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EX-32 - EXHIBIT 32 - First Financial Northwest, Inc.ffnw-2017331x10qexx32.htm
EX-31.2 - EXHIBIT 31.2 - First Financial Northwest, Inc.ffnw-2017331x10qexx312.htm
EX-31.1 - EXHIBIT 31.1 - First Financial Northwest, Inc.ffnw-2017331x10qexx311.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the quarterly period ended March 31, 2017
 
 
or
[   ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
           For the transition period from ____________ to ____________
 
Commission File Number: 001-33652
 
 
FIRST FINANCIAL NORTHWEST, INC.
(Exact name of registrant as specified in its charter)
 
Washington
 
26-0610707
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)
 
 
 
201 Wells Avenue South, Renton, Washington
 
98057
(Address of principal executive offices)
 
(Zip Code)
 
 
 
Registrant’s telephone number, including area code:
 
(425) 255-4400
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES    X   NO      

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

YES    X   NO      

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES       NO   X   

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of May 5, 2017, 11,035,791 shares of the issuer’s common stock, $0.01 par value per share, were outstanding.



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


2

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


Part 1. Financial Information

Item 1. Financial Statements

 
March 31, 2017
 
December 31, 2016
Assets
 
(Unaudited)
 
 
Cash on hand and in banks
$
6,066

 
$
5,779

Interest-earning deposits with banks
20,007

 
25,573

Investments available-for-sale, at fair value
129,662

 
129,260

Loans receivable, net of allowance of $11,158 and $10,951
838,768

 
815,043

Federal Home Loan Bank ("FHLB") stock, at cost
8,102

 
8,031

Accrued interest receivable
3,389

 
3,147

Deferred tax assets, net
2,907

 
3,142

Other real estate owned ("OREO")
2,281

 
2,331

Premises and equipment, net
18,912

 
18,461

Bank owned life insurance ("BOLI"), net
27,534

 
24,153

Prepaid expenses and other assets
2,892

 
2,664

Total assets
$
1,060,520

 
$
1,037,584

 
 
 
 
Liabilities and Stockholders' Equity
 

 
 
Deposits:
 
 
 
Noninterest-bearing deposits
$
36,190

 
$
33,422

Interest-bearing deposits
698,517

 
684,054

Total deposits
734,707

 
717,476

FHLB Advances
171,500

 
171,500

Advance payments from borrowers for taxes and insurance
4,092

 
2,259

Accrued interest payable
237

 
231

Other liabilities
8,235

 
7,993

Total liabilities
918,771

 
899,459

 
 

 
 
Commitments and contingencies


 


Stockholders' Equity
 

 
 
Preferred stock, $0.01 par value; authorized 10,000,000 shares; no shares
issued or outstanding

 

Common stock, $0.01 par value; authorized 90,000,000 shares; issued and
outstanding 11,035,791 shares at March 31, 2017, and 10,938,251
shares at December 31, 2016
110

 
109

Additional paid-in capital
98,186

 
96,852

Retained earnings, substantially restricted
50,702

 
48,981

Accumulated other comprehensive loss, net of tax
(1,042
)
 
(1,328
)
Unearned Employee Stock Ownership Plan ("ESOP") shares
(6,207
)
 
(6,489
)
Total stockholders' equity
141,749

 
138,125

Total liabilities and stockholders' equity
$
1,060,520

 
$
1,037,584


See accompanying selected notes to consolidated financial statements.

3


FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
Consolidated Income Statements
(Dollars in thousands, except per share data)
(Unaudited)

 
Three Months Ended March 31,
 
2017
 
2016
Interest income
 
 
 
Loans, including fees
$
10,027

 
$
8,727

Investments available-for-sale
845

 
675

Interest-earning deposits with banks
44

 
113

Dividends on FHLB stock
82

 
47

Total interest income
10,998

 
9,562

Interest expense
 
 
 
Deposits
1,691

 
1,483

FHLB advances
445

 
298

Total interest expense
2,136

 
1,781

Net interest income
8,862

 
7,781

Provision (recapture of provision) for loan losses
200

 
(100
)
Net interest income after provision (recapture of provision) for loan losses
8,662

 
7,881

Noninterest income
 
 
 
BOLI income
201

 
165

Wealth management revenue
140

 
210

Other
194

 
105

Total noninterest income
535

 
480

Noninterest expense
 

 
 
Salaries and employee benefits
4,285

 
3,774

Occupancy and equipment
480

 
508

Professional fees
439

 
468

Data processing
240

 
190

Gain on sale of OREO property, net

 
(1
)
OREO market value adjustments
50

 
258

OREO related reimbursements, net
(10
)
 
(20
)
Regulatory assessments
96

 
120

Insurance and bond premiums
99

 
88

Marketing
48

 
36

Other general and administrative
341

 
352

Total noninterest expense
6,068

 
5,773

Income before federal income tax provision
3,129

 
2,588

Federal income tax provision
785

 
763

Net income
$
2,344

 
$
1,825

Basic earnings per common share
$
0.23

 
$
0.14

Diluted earnings per common share
$
0.22

 
$
0.14

Basic weighted average number of common shares outstanding
10,319,722

 
12,744,694

Diluted weighted average number of common shares outstanding
10,504,046

 
12,905,527

See accompanying selected notes to consolidated financial statements.

4


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


 
Three Months Ended March 31,
 
2017
 
2016
Net income
$
2,344

 
$
1,825

Other comprehensive income, before tax:
 
 
 
Gross unrealized holding gains on investments available-for-sale
377

 
1,443

Tax provision
(132
)
 
(506
)
Gain on cash flow hedge
63

 

Tax provision
(22
)
 

Other comprehensive income, net of tax
286

 
937

Total comprehensive income
$
2,630

 
$
2,762


See accompanying selected notes to consolidated financial statements.



5


FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity
(Dollars in thousands except share data)
(Unaudited)


 
Shares
 
Common Stock
 
Additional Paid-in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive (Loss) Income,
 net of tax
 
Unearned
ESOP
Shares
 
Total Stockholders’ Equity
Balances at December 31, 2015
13,768,814

 
$
138

 
$
136,338

 
$
42,892

 
$
(1,077
)
 
$
(7,618
)
 
$
170,673

Other comprehensive income


 


 


 
1,825

 
937

 


 
2,762

Exercise of stock options
55,673

 


 
1,348

 


 


 


 
1,348

Compensation related to stock options and restricted stock awards


 


 
93

 


 


 


 
93

Allocation of 28,213 ESOP shares


 


 
95

 


 


 
283

 
378

Repurchase and retirement of common stock
(314,087
)
 
(3
)
 
(5,310
)
 


 


 


 
(5,313
)
Cash dividend declared and paid ($0.06 per share)


 


 


 
(763
)
 


 


 
(763
)
Balances at March 31, 2016
13,510,400

 
$
135

 
$
132,564

 
$
43,954

 
$
(140
)
 
$
(7,335
)
 
$
169,178


 
Shares
 
Common 
Stock
 
Additional 
Paid-in
Capital
 
Retained
Earnings
 
Accumulated Other Comprehensive (Loss) Income,  net of tax
 
Unearned
ESOP
Shares
 
Total
Stockholders' Equity
Balances at December 31, 2016
10,938,251

 
$
109

 
$
96,852

 
$
48,981

 
$
(1,328
)
 
$
(6,489
)
 
$
138,125

Net income


 


 


 
2,344

 


 


 
2,344

Other comprehensive income


 


 


 


 
286

 


 
286

Exercise of stock options
97,540

 
1

 
953

 


 


 


 
954

Compensation related to stock options and restricted stock awards

 

 
110

 


 


 


 
110

Allocation of 28,214 ESOP shares

 

 
271

 


 


 
282

 
553

Cash dividend declared and paid ($0.06 per share)


 

 


 
(623
)
 


 


 
(623
)
Balances at March 31, 2017
11,035,791

 
$
110

 
$
98,186

 
$
50,702

 
$
(1,042
)
 
$
(6,207
)
 
$
141,749


See accompanying selected notes to consolidated financial statements.

6


FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)

 
Three Months Ended March 31,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net income
$
2,344

 
$
1,825

Adjustments to reconcile net income to net cash provided by
operating activities:
 

 
 
Provision (recapture of provision) for loan losses
200

 
(100
)
OREO market value adjustments
50

 
258

Gain on sale of OREO property, net

 
(1
)
Depreciation of premises and equipment
260

 
251

Amortization of premiums and discounts on investments available-for-sale, net
167

 
250

Deferred federal income taxes
81

 
133

Allocation of ESOP shares
553

 
378

Stock compensation expense
110

 
93

Change in cash surrender value of BOLI
(201
)
 
(165
)
Changes in operating assets and liabilities:
 
 
 

Prepaid expenses and other assets
(165
)
 
(237
)
Net increase in advance payments from borrowers for taxes and insurance
1,833

 
1,830

Accrued interest receivable
(242
)
 
(146
)
Accrued interest payable
6

 
(29
)
Other liabilities
242

 
(125
)
Net cash provided by operating activities
5,238

 
4,215

Cash flows from investing activities:
 

 
 

Proceeds from sales of OREO properties

 
1

Proceeds from calls and sales of investments available-for-sale
26

 
45

Principal repayments on investments available-for-sale
2,790

 
3,864

Purchases of investments available-for-sale
(3,008
)
 
(8,285
)
Net increase in loans receivable
(23,925
)
 
(32,311
)
(Purchase) redemption of FHLB stock
(71
)
 
1,306

Purchases of premises and equipment
(711
)
 
(709
)
Purchase of BOLI
(3,180
)
 

Net cash used by investing activities
(28,079
)
 
(36,089
)
Cash flows from financing activities:
 

 
 

Net increase (decrease) in deposits
17,231

 
(6,851
)
Repayments of advances from the FHLB

 
(34,000
)
Proceeds from stock options exercises
954

 
1,348

Repurchase and retirement of common stock

 
(5,313
)
Dividends paid
(623
)
 
(763
)
Net cash provided (used) by financing activities
17,562

 
(45,579
)
 
 
 
 
Continued
 
 
 

7


FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)

 
 
 
 
 
Three Months Ended March 31,
 
2017
 
2016
 
 
 
 
Net decrease in cash and cash equivalents
$
(5,279
)
 
$
(77,453
)
Cash and cash equivalents at beginning of period
31,352

 
105,711

Cash and cash equivalents at end of period
$
26,073

 
$
28,258

 
 
 
 
Supplemental disclosures of cash flow information:
 

 
 

Cash paid during the period for:
 

 
 

Interest paid
$
2,130

 
$
1,810

Federal income taxes paid

 
500

Noncash items:
 

 
 

Change in unrealized loss on investments available-for-sale
$
377

 
$
1,443

Change in gain on cash flow hedge
63

 


See accompanying selected notes to consolidated financial statements.


8



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

Note 1 - Description of Business

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

First Financial Northwest Bank is headquartered in Renton, Washington, where it has a full-service retail branch as well as a smaller branch located in a commercial development known as the “Landing”. Two additional, smaller branches are located in Mill Creek and Edmonds, both in Snohomish County, Washington. The Bank has received regulatory approval to open two new branches in King County. The first is expected to open in the second quarter of 2017 in the community of Crossroads in Bellevue, Washington, and the second is expected to open in the fourth quarter of 2017 in Bothell, Washington. The Bank’s primary market area consists of King, Snohomish, Pierce and Kitsap counties, Washington.

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

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

Note 2 - Basis of Presentation

The accompanying unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"). Accordingly, they do not include all of the information and footnotes required by U.S. Generally Accepted Accounting Principles (“GAAP”) for complete financial statements. These unaudited interim consolidated financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the SEC. In our opinion, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of the unaudited interim consolidated financial statements in accordance with GAAP have been included. All significant intercompany balances and transactions between the Company and its subsidiaries have been eliminated in consolidation. Operating results for the three months ended March 31, 2017, are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. In preparing the unaudited consolidated financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the allowance for loan and lease losses (“ALLL”), the valuation of other real estate owned (“OREO”) and the underlying collateral of impaired loans, deferred tax assets, and the fair value of financial instruments.

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

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


9


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


Note 3 - Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606). In August 2015, FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606) which postponed the effective date of 2014-09. Subsequently, in March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations. This amendment clarifies that an entity should determine if it is the principal or the agent for each specified good or service promised in a contract with a customer. In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. The core principle of Topic 606 is that an entity must recognize revenue when it has satisfied a performance obligation of transferring promised goods or services to a customer. The standard is effective for public entities for interim and annual periods beginning after December 15, 2017; early adoption is not permitted. The standard allows for full retrospective adoption for all periods presented or modified retrospective adoption to only the most current period presented in the financial statements. The cumulative effect of initially applying the standard is recognized at the date of the initial application. Our primary source of revenue is interest income, which is recognized as it is earned and is deemed to be in compliance with this ASU. With respect to noninterest income, the Company is in its preliminary stages of identifying and evaluating the revenue streams and underlying revenue contracts within the scope of the guidance. The Company is expecting to begin developing processes and procedures during 2017 to ensure it is fully compliant with these amendments. To date, the Company has not yet identified any significant changes in the timing of revenue recognition when considering the amended accounting guidance; however, the Company’s implementation efforts are ongoing and such assessments may change prior to the January 1, 2018 implementation date. Accordingly, the Company does not expect implementation of this standard to have a material impact on our consolidated financial statements.

In January 2016, FASB issued ASU No. 2016-01, Financial Instruments--Overall, Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 requires equity investments (except those accounted for under the equity method of accounting) to be measured at fair value with changes in fair value recognized in net income. The amendments in this ASU also require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in instrument-specific credit risk. In addition, the ASU eliminates the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. The ASU also clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The amendments in this ASU are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early application is permitted for fiscal years or interim periods that have not yet been issued if adopted at the beginning of the fiscal year. The Company is reviewing our available-for-sale investment portfolio in accordance with the provision of this standard. The adoption of ASU 2016-01 is not expected to have a material impact on the Company’s consolidated financial statements.
        
In February 2016, FASB issued ASU No. 2016-02, Leases (Topic 842). ASU No. 2016-02 requires lessees to recognize on the balance sheet the assets and liabilities arising from operating leases. A lessee should recognize a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. A lessee should include payments to be made in an optional period only if the lessee is reasonably certain to exercise an option to extend the lease or not to exercise an option to terminate the lease. For a finance lease, interest payments should be recognized separately from amortization of the right-of-use asset in the statement of comprehensive income. For operating leases, the lease cost should be allocated over the lease term on a generally straight-line basis. The amendments in ASU 2016-02 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application of the amendments in the ASU is permitted. The effect of the adoption will depend on leases at the time of adoption. Once adopted, we expect to report higher assets and liabilities as a result of including right-of-use assets and lease liabilities related to certain banking offices and certain equipment under noncancelable operating lease agreements, however, based on current leases, the adoption is expected to increase our consolidated balance sheets by less than 5% and not to have a material impact on our regulatory capital ratios.
In June 2016, FASB issued ASU No. 2016-13, Financial Instruments--Credit Losses (Topic 326). This ASU replaces the existing incurred loss impairment methodology that recognizes credit losses when a probable loss has been incurred with new methodology where loss estimates are based upon lifetime expected credit losses. The amendments in this ASU require a financial asset that is measured at amortized cost to be presented at the net amount expected to be collected. The income statement would then reflect the measurement of credit losses for newly recognized financial assets as well as changes to the expected credit losses that have taken place during the reporting period. The measurement of expected credit losses will be based on historical information, current conditions, and reasonable and supportable forecasts that impact the collectability of the reported amount. Available-for-sale securities will bifurcate the fair value mark and establish an allowance for credit losses through the income statement for the

10


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


credit portion of that mark. The interest portion will continue to be recognized through accumulated other comprehensive income or loss. The change in allowance recognized as a result of adoption will occur through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the ASU is adopted. The amendments in this ASU are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted for fiscal years beginning after December 15, 2018. The Company is evaluating our current expected loss methodology of our loan and investment portfolios to identify the necessary modifications in accordance with this standard and expects a change in the processes and procedures to calculate the ALLL, including changes in assumptions and estimates to consider expected credit losses over the life of the loan versus the current accounting practice that utilizes the incurred loss model. A valuation adjustment to our ALLL or investment portfolio that is identified in this process will be reflected as a one-time adjustment in equity rather than earnings. We are evaluating the potential impact adoption of this standard will have on our consolidated financial statements and expect to shortly begin developing and implementing processes and procedures to ensure we are fully compliant with the amendments at the adoption date. Once adopted, we expect our allowance for loan losses to increase, however, until our evaluation is complete the magnitude of the increase will be unknown.

