First Northwest Bancorp - 10-Q quarterly report FY2016 Q2

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended December 31, 2015



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from _____ to _____

Commission File Number: 001-36741

FIRST NORTHWEST BANCORP

(Exact name of registrant as specified in its charter)



Washington	46-1259100
(State or other jurisdiction of incorporation	(I.R.S. Employer
or organization)	I.D. Number)

105 West 8th Street, Port Angeles, Washington	98362
(Address of principal executive offices)	(Zip Code)

Registrant's telephone number, including area code:	(360) 457-0461

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 ý 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 ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	x	Smaller reporting company	¨

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

Yes ¨ No ý

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of February 4, 2016, there were 13,100,360 shares of common stock, $.01 par value per share, outstanding.

FIRST NORTHWEST BANCORP

FORM 10-Q

TABLE OF CONTENTS



PART 1 - FINANCIAL INFORMATION
	Page
Item 1 - Financial Statements (Unaudited)	3

Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations	34

Item 3 - Quantitative and Qualitative Disclosures About Market Risk	53

Item 4 - Controls and Procedures	53

PART II - OTHER INFORMATION

Item 1 - Legal Proceedings	54

Item 1A - Risk Factors	54

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds	54

Item 3 - Defaults Upon Senior Securities	54

Item 4 - Mine Safety Disclosures	54

Item 5 - Other Information	54

Item 6 - Exhibits	54

SIGNATURES	55

As used in this report, the terms, “we,” “our,” and “us,” and “Company” refer to First Northwest Bancorp ("First Northwest") and its consolidated subsidiary, unless the context indicates otherwise. When we refer to “First Federal” or the “Bank” in this report, we are referring to First Federal Savings and Loan Association of Port Angeles, the wholly owned subsidiary of First Northwest Bancorp.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

FIRST NORTHWEST BANCORP AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share information) (Unaudited)



ASSETS	December 31, 2015			June 30, 2015

Cash and due from banks	$	14,158		$	10,590
Interest-bearing deposits in banks	9,502			34,440
Investment securities available for sale, at fair value	305,131			299,040
Investment securities held to maturity, at amortized cost	58,872			61,524
Loans held for sale	—			110
Loans receivable (net of allowance for loan losses of $6,974 and $7,111)	527,144			487,887
Federal Home Loan Bank (FHLB) stock, at cost	4,197			4,807
Accrued interest receivable	2,868			2,546
Premises and equipment, net	13,563			12,580
Mortgage servicing rights, net	1,055			1,187
Bank-owned life insurance, net	18,190			18,168
Real estate owned and repossessed assets	158			1,914
Prepaid expenses and other assets	2,964			2,009

Total assets	$	957,802		$	936,802


LIABILITIES AND STOCKHOLDERS' EQUITY

Deposits	$	685,093		$	647,164
Borrowings	75,154			90,033
Accrued interest payable	210			265
Accrued expenses and other liabilities	6,943			7,727
Advances from borrowers for taxes and insurance	1,027			932

Total liabilities	768,427			746,121

Stockholders' Equity
Preferred stock, $0.01 par value, authorized 5,000,000 shares, no shares issued or outstanding	—			—
Common stock, $0.01 par value, authorized 75,000,000 shares; issued and outstanding 13,100,360 at December 31, 2015, and June 30, 2015	131			131
Additional paid-in capital	126,810			126,809
Retained earnings	76,514			74,573
Accumulated other comprehensive (loss) income, net of tax	(1,551		)	750
Unearned employee stock ownership plan (ESOP) shares	(12,529		)	(11,582		)

Total stockholders' equity	189,375			190,681

Total liabilities and stockholders' equity	$	957,802		$	936,802

See selected notes to the consolidated financial statements.

FIRST NORTHWEST BANCORP AND SUBSIDIARY

CONSOLIDATED INCOME STATEMENTS

(Dollars in thousands, except per share data) (Unaudited)



	Three Months Ended						Six Months Ended
	December 31,						December 31,
	2015			2014			2015			2014
INTEREST INCOME
Interest and fees on loans receivable	$	5,766		$	5,606		$	11,268		$	11,135
Interest on mortgage-backed and related securities	1,351			757			2,553			1,533
Interest on investment securities	776			330			1,565			647
Interest-bearing deposits and other	14			22			34			27
FHLB dividends	34			2			45			5

Total interest income	7,941			6,717			15,465			13,347
INTEREST EXPENSE
Deposits	510			382			1,011			753
Borrowings	671			734			1,397			1,470

Total interest expense	1,181			1,116			2,408			2,223

Net interest income	6,760			5,601			13,057			11,124
PROVISION FOR LOAN LOSSES	—			—			—			—

Net interest income after provision for loan losses	6,760			5,601			13,057			11,124
NONINTEREST INCOME
Loan and deposit service fees	882			824			1,811			1,659
Mortgage servicing fees, net of amortization	57			60			115			133
Net gain on sale of loans	26			41			68			138
Net gain on sale of investment securities	856			—			856			—
(Decrease) increase in cash surrender value of bank-owned life insurance	(17		)	(16		)	22			23
Other income	74			70			269			168

Total noninterest income	1,878			979			3,141			2,121

NONINTEREST EXPENSE
Compensation and benefits	3,708			3,049			6,981			6,089
Real estate owned and repossessed assets (income) expenses, net	(35		)	(146		)	(377		)	(62		)
Data processing	653			622			1,308			1,232
Occupancy and equipment	908			768			1,721			1,562
Supplies, postage, and telephone	200			171			339			331
Regulatory assessments and state taxes	183			78			277			163
Advertising	252			144			441			272
Professional fees	439			128			899			297
FDIC insurance premium	99			131			223			267
FHLB prepayment penalty	779			—			779			—
Other	497			497			1,007			808

Total noninterest expense	7,683			5,442			13,598			10,959

INCOME BEFORE PROVISION FOR INCOME TAXES	955			1,138			2,600			2,286

PROVISION FOR INCOME TAXES	242			256			659			555

NET INCOME	$	713		$	882		$	1,941		$	1,731

Basic and diluted earnings per share	$	0.06		na (1)			$	0.16		na (1)

(1) Not applicable as no shares were outstanding during this period.

See selected notes to the consolidated financial statements.

