vice President and Chief
Credit Officer
Kelly A. Liske, Executive Vice President and Chief
Banking Officer
Brett Bies, Senior Vice President and Chief
Information Officer
Ed Brady, Senior Vice President and Chief Risk Officer/
Compliance and BSA Officer
Joyce L. Ruiz, Senior Vice President and Chief Administrative
Officer/Corporate Secretary
Customer Contact Center
360.417.3204
800.800.1577 toll-free
Hours:
M–F 7:00 am–7:00 pm
Sat 9:00 am–1:00 pm
Locations:
Port Angeles
Corporate Office /
Administration Center
105 West Eighth Street
Port Angeles, WA 98362
Downtown
141 West First Street
Port Angeles, WA 98362
Eastside
1603 East First Street
Port Angeles, WA 98362
Sixth Street
227 East Sixth Street
Port Angeles, WA 98362
Sequim
Sequim Avenue
333 North Sequim Avenue
Sequim, WA 98382
Sequim Village Marketplace
1201 West Washington Street
Sequim, WA 98382
Forks
131 Calawah Way
Forks, WA 98331
Port Townsend
1321 Sims Way
Port Townsend, WA 98368
Silverdale
3035 Bucklin Hill Road
Silverdale, WA 98383
Bellingham Coming Winter 2015!
1207 Barkley Boulevard
Bellingham, WA 98226
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