In August 2016, FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This ASU was to address the appropriate classification of eight specific cash flow issues on the cash flow statement. Debt prepayment costs should be classified as an outflow for financing activities. Settlement of zero-coupon debt instruments divides the interest portion as an outflow for operating activities and the principal portion as an outflow for financing activities. Contingent consideration payments made after a business combination should be classified as outflows for financing and operating activities. Proceeds from the settlement of bank-owned life insurance policies should be classified as inflows from investing activities. Other specific areas are identified in the ASU as to the appropriate classification of the cash inflows or outflows. The amendments in this ASU are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted and must be applied using a retrospective transition method to each period presented. The Company is evaluating our current cash flow statement classifications in accordance with the standard. Adoption of ASU 2016-15 is not expected to have a material impact on the Company’s consolidated financial statements.

In January 2017, FASB issued ASU 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments-Equity Method and Joint Ventures (Topic 323). The ASU amends the Codification for SEC staff announcements made at recent Emerging Issues Task Force (EITF) meetings. The SEC guidance that specifically relates to the Company’s consolidated financial statements was from the September 2016 meeting, where the SEC staff expressed their expectations about the extent of disclosures registrants should make about the effects of the new FASB guidance as well as any amendments issued prior to adoption, in particular on revenue (ASU 2014-09), leases (ASU 2016-02) and credit losses on financial instruments (ASU 2016-13) in accordance with Staff Accounting Bulletin Topic 11.M. Registrants are required to disclose the effect that recently issued accounting standards will have on their financial statements when adopted in a future period. In cases where a registrant cannot reasonably estimate the impact of the adoption, then additional qualitative disclosures should be considered. The ASU incorporates these SEC staff views into Topic 250 and adds references to that guidance in the transition paragraphs of each of the three new standards. The Company has adopted the amendments in this ASU and appropriate disclosures have been included in this Note for each recently issued accounting standard.

In January 2017, FASB issued ASU No. 2017-04, Intangibles--Goodwill and Other (Topic 350). This ASU simplifies the impairment calculation for subsequent measurement of goodwill by eliminating the step of comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Under the amendments in this ASU, an entity will evaluate the carrying amount of a reporting unit to its fair value, as if the reporting unit had been acquired in a business combination. An impairment charge should be recognized for the amount that the carrying amount exceeds the fair value, not to exceed the amount of goodwill. The income tax effect should be considered for any tax deductible goodwill when measuring the impairment loss. While the Company does not have any goodwill to recognize from any previous transaction, this ASU will apply to the impairment analysis of goodwill recognized in future transactions. The amendments in this ASU are effective for goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for reporting periods after January 1, 2017. Adoption of ASU 2017-04 is not expected to have a material impact on the Company’s consolidated financial statements.
    
In March 2017, the FASB issued ASU No. 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. The ASU shortens the amortization period for certain callable debt securities held at a premium. The standard will take effect for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The adoption of ASU No. 2017-08 is not expected to have a material impact on the Company's consolidated financial statements.

Note 4 - Investments

11


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



Investments available-for-sale are summarized as follows at the dates indicated:
 
March 31, 2017
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value

(In thousands)
Mortgage-backed investments:
 
 
 
 
 
 
 
   Fannie Mae
$
41,858

 
$
118

 
$
(757
)
 
$
41,219

   Freddie Mac
17,126

 
86

 
(58
)
 
17,154

   Ginnie Mae
18,705

 
36

 
(591
)
 
18,150

Municipal bonds
13,163

 
52

 
(64
)
 
13,151

U.S. Government agencies
15,521

 
85

 
(148
)
 
15,458

Corporate bonds
24,505

 
422

 
(397
)
 
24,530

Total
$
130,878

 
$
799

 
$
(2,015
)
 
$
129,662

 
December 31, 2016
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
(In thousands)
Mortgage-backed investments:
 
 
 
 
 
 
 
   Fannie Mae
$
42,060

 
$
126

 
$
(854
)
 
$
41,332

   Freddie Mac
18,013

 
95

 
(99
)
 
18,009

   Ginnie Mae
19,133

 
41

 
(540
)
 
18,634

Municipal bonds
13,203

 
11

 
(107
)
 
13,107

U.S. Government agencies
15,937

 
75

 
(155
)
 
15,857

Corporate bonds
22,506

 
241

 
(426
)
 
22,321

Total
$
130,852

 
$
589

 
$
(2,181
)
 
$
129,260

 
The tables below summarize the aggregate fair value and gross unrealized loss by length of time those investment securities have been continuously in an unrealized loss position at the dates indicated:
 
March 31, 2017
 
Less Than 12 Months
 
12 Months or Longer
 
Total
 
Fair Value
 
Gross Unrealized
Loss
 
Fair Value
 
Gross Unrealized
Loss
 
Fair Value
 
Gross Unrealized
Loss
 
(In thousands)
Mortgage-backed investments:
 
 
 
 
 
 
 
 
 
 
 
   Fannie Mae
$
32,840

 
$
(757
)
 
$

 
$

 
$
32,840

 
$
(757
)
   Freddie Mac
8,013

 
(58
)
 

 

 
8,013

 
(58
)
   Ginnie Mae
16,400

 
(591
)
 

 

 
16,400

 
(591
)
Municipal bonds
4,019

 
(64
)
 

 

 
4,019

 
(64
)
U.S. Government agencies
8,440

 
(148
)
 

 

 
8,440

 
(148
)
Corporate bonds
2,462

 
(38
)
 
6,141

 
(359
)
 
8,603

 
(397
)
Total
$
72,174

 
$
(1,656
)
 
$
6,141

 
$
(359
)
 
$
78,315

 
$
(2,015
)

12


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


 
December 31, 2016
 
Less Than 12 Months
 
12 Months or Longer
 
Total
 
Fair Value
 
Gross Unrealized
Loss
 
Fair Value
 
Gross Unrealized
Loss
 
Fair Value
 
Gross Unrealized
Loss
 
(In thousands)
Mortgage-backed investments:
 
 
 
 
 
 
 
 
 
 
 
   Fannie Mae
$
34,763

 
$
(854
)
 
$

 
$

 
$
34,763

 
$
(854
)
   Freddie Mac
8,343

 
(99
)
 

 

 
8,343

 
(99
)
   Ginnie Mae
16,734

 
(540
)
 

 

 
16,734

 
(540
)
Municipal bonds
8,815

 
(107
)
 

 

 
8,815

 
(107
)
U.S. Government agencies
9,000

 
(153
)
 
1,426

 
(2
)
 
10,426

 
(155
)
Corporate bonds
3,880

 
(119
)
 
4,693

 
(307
)
 
8,573

 
(426
)
Total
$
81,535

 
$
(1,872
)
 
$
6,119

 
$
(309
)
 
$
87,654

 
$
(2,181
)

On a quarterly basis, management makes an assessment to determine whether there have been any events or economic circumstances to indicate that a security on which there is an unrealized loss is impaired on an other-than-temporary basis. The Company considers many factors including the severity and duration of the impairment, recent events specific to the issuer or industry, and for debt securities, external credit ratings and recent downgrades. Securities on which there is an unrealized loss that is deemed to be an other-than-temporary impairment (“OTTI”) are written down to fair value. If the Company intends to sell a debt security, or it is likely that the Company will be required to sell the debt security before recovering its cost basis, the entire impairment loss would be recognized in earnings as an OTTI. If the Company does not intend to sell the debt security and it is not likely that it will be required to sell the debt security but does not expect to recover the entire amortized cost basis of the debt security, only the portion of the impairment loss representing credit losses would be recognized in earnings. The credit loss on a debt 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 debt security being measured for potential OTTI. The remaining impairment related to all other factors, the difference between the present value of the cash flows expected to be collected and fair value, is recognized as a charge to other comprehensive income (“OCI”). Impairment losses related to all other factors are presented as separate categories within OCI. At March 31, 2017 and December 31, 2016, the Company had 46 securities and 53 securities in an unrealized loss position, respectively. At both March 31, 2017 and December 31, 2016, the Company had four securities in an unrealized loss position for 12 months or more. Management reviewed the financial condition of the entities issuing municipal or corporate bonds at March 31, 2017 and December 31, 2016, and determined that an OTTI charge was not warranted.

The amortized cost and estimated fair value of investments available-for-sale at March 31, 2017, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Investments not due at a single maturity date, primarily mortgage-backed investments, are shown separately.
 
March 31, 2017
 
Amortized Cost
 
Fair Value
 
(In thousands)
Due within one year
$
2,507

 
$
2,520

Due after one year through five years
6,841

 
6,843

Due after five years through ten years
26,016

 
26,085

Due after ten years
17,825

 
17,691

 
53,189

 
53,139

Mortgage-backed investments
77,689

 
76,523

Total
$
130,878

 
$
129,662


Under Washington state law, in order to participate in the public funds program the Company is required to pledge eligible securities as collateral in an amount equal to 50% of the public deposits held less the FDIC insured amount. Investment securities with market values of $22.0 million and $22.6 million were pledged as collateral for public deposits at March 31, 2017 and

13


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


December 31, 2016, respectively, both of which exceeded the collateral requirements established by the Washington Public Deposit Protection Commission.

For the three months ended March 31, 2017, and March 31, 2016, we had calls on investment securities of $26,000, and $45,000, respectively, with no gains or losses. There were no sales of investment securities during the first quarter of 2017 or 2016.

During the three months ended March 31, 2017, we purchased $3.0 million of investment securities, consisting of a $1.0 million fixed rate mortgage-backed security, and a $2.0 million variable rate corporate bond. During the three months ended March 31, 2016, we purchased $8.3 million of investment securities, consisting of a $5.0 million variable rate corporate bond, $1.5 million of fixed rate municipal bonds, and a $1.8 million fixed rate mortgage-backed security.


14


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


Note 5 - Loans Receivable

Loans receivable are summarized as follows at the dates indicated: 
 
March 31, 2017
 
December 31, 2016
 
(In thousands)
One-to-four family residential:
 
 
 
Permanent owner occupied
$
135,743

 
$
137,834

Permanent non-owner occupied
113,476

 
111,601

 
249,219

 
249,435

 
 
 
 
Multifamily
121,718

 
123,250

 
 
 
 
Commercial real estate
317,719

 
303,694

 
 
 
 
Construction/land:
 
 
 

One-to-four family residential
58,447

 
67,842

Multifamily
108,801

 
111,051

Land
39,687

 
30,055

 
206,935

 
208,948

 
 
 
 
Business
10,370

 
7,938

Consumer
7,878

 
6,922

Total loans
913,839

 
900,187

 
 
 
 
Less:
 
 
 

Loans in process ("LIP")
61,735

 
72,026

Deferred loan fees, net
2,178

 
2,167

Allowance for loan and lease losses ("ALLL")
11,158

 
10,951

Loans receivable, net
$
838,768

 
$
815,043


At March 31, 2017, loans totaling $445.2 million were pledged to secure borrowings from the FHLB of Des Moines compared to $472.1 million at December 31, 2016.
    
ALLL. The Company maintains an ALLL as a reserve against probable and inherent risk of losses in its loan portfolios. The ALLL is comprised of a general reserve component for loans evaluated collectively for loss and a specific reserve component for loans evaluated individually. When an issue is identified and it is determined that the loan needs to be classified as nonperforming and/or impaired, an evaluation of the discounted expected cash flows is done and an appraisal may be obtained on the collateral. Based on this evaluation, additional provision for loan loss or charge-offs is recorded prior to the end of the financial reporting period.

The following tables summarize changes in the ALLL and loan portfolio by loan type and impairment method at the dates and for the periods shown: 


15


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


 
At or For the Three Months Ended March 31, 2017
 
One-to-Four
Family
Residential
 
Multifamily
 
Commercial 
Real Estate
 
Construction/
Land
 
Business
 
Consumer
 
Total
 
(In thousands)
ALLL:
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
2,551

 
$
1,199

 
$
3,893

 
$
2,792

 
$
237

 
$
279

 
$
10,951

   Charge-offs

 

 

 

 

 

 

   Recoveries
7

 

 

 

 

 

 
7

   (Recapture) Provision
(16
)
 
(11
)
 
134

 
(1
)
 
74

 
20

 
200

Ending balance
$
2,542

 
$
1,188

 
$
4,027

 
$
2,791

 
$
311

 
$
299

 
$
11,158

 

 

 

 

 

 

 

ALLL by category:


 


 


 


 


 


 


General reserve
$
2,357

 
$
1,188

 
$
4,003

 
$
2,791

 
$
311

 
$
299

 
$
10,949

Specific reserve
185

 

 
24

 

 

 

 
209

 

 

 

 

 

 

 

Loans: (1)

 

 

 

 

 

 
 
Total loans
$
249,219

 
$
121,718

 
$
317,719

 
$
145,200

 
$
10,370

 
$
7,878

 
$
852,104

Loans collectively evaluated for impairment (2)
226,884

 
120,566

 
314,036

 
145,200

 
10,370

 
7,778

 
824,834

Loans individually evaluated for impairment (3)
22,335

 
1,152

 
3,683

 

 

 
100

 
27,270

____________ 

(1) Net of LIP.
(2) Loans collectively evaluated for general reserves.
(3) Loans individually evaluated for specific reserves.




16


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


 
At or For the Three Months Ended March 31, 2016
 
One-to-Four
Family
Residential
 
Multifamily
 
Commercial 
Real Estate
 
Construction/
Land
 
Business
 
Consumer
 
Total
 
(In thousands)
ALLL:
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
3,028

 
$
1,193

 
$
3,395

 
$
1,193

 
$
229

 
$
425

 
$
9,463

   Charge-offs

 

 

 

 

 
(19
)
 
(19
)
   Recoveries
22

 

 
104

 

 

 
1

 
127

   (Recapture) Provision
(210
)
 
(9
)
 
(2
)
 
199

 
(32
)
 
(46
)
 
(100
)
Ending balance
$
2,840

 
$
1,184

 
$
3,497

 
$
1,392

 
$
197

 
$
361

 
$
9,471

 

 

 

 

 

 

 

ALLL by category:


 


 


 


 


 


 


General reserve
$
2,389

 
$
1,184

 
$
3,383

 
$
1,336

 
$
197

 
$
323

 
$
8,812

Specific reserve
451

 

 
114

 
56

 

 
38

 
659

 

 

 

 

 

 

 

Loans: (1)

 

 

 

 

 

 
 
Total loans
$
256,817

 
$
129,553

 
$
258,946

 
$
71,362

 
$
6,548

 
$
5,972

 
$
729,198

Loans collectively evaluated for impairment (2)
223,549

 
127,966

 
254,477

 
70,867

 
6,548

 
5,785

 
689,192

Loans individually evaluated for impairment (3)
33,268

 
1,587

 
4,469

 
495

 

 
187

 
40,006

_____________ 

(1) Net of LIP.
(2) Loans collectively evaluated for general reserves.
(3) Loans individually evaluated for specific reserves.


17


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



Past Due Loans. Loans are considered past due if a scheduled principal or interest payment is due and unpaid for 30 days or more. At March 31, 2017, there were no past due loans. In comparison, past due loans comprised 0.06% of total loans receivable, net of LIP at December 31, 2016. The following tables represent a summary of the aging of loans by type at the dates indicated:

 
Loans Past Due as of March 31, 2017
 
 
 
 
 
30-59 Days
 
60-89 Days
 
90 Days and
Greater
 
Total Past
Due
 
Current
 
Total (1) (2)
 
(In thousands)
Real estate:
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential:
 
 
 
 
 
 
 
 
 
 
 
Owner occupied
$

 
$

 
$

 
$

 
$
135,743

 
$
135,743

Non-owner occupied

 

 

 

 
113,476

 
113,476

Multifamily

 

 

 

 
121,718

 
121,718

Commercial real estate

 

 

 

 
317,719

 
317,719

Construction/land

 

 

 

 
145,200

 
145,200

Total real estate

 

 

 

 
833,856

 
833,856

Business

 

 

 

 
10,370

 
10,370

Consumer

 

 

 

 
7,878

 
7,878

Total loans
$

 
$

 
$

 
$

 
$
852,104

 
$
852,104

 ________________ 

(1) There were no loans 90 days and greater past due and still accruing interest at March 31, 2017.
(2) Net of LIP.