FIRST NORTHWEST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(In thousands) (Unaudited)



	Three Months Ended					Six Months Ended
	December 31,					December 31,
	2015			2014		2015			2014

NET INCOME	$	713		$	882	$	1,941		$	1,731

Other comprehensive (loss) income, net of tax
Unrealized (loss) gain on securities:
Unrealized holding (loss) gain, net of taxes of
$(1,199), $120, $(893) and $149, respectively	(2,328		)	232		(1,736		)	283
Reclassification adjustments for gains on sales
of securities, net of taxes of $(291), $0,
$(291) and $0, respectively	(565		)	—		(565		)	—

Other comprehensive (loss) income, net of tax	(2,893		)	232		(2,301		)	283

COMPREHENSIVE (LOSS) INCOME	$	(2,180	)	$	1,114	$	(360	)	$	2,014

See selected notes to the consolidated financial statements.

FIRST NORTHWEST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

For the Six Months Ended December 31, 2015 and 2014

(Dollars in thousands, except share information) (Unaudited)



	Common Stock			Additional Paid-in Capital		Retained Earnings		Unearned ESOP Shares			Accumulated Other Comprehensive Income (Loss), Net of Tax			Total Stockholders' Equity
	Shares	Amount

BALANCE, June 30, 2014	—	$	—	$	—	$	79,663	$	—		$	1,332		$	80,995

Net income						1,731								1,731
Other comprehensive income, net of tax											283			283


BALANCE, December 31, 2014	—	$	—	$	—	$	81,394	$	—		$	1,615		$	83,009



BALANCE, June 30, 2015	13,100,360	$	131	$	126,809	$	74,573	$	(11,582	)	$	750		$	190,681

Net income						1,941								1,941
Other comprehensive loss, net of tax											(2,301		)	(2,301		)
ESOP shares purchased								(1,253		)				(1,253		)
ESOP shares allocated				1				306						307


BALANCE, December 31, 2015	13,100,360	$	131	$	126,810	$	76,514	$	(12,529	)	$	(1,551	)	$	189,375

See selected notes to the consolidated financial statements.



FIRST NORTHWEST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited)
	Six Months Ended
	December 31,
	2015			2014
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	1,941		$	1,731
Adjustments to reconcile net income to net cash from operating activities:
Depreciation	523			492
Amortization and accretion of premiums and discounts on investments, net	770			638
Amortization of deferred loan fees, net	(58		)	(84		)
Amortization of mortgage servicing rights	152			167
Additions to mortgage servicing rights	(20		)	(40		)
Gain on sale of real estate owned and repossessed assets, net	(507		)	(215		)
Deferred federal income taxes	12			—
Allocation of ESOP shares	307			—
Gain on sale of loans	(68		)	(138		)
Gain on sale of securities available for sale, net	(856		)	—
Write-down on real estate owned and repossessed assets	53			84
Increase in cash surrender value of life insurance	(22		)	(23		)
Origination of loans held for sale	(2,131		)	(6,095		)
Proceeds from loans held for sale	2,309			6,846
Change in assets and liabilities:
(Increase) decrease in accrued interest receivable	(322		)	54
Decrease (increase) in prepaid expenses and other assets	217			(1,216		)
(Decrease) increase in accrued interest payable	(55		)	2
(Decrease) increase in accrued expenses and other liabilities	(784		)	1,600

Net cash from operating activities	1,461			3,803

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available for sale	(103,945		)	(25,943		)
Proceeds from maturities, calls, and principal repayments of securities available for sale	20,246			12,595
Proceeds from sales of securities available for sale	74,363			—
Purchase of securities held to maturity	(500		)	—
Proceeds from maturities, calls, and principal repayments of securities held to maturity	2,998			3,199
Proceeds from FHLB stock redemption	610			204
Proceeds from sale of real estate owned and repossessed assets	3,266			795
Loan originations, net of repayments, write-offs, and recoveries	(40,255		)	852
Purchase of premises and equipment, net	(1,506		)	(279		)

Net cash from investing activities	(44,723		)	(8,577		)

See selected notes to the consolidated financial statements.



FIRST NORTHWEST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited)
	Six Months Ended
	December 31,
	2015			2014
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits	$	37,929		$	140,425
Proceeds from FHLB advances	17,703			17,100
Repayment of FHLB advances	(32,473		)	(32,200		)
Repayment of notes payable	(109		)	—
Net increase (decrease) in advances from borrowers for taxes and insurance	95			(228		)
Purchase of ESOP shares	(1,253		)	—

Net cash from financing activities	21,892			125,097

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS	(21,370		)	120,323

CASH AND CASH EQUIVALENTS, beginning of period	45,030			18,960

CASH AND CASH EQUIVALENTS, end of period	$	23,660		$	139,283

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest on deposits and other borrowings	$	2,463		$	2,221

Income taxes	$	1,277		$	250

NONCASH INVESTING ACTIVITIES
Unrealized (loss) gain on securities available for sale	$	(3,482	)	$	432

Net loans transferred to real estate owned and repossessed assets	$	1,056		$	1,880

See selected notes to the consolidated financial statements.

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 - Basis of Presentation and Critical Accounting Policies

Organization and Nature of business - First Northwest Bancorp, a Washington corporation, became the holding company of First Federal Savings and Loan Association of Port Angeles, on January 29, 2015, upon completion of the Bank's conversion from a mutual to stock form of organization (the "Conversion"). In connection with the Conversion, the Company issued an aggregate of 12,167,000 shares of common stock at an offering price of $10.00 per share for gross proceeds of $121.7 million. An additional 933,360 shares of Company common stock and $400,000 in cash were contributed to the First Federal Community Foundation ("Foundation"), a charitable foundation that was established in connection with the Conversion, resulting in the issuance of a total of 13,100,360 shares. The Company received $117.6 million in net proceeds from the stock offering of which $58.4 million were contributed to the Bank upon Conversion. The Bank intends to use this additional capital for future lending and investment activities and for general and other corporate purposes subject to regulatory limitations.

Pursuant to the Bank's Plan of Conversion (the "Plan") adopted by its Board of Directors, and as approved by its members, the Company established an employee stock ownership plan ("ESOP") which purchased in the open market 8% of the common stock issued in the Conversion for a total of 1,048,029 shares with funds borrowed from the Company.