 
Loans Past Due as of December 31, 2016
 
 
 
 
 
30-59 Days
 
60-89 Days
 
90 Days and
Greater
 
Total Past
Due
 
Current
 
Total (1) (2)
 
(In thousands)
Real estate:
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential:
 
 
 
 
 
 
 
 
 
 
 
Owner occupied
$
304

 
$

 
$
169

 
$
473

 
$
137,361

 
$
137,834

Non-owner occupied

 

 

 

 
111,601

 
111,601

Multifamily

 

 

 

 
123,250

 
123,250

Commercial real estate

 

 

 

 
303,694

 
303,694

Construction/land

 

 

 

 
136,922

 
136,922

Total real estate
304

 

 
169

 
473

 
812,828

 
813,301

Business

 

 

 

 
7,938

 
7,938

Consumer

 

 

 

 
6,922

 
6,922

Total loans
$
304

 
$

 
$
169

 
$
473

 
$
827,688

 
$
828,161

_________________ 

(1) There were no loans 90 days and greater past due and still accruing interest at December 31, 2016.
(2) Net of LIP.







18


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




Nonaccrual Loans. The following table is a summary of nonaccrual loans by loan type at the dates indicated:

 
March 31, 2017
 
December 31, 2016
 
(In thousands)
One-to-four family residential
$
545

 
$
798

Consumer
57

 
60

Total nonaccrual loans
$
602

 
$
858


During the three months ended March 31, 2017, interest income that would have been recognized had these nonaccrual loans been performing in accordance with their original terms was $9,000. For the three months ended March 31, 2016, foregone interest on nonaccrual loans was $14,000.

The following tables summarize the loan portfolio by type and payment status at the dates indicated:

 
March 31, 2017
 
One-to-Four
Family
Residential
 
Multifamily
 
Commercial
Real Estate
 
Construction /
Land
 
Business
 
Consumer
 
Total (1)
 
(In thousands)
Performing (2)
$
248,674

 
$
121,718

 
$
317,719

 
$
145,200

 
$
10,370

 
$
7,821

 
$
851,502

Nonperforming (3)
545

 

 

 

 

 
57

 
602

Total loans
$
249,219

 
$
121,718

 
$
317,719

 
$
145,200

 
$
10,370

 
$
7,878

 
$
852,104

_____________

(1) 
Net of LIP.
(2) 
There were $135.2 million of owner-occupied one-to-four family residential loans and $113.5 million of non-owner occupied one-to-four family residential loans classified as performing.
(3) 
The $545,000 of one-to-four family residential loans classified as nonperforming are all owner-occupied.
 
December 31, 2016
 
One-to-Four
Family
Residential
 
Multifamily
 
Commercial
Real Estate
 
Construction/
Land
 
Business
 
Consumer
 
Total (1)
 
(In thousands)
Performing (2)
$
248,637

 
$
123,250

 
$
303,694

 
$
136,922

 
$
7,938

 
$
6,862

 
$
827,303

Nonperforming (3)
798

 

 

 

 

 
60

 
858

Total loans
$
249,435

 
$
123,250

 
$
303,694

 
$
136,922

 
$
7,938

 
$
6,922

 
$
828,161

_____________

(1) Net of LIP.    
(2) There were $137.0 million of owner-occupied one-to-four family residential loans and $111.6 million of non-owner occupied one-to-four family residential loans classified as performing.
(3) The $798,000 of one-to-four family residential loans classified as nonperforming are all owner-occupied.

Impaired Loans. A loan is considered impaired when we have determined that we may be unable to collect payments of principal or interest when due under the terms of the original loan document. There were no funds committed to be advanced in connection with impaired loans at either March 31, 2017, or December 31, 2016.

19


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



The following tables present a summary of loans individually evaluated for impairment by loan type at the dates indicated:

 
March 31, 2017

Recorded Investment (1)
 
Unpaid Principal Balance (2)
 
Related Allowance
 
(In thousands)
Loans with no related allowance:
 
 
 
 
 
  One-to-four family residential:

 

 

      Owner occupied
$
2,012

 
$
2,284

 
$

      Non-owner occupied
14,356

 
14,374

 

  Multifamily
1,152

 
1,152

 

   Commercial real estate
2,932

 
2,997

 

   Consumer
100

 
146

 

Total
20,552

 
20,953

 

Loans with an allowance:


 


 


  One-to-four family residential:


 


 


      Owner occupied
1,888

 
1,958

 
48

      Non-owner occupied
4,079

 
4,101

 
137

   Commercial real estate
751

 
751

 
24

Total
6,718

 
6,810

 
209

Total impaired loans:


 


 


  One-to-four family residential:


 


 


      Owner occupied
3,900

 
4,242

 
48

      Non-owner occupied
18,435

 
18,475

 
137

   Multifamily
1,152

 
1,152

 

   Commercial real estate
3,683

 
3,748

 
24

   Consumer
100

 
146

 

Total
$
27,270

 
$
27,763

 
$
209

_________________ 

(1) Represents the loan balance less charge-offs.
(2) Contractual loan principal balance.




20


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


 
December 31, 2016
 
Recorded Investment (1)
 
Unpaid Principal Balance (2)
 
Related Allowance
 
(In thousands)
Loans with no related allowance:
 
 
 
 
 
  One-to-four family residential:
 
 
 
 
 
      Owner occupied
$
2,216

 
$
2,475

 
$

      Non-owner occupied
16,634

 
16,652

 

  Multifamily
1,564

 
1,564

 

   Commercial real estate
2,952

 
3,012

 

   Consumer
103

 
148

 

Total
23,469

 
23,851

 

Loans with an allowance:
 
 
 
 
 
  One-to-four family residential:
 
 
 
 
 
      Owner occupied
1,896

 
1,965

 
51

      Non-owner occupied
4,326

 
4,347

 
151

   Commercial real estate
755

 
755

 
26

   Construction/land
495

 
495

 
81

Total
7,472

 
7,562

 
309

Total impaired loans:
 
 
 
 
 
  One-to-four family residential:
 
 
 
 
 
      Owner occupied
4,112

 
4,440

 
51

      Non-owner occupied
20,960

 
20,999

 
151

   Multifamily
1,564

 
1,564

 

   Commercial real estate
3,707

 
3,767

 
26

   Construction/land
495

 
495

 
81

   Consumer
103

 
148

 

Total
$
30,941

 
$
31,413

 
$
309

_________________ 

(1) Represents the loan balance less charge-offs.
(2) Contractual loan principal balance.



21


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



The following table presents the average recorded investment in loans individually evaluated for impairment and the interest income recognized for the three months ended March 31, 2017 and 2016:

 
Three Months Ended March 31, 2017
 
Three Months Ended March 31, 2016
 
Average Recorded Investment
 
Interest Income Recognized
 
Average Recorded Investment
 
Interest Income Recognized
 
(In thousands)
Loans with no related allowance:


 


 


 

   One-to-four family residential:


 


 


 

      Owner occupied
$
2,114

 
$
31

 
$
2,872

 
$
60

      Non-owner occupied
15,495

 
211

 
23,108

 
321

Multifamily
1,358

 
19

 
1,001

 
27

Commercial real estate
2,942

 
53

 
2,466

 
39

Consumer
102

 
2

 
122

 
2

Total
22,011

 
316

 
29,569

 
449




 


 


 

Loans with an allowance:


 


 


 

   One-to-four family residential:


 


 


 

      Owner occupied
1,892

 
26

 
2,116

 
29

      Non-owner occupied
4,203

 
55

 
6,587

 
78

Multifamily

 

 
590

 

Commercial real estate
753

 
10

 
2,217

 
35

Construction/land
248

 

 
495

 
5

Consumer

 

 
76

 
1

Total
7,096

 
91

 
12,081

 
148




 


 


 

Total impaired loans:


 


 


 

   One-to-four family residential:


 


 


 

      Owner occupied
4,006

 
57

 
4,988

 
89

      Non-owner occupied
19,698

 
266

 
29,695

 
399

Multifamily
1,358

 
19

 
1,591

 
27

Commercial real estate
3,695

 
63

 
4,683

 
74

Construction/land
248

 

 
495

 
5

Consumer
102

 
2

 
198

 
3

Total
$
29,107

 
$
407

 
$
41,650

 
$
597


Troubled Debt Restructurings. Certain loan modifications are accounted for as troubled debt restructured loans (“TDRs”). At March 31, 2017, the TDR portfolio totaled $26.8 million, of which one loan of $109,000 was on nonaccrual status because it had previously not performed in accordance with the terms of its restructure. As of March 31, 2017, it was current, however it will remain on nonaccrual status until it has performed for six months and is expected to continue to perform. At December 31, 2016, the TDR portfolio totaled $30.3 million, of which one loan of $174,000 was not performing in accordance with the terms of its restructure and was on nonaccrual status.

During the three months ended March 31, 2017, there were no loans modified as TDRs. In comparison, the following table presents loans that were modified as TDRs during the three months ended March 31, 2016, and their recorded investment both before and after the modification:


22


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


 
Three Months Ended March 31, 2016
 
Number of Loans
 
Pre-Modification Outstanding
Recorded
Investment
 
Post-Modification Outstanding
Recorded
Investment
 
(Dollars in thousands)
One-to-four family residential:
 
 
 
 
 
Principal and interest with interest rate concession
1

 
$
558

 
$
558

Commercial real estate:
 
 
 
 
 
Interest-only payments with interest rate concession and advancement of maturity date
1

 
495

 
495

Total
2

 
$
1,053

 
$
1,053


At March 31, 2017, the Company had no commitments to extend additional credit to borrowers whose loan terms have been modified in TDRs. All TDRs are also classified as impaired loans and are included in the loans individually evaluated for impairment as part of the calculation of the ALLL.

The TDRs that occurred during the three months ended March 31, 2016, included granting the borrower interest rate concessions and advancing the maturity date for a period of time ranging from one to three years. No loans accounted for as TDRs were charged-off to the ALLL for the three months ended March 31, 2017 and 2016.

TDRs that default after they have been modified are typically evaluated individually on a collateral basis. Any additional impairment is charged to the ALLL. For the three months ended March 31, 2017, and the three months ended March 31, 2016, no loans that had been modified in the previous 12 months defaulted.

Credit Quality Indicators. The Company utilizes a nine-category risk rating system and assigns a risk rating for all credit exposures. The risk rating system is designed to define the basic characteristics and identify risk elements of each credit extension. Credits risk rated 1 through 5 are considered to be “pass” credits. Pass credits include assets, such as cash secured loans with funds on deposit with the Bank, where there is virtually no credit risk. Pass credits also include credits that are on the Company’s watch list, where the borrower exhibits potential weaknesses, which may, if not checked or corrected, negatively affect the borrower’s financial capacity and threaten their ability to fulfill debt obligations in the future. Credits classified as special mention are risk rated 6 and possess weaknesses that deserve management’s close attention. Special mention assets do not expose the Company to sufficient risk to warrant adverse classification in the substandard, doubtful or loss categories. Substandard credits are risk rated 7. An asset is considered substandard if it is inadequately protected by the current net worth and payment capacity of the borrower or of any collateral pledged.

Substandard assets include those characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful are risk rated 8 and have all the weaknesses inherent in those credits classified as substandard with the added characteristic that the weaknesses present make collection or liquidation in full highly questionable and improbable, on the basis of currently existing facts, conditions, and values. Assets classified as loss are risk rated 9 and are considered uncollectible and cannot be justified as a viable asset for the Company. There were no loans classified as doubtful or loss at March 31, 2017 and December 31, 2016.

    

23


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


The following tables represent a summary of loans by type and risk category at the dates indicated:
 
March 31, 2017
 
One-to-Four
Family
Residential
 
Multifamily
 
Commercial
Real Estate
 
Construction/ 
Land
 
Business
 
Consumer
 
Total (1)
 
(In thousands)
Risk Rating:
 
 
 
 
 
 
 
 
 
 
 
 
 
   Pass
$
245,299

 
$
121,718

 
$
314,698

 
$
145,200

 
$
10,370

 
$
7,633

 
$
844,918

   Special mention
2,824

 

 
3,021

 

 

 
188

 
6,033

   Substandard
1,096

 

 

 

 

 
57

 
1,153

Total loans
$
249,219

 
$
121,718

 
$
317,719

 
$
145,200

 
$
10,370

 
$
7,878

 
$
852,104

 _____________ 

(1) Net of LIP.

 
December 31, 2016
 
One-to-Four
Family
Residential
 
Multifamily
 
Commercial
Real Estate
 
Construction /
Land
 
Business
 
Consumer
 
Total (1)
 
(In thousands)
Risk Rating:
 
 
 
 
 
 
 
 
 
 
 
 
 
   Pass
$
245,237

 
$
123,250

 
$
300,655

 
$
136,427

 
$
7,938

 
$
6,674

 
$
820,181

   Special mention
2,847

 

 
3,039

 

 

 
188

 
6,074

   Substandard
1,351

 

 

 
495

 

 
60

 
1,906

Total loans
$
249,435

 
$
123,250

 
$
303,694

 
$
136,922

 
$
7,938

 
$
6,922

 
$
828,161

  _____________ 

(1) Net of LIP.

Note 6 - Other Real Estate Owned

OREO includes properties acquired by the Company through foreclosure and deed in lieu of foreclosure. The following table is a summary of OREO activity during the periods shown: 
 
Three Months Ended March 31,
 
2017
 
2016
 
(In thousands)
Balance at beginning of period
$
2,331

 
$
3,663

Loans transferred to OREO

 

Gross proceeds from sale of OREO

 
(1
)
Gain on sale of OREO

 
1

Market value adjustments
(50
)
 
(258
)
Balance at end of period
$
2,281

 
$
3,405

 
There were no sales of OREO properties during the three months ended March 31, 2017. During this period, the Bank recognized a $50,000 market value adjustment on a property in Kitsap County that had a book value of $506,000 prior to the valuation adjustment as a result of signing a sale contract on this property. The sale subsequently closed in April 2017. OREO at March 31, 2017 consisted of $2.3 million in commercial real estate properties.

Note 7 - Fair Value


24


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


Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

The Company determines the fair values of its financial instruments based on the fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair values. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect its estimate for market assumptions.

Valuation inputs refer to the assumptions market participants would use in pricing a given asset or liability using one of the three valuation techniques. Inputs can be observable or unobservable. Observable inputs are those assumptions that market participants would use in pricing the particular asset or liability. These inputs are based on market data and are obtained from an independent source. Unobservable inputs are assumptions based on the Company’s own information or estimate of assumptions used by market participants in pricing the asset or liability. Unobservable inputs are based on the best and most current information available on the measurement date.

All inputs, whether observable or unobservable, are ranked in accordance with a prescribed fair value hierarchy:

Level 1 - Quoted prices for identical instruments in active markets.

Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable.

Level 3 - Instruments whose significant value drivers are unobservable.
 