First Northwest's business activities generally are limited to passive investment activities and oversight of its investment in First Federal. Accordingly, the information set forth in this report, including the consolidated unaudited financial statements and related data, relates primarily to the Bank.

The Bank provides commercial and consumer banking services to individuals and businesses located primarily on the Olympic Peninsula in the State of Washington. These services include deposit and lending transactions that are supplemented with other borrowing and investing activities.

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 our audited consolidated financial statements and accompanying notes included in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2015. In our opinion, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of the consolidated financial statements in accordance with GAAP have been included. Operating results for the three and six months ended December 31, 2015, are not necessarily indicative of the results that may be expected for the year ended June 30, 2016. In preparing the unaudited interim 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 in the near term relate to a determination of the allowance for loan losses (ALLL), mortgage servicing rights, fair value of financial instruments, deferred tax assets and liabilities, and the valuation of impaired loans and real estate owned and repossessed assets. The Company completed its stock offering and became a public company on January 29, 2015, and therefore earnings per share and share calculations prior to that date are not meaningful.

The Conversion was accounted for as a change in corporate form with the historic basis of the Bank's assets, liabilities, and equity unchanged as a result.

Principles of consolidation - The accompanying consolidated financial statements include the accounts of First Northwest Bancorp; its wholly owned subsidiary, First Federal; and First Federal's wholly owned subsidiary, North Olympic Peninsula Services, Inc. ("NOPS"), and majority-owned Craft3 Development IV, LLC ("Craft3"). NOPS owns a building currently rented in whole to First Federal. Craft3 is a partnership investment formed to provide a loan qualifying under the New Markets Tax Credit ("NMTC") rules. The Craft3 partnership was a seven year commitment, commensurate with the NMTC period, which expired June 6, 2015. First Federal subsequently entered a membership

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

redemption and assignment agreement which terminated its membership interest in the Craft3 partnership effective September 30, 2015. All material intercompany accounts and transactions have been eliminated in consolidation.

Subsequent Events - The Company has evaluated subsequent events for potential recognition and disclosure and determined there are no such events or transactions requiring recognition or disclosure.

Recently issued accounting pronouncements - In September 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. The ASU simplifies accounting for business combinations by not requiring retrospective adjustments of estimated amounts. Instead, the effect on earnings by line item as a result of changes in provisional amounts will be separately disclosed in the period for which the accounting of the combination is complete. The amendments in this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. The adoption of ASU No. 2015-16 is not expected to have a material impact on the Company's consolidated financial statements.

In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. The ASU simplifies accounting for deferred taxes by requiring that all deferred tax assets or liabilities be classified as noncurrent. This replaces the prior guidance which required deferred taxes to be separated into current and noncurrent amounts. The amendments in this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2016. The adoption of ASU No. 2015-17 is not expected to have a material impact on the Company's consolidated financial statements.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments--Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The main provisions of this ASU address the valuation and impairment of equity securities along with enhanced disclosures about those investments. Equity securities with readily determinable fair values will be treated in the same manner as other financial instruments. The amendments in this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The adoption of ASU No. 2016-01 is not expected to have a material impact on the Company's consolidated financial statements.

Reclassifications - 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 net income or stockholders' equity.

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 2 - Securities

The amortized cost, gross unrealized gains and losses, and estimated fair value of securities classified as available-for-sale and held-to-maturity at December 31, 2015, are summarized as follows:



	December 31, 2015
	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(In thousands)
Available for Sale
Municipal bonds	$	25,980	$	627	$	(132	)	$	26,475
U.S. Treasury and government agency issued bonds (Agency bonds)	23,446		91		(186		)	23,351
U.S. government agency issued asset-backed securities (ABS agency)	9,180		—		(762		)	8,418
Corporate issued asset-backed securities (ABS corporate)	29,672		—		(365		)	29,307
U.S. Small Business Administration securities (SBA)	9,880		—		(52		)	9,828
Mortgage-backed securities:
U.S. government agency issued mortgage-backed securities (MBS agency)	160,313		353		(1,200		)	159,466
Corporate issued mortgage-backed securities (MBS corporate)	49,059		—		(773		)	48,286

Total securities available for sale	$	307,530	$	1,071	$	(3,470	)	$	305,131

Held to Maturity
Municipal bonds	$	14,574	$	462	$	—		$	15,036
SBA	1,100		1		—			1,101
Mortgage-backed securities:
MBS agency	43,198		935		(181		)	43,952

Total securities held to maturity	$	58,872	$	1,398	$	(181	)	$	60,089

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The amortized cost, gross unrealized gains and losses, and estimated fair value of securities classified as available-for-sale and held-to-maturity at June 30, 2015, are summarized as follows:



	June 30, 2015
	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(In thousands)
Available for Sale
Municipal bonds	$	17,387	$	122	$	(235	)	$	17,274
Agency bonds	23,948		10		(184		)	23,774
ABS agency	9,647		—		(446		)	9,201
ABS corporate	29,634		—		—			29,634
SBA	33,955		519		(146		)	34,328
Mortgage-backed securities:
MBS agency	175,239		2,241		(603		)	176,877
MBS corporate	8,147		—		(195		)	7,952

Total securities available for sale	$	297,957	$	2,892	$	(1,809	)	$	299,040

Held to Maturity
Municipal bonds	$	15,149	$	424	$	(20	)	$	15,553
SBA	875		3		(1		)	877
Mortgage-backed securities:
MBS agency	45,500		889		(309		)	46,080

Total securities held to maturity	$	61,524	$	1,316	$	(330	)	$	62,510

The following shows the unrealized gross losses and fair value of the investment portfolio by length of time that individual securities in each category have been in a continuous loss position as of December 31, 2015:



	Less Than Twelve Months					Twelve Months or Longer					Total
	Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value
	(In thousands)
Available for Sale
Municipal bonds	$	(132	)	$	2,095	$	—		$	—	$	(132	)	$	2,095
Agency bonds	(186		)	14,445		—			—		(186		)	14,445
ABS agency	—			—		(762		)	8,418		(762		)	8,418
ABS corporate	(365		)	29,307		—			—		(365		)	29,307
SBA	(52		)	9,623		—			—		(52		)	9,623
Mortgage-backed securities:
MBS agency	(1,020		)	113,733		(180		)	12,030		(1,200		)	125,763
MBS corporate	(773		)	48,287		—			—		(773		)	48,287

Total available for sale	$	(2,528	)	$	217,490	$	(942	)	$	20,448	$	(3,470	)	$	237,938

Held to Maturity
SBA	$	—		$	316	$	—		$	—	$	—		$	316
Mortgage-backed securities:
MBS agency	(115		)	14,791		(66		)	5,496		(181		)	20,287

Total held to maturity	$	(115	)	$	15,107	$	(66	)	$	5,496	$	(181	)	$	20,603

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



	Less Than Twelve Months					Twelve Months or Longer					Total
	Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value
	(In thousands)
Available for Sale
Municipal bonds	$	(204	)	$	9,809	$	(31	)	$	3,801	$	(235	)	$	13,610
Agency bonds	(184		)	20,792		—			—		(184		)	20,792
ABS agency	—			—		(446		)	9,201		(446		)	9,201
SBA	(140		)	11,823		(6		)	4,122		(146		)	15,945
Mortgage-backed securities:
MBS agency	(459		)	63,631		(144		)	11,091		(603		)	74,722
MBS corporate	(195		)	4,164		—			—		(195		)	4,164

Total available for sale	$	(1,182	)	$	110,219	$	(627	)	$	28,215	$	(1,809	)	$	138,434

Held to Maturity
Municipal bonds	$	—		$	—	$	(20	)	$	1,298	$	(20	)	$	1,298
SBA	—			—		(1		)	244		(1		)	244
Mortgage-backed securities:
MBS agency	(272		)	14,628		(37		)	3,059		(309		)	17,687

Total held to maturity	$	(272	)	$	14,628	$	(58	)	$	4,601	$	(330	)	$	19,229

The Company may hold certain investment securities in an unrealized loss position that are not considered other than temporarily impaired (OTTI). At December 31, 2015, there were 63 investment securities with $3.7 million of unrealized losses and a fair value of approximately $258.5 million. At June 30, 2015, there were 54 investment securities with $2.1 million of unrealized losses and a fair value of approximately $157.7 million.

We believe that the unrealized losses on our investment securities relate principally to the general change in interest rates and illiquidity, and not credit quality, that has occurred since the initial purchase, and such unrecognized losses or gains will continue to vary with general interest rate level fluctuations in the future. Certain investments in a loss position are guaranteed by government entities or government sponsored entities. The Company does not intend to sell the temporarily impaired securities and believes it is not likely it will be required to sell these investments prior to a market price recovery or maturity.

There were no OTTI losses during the three and six months ended December 31, 2015 or 2014.

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The amortized cost and estimated fair value of investment securities by contractual maturity are shown in the following tables at the dates indicated. Expected maturities of mortgage-backed securities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties; therefore, these securities are shown separately.



	December 31, 2015
	Available-for-Sale				Held-to-Maturity
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
	(In thousands)
Mortgage-backed securities:
Due within one year	$	—	$	—	$	—	$	—
Due after one through five years	—		—		2,813		2,860
Due after five through ten years	20,671		20,519		4,313		4,329
Due after ten years	188,701		187,233		36,072		36,763

Total mortgage-backed securities	209,372		207,752		43,198		43,952

All other investment securities:
Due within one year	8,004		7,869		—		—
Due after one through five years	15,275		15,237		500		500
Due after five through ten years	23,445		23,517		9,843		10,108
Due after ten years	51,434		50,756		5,331		5,529

Total all other investment securities	98,158		97,379		15,674		16,137

Total investment securities	$	307,530	$	305,131	$	58,872	$	60,089



	June 30, 2015
	Available-for-Sale				Held-to-Maturity
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
	(In thousands)
Mortgage-backed securities:
Due within one year	$	—	$	—	$	32	$	34
Due after one through five years	—		—		1		1
Due after five through ten years	5,912		5,988		6,207		6,303
Due after ten years	177,474		178,841		39,260		39,742

Total mortgage-backed securities	183,386		184,829		45,500		46,080

All other investment securities:
Due within one year	7,982		7,982		260		261
Due after one through five years	10,966		10,945		165		166
Due after five through ten years	28,836		28,820		9,921		10,126
Due after ten years	66,787		66,464		5,678		5,877

Total all other investment securities	114,571		114,211		16,024		16,430

Total investment securities	$	297,957	$	299,040	$	61,524	$	62,510

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Sales of securities available-for-sale for the periods shown are summarized as follows:



	Three Months Ended December 31,					Six Months Ended December 31,
	2015			2014		2015			2014
	(In thousands)
Proceeds from sales	$	74,363		$	—	$	74,363		$	—
Gross realized gains	1,003			—		1,003			—
Gross realized losses	(147		)	—		(147		)	—

Note 3 - Loans Receivable

Loans receivable consisted of the following at the dates indicated:



	December 31, 2015			June 30, 2015
	(In thousands)
Real Estate:
One-to-four family	$	275,728		$	256,696
Multi-family	44,104			33,086
Commercial real estate	130,398			125,623
Construction and land	26,580			19,127
Total real estate loans	476,810			434,532

Consumer:
Home equity	35,288			36,387
Other consumer	7,687			8,198
Total consumer loans	42,975			44,585

Commercial business loans	13,623			14,764

Total loans	533,408			493,881

Less:
Net deferred loan fees	1,070			840
Premium on purchased loans, net	(1,780		)	(1,957		)
Allowance for loan losses	6,974			7,111

Total loans receivable, net	$	527,144		$	487,887

Allowance for Loan Losses. The Company maintains a general allowance for loan losses based on evaluating known and inherent risks in the loan portfolio, including management’s continuing analysis of the factors underlying the quality of the loan portfolio. These factors include changes in the size and composition of the loan portfolio, actual loan loss experience, and current and anticipated economic conditions. The reserve is an estimate based upon factors and trends identified by management at the time the financial statements are prepared.