The tables below present the balances of assets measured at fair value on a recurring basis (there were no transfers between Level 1, Level 2 and Level 3 recurring measurements) at March 31, 2017 and December 31, 2016:
 
Fair Value Measurements at March 31, 2017
 
Fair Value Measurements
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
 
(In thousands)
Investments available-for-sale:
 
 
 
 
 
 
 
Mortgage-backed investments:
 
 
 
 
 
 
 
Fannie Mae
$
41,219

 
$

 
$
41,219

 
$

Freddie Mac
17,154

 

 
17,154

 

Ginnie Mae
18,150

 

 
18,150

 

Municipal bonds
13,151

 

 
13,151

 

U.S. Government agencies
15,458

 

 
15,458

 

Corporate bonds
24,530

 

 
24,530

 

Total available-for-sale
investments
129,662

 

 
129,662

 

Derivative fair value asset
1,396

 

 
1,396

 

 
$
131,058

 
$

 
$
131,058

 
$


25


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


 
Fair Value Measurements at December 31, 2016
 
Fair Value Measurements
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
 
(In thousands)
Investments available-for-sale:
 
 
 
 
 
 
 
Mortgage-backed investments:
 
 
 
 
 
 
 
Fannie Mae
$
41,332

 
$

 
$
41,332

 
$

Freddie Mac
18,009

 

 
18,009

 

Ginnie Mae
18,634

 

 
18,634

 

Municipal bonds
13,107

 

 
13,107

 

U.S. Government agencies
15,857

 

 
15,857

 

Corporate bonds
22,321

 

 
22,321

 

Total available-for-sale
investments
129,260

 

 
129,260

 

Derivative fair value asset
1,333

 

 
1,333

 

 
$
130,593

 
$

 
$
130,593

 
$


The estimated fair value of Level 2 investments is based on quoted prices for similar investments in active markets, identical or similar investments in markets that are not active and model-derived valuations whose inputs are observable.    

The tables below present the balances of assets measured at fair value on a nonrecurring basis at March 31, 2017 and December 31, 2016
 
Fair Value Measurements at March 31, 2017
 
Fair Value
Measurements
 
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
 
Significant
Other
Observable
Inputs (Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
(In thousands)
Impaired loans (included in loans
receivable, net)
(1)
$
27,061

 
$

 
$

 
$
27,061

OREO
2,281

 

 

 
2,281

Total
$
29,342

 
$

 
$

 
$
29,342

_____________

(1) 
Total fair value of impaired loans is net of $209,000 of specific reserves on performing TDRs.

 
Fair Value Measurements at December 31, 2016
 
Fair Value
Measurements
 
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
 
Significant
Other
Observable
Inputs (Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
(In thousands)
Impaired loans (included in loans
receivable, net)
(1)
$
30,632

 
$

 
$

 
$
30,632

OREO
2,331

 

 

 
2,331

Total
$
32,963

 
$

 
$

 
$
32,963

_____________

(1)    Total fair value of impaired loans is net of $309,000 of specific reserves on performing TDRs.

26


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


 
The fair value of impaired loans is calculated using the collateral value method or on a discounted cash flow basis. Inputs used in the collateral value method include appraised values, less estimated costs to sell. Some of these inputs may not be observable in the marketplace. Appraised values may be discounted based on management’s knowledge of the marketplace, subsequent changes in market conditions, or management’s knowledge of the borrower.

OREO properties are measured at the lower of their carrying amount or fair value, less estimated costs to sell. Fair values are generally based on third party appraisals of the property, resulting in a Level 3 classification. In cases where the carrying amount exceeds the fair value, less estimated costs to sell, an impairment loss is recognized.

The following tables present quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a nonrecurring basis at March 31, 2017 and December 31, 2016:
 
March 31, 2017
 
Fair Value
 
Valuation Technique
 
Unobservable Input(s)
 
Range (Weighted Average)
 
(Dollars in thousands)
Impaired Loans
$
27,061

 
Market approach
 
Appraised value discounted by market or borrower conditions
 
0.0%
(0.00%)
 
 
 
 
 
 
 
 
OREO
$
2,281

 
Market approach
 
Appraised value less selling costs
 
0.0% - 9.94% (2.16%)

 
December 31, 2016
 
Fair Value
 
Valuation Technique
 
Unobservable Input(s)
 
Range (Weighted Average)
 
(Dollars in thousands)
Impaired Loans
$
30,632

 
Market approach
 
Appraised value discounted by market or borrower conditions
 
0.0%
(0.00%)
 
 
 
 
 
 
 
 
OREO
$
2,331

 
Market approach
 
Appraised value less selling costs
 
0.0%
(0.00%)

The carrying amounts and estimated fair values of financial instruments were as follows at the dates indicated: 

27


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


 
March 31, 2017
 
 
 
Estimated
 
Fair Value Measurements Using:
 
Carrying Value
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Financial Assets:
 
 
 
 
 
 
 
 
 
Cash on hand and in banks
$
6,066

 
$
6,066

 
$
6,066

 
$

 
$

Interest-earning deposits with banks
20,007

 
20,007

 
20,007

 

 

Investments available-for-sale
129,662

 
12,662

 

 
12,662

 

Loans receivable, net
838,768

 
840,069

 

 

 
840,069

FHLB stock
8,102

 
8,102

 

 
8,102

 

Accrued interest receivable
3,389

 
3,389

 

 
3,389

 

Derivative fair value asset
1,396

 
1,396

 

 
1,396

 

 
 
 
 
 
 
 
 
 
 
Financial Liabilities:
 

 
 

 
 

 
 

 
 
Deposits
303,767

 
303,767

 
303,767

 

 

Certificates of deposit, retail
355,452

 
355,411

 

 
355,411

 

Certificates of deposit, brokered
75,488

 
75,747

 

 
75,747

 

Advances from the FHLB
171,500

 
168,491

 

 
168,491

 

Accrued interest payable
237

 
237

 

 
237

 


 
December 31, 2016
 
 
 
Estimated
 
Fair Value Measurements Using:
 
Carrying Value
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Financial Assets:
 
 
 
 
 
 
 
 
 
Cash on hand and in banks
$
5,779

 
$
5,779

 
$
5,779

 
$

 
$

Interest-earning deposits with banks
25,573

 
25,573

 
25,573

 

 

Investments available-for-sale
129,260

 
129,260

 

 
129,260

 

Loans receivable, net
815,043

 
818,054

 

 

 
818,054

FHLB stock
8,031

 
8,031

 

 
8,031

 

Accrued interest receivable
3,147

 
3,147

 

 
3,147

 

Derivative fair value asset
1,333

 
1,333

 

 
1,333

 

 
 
 
 
 
 
 
 
 
 
Financial Liabilities:
 

 
 

 
 

 
 

 
 
Deposits
285,335

 
285,335

 
285,335

 

 

Certificates of deposit, retail
356,653

 
356,723

 

 
356,723

 

Certificates of deposit, brokered
75,488

 
75,431

 

 
75,431

 

Advances from the FHLB
171,500

 
170,221

 

 
170,221

 

Accrued interest payable
231

 
231

 

 
231

 


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 on hand and in banks, interest-earning deposits with banks, FHLB stock, accrued interest receivable, accrued interest payable, and investment transactions payable. FHLB stock is not publicly-traded, however

28


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


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.

Investments available-for-sale: The fair value of all investments, excluding FHLB stock, was based upon quoted market prices for similar investments in active markets, identical or similar investments in markets that are not active and model-derived valuations whose inputs are observable.

Loans receivable: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair value of fixed-rate loans is estimated using discounted cash flow analysis, utilizing interest rates that would be offered for loans with similar terms to borrowers of similar credit quality. As a result of current market conditions, cash flow estimates have been further discounted to include a credit factor. The fair value of nonperforming loans is estimated using the fair value of the underlying collateral.

Derivatives: The fair value of derivatives is based on dealer quotes, pricing models, discounted cash flow methodologies or similar techniques for which the determination of fair value may require significant management judgment or estimation.

Liabilities: The fair value of deposits with no stated maturity, such as statement savings, interest-bearing checking and money market accounts, is equal to the amount payable on demand. The fair value of certificates of deposit is based on the discounted value of contractual cash flows using current interest rates for certificates of deposit with similar remaining maturities. The fair value of FHLB advances is estimated based on discounting the future cash flows using current interest rates for debt with similar remaining maturities.

Off balance sheet commitments: No fair value adjustment is necessary for commitments made to extend credit, which represents commitments for loan originations or for outstanding commitments to purchase loans. These commitments are at variable rates, are for loans with terms of less than one year and have interest rates which approximate prevailing market rates, or are set at the time of loan closing.

Fair value estimates are based on existing balance sheet financial instruments without attempting to estimate the value of anticipated future business. The fair value has not been estimated for assets and liabilities that are not considered financial instruments.

Note 8 - Derivatives

The Company uses a derivative financial instrument, which qualifies as a cash flow hedge, to manage the risk of changes in future cash flows due to interest rate fluctuations. The hedge instrument is a $50.0 million three-month FHLB advance that will be renewed every three months at the fixed interest rate at that time. The agreement has a five year term and stipulates that the counterparty will pay the Company interest at three-month LIBOR and the Company will pay fixed interest of 1.34% on the $50.0 million notional amount. The Company pays or receives the net interest amount quarterly and includes this amount as part of interest expense on the Consolidated Income Statement.

Quarterly, the effectiveness evaluation is based upon the fluctuation of the interest the Company pays to the FHLB for the hedge instrument as compared to the three-month LIBOR interest received from the counterparty. At March 31, 2017, the fair value of the cash flow hedge of $1.4 million was reported with other assets. The tax effected amount of $908,000 was included in Other Comprehensive Income. There were no amounts recorded in the Consolidated Income Statement for the quarters ended March 31, 2017 or 2016 related to ineffectiveness.

Fair value for this derivative instrument, which generally changes as a result of changes in the level of market interest rates, is estimated based on dealer quotes and secondary market sources.

The following table presents the fair value of this derivative instrument as of March 31, 2017 and December 31, 2016:

29


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


 
Balance Sheet Location
 
Fair Value at
March 31, 2017
 
Fair Value at
December 31, 2016
 
(In thousands)
Interest rate swap on FHLB debt
   designated as cash flow hedge
Other Assets
 
$
1,396

 
$
1,333

 
 
 
 
 
 
Total derivatives
 
 
$
1,396

 
$
1,333


The following table presents the effect of this derivative instrument on the Consolidated Statement of Comprehensive Income for the quarters ended March 31, 2017 and 2016:

 
Balance Sheet Location
 
Amount Recognized in OCI at March 31, 2017
 
Amount Recognized in OCI at December 31, 2016
 
(In thousands)
Interest rate swap on FHLB debt
designated as cash flow hedge
Other assets
 
$
908

 
$
866



Note 9 - Stock-Based Compensation

In June 2016, First Financial Northwest’s shareholders approved the First Financial Northwest, Inc. 2016 Equity Incentive Plan (“2016 Plan”). This plan provides for the granting of incentive stock options (“ISO”), non-qualified stock options (“NQSO”), restricted stock and restricted stock units until June 2026. The 2016 Plan established 1,400,000 shares available to grant with a maximum of 400,000 of these shares available to grant as restricted stock awards. Each share issued as a restricted stock award counts as two shares towards the total shares available to award.

Under the 2016 Plan, the vesting date for each option award or restricted stock award is determined by an award committee and specified in the award agreement. In the case of restricted stock awards granted in lieu of cash payments of directors’ fees, the grant date is used as the vesting date unless the award agreement provides otherwise.

As a result of the approval of the 2016 Plan, the First Financial Northwest, Inc. 2008 Equity Incentive Plan (“2008 Plan”) was frozen and no additional awards will be made. As of June 30, 2016, there were 611,756 available stock options and 74,478 available restricted stock awards that are no longer available to be awarded under the 2008 Plan. Restricted stock awards and stock options that were granted under the 2008 Plan will continue to vest and be available for exercise, subject to the 2008 Plan provisions. At March 31, 2017, there were 1,371,896 total shares available for grant under the 2016 Plan, including 385,948 shares available to be granted as restricted stock.

For the three months ended March 31, 2017 and 2016, total compensation expense for the Plan was $110,000, and $93,000, respectively, and the related income tax benefit was $39,000 and $32,000, respectively.

Stock Options

Under the 2008 Plan, stock option awards were granted with an exercise price equal to the market price of First Financial Northwest’s common stock at the grant date. These option awards have a vesting period of five years, with 20% vesting on the anniversary date of each grant date, and a contractual life of 10 years. Any unexercised stock options will expire ten years after the grant date or sooner in the event of the award recipient’s death, disability or termination of service with the Company or the Bank.

Under the 2016 Plan, the exercise price and vesting period for stock options are determined by the award committee and specified in the award agreement, however, the exercise price shall not be less than the fair market value of a share as of the grant date. Any unexercised stock option will expire 10 years after the award date or sooner in the event of the award recipient’s death, disability, retirement, or termination of service.

The fair value of each option award is estimated on the grant date using a Black-Scholes model that uses the following assumptions. The dividend yield is based on the current quarterly dividend in effect at the time of the grant. Historical employment data is used to estimate the forfeiture rate. The historical volatility of the Company’s stock price over a specified period of time

30


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


is used for the expected volatility assumption. First Financial Northwest bases the risk-free interest rate on the U.S. Treasury Constant Maturity Indices in effect on the date of the grant. First Financial Northwest elected to use the “Share-Based Payments” method permitted by the SEC to calculate the expected term. This method uses the vesting term of an option along with the contractual term, setting the expected life at the midpoint.

Under certain conditions, a cashless exercise of vested stock options may occur by the option holder surrendering the number of options valued at the current stock price at the time of exercise to cover the total cost to exercise. The surrendered options are canceled and are unavailable for reissue.
    
A summary of the Company’s stock option plan awards and activity for the three months ended March 31, 2017, follows: 

 
For the Three Months Ended March 31, 2017
 
Shares
 
Weighted-Average Exercise Price
 
Weighted-Average Remaining Contractual Term in Years
 
Aggregate Intrinsic Value
Outstanding at January 1, 2017
603,820

 
$
10.19

 

 
$

Exercised
(97,540
)
 
9.78

 

 

Outstanding at March 31, 2017
506,280

 
10.27

 
5.24
 
3,747,449

Vested and expected to vest assuming a 3% forfeiture
rate over the vesting term
501,210

 
10.26

 
5.21
 
3,714,537

Exercisable at March 31, 2017
337,280

 
9.81

 
4.22
 
2,650,359



As of March 31, 2017, there was $524,791 of total unrecognized compensation cost related to nonvested stock options granted under the 2008 Plan. The cost is expected to be recognized over the remaining weighted-average vesting period of 2.57 years. There were no stock options granted during the three months ended March 31, 2017 under either the 2008 Plan or 2016 Plan.

Restricted Stock Awards

The 2008 Plan authorized the grant of restricted stock awards to directors, advisory directors, officers and employees. Compensation expense is recognized over the vesting period of the awards based on the fair value of the stock at the grant date. The restricted stock awards’ fair value is equal to the stock price on the grant date. Shares awarded under this plan as restricted stock vest ratably over a five-year period beginning at the grant date with 20% vesting on the anniversary date of each grant date.

The 2016 Plan authorizes the grant of restricted stock awards subject to vesting periods or terms as defined by the award committee and specified in the award agreement. Restricted stock awards granted in lieu of cash payments for directors’ fees are subject to immediate vesting on the grant date unless the award agreement provides otherwise.

A summary of changes in nonvested restricted stock awards for the three months ended March 31, 2017, follows: 

31


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



For the Three Months Ended March 31, 2017

Shares
 
Weighted-Average
Grant Date
Fair Value
Nonvested at January 1, 2017
26,400

 
$
9.13

Granted

 

Vested

 

Canceled

 

Forfeited

 

Nonvested at March 31, 2017
26,400

 
9.13
Expected to vest assuming a 3% forfeiture rate over the vesting term
25,608

 


As of March 31, 2017, there was $132,188 of total unrecognized compensation costs related to nonvested shares granted as restricted stock awards. The cost is expected to be recognized over the remaining weighted-average vesting period of 0.91 years.

Note 10 - Earnings Per Share

Per the provisions of FASB 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. ESOP shares are considered outstanding for basic and diluted earnings per share when the shares are committed to be released. Certain of the Company’s nonvested restricted stock awards qualify as participating securities.

Net income is allocated between the common stock and participating securities pursuant to the two-class method, based on their rights to receive dividends, participate in earnings, or absorb losses. Basic earnings per common shares is computed by dividing net earnings available to common shareholders by the weighted-average number of common shares outstanding during the period, excluding participating nonvested restricted shares.

The following table presents a reconciliation of the components used to compute basic and diluted earnings per share for the periods indicated:
 
 
Three Months Ended March 31,
 
 
2017
 
2016
 
 
(Dollars in thousands, except share data)
Net income
 
$
2,344

 
$
1,825

Less: Earnings allocated to participating
securities
 
(5
)
 
(6
)
Earnings allocated to common shareholders
 
$
2,339

 
$
1,819

 
 
 
 
 
Basic weighted average common shares
outstanding
 
10,319,722

 
12,744,694

Dilutive stock options
 
171,028

 
144,521

Dilutive restricted stock grants
 
13,296

 
16,312

Diluted weighted average common shares
outstanding
 
10,504,046

 
12,905,527

 
 
 
 
 
Basic earnings per share
 
$
0.23

 
$
0.14

Diluted earnings per share
 
$
0.22

 
$
0.14



32


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


Potential dilutive shares are excluded from the computation of earnings per share if their effect is anti-dilutive. For the three months ended March 31, 2017, there were no options to purchase shares of common stock that were omitted from the computation of diluted earnings per share because their effect would be anti-dilutive. For the three months ended March 31, 2016, options to purchase an additional 60,000 shares of common stock, respectively, were excluded as their effect would be anti-dilutive.

Note 11 - Subsequent Events

Branch Acquisition

On April 10, 2017, the Company announced that the Bank had entered into a definitive agreement to purchase four bank branches in King and Snohomish counties. The Bank will assume approximately $102 million in deposits associated with the branches, based on deposits as of December 31, 2016, for a deposit premium of 3.125%, based on the deposit balance at the time the transaction closes. The agreement does not include the purchase of any loans. At the closing of the proposed transaction, the Bank will take ownership of a building and land for one branch and assume the leases for three other branches.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements
Certain matters discussed in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to our financial condition, results of operations, plans, objectives, future performance or business. Forward-looking statements are not statements of historical fact, are based on certain assumptions and are generally identified by use of the words “believes,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” or similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would” and “could.” Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, assumptions and statements about, among other things, expectations of the business environment in which we operate, projections of future performance or financial items, perceived opportunities in the market, potential future credit experience, and statements regarding our mission and vision. These forward-looking statements are based upon current management expectations and may, therefore, involve risks and uncertainties. Our actual results, performance, or achievements may differ materially from those suggested, expressed, or implied by forward-looking statements as a result of a wide variety or range of factors including, but not limited to: the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs, that may be affected by deterioration in the housing and commercial real estate markets, and may lead to increased losses and nonperforming assets in our loan portfolio, and may result in our allowance for loan losses not being adequate to cover actual losses, and require us to materially increase our reserves; changes in general economic conditions, either nationally or in our market areas; changes in the levels of general interest rates, and the relative differences between short and long term interest rates, deposit interest rates, our net interest margin and funding sources; fluctuations in the demand for loans, the number of unsold homes and other properties and fluctuations in real estate values in our market areas; results of examinations of us by the Federal Reserve Bank of San Francisco and our bank subsidiary by the Federal Deposit Insurance Corporation (“FDIC”), the Washington State Department of Financial Institutions, Division of Banks (“DFI”) or other regulatory authorities, including the possibility that any such regulatory authority may initiate an enforcement action against the Company or the Bank which could require us to increase our reserve for loan losses, write-down assets, change our regulatory capital position, affect our ability to borrow funds or maintain or increase deposits, or impose additional requirements or restrictions on us, any of which could adversely affect our liquidity and earnings; our ability to pay dividends on our common stock; our ability to attract and retain deposits; increases in premiums for deposit insurance; our ability to control operating costs and expenses; the use of estimates in determining the fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation; difficulties in reducing risk associated with the loans on our balance sheet; staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our work force and potential associated charges; computer systems on which we depend could fail or experience a security breach; our ability to retain key members of our senior management team; costs and effects of litigation, including settlements and judgments; our ability to implement our branch expansion strategy; our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we have acquired or may in the future acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto, including our pending branch purchase; our ability to manage loan delinquency rates; costs and effects of litigation, including settlements and judgments; increased competitive pressures among financial services companies; changes in consumer spending, borrowing and savings habits; legislative or regulatory changes that adversely affect our business including changes in regulatory policies and principles, including the interpretation of regulatory capital or other rules, including as a result of Basel III; the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd Frank Act”) and the implementing regulations; the availability of resources to

33



address changes in laws, rules, or regulations or to respond to regulatory actions; adverse changes in the securities markets; inability of key third-party providers to perform their obligations to us; changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the Financial Accounting Standards Board, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods; the economic impact of war or any terrorist activities; other economic, competitive, governmental, regulatory, and technological factors affecting our operations; pricing, products and services; and other risks detailed in our filings with the U.S. Securities and Exchange Commission (“SEC”), including our Annual Report on Form 10-K for the year ended December 31, 2016 (“2016 Form 10-K”). Any of the forward-looking statements that we make in this Form 10-Q and in the other public reports and statements we make may turn out to be wrong because of the inaccurate assumptions we might make, because of the factors illustrated above or because of other factors that we cannot foresee. Because of these and other uncertainties, our actual future results may be materially different from those expressed in any forward-looking statements made by or on our behalf. Therefore, these factors should be considered in evaluating the forward-looking statements, and undue reliance should not be placed on such statements. We undertake no responsibility to update or revise any forward-looking statements.

Overview

First Financial Northwest Bank (“the Bank”) is a wholly-owned subsidiary of First Financial Northwest, Inc. (“the Company”) and, as such, comprises substantially all of the activity for First Financial Northwest, Inc. First Financial Northwest Bank was a community-based savings bank until February 4, 2016, when the Bank converted to a Washington chartered commercial bank reflecting the commercial banking services it now provides to its customers. The Bank primarily serves King, Pierce, Snohomish, and Kitsap counties, Washington, through its full-service banking office and smaller branch in Renton, Washington, and two smaller branches located in Mill Creek and Edmonds, Washington. The addition of branch locations, together with improved technology from the conversion to a new core data processor in 2015 have allowed the Bank to better meet the needs of our customers and broaden the demographics of our customer base. The Bank has received regulatory approval to open a new branch office in the community of Crossroads in Bellevue, Washington in the second quarter of 2017 and another at The Junction, a new, mixed use development in Bothell, Washington in the fourth quarter of 2017. The branches will be leased spaces in retail centers.

The Bank’s business consists predominantly of attracting deposits from the general public, combined with borrowing from the Federal Home Loan Bank of Des Moines (“FHLB”) and raising funds in the wholesale market, then utilizing these funds to originate one-to-four family residential, multifamily, commercial real estate, construction/land, business, and consumer loans. Our current business strategy emphasizes commercial real estate, construction, one-to-four family residential, and multifamily lending. With the current low interest rate environment, we are not aggressively pursuing longer term assets, but rather are focused on financing shorter term loans, in particular construction/land loans. Recently, improvements in the economy, employment rates, stronger real estate prices, and a general lack of new housing inventory in certain areas in the Puget Sound region have resulted in our significantly increasing originations of construction loans for properties located in our market area. We anticipate that construction/land lending will continue to be a strong element of our total loan portfolio in future periods. We will continue to take a disciplined approach in our construction/land lending by concentrating our efforts on one-to-four family residential loans to builders known to us. On a limited basis, we also will provide multifamily loans to developers with proven success in this type of construction. In addition, we have geographically expanded our loan portfolio through loan purchases or loan participations of commercial and multifamily real estate loans that are outside of our primary market area. We have a loan officer with extensive experience in California to further support our efforts to geographically diversify our loan portfolio through direct loan originations, loan participations, or loan purchases.

In support of our strategic growth plan, the Bank has developed a national line of business to originate and service aircraft loans. These loans are collateralized by new or used, single-engine piston aircraft to light jets for business or personal use for which industry accepted valuation resources have demonstrated an acceptable valuation history. As we grow our aircraft loan portfolio, we anticipate these loans will range in size from $250,000 to $8.0 million and the primary focus of our underwriting guidelines will be on the asset value of the collateral rather than emphasis on the ability of the borrower to repay the loan. We began originating aircraft loans in the fourth quarter of 2016. At March 31, 2017, our business loans included $2.8 million in fixed rate aircraft loans.

Our primary source of revenue is interest income, which is the income that we earn on our loans and investments. Interest expense is the interest that we pay on our deposits and borrowings. Net interest income is the difference between interest income and interest expense. Changes in levels of interest rates affect interest income and interest expense differently and, thus, impacts our net interest income.

An offset to net interest income is the provision for loan losses which is required to establish the allowance for loan and lease losses (“ALLL”) at a level that adequately provides for probable losses inherent in our loan portfolio. As our loan portfolio increases, or due to an increase for probable losses inherent in our loan portfolio, our ALLL may increase, resulting in a decrease

34



to net interest income. Improvements in loan risk ratings, increases in property values, or receipt of recoveries of amounts previously charged off may partially or fully offset any increase to ALLL due to loan growth or an increase in probable loan losses.

Noninterest income is generated from various loan or deposit fees, increases in the cash surrender value of bank owned life insurance (“BOLI”), and revenue earned on our wealth management brokerage services. This income is increased or partially offset by any net gain or loss on sales of investment securities.

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

Critical Accounting Policies

Our significant accounting policies are fundamental to understanding our results of operations and financial condition because they require that we use estimates and assumptions that may affect the value of our assets or liabilities and our financial results. These policies are critical because they require management to make difficult, subjective, and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or by using different assumptions. These policies govern the ALLL, the valuation of OREO, and the calculation of deferred taxes, fair values, and other-than-temporary impairments on the market value of investments and derivatives. These policies and estimates are described in further detail in Part II, Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 1, Summary of Significant Accounting Policies with the 2016 Form 10-K. There have not been any material changes in the Company’s critical accounting policies and estimates as compared to the disclosure contained in the 2016 Form 10-K.

Comparison of Financial Condition at March 31, 2017 and December 31, 2016

Total assets were $1.1 billion at March 31, 2017, an increase of 2.2%, from $1.0 billion at December 31, 2016. The following table details the $22.9 million net change in the composition of our assets at March 31, 2017 from December 31, 2016.
 
Balance at
March 31, 2017
 
Change from December 31, 2016
 
Percent Change
 
(Dollars in thousands)
Cash on hand and in banks                                           
$
6,066

 
$
287

 
5.0
 %
Interest-earning deposits with banks                                           
20,007

 
(5,566
)
 
(21.8
)
Investments available-for-sale, at fair value
129,662

 
402

 
0.3

Loans receivable, net                                           
838,768

 
23,725

 
2.9

Premises and equipment, net
18,912

 
451

 
2.4

FHLB stock, at cost                                
8,102

 
71

 
0.9

Accrued interest receivable
3,389

 
242

 
7.7

Deferred tax assets, net
2,907

 
(235
)
 
(7.5
)
OREO
2,281

 
(50
)
 
(2.1
)
BOLI, net
27,534

 
3,381

 
14.0

Prepaid expenses and other assets
2,892

 
228

 
8.6

Total assets                                
$
1,060,520

 
$
22,936

 
2.2
 %


35



Interest-earning deposits with banks. Our interest-earning deposits with banks, consisting primarily of funds held at the Federal Reserve Bank of San Francisco, decreased by $5.6 million from December 31, 2016 to March 31, 2017 as these funds were partially utilized in the three months ended March 31, 2017 to fund new loan originations.

Investments available-for-sale. Our investments available-for-sale portfolio remained relatively stable during the first three months of 2017 with an increase of $402,000 during this period. We purchased a $1.0 million Fannie Mae security and a $2.0 million subordinated debt security that offset principal paydowns received of $2.8 million during the first quarter of 2017. At March 31, 2017, corporate bonds issued by financial institutions represented $24.5 million, or 18.9% of our investments available-for-sale and municipal bonds represented $13.2 million, or 10.1% of our investments available-for-sale. In addition, the Bank had partial calls of $5,000 on a taxable municipal security and $21,000 on a U.S. government agency security.

The net unrealized loss of our investments available-for-sale had a pre-tax decrease of $377,000 during the three months ended March 31, 2017 as a result of a net improvement in the market value of the underlying securities in our portfolio.

The effective duration of the investments available-for-sale at March 31, 2017, was 3.8% as compared to 4.0% at December 31, 2016. Effective duration is a measure that attempts to quantify the anticipated percentage change in the value of an investment security (or portfolio) in the event of a 100 basis point change in market yields. Since the Bank’s portfolio includes securities with embedded options (including call options on bonds and prepayment options on mortgage-backed securities), management believes that effective duration is an appropriate metric to use as a tool when analyzing the Bank’s investment securities portfolio, as effective duration incorporates assumptions relating to such embedded options, including changes in cash flow assumptions as interest rates change.

Loans receivable. Net loans receivable increased $23.7 million during the first three months of 2017 to $838.8 million at March 31, 2017. The following table details the types of commercial real estate, multifamily and construction and development loans in our portfolio. We routinely monitor the concentrations of our commercial and construction loans to achieve our goal of maintaining compliance with internally established concentration guidelines. The Bank has set aggregate concentration guidelines that total commercial real estate, including residential, non-residential, and construction, should not exceed 550% of total risk-based capital. Construction/land loans are further limited to 100% of total risk-based capital. At March 31, 2017, the Bank’s concentrations were 441.2% for total commercial real estate loans and 111.7% for total construction/land loans. The concentration of construction/land loans is calculated using the funded balance of these loans and consequently can fluctuate based on the timing of construction draws, as well as loan payoffs. Management reviews estimated construction draws and loan payoffs and adjusts loan originations based on these estimates in order to achieve our goal of compliance with our construction guidelines. Our commercial and multifamily real estate and construction/land loan portfolios are subject to ongoing credit reviews performed by both independent loan review staff, as well as an external third-party review firm to assist with identifying potential adverse trends and risks in the portfolio allowing management to initiate timely corrective action, as necessary.  Such reviews also assist with ensuring loan risk grades are accurately assigned and thereby properly accounted for in the ALLL.  The review places emphasis on large borrowing relationships, stress testing, compliance with loan covenants, as well as other risk factors warranting enhanced review. The following table presents a breakdown of our loan portfolio by collateral type at March 31, 2017 and December 31, 2016:

36



 
March 31, 2017
 
December 31, 2016
 
(In thousands)
Multifamily real estate:
 
 
 
Other multifamily
$
113,877

 
$
115,372

Micro-unit apartments
7,841

 
7,878

Total multifamily
121,718

 
123,250

 
 
 
 
Commercial real estate:
 
 
 
Office
101,369

 
101,688

Retail
105,233

 
106,294

Storage
35,290

 
34,816

Mobile home park
20,519

 
20,689

Warehouse
21,575

 
15,338

Other non-residential
33,733

 
24,869

Total commercial real estate
317,719

 
303,694

 
 
 
 
Construction/land:
 
 
 
Land
39,687

 
30,055

One-to-four family residential
58,447

 
67,842

Multifamily
108,801

 
111,051

Total construction/land
206,935

 
208,948

Total commercial, multifamily and construction/land loans
$
646,372

 
$
635,892


During the first three months of 2017, total construction/land loans decreased by $2.0 million as compared to December 31, 2016. The LIP related to these loans decreased by $10.3 million as disbursements on existing loans exceeded the unfunded portion of new loan originations. Included in total construction/land loans at March 31, 2017 are $67.7 million of multifamily loans and $2.6 million of one-to-four family loans that will roll over to permanent loans at the completion of their construction period in accordance with the terms of the construction/land loan.

To assist in our strategic initiatives for loan growth, the Bank will utilize loan participations or loan purchases within Washington or in the Western United States. The Bank goal with respect to participations is to locate a selling bank that is unable to make an entire loan due to legal or lending concentration limitations. Sellers of these loans are reviewed for management/lending experience, financial condition, asset quality metrics, and regulatory matters. Loans acquired through participation or purchase must meet the Bank’s underwriting standards. During the three months ended March 31, 2017, the Bank purchased participation interests in two commercial real estate loans in Washington and California for a total of $12.8 million.
 