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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



	At or For the Three Months Ended December 31, 2015
	One-to- four family			Multi-family		Commercial real estate			Construction and land		Home equity			Other consumer			Commercial business			Unallocated			Total
	(In thousands)
ALLL:
Beginning balance	$	3,027		$	260	$	1,040		$	372	$	946		$	284		$	163		$	984		$	7,076
Provision for loan losses	(115		)	27		(34		)	17		83			58			(24		)	(12		)	—
Charge-offs	(53		)	—		—			—		(30		)	(72		)	—			—			(155		)
Recoveries	4			—		—			1		31			17			—			—			53
Ending balance	$	2,863		$	287	$	1,006		$	390	$	1,030		$	287		$	139		$	972		$	6,974



	At or For the Six Months Ended December 31, 2015
	One-to- four family			Multi-family		Commercial real estate		Construction and land		Home equity			Other consumer			Commercial business			Unallocated		Total
	(In thousands)
ALLL:
Beginning balance	$	3,143		$	251	$	998	$	336	$	1,052		$	321		$	251		$	759	$	7,111
Provision for loan losses	(228		)	36		8		53		4			60			(146		)	213		—
Charge-offs	(60		)	—		—		—		(69		)	(122		)	(7		)	—		(258		)
Recoveries	8			—		—		1		43			28			41			—		121
Ending balance	$	2,863		$	287	$	1,006	$	390	$	1,030		$	287		$	139		$	972	$	6,974



	At December 31, 2015
	One-to- four family		Multi-family		Commercial real estate		Construction and land		Home equity		Other consumer		Commercial business		Unallocated		Total
	(In thousands)
Total ALLL	$	2,863	$	287	$	1,006	$	390	$	1,030	$	287	$	139	$	972	$	6,974
General reserve	2,623		287		935		369		947		221		98		972		6,452
Specific reserve	240		—		71		21		83		66		41		—		522

Total loans	$	275,728	$	44,104	$	130,398	$	26,580	$	35,288	$	7,687	$	13,623	$	—	$	533,408
General reserves ⁽¹⁾	269,932		43,557		129,058		26,414		34,522		7,549		13,240		—		524,272
Specific reserves ⁽²⁾	5,796		547		1,340		166		766		138		383		—		9,136


⁽¹⁾ Loans collectively evaluated for general reserves.
⁽²⁾ Loans individually evaluated for specific reserves.

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



	At or For the Three Months Ended December 31, 2014
	One-to- four family			Multi-family			Commercial real estate		Construction and land			Home equity			Other consumer			Commercial business			Unallocated		Total
ALLL:	(In thousands)
Beginning balance	$	3,746		$	417		$	1,270	$	431		$	1,151		$	338		$	206		$	424	$	7,983
Provision for loan losses	(348		)	(23		)	103		(23		)	(54		)	(15		)	(21		)	381		—
Charge-offs	(103		)	—			—		(4		)	(195		)	(39		)	—			—		(341		)
Recoveries	5			—			—		1			8			7			3			—		24
Ending balance	$	3,300		$	394		$	1,373	$	405		$	910		$	291		$	188		$	805	$	7,666



	At or For the Six Months Ended December 31, 2014
	One-to- four family			Multi-family			Commercial real estate			Construction and land			Home equity			Other consumer			Commercial business			Unallocated		Total
ALLL:	(In thousands)
Beginning balance	$	3,408		$	475		$	1,491		$	397		$	1,289		$	389		$	388		$	235	$	8,072
Provision for loan losses	3			(81		)	(118		)	56			(203		)	(24		)	(203		)	570		—
Charge-offs	(122		)	—			—			(49		)	(195		)	(95		)	—			—		(461		)
Recoveries	11			—			—			1			19			21			3			—		55
Ending balance	$	3,300		$	394		$	1,373		$	405		$	910		$	291		$	188		$	805	$	7,666



	At June 30, 2015
	One-to- four family		Multi-family		Commercial real estate		Construction and land		Home equity		Other consumer		Commercial business		Unallocated		Total
	(In thousands)
Total ALLL	$	3,143	$	251	$	998	$	336	$	1,052	$	321	$	251	$	759	$	7,111
General reserve	2,982		251		923		318		998		244		207		759		6,682
Specific reserve	161		—		75		18		54		77		44		—		429

Total loans	$	256,696	$	33,086	$	125,623	$	19,127	$	36,387	$	8,198	$	14,764	$	—	$	493,881
General reserves ⁽¹⁾	249,290		32,456		124,260		18,968		35,752		8,034		14,361		—		483,121
Specific reserves ⁽²⁾	7,406		630		1,363		159		635		164		403		—		10,760


⁽¹⁾ Loans collectively evaluated for general reserves.
⁽²⁾ Loans individually evaluated for specific reserves.

Impaired loans. A loan is considered impaired when First Federal has determined that it may be unable to collect payments of principal or interest when due under the contractual terms of the loan. In the process of identifying loans as impaired, management takes into consideration factors that include payment history and status, collateral value, financial condition of the borrower, and the probability of collecting scheduled payments in the future. Minor payment delays and insignificant payment shortfalls typically do not result in a loan being classified as impaired. The significance of payment delays and shortfalls is considered by management on a case-by-case basis after taking into consideration the totality of circumstances surrounding the loans and the borrowers, including payment history and amounts of any payment shortfall, length and reason for delay, and likelihood of return to stable performance. Impairment is measured on a loan-by-loan basis for all loans in the portfolio except smaller balance homogeneous loans and certain qualifying troubled debt restructuring ("TDR") loans.

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents a summary of loans individually evaluated for impairment by portfolio segment at the dates indicated:



	December 31, 2015						June 30, 2015
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
	(In thousands)
With no allowance recorded:
One-to-four family	$	1,667	$	2,222	$	—	$	3,502	$	4,162	$	—
Multi-family	423		423		—		503		503		—
Commercial real estate	349		412		—		355		416		—
Construction and land	16		47		—		17		48		—
Home equity	163		300		—		209		322		—
Other consumer	—		33		—		—		10		—
Commercial business	77		77		—		—		180		—
Total	2,695		3,514		—		4,586		5,641		—

With an allowance recorded:
One-to-four family	4,129		4,306		240		3,904		4,157		161
Multi-family	124		124		—		127		126		—
Commercial real estate	991		991		71		1,008		1,008		75
Construction and land	150		174		21		142		166		18
Home equity	603		665		83		426		441		54
Other consumer	138		158		66		164		181		77
Commercial business	306		306		41		403		403		44
Total	6,441		6,724		522		6,174		6,482		429

Total impaired loans:
One-to-four family	5,796		6,528		240		7,406		8,319		161
Multi-family	547		547		—		630		629		—
Commercial real estate	1,340		1,403		71		1,363		1,424		75
Construction and land	166		221		21		159		214		18
Home equity	766		965		83		635		763		54
Other consumer	138		191		66		164		191		77
Commercial business	383		383		41		403		583		44
Total	$	9,136	$	10,238	$	522	$	10,760	$	12,123	$	429

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following tables present the average recorded investment in loans individually evaluated for impairment and the related interest income recognized for the periods shown:



	Three Months Ended				Six Months Ended
	December 31, 2015				December 31, 2015
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(In thousands)
With no allowance recorded:
One-to-four family	$	2,176	$	45	$	2,590	$	45
Multi-family	448		3		391		7
Commercial real estate	350		5		352		11
Construction and land	16		1		16		2
Home equity	177		6		230		6
Other consumer	—		1		5		1
Commercial business loans	26		2		13		3
Total	3,193		63		3,597		75

With an allowance recorded:
One-to-four family	3,632		68		3,515		104
Multi-family	125		2		209		3
Commercial real estate	994		13		998		24
Construction and land	153		7		151		8
Home equity	515		10		442		17
Other consumer	160		4		163		6
Commercial business	368		4		385		8
Total	5,947		108		5,863		170

Total impaired loans:
One-to-four family	5,808		113		6,105		149
Multi-family	573		5		600		10
Commercial real estate	1,344		18		1,350		35
Construction and land	169		8		167		10
Home equity	692		16		672		23
Other consumer	160		5		168		7
Commercial business	394		6		398		11
Total	$	9,140	$	171	$	9,460	$	245

Interest income recognized on a cash basis on impaired loans for the three and six months ended December 31, 2015, was $112,000 and $188,000, respectively.

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following tables present the average recorded investment in loans individually evaluated for impairment and the related interest income recognized for the periods shown:



	Three Months Ended				Six Months Ended
	December 31, 2014				December 31, 2014
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(In thousands)
With no allowance recorded:
One-to-four family	$	3,893	$	83	$	3,959	$	109
Multi-family	564		5		580		9
Commercial real estate	2,098		13		2,004		38
Construction and land	310		15		311		16
Home equity	196		3		258		5
Other consumer	—		—		—		1
Total	7,061		119		7,112		178

With an allowance recorded:
One-to-four family	3,304		70		3,321		105
Multi-family	129		2		129		3
Commercial real estate	1,251		12		1,944		25
Construction and land	162		10		160		11
Home equity	646		11		653		19
Other consumer	76		3		64		2
Commercial business	422		6		423		12
Total	5,990		114		6,694		177

Total impaired loans:
One-to-four family	7,197		153		7,280		214
Multi-family	693		7		709		12
Commercial real estate	3,349		25		3,948		63
Construction and land	472		25		471		27
Home equity	842		14		911		24
Other consumer	76		3		64		3
Commercial business	422		6		423		12
Total	$	13,051	$	233	$	13,806	$	355

Interest income recognized on a cash basis on impaired loans for the three and six months ended December 31, 2014, was $112,000, and $235,000, respectively.

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the recorded investment in nonaccrual loans by class of loan at the dates indicated:



	December 31, 2015		June 30, 2015
	(In thousands)
One-to-four family	$	1,670	$	4,232
Commercial real estate	139		147
Construction and land	166		159
Home equity	140		181
Other consumer	139		164

Total nonaccrual loans	$	2,254	$	4,883

Past due loans. Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. There were no loans past due 90 days or more and still accruing interest at December 31, 2015 and June 30, 2015.

The following table presents past due loans, net of partial loan charge-offs, by class, as of December 31, 2015:



	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans
	(In thousands)
Real Estate:
One-to-four family	$	1,355	$	613	$	455	$	2,423	$	273,305	$	275,728
Multi-family	—		—		—		—		44,104		44,104
Commercial real estate	—		—		—		—		130,398		130,398
Construction and land	99		36		141		276		26,304		26,580
Total real estate loans	1,454		649		596		2,699		474,111		476,810

Consumer:
Home equity	419		—		94		513		34,775		35,288
Other consumer	169		4		22		195		7,492		7,687
Total consumer loans	588		4		116		708		42,267		42,975

Commercial business loans	—		—		—		—		13,623		13,623

Total loans	$	2,042	$	653	$	712	$	3,407	$	530,001	$	533,408

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents past due loans, net of partial loan charge-offs, by class, as of June 30, 2015:



	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans
	(In thousands)
Real Estate:
One-to-four family	$	—	$	1,230	$	704	$	1,934	$	254,762	$	256,696
Multi-family	—		—		—		—		33,086		33,086
Commercial real estate	—		—		—		—		125,623		125,623
Construction and land	—		114		23		137		18,990		19,127
Total real estate loans	—		1,344		727		2,071		432,461		434,532

Consumer:
Home equity	81		15		98		194		36,193		36,387
Other consumer	58		89		10		157		8,041		8,198
Total consumer loans	139		104		108		351		44,234		44,585

Commercial business loans	—		—		—		—		14,764		14,764

Total loans	$	139	$	1,448	$	835	$	2,422	$	491,459	$	493,881

Credit quality indicator. Federal regulations provide for the classification of lower quality loans and other assets, such as debt and equity securities, as substandard, doubtful, or loss; risk ratings 6, 7, and 8 in our 8-point risk rating system, respectively. An asset is considered substandard if it is inadequately protected by the current net worth and pay capacity of the borrower or of any collateral pledged. Substandard assets include those characterized by the distinct possibility that First Federal will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses present make collection or liquidation in full highly questionable and improbable, on the basis of currently existing facts, conditions, and values. Assets classified as loss are those considered uncollectible and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted.

When First Federal classifies problem assets as either substandard or doubtful, it may establish a specific allowance to address the risk specifically or First Federal may allow the loss to be addressed in the general allowance. General allowances represent loss allowances that have been established to recognize the inherent risk associated with lending activities but that, unlike specific allowances, have not been specifically allocated to particular problem assets. When an insured institution classifies problem assets as a loss, it is required to charge off such assets in the period in which they are deemed uncollectible. Assets that do not currently expose First Federal to sufficient risk to warrant classification as substandard or doubtful but possess identified weaknesses are designated as either watch or special mention assets; risk ratings 4 and 5 in our risk rating system, respectively. At December 31, 2015 and June 30, 2015, First Federal had $5.8 million and $9.9 million, respectively, of loans classified as substandard and no loans classified as doubtful or loss. Loans not otherwise classified are considered pass graded loans and are rated 1-3 in our risk rating system.