The majority of our loan portfolio continues to be focused in our primary market area, however we are also seeking geographic diversification. Through loan purchases and by loan originations initiated by our California employee, we have acquired loans secured by collateral located in Arizona, California, Colorado, Oregon, and Utah. At March 31, 2017, total loans secured by collateral located in California represented 1.7% of our total loans, net of LIP and total loans secured by collateral located outside the states of California and Washington represented 4.6% of our total loans, net of LIP. The following table details geographic concentrations in our loan portfolio, net of LIP:


37



 
 
At March 31, 2017
 
 
One-to-four family residential
 
Multifamily
 
Commercial real estate
 
Construction/land
 
Business
 
Consumer
 
Total
 
 
(In thousands)
King County
 
$
186,232

 
$
75,249

 
$
161,609

 
$
126,467

 
$
7,520

 
$
6,820

 
$
563,897

Pierce County
 
38,130

 
14,662

 
33,578

 
2,460

 

 
739

 
89,569

Snohomish County
 
10,305

 
2,203

 
30,390

 
13,866

 
90

 
241

 
57,095

Kitsap County
 
2,267

 
1,544

 
830

 
118

 

 
78

 
4,837

California
 

 

 
14,074

 

 
460

 

 
14,534

Other Washington Counties
 
12,165

 
16,516

 
51,842

 
2,289

 

 

 
82,812

Outside Washington and California
 
120

 
11,544

 
25,396

 

 
2,300

 

 
39,360

Total loans, net of LIP
 
$
249,219

 
$
121,718

 
$
317,719

 
$
145,200

 
$
10,370

 
$
7,878

 
$
852,104


Our five largest borrowing relationships, which represent 10.5% of our net loans, increased by $8.1 million to $87.6 million at March 31, 2017 from $79.5 million at December 31, 2016. The total number of loans represented by this group of borrowers increased to 36 loans at March 31, 2017 from 23 loans at December 31, 2016. At March 31, 2017, all five borrowers were current on their loan payments. We monitor the performance of these borrowing relationships very closely due to their concentration risk in relation to the entire loan portfolio. The following table details our five largest lending relationships at March 31, 2017:

Borrower (1)
 
Number
of Loans
 
One-to-Four Family
Residential
(2)

Multifamily

Commercial
Real Estate

Construction/
Land
 
Aggregate
Balance of
Loans (3)

 
(Dollars in thousands)
Real estate investor
 
3
 
$
565

 
$

 
$

 
$
22,000

 
$
22,565

Real estate investor
 
17
 

 
17,502

 
836

 

 
18,338

Real estate investor
 
7
 
476

 

 
15,615

 

 
16,091

Real estate investor
 
4
 

 

 
15,576

 

 
15,576

Real estate investor
 
5
 
464

 

 
14,572

 

 
15,036

Total
 
36
 
$
1,505

 
$
17,502

 
$
46,599

 
$
22,000

 
$
87,606

________
(1)
The composition of borrowers represented in the table may change between periods.
(2) 
$940,000 of the one-to-four family residential loans for these borrowers are for owner occupied properties while $565,000 is for non-owner occupied. The commercial real estate loans are for non-owner occupied properties.
(3) 
Net of LIP.

The ALLL increased to $11.2 million at March 31, 2017, from $11.0 million at December 31, 2016, and represented 1.3% of total loans receivable, net of LIP at both March 31, 2017 and December 31, 2016. The ALLL consists of two components, the general allowance and the specific reserves. The increase in the ALLL, primarily a result of growth in our loan portfolio, consisted of a $307,000 increase in the general reserve and a $100,000 decrease in the specific reserves. For additional information, see “Comparison of Operating Results for the Three Months Ended March 31, 2017 and 2016 - Provision for Loan Losses” discussed below.

We believe that the ALLL at March 31, 2017, was adequate to absorb the probable and inherent risks of loss in the loan portfolio at that date. While we believe the estimates and assumptions used in our determination of the adequacy of the allowance are reasonable, there can be no assurance that such estimates and assumptions will be proven correct in the future, that the actual amount of future losses will not exceed the amount of past provisions, or that any increased provisions that may be required will not adversely impact our financial condition and results of operations. Future additions to the allowance may become necessary based upon changing economic conditions, the level of problem loans, business conditions, credit concentrations, increased loan balances, or changes in the underlying collateral of the loan portfolio. In addition, the determination of the amount

38



of our ALLL is subject to review by bank regulators as part of the routine examination process, which may result in the establishment of additional loss reserves or the charge-off of specific loans against established loss reserves based upon their judgment of information available to them at the time of their examination.

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

The following table presents a breakdown of our TDRs at the dates indicated:

March 31, 2017

December 31, 2016

Three Month Change

(Dollars in thousands)
Nonperforming TDRs:





   One-to-four family residential
$
109


$
174


$
(65
)
Total nonperforming TDRs
109


174


(65
)






Performing TDRs:





   One-to-four family residential
21,790


24,274


(2,484
)
   Multifamily
1,152


1,564


(412
)
   Commercial real estate
3,683


4,202


(519
)
   Consumer
43


43



Total performing TDRs
26,668


30,083


(3,415
)
Total TDRs
$
26,777


$
30,257


$
(3,480
)
% TDRs classified as performing
99.6
%

99.4
%

 

Our TDRs decreased $3.5 million at March 31, 2017, compared to December 31, 2016, as a result of principal repayments and loan payoffs. At March 31, 2017, one TDR was on nonaccrual status although current on its payments. There were no committed but undisbursed funds in connection with our TDRs and impaired loans. The largest TDR relationship at March 31, 2017, totaled $8.9 million and was comprised of $8.1 million in one-to-four family residential rental properties and $751,000 in owner occupied commercial property, all located in King County.

Loans are considered past due if a scheduled principal or interest payment is due and unpaid for 30 days or more. At March 31, 2017, there were no past due loans. At December 31, 2016, past due loans comprised 0.06% of total loans receivable.     
Nonperforming assets decreased to $2.9 million at March 31, 2017, compared to $3.2 million at December 31, 2016. The following table presents detailed information on our nonperforming assets at the dates indicated:


39




March 31, 2017

December 31, 2016

Three Month Change

(Dollars in thousands)
Nonperforming loans:





  One-to-four family residential
$
545


$
798


$
(253
)
  Consumer
57


60


(3
)
Total nonperforming loans
602


858


(256
)






OREO
2,281


2,331


(50
)
Total nonperforming assets (1)
$
2,883


$
3,189


$
(306
)








Nonperforming assets as a
percent of total assets
0.27
%

0.31
%


____________ 
(1) The difference between nonperforming assets reported above, and the totals reported by other industry sources, is due to their inclusion of all TDRs as nonperforming loans, although 99.6% of our TDRs were performing in accordance with their restructured terms at March 31, 2017. The remaining 0.4% of TDRs at March 31, 2017, that were nonperforming are reported above as nonperforming loans.

Nonaccrual loans are loans that are 90 days or more delinquent or other loans which, in management's opinion, the borrower is unable to meet scheduled payment obligations. Nonaccrual loans decreased to $602,000 at March 31, 2017, from $858,000 December 31, 2016. During the first three months of 2017, one loan with a $62,000 balance was returned to accrual status as a result of consistent payments for a period of time and demonstration of the ability to continue making payments. Further reductions in nonperforming loans was a result of $194,000 in principal payments and payoffs of nonaccrual loans during this period. There were no charge-offs or loans added to nonaccrual status.

The three largest nonaccrual loans in the loan portfolio at March 31, 2017, included a $291,000 owner occupied single family residence in Snohomish County, a $135,000 owner occupied single family residence in King County, and a $109,000 owner occupied single family residence in King County. Each of these loans is current on its loan payments.

We continue to focus our efforts on working with borrowers to bring their loans current or converting nonaccrual loans to OREO and subsequently selling the properties. By taking ownership of these properties, we can generally convert nonearning assets into earning assets on a more timely basis than which may otherwise be the case. Our success in this area is reflected by the continued improved ratio of our nonperforming assets as a percent of total assets, which declined to 0.27% at March 31, 2017, compared to 0.31% at December 31, 2016.

OREO. OREO includes properties acquired by the Bank through foreclosure or acceptance of a deed in lieu of foreclosure. At March 31, 2017, and December 31, 2016, OREO was $2.3 million. During the three months ended March 31, 2017, a $50,000 market valuation adjustment was taken on a property for which we had entered into a sale contract. The sale of this property subsequently closed in April 2017.

The three largest OREO properties at March 31, 2017, were an office building valued at $837,000 located in Pierce County, a retail building valued at $505,000 in Mason County, and undeveloped land valued at $456,000 in Kitsap County, which subsequently sold.

The following table presents a breakdown of our OREO by county and number of properties at March 31, 2017:


40



 
County
 
Total OREO
 
Number of Properties
 
Percent of
Total OREO
 
Pierce
 
Kitsap
 
Mason
 
(Dollars in thousands)
OREO:
 
 
 
 
 
 
 
 
 
 
 
   Commercial real estate (1)
$
1,320

 
$
456

 
$
505

 
$
2,281

 
5

 
100.0
%
Total OREO
$
1,320

 
$
456

 
$
505

 
$
2,281

 
5

 
100.0
%

(1) Of the five properties classified as commercial real estate, two are office/retail buildings and three are undeveloped lots.

Deposits. During the first three months of 2017, deposits increased $17.2 million to $734.7 million at March 31, 2017, compared to $717.5 million at December 31, 2016. Deposit accounts consisted of the following:

 
March 31, 2017
 
Change from December 31, 2016
 
Percent Change
 
(Dollars in thousands)
Noninterest-bearing
$
36,190

 
$
2,768

 
8.3
 %
Interest-bearing checking
21,584

 
3,052

 
16.5

Statement savings
27,415

 
(968
)
 
(3.4
)
Money market
218,578

 
13,580

 
6.6

Certificates of deposit, retail
355,452

 
(1,201
)
 
(0.3
)
Certificates of deposit, brokered
75,488






$
734,707


$
17,231


2.4

 
The increase during the first three months of 2017 was predominantly in retail deposits reflecting our strategy to grow our core deposits. Growth occurred in both our noninterest-bearing and interest-bearing checking accounts and money market accounts as we pursue these sources of lower cost funding.

Our portfolio of brokered certificates of deposits remained at $75.5 million at March 31, 2017, unchanged from December 31, 2016. We may add to our portfolio of these brokered deposits as a source of additional funding in future periods. While brokered certificates of deposit may carry a higher cost than our retail certificates, their remaining maturity periods of 16 to 46 months, along with the enhanced call features of these deposits, assist us in our efforts to manage interest rate risk.

At March 31, 2017 and December 31, 2016, we held $23.8 million and $23.7 million in public funds, respectively, nearly all of which were retail certificates of deposit.

Advances. We use advances from the FHLB as an alternative funding source to reduce interest rate risk and to leverage our balance sheet. Total FHLB advances at March 31, 2017 and December 31, 2016 were $171.5 million. At March 31, 2017, the Bank held $20.0 million in borrowings that are due in less than one year and $21.5 million in borrowings that are due in one to three years. Included in our total advances at that date is a $50.0 million three-month fixed-rate advance designated as a hedge instrument in a cash flow hedge, as described below. In addition, at March 31, 2017, the Bank held an $80.0 million Member Option Variable Rate advance that reprices monthly and allows prepayment without penalties on the repricing date.

Cash Flow Hedge. To assist in managing interest rate risk, the Bank entered into a five-year, $50 million notional, pay fixed, receive floating cash flow hedge or interest rate swap with a qualified institution on October 25, 2016. Under the terms of the agreement, the Bank will pay a fixed rate of 1.34% for five years and, will in turn, receive an interest payment based on the three-month LIBOR index, which resets quarterly. Concurrently, the Bank borrowed a $50.0 million fixed rate three-month advance that will be renewed quarterly at the fixed interest rate in effect at that time. Effectiveness of the swap is evaluated quarterly with any ineffectiveness recognized as a gain or a loss on the income statement in noninterest income. A change in the fair value of the cash flow hedge is recognized as an other asset or other liability on the balance sheet with the tax-effected portion of the change included in other comprehensive income. At March 31, 2017, we recognized a $1.4 million fair value asset as a result in the increase in the market value of the hedge agreement.

Stockholders’ Equity. Total stockholders’ equity increased $3.6 million during 2017 to $141.7 million at March 31, 2017, from $138.1 million at December 31, 2016. Additional paid-in capital increased $1.3 million as a result of the exercise

41



of stock options for 97,540 shares during the three months ended March 31, 2017. Also contributing to the increase, retained earnings increased $1.7 million during the three months ended March 31, 2017, as a result of $2.3 million in net income partially offset by $623,000 paid out in shareholder dividends.

The following table shows cash dividends paid per share and the related dividend payout ratio for the periods indicated:
 
Three Months Ended March 31,
 
2017
 
2016
 
 
 
 
Dividend declared per common share
$
0.06

 
$
0.06

Dividend payout ratio (1)
26.1
%
 
42.0
%
______________
(1) Dividends paid per common share divided by basic earnings per common share
    
The Company had a share repurchase plan in effect from September 16, 2016 through March 17, 2017, however no shares were repurchased under this plan in 2017. Of the 1,500,000 shares authorized as part of this plan, 1,133,777 were repurchased.

Comparison of Operating Results for the Three Months Ended March 31, 2017 and 2016

General. Net income for the three months ended March 31, 2017 was $2.3 million, or $0.22 per diluted share as compared to net income of $1.8 million, or $0.14 per diluted share for the quarter ended March 31, 2016. The $519,000 increase in net income during the first quarter of 2017 was primarily a result of increases in net interest income and noninterest income partially offset by increases in the provision for loan losses and in noninterest expense.

Net Interest Income. Net interest income for the quarter ended March 31, 2017 increased $1.1 million to $8.9 million, as compared to $7.8 million for the first quarter in 2016, due to the $1.4 million increase in our interest income partially offset by a $355,000 increase in interest expense.

The following table details the change in net interest income due to changes in yield or cost, or changes in the average balance of the related asset or liability:


42



 
Three Months Ended March 31, 2017
Compared to March 31, 2016
Net Change

Rate

Volume

Total

(In thousands)
Interest-earning assets:





   Loans receivable, net
$
(455
)

$
1,755


$
1,300

   Investments available-for-sale
177


(7
)

170

   Interest-earning deposits with banks
13


(82
)

(69
)
   FHLB stock
19


16


35

Total net change in income on interest-earning assets
(246
)

1,682


1,436







Interest-bearing liabilities:





   Interest-bearing checking
11


1


12

   Money market
72


(1
)

71

   Certificates of deposit, retail
77


89


166

   Certificates of deposit, brokered
(95
)
 
54

 
(41
)
   Advances from the FHLB
29


118


147

Total net change in expense on interest-bearing liabilities
94


261


355

Total net change in net interest income
$
(340
)

$
1,421


$
1,081


The $1.3 million increase in loan interest income during the first quarter of 2017, as compared to the same period in 2016, was a result of a $138.1 million increase in the average outstanding loan balance partially offset by a decrease in the average loan yield of 22 basis points. Higher yielding loans continue to be repaid while new loan originations are at lower rates, reflecting the relatively low interest rate environment.
 
During the first quarter of 2017, interest income from our investments available-for-sale increased by $170,000 as compared to the same period in 2016. The average balance of our investments available-for-sale for the three months ended March 31, 2017 decreased by $1.3 million as compared to the same period last year as sales and paydowns outpaced purchases of new investments. As a result of restructuring our available-for-sale investment portfolio through the sales of lower yielding investment securities, and utilizing the proceeds received to purchase higher yielding, long-term investment securities last year, our yield on these assets increased by 56 basis points for the three months ended March 31, 2017, as compared to the same period in 2016.

Partially offsetting the increase in interest income, interest expense increased by $355,000 for the three months ended March 31, 2017, as compared to the same period in 2016. The average balance of our interest-bearing liabilities increased $92.6 million over the last year to support the growth in our financial assets. The average balance of deposits increased by $44.0 million for the three months ended March 31, 2017 as compared to the same period in 2016, including growth in retail certificates of deposit of $31.8 million, brokered certificates of deposit of $10.1 million, interest-bearing checking accounts of $2.5 million and statement savings of $1.1 million. These increases were partially offset by a decrease of $1.4 million in the average balance of our money market accounts as funds deposited in 2016 for short-term construction development accounts were withdrawn in support of their respective projects. In further support of our asset growth, average borrowings at the FHLB increased by $48.6 million for the three months ended March 31, 2017, as compared to March 31, 2016. The average cost of both our deposits and FHLB borrowings increased by seven basis points for the three months ended March 31, 2017, as compared to the same period in 2016

The following table compares detailed average balances, related interest income or interest expense, associated yields and rates, and the resulting net interest margin for the three months ended March 31, 2017 and 2016. Nonaccrual loans are included in the average balance of net loans receivable and are considered to carry a zero yield.