Additionally, First Federal categorizes loans as performing or nonperforming based on payment activity. Loans that are more than 90 days past due and nonaccrual loans are considered nonperforming.

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table represents the internally assigned grade as of December 31, 2015, by class of loans:



	Pass		Watch		Special Mention		Sub- Standard		Total
	(In thousands)
Real Estate:
One-to-four family	$	268,154	$	3,240	$	1,578	$	2,756	$	275,728
Multi-family	37,453		6,104		—		547		44,104
Commercial real estate	119,249		9,508		667		974		130,398
Construction and land	26,087		187		65		241		26,580
Total real estate loans	450,943		19,039		2,310		4,518		476,810

Consumer:
Home equity	33,262		1,209		164		653		35,288
Other consumer	7,222		254		40		171		7,687
Total consumer loans	40,484		1,463		204		824		42,975

Commercial business loans	8,083		5,117		—		423		13,623

Total loans	$	499,510	$	25,619	$	2,514	$	5,765	$	533,408

The following table represents the internally assigned grade as of June 30, 2015, by class of loans:



	Pass		Watch		Special Mention		Sub- Standard		Total
	(In thousands)
Real Estate:
One-to-four family	$	247,491	$	2,458	$	794	$	5,953	$	256,696
Multi-family	22,907		9,550		—		629		33,086
Commercial real estate	106,072		12,960		5,134		1,457		125,623
Construction and land	18,426		351		113		237		19,127
Total real estate loans	394,896		25,319		6,041		8,276		434,532

Consumer:
Home equity	34,969		501		86		831		36,387
Other consumer	7,622		213		77		286		8,198
Total consumer loans	42,591		714		163		1,117		44,585

Commercial business loans	8,449		5,795		62		458		14,764

Total loans	$	445,936	$	31,828	$	6,266	$	9,851	$	493,881

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table represents the credit risk profile based on payment activity as of December 31, 2015, by class of loans:



	Nonperforming		Performing		Total
	(In thousands)
Real Estate:
One-to-four family	$	1,670	$	274,058	$	275,728
Multi-family	—		44,104		44,104
Commercial real estate	139		130,259		130,398
Construction and land	166		26,414		26,580

Consumer:
Home equity	140		35,148		35,288
Other consumer	139		7,548		7,687

Commercial business loans	—		13,623		13,623

Total loans	$	2,254	$	531,154	$	533,408

The following table represents the credit risk profile based on payment activity as of June 30, 2015, by class of loans:



	Nonperforming		Performing		Total
	(In thousands)
Real Estate:
One-to-four family	$	4,232	$	252,464	$	256,696
Multi-family	—		33,086		33,086
Commercial real estate	147		125,476		125,623
Construction and land	159		18,968		19,127

Consumer:
Home equity	181		36,206		36,387
Other consumer	164		8,034		8,198

Commercial business loans	—		14,764		14,764

Total loans	$	4,883	$	488,998	$	493,881

Troubled debt restructuring. A TDR is a loan to a borrower who is experiencing financial difficulty that has been modified from its original terms and conditions in such a way that First Federal is granting the borrower a concession of some kind. First Federal has granted a variety of concessions to borrowers in the form of loan modifications. The modifications granted can generally be described in the following categories:

Rate modification - A modification in which the interest rate is changed.

Term modification - A modification in which the maturity date, timing of payments, or frequency of payments is changed.

Payment modification - A modification in which the dollar amount of the payment is changed. Interest-only modifications in which a loan is converted to interest-only payments for a period of time are included in this category.

Combination modification - Any other type of modification, including the use of multiple categories above.

Upon identifying a receivable as a TDR loan, First Federal classifies the loan as impaired for purposes of determining the allowance for loan losses. This requires the loan to be evaluated individually for impairment, generally based on the expected cash flows under the new terms discounted at the loan’s original effective interest rates. For TDR loans that subsequently default, the method of determining impairment is generally the fair value of the collateral less estimated selling costs.

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

TDR loans may be upgraded in their classification and placed on accrual status once there is a sustained period of repayment performance, usually six months or longer, and there is a reasonable assurance that repayment will continue. First Federal allows reclassification of a troubled debt restructuring back into the general loan pool (as a non-troubled debt restructuring) if the borrower is able to refinance the loan at then-current market rates and meet all of the underwriting criteria of First Federal required of other borrowers. The refinance must be based on the borrower’s ability to repay the debt and no special concessions of rate and/or term are granted to the borrower.

The following is a summary of information pertaining to TDR loans included in impaired loans at the dates indicated:



	December 31,		June 30,
	2015		2015
	(In thousands)
Total TDR loans	$	7,430	$	7,746
Allowance for loan losses related to TDR loans	362		272
Total nonaccrual TDR loans	897		5,676

There were no new TDR loans, or renewals or modifications of existing TDR loans during the three and six months ended December 31, 2015 and 2014.

The following is a summary of TDR loans which incurred a payment default within 12 months of the restructure date during the three and six months ended December 31, 2015.



	Number of Contracts	Rate Modification		Term Modification		Combination Modification		Total Modifications
		(Dollars in thousands)
TDR loans that subsequently defaulted
One- to four-family	2	$	—	$	—	$	379	$	379

There were no TDR loans which incurred a payment default within 12 months of the restructure date during the three and six months ended December 31, 2014.

No additional funds are committed to be advanced in connection with impaired loans at December 31, 2015.

The following table presents TDR loans by class at the dates indicated by accrual and nonaccrual status.