43



 
Three Months Ended March 31,
 
2017
 
2016
 
Average
Balance
 
Interest Earned / Paid
 
Yield /
Cost
 
Average
Balance
 
Interest Earned / Paid
 
Yield /
Cost
 
(Dollars in thousands)
Assets
 
 
 
 
 
 
 
 
 
 
 
Loans receivable, net                                           
$
825,251

 
$
10,027

 
4.93
%
 
$
687,102

 
$
8,727

 
5.15
%
Investments available-for-sale
128,993

 
845

 
2.66

 
130,332

 
675

 
2.10

Interest-earning deposits with banks                                          
24,233

 
44

 
0.74

 
88,383

 
113

 
0.52

FHLB stock                      
8,034

 
82

 
4.14

 
6,034

 
47

 
3.16

Total interest-earning assets                                                      
986,511

 
10,998

 
4.52

 
911,851

 
9,562

 
4.25

Noninterest earning assets
59,962

 
 
 
 
 
58,580

 
 
 
 
Total average assets
$
1,046,473

 
 
 
 
 
$
970,431

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing checking
$
19,481

 
$
16

 
0.33
%
 
$
16,988

 
$
4

 
0.10
%
Statement savings
28,072

 
11

 
0.16

 
27,018

 
11

 
0.17

Money market
209,843

 
283

 
0.55

 
211,197

 
212

 
0.41

Certificates of deposit, retail
355,414

 
1,072

 
1.22

 
323,659

 
906

 
1.14

Certificates of deposit, brokered
75,488

 
309

 
1.66

 
65,420

 
350

 
2.17

Advances from the FHLB
171,500

 
445

 
1.05

 
122,884

 
298

 
0.98

Total interest-bearing liabilities
859,798

 
2,136

 
1.01

 
767,166

 
1,781

 
0.94

Noninterest bearing liabilities
46,129

 
 
 
 
 
32,814

 
 
 
 
Average equity
140,546

 
 
 
 
 
170,451

 
 
 
 
Total average liabilities and equity
$
1,046,473

 
 
 
 
 
$
970,431

 
 
 
 
Net interest income
 
 
$
8,862

 
 
 
 
 
$
7,781

 
 
Net interest margin
 
 
 
 
3.64
%
 
 
 
 
 
3.46
%

Provision for Loan Losses. Management recognizes that loan losses may occur over the life of a loan and that the ALLL must be maintained at a level necessary to absorb specific losses on impaired loans and probable losses inherent in the loan portfolio. Our methodology for analyzing the ALLL consists of two components: general and specific reserves. The general reserve is determined by applying factors to our various groups of loans. Management considers factors such as charge-off history, the prevailing economy, the regulatory environment, competition, geographic and loan type concentrations, policy and underwriting standards, nature and volume of the loan portfolio, managements’ experience level, our loan review and grading systems, the value of underlying collateral and the level of problem loans in assessing the ALLL. The specific reserve component is created when management believes that the collectability of a specific loan has been impaired and a loss is probable. The specific reserves are computed using current appraisals, listed sales prices, and other available information, less costs to complete, if any, and costs to sell the property. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available or if future events differ from current estimates.

During the quarter ended March 31, 2017, management evaluated the adequacy of the ALLL and concluded that additional provision for loan losses in the amount of $200,000 was appropriate for the quarter. For the quarter ended March 31, 2016, a $100,000 recapture of the provision for loan losses was recorded. For the first quarter of 2017, the provision for loan losses was primarily a result of growth in our loan portfolio. In comparison, the recapture reported in the first quarter of 2016 was primarily a result of improved grades in our loan portfolio partially offset by an increase in the balance of our loans receivable.

The following table summarizes selected financial data related to our ALLL and loan portfolio. All loan balances and ratios are calculated using loan balances that are net of LIP.

44




At or For the Three Months Ended March 31,

2017

2016
 
(Dollars in thousands)
Total loans receivable, net of LIP, end of period
$
852,104

 
$
729,198

Average loans receivable during period
825,251

 
687,102

ALLL balance at beginning of period
10,951

 
9,463

Provision (recapture of provision) for loan losses
200

 
(100
)
Charge-offs:


 
 
Consumer

 
(19
)
Total charge-offs

 
(19
)
Recoveries:


 
 
One-to-four family
7

 
22

Commercial real estate

 
104

Consumer

 
1

Total recoveries
7

 
127

Net recovery
7

 
108

ALLL balance at end of period
$
11,158

 
$
9,471

ALLL as a percent of total loans, net of LIP
1.31
%
 
1.30
%
Ratio of net recoveries to average net loans receivable

 
0.02


Noninterest Income. Noninterest income increased $55,000 to $535,000 for the quarter ended March 31, 2017, from $480,000 for the quarter ended March 31, 2016. The following table provides a detailed analysis of the changes in the components of noninterest income:
 
Three Months Ended March 31, 2017
 
Change from Three Months Ended
March 31, 2016
 
Percent Change
 
(Dollars in thousands)
BOLI change in cash surrender value
201

 
36

 
21.8

Wealth management revenue
140

 
(70
)
 
(33.3
)
Other noninterest income:


 


 


Service fees on deposit accounts
24

 
9

 
60.0

Loan service fees
35

 
(13
)
 
(27.1
)
Other fees
135

 
93

 
221.4

Total other noninterest income
194

 
89

 
84.8

Total noninterest income                                           
$
535

 
$
55

 
11.5


The increase in the quarter ended March 31, 2017, compared to the quarter ended March 31, 2016, was partially a result of the $36,000 increase in noninterest income recognized on the change in cash surrender value of our BOLI policies. We recognize the increase in cash surrender value of these policies, which represents the increase in underlying investments, as noninterest income, although it assists us in offsetting expenses for employee benefits. In addition, during the quarter ended June 30, 2016, we surrendered one $10.2 million BOLI policy which was replaced with a higher yielding policy. In addition to service fees on deposit accounts and loan service fees, other noninterest income includes $85,000 in fees on certain commercial loans where loan customers participate in an interest rate swap. As a result of the interest rate swap, these commercial loan customers pay a fixed interest rate to us, which we forward to a third party broker institution and receive variable interest payments based on one month LIBOR in return. On most of these loans, in addition to the interest payment, the Bank receives a fee from the counterparty that is recognized as other noninterest income at the time the loan is originated.
        

45



Noninterest Expense. Noninterest expense increased $295,000 to $6.1 million for the quarter ended March 31, 2017 from $5.8 million for the comparable quarter in 2016.

The following table provides a detailed analysis of the changes in the components of noninterest expense:
 
Three Months Ended March 31, 2017
 
Change from Three Months Ended
March 31, 2016
 
Percent Change
 
(Dollars in thousands)
Salaries and employee benefits
$
4,285

 
$
511

 
13.5
 %
Occupancy and equipment                                           
480

 
(28
)
 
(5.5
)
Professional fees                                
439

 
(29
)
 
(6.2
)
Data processing                                
240

 
50

 
26.3

Loss (gain) on sale of OREO property, net                                

 
1

 
(100.0
)
OREO market value adjustments
50

 
(208
)
 
(80.6
)
OREO related expenses, net
(10
)
 
10

 
(50.0
)
Regulatory assessments
96

 
(24
)
 
(20.0
)
Insurance and bond premiums                                           
99

 
11

 
12.5

Marketing
48

 
12

 
33.3

Other general and administrative
341

 
(11
)
 
(3.1
)
Total noninterest expense                                           
$
6,068

 
$
295

 
5.1
 %

Expenses for salaries and employee benefits increased $511,000 for the first quarter of 2017, as compared to the same period in 2016 primarily as a result of increases in salaries and in the number of employees. As a result of our new branches and the development of new products, the number of employees increased to 121 at March 31, 2017 from 115 at March 31, 2016. In addition, our ESOP compensation expense increased as a result of an increase in the year-to-date stock price used in the compensation calculation.

Partially offsetting this increase, market value adjustments on OREO properties decreased by $208,000 for the three months ended March 31, 2017, as compared to the three months ended March 31, 2016. During the first quarter of 2016, the valuation adjustment was primarily the result of one property that was adjusted by $249,000 to reflect the negotiated sales price on its pending sale. That sale subsequently fell through. In comparison, for the three months ended March 31, 2017, an additional $50,000 valuation adjustment was taken on the same parcel of property as a result of a different sale contract. This sale subsequently closed in April 2017.

Federal Income Tax Expense. Our statutory income tax rate is 35%. We recorded federal income tax provisions of $785,000 and $763,000 for the quarters ended March 31, 2017, and 2016, respectively, as a result of our consolidated pretax net income. For the quarter ended March 31, 2017, we incurred a tax benefit as a result of exercise of certain stock options during the quarter, resulting in an effective tax rate of 25.1%.

Liquidity

We are required to have enough cash flow in order to maintain sufficient liquidity to ensure a safe and sound operation. We maintain cash flows above the minimum level believed to be adequate to meet the requirements of normal operations, including potential deposit outflows. On a daily basis, we review and update cash flow projections to ensure that adequate liquidity is maintained.

Our primary sources of funds are customer deposits, cash flow from the loan and investment portfolios, advances from the FHLB, and to a lesser extent, brokered certificates of deposit. These funds, together with equity, are used to make loans, acquire investment securities and other assets, and fund continuing operations. At March 31, 2017, retail certificates of deposit scheduled to mature in one year or less totaled $168.8 million. Management’s practice is to maintain deposit rates at levels that are competitive with other local financial institutions. While maturities and the scheduled amortization of loans are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by the level of interest rates, economic conditions and competition. We measure our liquidity based on our ability to fund our assets and to meet liability obligations when they come due. Liquidity (and funding) risk occurs when funds cannot be raised at reasonable prices or in a reasonable time frame to meet our normal or

46



unanticipated obligations. We regularly monitor the mix between our assets and our liabilities to manage effectively our liquidity and funding requirements.

When deposits are not readily available and/or cost effective to provide the funds for our assets, we use alternative funding sources. These sources include, but are not limited to: advances from the FHLB, wholesale funding, brokered deposits, federal funds purchased and dealer repurchase agreements, as well as other short-term alternatives. These funding sources are generally collateral dependent. We may also liquidate assets to meet our funding needs. The balance of our investments available-for-sale increased $402,000 from December 31, 2016, to $129.7 million at March 31, 2017, and represents a ready source of cash if needed. The balance of our interest-earning deposits with banks decreased by $5.6 million from December 31, 2016 to March 31, 2017, as we shifted cash into higher yielding assets. At March 31, 2017, the Bank maintained credit facilities with the FHLB totaling $362.3 million, with an outstanding balance of $171.5 million. At March 31, 2017, we also had available a total of $35.0 million credit facilities with other financial institutions, with no balance outstanding. For additional information, see the Consolidated Statements of Cash Flows in Item 1 of this Form 10-Q.

To assist in our funds acquisition and interest rate risk management efforts, management utilizes the national brokered deposit market and maintained a balance at March 31, 2017 of $75.5 million of brokered certificates of deposit. In contrast to most retail certificate of deposit offerings which provide the depositor with an option to withdraw their funds prior to maturity, subject to an early withdrawal penalty, certificates of deposit acquired in the brokered market limits the depositor ability to withdraw the funds before the end of the term (except in the case of death or adjudication of incompetence of a depositor) which greatly reduces early redemption risk associated with retail deposits. This strategy may include, but is not necessarily limited to, raising longer term deposits (with terms greater than three years) that assist the Bank in its interest rate risk management efforts. At March 31, 2017, brokered certificates of deposit had a remaining maturity of 16 to 46 months. Most of these certificates also provide the Bank the option to redeem the deposit after six months, a favorable distinction compared to retail certificate of deposit terms that are offered in our local market. With these redemption limitations and call features, the cost of these brokered deposits is generally higher than our retail certificate of deposit offerings. Consequently, as we increase our brokered deposits, our cost of funds may increase.

First Financial Northwest is a separate legal entity from the Bank and, on a stand-alone level, must provide for its own liquidity and pay its own operating expenses and cash dividends. First Financial Northwest's primary sources of funds consist of dividends from the Bank, although there are regulatory considerations on the ability of the Bank to pay dividends. At March 31, 2017, the Company (on an unconsolidated basis) had liquid assets of $14.8 million and short-term liabilities of $102,000.

On a monthly basis, we estimate our liquidity sources and needs for the next six months. Also, we determine funding concentrations and our need for sources of funds other than deposits. This information is used by our Asset/Liability Management Committee (“ALCO”) in forecasting funding needs and investing opportunities. We believe that our current liquidity position and our expected operating results are sufficient to fund all of our existing commitments.

Commitments and Off-Balance Sheet Arrangements

We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and the unused portions of lines of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated financial statements. Commitments to extend credit and lines of credit are not recorded as an asset or liability by us until the instrument is exercised. At March 31, 2017 and December 31, 2016, we had no commitments to originate loans for sale.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the loan agreement. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis. The amount of the collateral obtained, if deemed necessary by us upon the extension of credit, is based on our credit evaluation of the customer. The amount and type of collateral required varies, but may include real estate and income-producing commercial properties.
    
The following table summarizes our outstanding commitments to advance additional amounts pursuant to outstanding lines of credit and to disburse funds related to our construction loans at March 31, 2017:

47



 
 
 
Amount of Commitment Expiration
 
Total Amounts Committed
 
Through One Year
 
After One Through Three Years
 
After Three Through Five Years
 
After Five Years
 
(In thousands)
Unused portion of lines of credit                                                      
$
24,523

 
$
2,493

 
$
16,331

 
$
2,471

 
$
3,228

Undisbursed portion of construction loans
61,735

 
45,638

 
16,097

 

 

Total commitments
$
86,258

 
$
48,131

 
$
32,428

 
$
2,471

 
$
3,228


We anticipate that we will continue to have sufficient funds and alternative funding sources to meet our current commitments.

As of March 31, 2017, the Bank had four operating leases with initial terms of 5 to 8 years which carry minimum lease payments of $19,000 per month. All four leases offer extension periods. In addition, the Bank signed a fifth lease agreement in April 2017 for the new branch office in Bothell, Washington that is expected to open in the fourth quarter of 2017.
    
First Financial Northwest and its subsidiaries from time to time are involved in various claims and legal actions arising in the ordinary course of business. There are currently no matters that in the opinion of management would have a material adverse effect on First Financial Northwest’s consolidated financial position, results of operation, or liquidity.

Capital

At March 31, 2017, stockholders’ equity totaled $141.7 million, or 13.37% of total assets. Our book value per share of common stock was $12.84 at March 31, 2017, compared to $12.63 at December 31, 2016. Consistent with our goal to operate a sound and profitable financial organization, we actively seek to maintain a “well-capitalized” status in accordance with regulatory standards.

As of March 31, 2017, the Bank and consolidated Company exceeded all regulatory capital requirements and the Bank was considered “well capitalized” under regulatory capital guidelines of the FDIC. The following table provides our capital requirements and actual results.

 
At March 31, 2017
 
Actual
 
For Minimum Capital Adequacy Purposes
 
To be Categorized as “Well Capitalized”
 
 Amount
 
Ratio
 
 Amount
 
Ratio
 
 Amount
 
Ratio
 
 (Dollars in thousands)
Tier I leverage capital (to average assets)
 
 
 
 
 
 
 
 
 
 
 
Bank only
$
120,891

 
11.57
%
 
$
41,800

 
4.00
%
 
$
52,250

 
5.00
%
Consolidated
142,792

 
13.63

 
41,906

 
4.00

 
52,383

 
5.00

Common equity tier I ("CET1") (to risk-weighted assets)
 
 
 
 
 
 
 
 
 
 
 
Bank only
120,891

 
14.39

 
37,811

 
4.50

 
54,616

 
6.50

Consolidated
142,792

 
16.95

 
37,902

 
4.50

 
54,747

 
6.50

Tier I risk-based capital (to risk-weighted assets)
 
 
 
 
 
 
 
 
 
 
 
Bank only
120,891

 
14.39

 
50,415

 
6.00

 
67,220

 
8.00

Consolidated
142,792

 
16.95

 
50,536

 
6.00

 
67,381

 
8.00

Total risk-based capital (to risk-weighted assets)
 
 
 
 
 
 
 
 
 
 
 
Bank only
131,406

 
15.64

 
67,220

 
8.00

 
84,024

 
10.00

Consolidated
153,332

 
18.20

 
67,381

 
8.00

 
84,227

 
10.00



48



In addition to the minimum CET1, Tier 1 total capital and leverage ratios, the Bank now has to maintain a capital conservation buffer consisting of additional CET1 capital 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 began to be phased in starting in January 2016 at 0.625% of risk-weighted assets and will increase each year until fully implemented to an amount equal to 2.5% of risk-weighted assets in January 2019.


Item 3. Quantitative and Qualitative Disclosures about Market Risk

General. Our Board of Directors has approved an asset/liability management policy to guide management in maximizing net interest income by managing the differences in terms between interest-earning assets and interest-bearing liabilities while maintaining acceptable levels of liquidity, capital adequacy, interest rate sensitivity, credit risk, and profitability. The policy established an ALCO, comprised of certain members of senior management and the Board of Directors. The Committee’s purpose is to manage, coordinate, and communicate our asset/liability position consistent with our business plan and Board-approved policy. The ALCO meets quarterly to review various areas including:
economic conditions;
interest rate outlook;
asset/liability mix;
interest rate risk sensitivity;
current market opportunities to promote specific products;
historical financial results;
projected financial results; and
capital position.

Additionally, the Committee reviews current and projected liquidity needs. As part of its procedures, the ALCO regularly reviews our interest rate risk by modeling the impact that changes in interest rates may have on earnings, particularly net interest income. The market value of portfolio equity, which is the net present value of an institution’s existing assets less its liabilities and off-balance sheet instruments, is also modeled under several scenarios of changing interest rates. In both cases, results are evaluated and compared with the maximum potential change that is authorized by the Board of Directors.
 
Our Risk When Interest Rates Change. The rates of interest we earn on assets and pay on liabilities generally are established contractually for a period of time. Market interest rates change over time. Our loans generally have longer maturities than our deposits. Accordingly, our results of operations, like those of other financial institutions, are impacted by changes in interest rates and the interest rate sensitivity of our assets and liabilities. The risk associated with changes in interest rates and our ability to adapt to these changes is known as interest rate risk and is our most significant market risk.

We have utilized the following strategies in our efforts to manage interest rate risk:


we are originating shorter term higher yielding loans, whenever possible;
we have attempted, where possible, to extend the maturities of our deposits which typically fund our long-term assets;
we have invested in securities with relatively short average lives, generally less than eight years;
we have added adjustable-rate loans to our loan portfolio;
we have added brokered certificates of deposit with a call option as a new funding source; and
we have utilized an interest rate swap to effectively fix the rate on $50.0 million of FHLB advances.

We have evaluated the use of derivative instruments to limit the impact of interest rate changes on earnings, prepayment penalties and cash flows and to lower our cost of borrowing while taking into account variable interest rate risk. At March 31, 2016, we did not have any derivative financial instruments or trading accounts for any class of financial instruments, however, on October 25, 2016, the Bank entered into a Cash Flow Hedge agreement to effectively fix the rate on $50.0 million of FHLB advances. We are using this interest rate swap as a tool to lower the cost of certain FHLB advances as compared to the fixed rates offered by the FHLB for its longer term advances. At March 31, 2017, pursuant to the Cash Flow Hedge agreement we held a $50.0 million notional pay fixed, receive floating cash flow hedge. The Bank pays a fixed rate of 1.34% for five years and in turn,

49



will receive an interest payment based on three-month LIBOR, which resets quarterly. The hedge instrument is a $50.0 million FHLB fixed-rate three-month advance that is renewed at the fixed rate at that time. Entering into this hedge agreement has allowed the Bank to secure fixed rate funding at a lower cost than a traditional five-year fixed rate FHLB advance. We will continue to review similar instruments and may utilize them for interest rate risk management in the future.

Interest rate contracts, however, may expose us to the risk of loss associated with variations in the spread between the interest rate contract and the hedged item. In addition, these contracts carry volatility risk that the expected uncertainty relating to the price of the underlying asset differs from what is anticipated. If any interest rate swaps we enter into prove ineffective, it could result in volatility in our operating results, including potential losses, which could have a material adverse effect on our results of operations and cash flows.

Brokered Deposits. During the third quarter of 2014, management added the national brokered deposit market as an additional source of funds and to assist efforts in managing interest rate risk. Utilizing brokered deposits might result in increased regulatory scrutiny, as such deposits are not viewed as favorably as core retail deposits and there can be no assurance that the Bank will be allowed to include brokered deposits in its deposit mix in the future. While management will attempt to weigh the benefits of brokered deposits against the costs and risks, there can be no assurance that its conclusions will necessarily be aligned with those of the Bank’s regulators.

How We Measure the Risk of Interest Rate Changes. We monitor our interest rate sensitivity on a quarterly basis to measure the change in net interest income in varying rate environments. Management uses various assumptions to evaluate the sensitivity of our operations to changes in interest rates. Although management believes these assumptions are reasonable, the interest rate sensitivity of our assets and liabilities on net interest income and the market value of portfolio equity could vary substantially if different assumptions were used or actual experience differs from these assumptions. Although certain assets and liabilities may have similar maturities or periods of repricing, they may react differently to changes in market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types of assets and liabilities lag behind changes in market interest rates. Non-uniform changes and fluctuations in market interest rates across various maturities will also affect the results presented. In addition, certain assets, such as adjustable-rate mortgage loans, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. A portion of our adjustable-rate loans have interest rate floors below which the loan’s contractual interest rate may not adjust. Approximately 43.5% of our total loans, net LIP, were adjustable-rate loans at March 31, 2017. At that date, $108.9 million, or 29.4% of these loans were at their floor, with a weighted-average interest rate of 4.1%.

The inability of our loans to adjust downward can contribute to increased income in periods of declining interest rates. However, when loans are at their floors, there is a risk that our interest income may not increase as rapidly as our cost of funds during periods of increasing interest rates. Furthermore, in the event of a significant change in interest rates, prepayment and early withdrawal levels would likely deviate from those assumed. Finally, the ability of many borrowers to service their debt may decrease in the event of an interest rate increase. We consider all these factors in monitoring our interest rate exposure.

The assumptions we use are based upon a combination of proprietary and market data that reflect historical results and current market conditions. These assumptions relate to interest rates, loan prepayments, deposit decay rates and the market value of certain assets under the various interest rate scenarios. We use market data to determine prepayments and maturities of loans, investments and borrowings and use our own assumptions on deposit decay rates. The exception to this is time deposits, which are modeled to reprice to market rates upon their stated maturities. We also assume that non-maturity deposits can be maintained with rate adjustments not directly proportionate to the change in market interest rates, based upon our historical deposit decay rates which are substantially lower than market decay rates. We have demonstrated in the past that the tiering structure of our deposit accounts during changing rate environments results in relatively lower volatility and less than market rate changes in our interest expense for deposits. We tier our deposit accounts by balance and rate, whereby higher balances within an account earn higher rates of interest. Therefore, deposits that are not very rate sensitive (generally, lower balance tiers) are separated from deposits that are rate sensitive (generally, higher balance tiers). When interest rates rise, we do not have to raise interest rates proportionately on less rate sensitive accounts to retain these deposits. These assumptions are based upon our analysis of our customer base, competitive factors and historical experience.

Our income simulation model examines changes in net interest income in which interest rates were assumed to remain at their base level, instantaneously increase by 100, 200 and 300 basis points or decline immediately by 100 basis points. Reductions of rates by 200 and 300 basis points were not reported due to the current low rate environment.


50



The following table illustrates the change in our net interest income at March 31, 2017 that would occur in the event of an instantaneous change in interest rates equally across all maturities, with no effect given to any steps that we might take to counter the effect of that interest rate movement.
    
Net Interest Income Change at March 31, 2017
Basis Point Change in Rates
 
Net Interest Income
 
% Change
(Dollars in thousands)
+300
 
$
34,276

 
(0.01
)%
+200
 
34,303

 
0.07

+100
 
34,358

 
0.23

Base
 
34,278

 

(100)
 
34,263

 
(0.04
)

The following table illustrates the change in our net portfolio value (“NPV”) at March 31, 2017 that would occur in the event of an immediate change in interest rates equally across all maturities, with no effect given to any steps that we might take to counter the effect of that interest rate movement.
Basis Point
 
 
 
 
 
 
 
Net Portfolio as % of
 
Market
Change in
 
Net Portfolio Value (1)
 
Portfolio Value of Assets
 
Value of
Rates
 
Amount
 
$ Change (2)
 
% Change
 
NPV Ratio (3)
 
% Change (4)
 
Assets (5)
 
 
(Dollars in thousands)
+300
 
$
126,896

 
$
(31,237
)
 
(19.75
)%
 
12.87
%
 
(2.94
)%
 
$
986,079

+200
 
137,136

 
(20,997
)
 
(13.28
)
 
13.57

 
(1.98
)
 
1,010,459

+100
 
149,004

 
(9,129
)
 
(5.77
)
 
14.37

 
(0.86
)
 
1,037,144

Base
 
158,133

 

 

 
14.89

 

 
1,061,820

(100)
 
164,273

 
6,140

 
3.88

 
15.14

 
0.58

 
1,085,376

_____________ 

(1) The net portfolio value is the difference between the present value of the discounted cash flows of assets and liabilities and represents the market value of the Company’s equity for any given interest rate scenario. Net portfolio value is useful for determining, on a market value basis, how equity changes in response to various interest rate scenarios. Large changes in net portfolio value reflect increased interest rate sensitivity and generally more volatile earnings streams.
(2) The increase or decrease in net portfolio value at the indicated interest rates compared to the net portfolio value assuming no change in interest rates.
(3) Net portfolio value divided by the market value of assets.
(4) The increase or decrease in the net portfolio value divided by the market value of assets.
(5) The market value of assets represents the value of assets under the various interest rate scenarios and reflects the sensitivity of those assets to interest rate changes.

The net interest income and net portfolio value tables presented above are predicated upon a stable balance sheet with no growth or change in asset or liability mix. In addition, the net portfolio value is based upon the present value of discounted cash flows using our estimates of current replacement rates to discount the cash flows. The effects of changes in interest rates in the net interest income table are based upon a cash flow simulation of our existing assets and liabilities and assuming that delinquency rates would not change as a result of changes in interest rates, although there can be no assurance that this will be the case. Delinquency rates may change when interest rates change as a result of changes in the loan portfolio mix, underwriting conditions, loan terms or changes in economic conditions that have a delayed effect on the portfolio. Even if interest rates change in the designated amounts, there can be no assurance that our assets and liabilities would perform as set forth above. Also, a change in U.S. Treasury rates in the designated amounts accompanied by a change in the shape of the Treasury yield curve would cause changes to the net portfolio value and net interest income other than those indicated above.

At March 31, 2017, other than the interest rate swap we entered into through the Cash Flow Hedge agreement, we did not have any derivative financial instruments or trading accounts for any class of financial instruments, nor have we engaged in

51



any other hedging activities or purchased off-balance sheet derivative instruments. However, we continue to review such instruments and may utilize them for interest rate risk management in the future. Interest rate risk continues to be one of our primary risks, as other types of risks, such as foreign currency exchange risk and commodity pricing risk do not arise in the normal course of our business activities and operations.

Item 4. Controls and Procedures

The management of First Financial Northwest, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Securities Exchange Act of 1934 (“Exchange Act”). A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that its objectives are met. Also, because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Additionally, in designing disclosure controls and procedures, our management was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. As a result of these inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Furthermore, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

(a)
Evaluation of Disclosure Controls and Procedures: An evaluation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) was carried out under the supervision and with the participation of our Chief Executive Officer, Chief Financial Officer (Principal Financial Officer) and several other members of our senior management as of the end of the period covered by this report. Our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2017, our disclosure controls and procedures were effective in ensuring that the information required to be disclosed by us in the reports we file or submit under the Exchange Act is (i) accumulated and communicated to our 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)
Changes in Internal Controls: In the quarter ended March 31, 2017, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II
Item 1. Legal Proceedings

From time to time, we are engaged in various legal proceedings in the ordinary course of business, none of which are currently considered to have a material impact on our financial position or results of operations.

Item 1A. Risk Factors

There have been no material changes to the risk factors previously disclosed in Part I, Item 1A of our 2016 Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a)     Not applicable

(b)     Not applicable


(c)    The Bank did not repurchase any shares of common stock during the first quarter of 2017.        

Item 3. Defaults Upon Senior Securities

Not applicable.

52




Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

53




Item 6. Exhibits and Financial Statement Schedules
 
(a)       Exhibits
 
3.1

 
Articles of Incorporation of First Financial Northwest (1)
3.2

 
Amended and Restated Bylaws of First Financial Northwest (2)
4.0

 
Form of stock certificate of First Financial Northwest (1)
10.1

 
Amended Employment Agreement between First Savings Bank Northwest and Joseph W. Kiley III (3)
10.2

 
Form of Change in Control Severance Agreement for Executive Officers (4)
10.3

 
Form of Supplemental Executive Retirement Agreement entered into by First Savings Bank with Joseph W. Kiley III (5)
10.4

 
2008 Equity Incentive Plan (6)
10.5

 
2016 Equity Incentive Plan (7)
10.6

 
Forms of incentive and non-qualified stock option award agreements (8)
10.7

 
Form of restricted stock award agreement (8)
10.8

 
Employment Agreement between First Savings Bank Northwest and Richard P. Jacobson (3)
31.1

 
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
31.2

 
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
32

 
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
101

 
The following materials from First Financial Northwest’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2017, formatted in Extensible Business Reporting Language (XBRL): (1) Consolidated Balance Sheets; (2) Consolidated Income Statements; (3) Consolidated Statements of Comprehensive Income; (4) Consolidated Statements of Stockholders’ Equity; (5) Consolidated Statements of Cash Flows; and (6) Selected Notes to Consolidated Financial Statements.

 _____________
(1) 
Filed as an exhibit to First Financial Northwest’s Registration Statement on Form S-1 (333-143539)
(2) 
Filed as an exhibit to First Financial Northwest’s Current Report on Form 8-K dated March 24, 2016.
(3) 
Filed as an exhibit to First Financial Northwest’s Current Report on Form 8-K dated December 5, 2013.
(4) 
Filed as an exhibit to First Financial Northwest’s Current Report on Form 8-K dated September 9, 2014.
(5) 
Filed as an exhibit to First Financial Northwest’s Current Report on Form 8-K dated September 12, 2016.
(6) 
Filed as Appendix A to First Financial Northwest’s definitive proxy statement dated April 15, 2008.
(7) 
Filed as an exhibit to First Financial Northwest’s Current Report on Form 8-K dated June 15, 2016.
(8) 
Filed as an exhibit to First Financial Northwest’s Current Report on Form 8-K dated July 1, 2008.


54



SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
FIRST FINANCIAL NORTHWEST, INC. 
 
 
 
 
 
Date: May 9, 2017
By: 
/s/Joseph W. Kiley III
 
 
Joseph W. Kiley III
 
 
President and Chief Executive Officer (Principal Executive Officer)
Date: May 9, 2017
By: 
/s/Richard P. Jacobson
 
 
Richard P. Jacobson
 
 
Executive Vice President and Chief Financial Officer (Principal Financial Officer)
 
 
 
Date: May 9, 2017
By: 
/s/Christine A. Huestis
 
 
Christine A. Huestis
 
 
Vice President and Controller (Principal Accounting Officer)

55




Exhibit Index

Exhibit No.
 
Description
31.1

 
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
31.2

 
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
32

 
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
101

 
The following materials from First Financial Northwest’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2017, formatted in Extensible Business Reporting Language (XBRL): (1) Consolidated Balance Sheets; (2) Consolidated Income Statements; (3) Consolidated Statements of Comprehensive Income; (4) Consolidated Statements of Stockholders’ Equity; (5) Consolidated Statements of Cash Flows; and (6) Selected Notes to Consolidated Financial Statements.




56