	December 31, 2015						June 30, 2015
	Accrual		Nonaccrual		Total		Accrual		Nonaccrual		Total
	(In thousands)
One-to-four family	$	3,897	$	758	$	4,655	$	1,844	$	3,079	$	4,923
Multi-family	547		—		547		—		629		629
Commercial real estate	1,200		139		1,339		147		1,216		1,363
Construction and land	—		—		—		—		—		—
Home equity	506		—		506		79		349		428
Other consumer	—		—		—		—		—		—
Commercial business loans	383		—		383		—		403		403

Total TDR loans	$	6,533	$	897	$	7,430	$	2,070	$	5,676	$	7,746

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 4 - Deposits

The aggregate amount of time deposits in excess of the Federal Deposit Insurance Corporation ("FDIC") insured limit, currently $250,000, at December 31, 2015 and June 30, 2015, was $37.4 million and $36.3 million, respectively. Deposits and weighted-average interest rates at the dates indicated are as follows:



	Weighted-Average Interest Rate		December 31, 2015			Weighted-Average Interest Rate		June 30, 2015
	(In thousands)
Savings	0.04	%	$	89,654		0.04	%	$	88,129
Transaction accounts	0.01	%	207,645			0.01	%	183,890
Money market accounts	0.22	%	241,492			0.17	%	227,217
Certificates of deposit and jumbo certificates	0.99	%	146,302			0.94	%	147,928

			$	685,093				$	647,164

Weighted-average interest rate			0.30		%			0.28		%

Maturities of certificates at the dates indicated are as follows:



	December 31, 2015		June 30, 2015
	(In thousands)
Within one year or less	$	75,533	$	71,474
After one year through two years	28,022		33,336
After two years through three years	18,501		19,225
After three years through four years	14,174		14,504
After four years through five years	9,894		9,183
After five years	178		206

	$	146,302	$	147,928

Deposits at December 31, 2015 and June 30, 2015, include $44.5 million and $44.2 million, respectively, in public fund deposits. Investment securities with a carrying value of $53.9 million and $42.7 million were pledged as collateral for these deposits at December 31, 2015 and June 30, 2015, respectively. This exceeds the minimum collateral requirements established by the Washington Public Deposit Protection Commission.

Interest on deposits by type for the periods shown was as follows:



	Three Months Ended				Six Months Ended
	December 31,				December 31,
	2015		2014		2015		2014
	(In thousands)
Savings	$	10	$	10	$	19	$	19
Transaction accounts	4		2		7		5
Insured money market accounts	145		97		286		191
Certificates of deposit and jumbo certificates	351		273		699		538

	$	510	$	382	$	1,011	$	753

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 5 - Federal Taxes on Income

As a result of the bad debt deductions taken in years prior to 1988, retained earnings include accumulated earnings of approximately $6.4 million, on which federal income taxes have not been provided. If, in the future, this portion of retained earnings is used for any purpose other than to absorb losses on loans or on property acquired through foreclosure, federal income taxes may be imposed at the then-prevailing corporate tax rates. The Company does not contemplate that such amounts will be used for any purpose that would create a federal income tax liability; therefore, no provision has been made.

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. These calculations are based on many complex factors including estimates of the timing of reversals of temporary differences, the interpretation of federal income tax laws, and a determination of the differences between the tax and the financial reporting basis of assets and liabilities. Actual results could differ significantly from the estimates and interpretations used in determining the current and deferred income tax assets and liabilities.

Under current Federal income tax regulations, charitable contribution deductions are limited to 10% of taxable income. The Company currently has a deferred tax asset of $3.3 million and related valuation allowance of $1.9 million for financial statement reporting purposes related to its contribution to the Foundation. The contribution carryforward and related valuation allowance will expire in 2020. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company evaluates whether its deferred tax assets will be realized and adjusts the amount of its valuation allowance, if necessary. The valuation allowance was $1.9 million at both December 31, 2015 and June 30, 2015. The total net deferred tax asset was $1.4 million and $188,000 at December 31, 2015 and June 30, 2015, respectively.

The Company applies the provisions of FASB ASC 740 that require the application of a more-likely-than-not recognition criterion for the reporting of uncertain tax positions on its financial statements. The Company had no unrecognized tax assets at December 31, 2015 and June 30, 2015. During the six months ended December 31, 2015 and the year ended June 30, 2015, the Company recognized no interest and penalties. The Company recognizes interest and penalties in income tax expense. The Company files income tax returns in the U.S. federal jurisdiction and is no longer subject to U.S. federal income tax examinations by tax authorities for years ending before June 30, 2012.

Note 6 - Earnings per Share

Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Basic and diluted earnings per share are the same amount at December 31, 2015 as the Company does not have any additional potential dilutive common shares.

The following table presents a reconciliation of the components used to compute basic and diluted earnings per share for the three and six months ended December 31, 2015 and 2014.

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



	Three Months Ended				Six Months Ended
	December 31,				December 31,
	2015		2014		2015		2014
Numerator:
Net income	$	713	$	882	$	1,941	$	1,731

Denominator:
Denominator for basic and diluted earnings per share -
weighted average common shares outstanding	12,094,515		na(1)		12,094,515		na(1)

Basic and diluted earnings per share	$	0.06			$	0.16

(1) Earnings per share and share calculations are not applicable (na) as the Company completed its stock offering and became a public company on January 29, 2015.

As of December 31, 2015, the ESOP had purchased 1,048,029 shares in the open market. Unallocated shares are not included as outstanding for either basic or diluted earnings per share calculations. As of December 31, 2015, there were 1,005,845 shares in the ESOP that remain unallocated.

Note 7 - Employee Benefits

Employee Stock Ownership Plan

In connection with the Conversion, the Company established an ESOP for eligible employees of the Company and the Bank. Employees of the Company and the Bank who have been credited with at least 1,000 hours of service during a 12-month period are eligible to participate in the ESOP.

Pursuant to the Plan, the ESOP purchased in the open market 8% of the common stock issued in the Conversion for a total of 1,048,029 shares at an average price of $12.45 per share with funds borrowed from the Company. It is anticipated that the Bank will make contributions to the ESOP in amounts necessary to amortize the ESOP loan payable to the Company over a period of 20 years. At December 31, 2015, the weighted average interest rate paid on the ESOP loan payable was 2.46% per annum.

Shares purchased by the ESOP with the loan proceeds are held in a suspense account and allocated to ESOP participants on a pro rata basis as principal and interest payments are made annually by the ESOP to the Company. The loan is secured by shares purchased with the loan proceeds and will be repaid by the ESOP with funds from the Bank's discretionary contributions to the ESOP and earnings on the ESOP assets. Payments of principal and interest are due annually on June 30. No payment of principal or interest was made during the six months ended December 31, 2015.

As shares are committed to be released from collateral, the Company reports compensation expense equal to the average daily market prices of the shares and the shares become outstanding for EPS computations. The compensation expense is accrued monthly throughout the year. Dividends on allocated ESOP shares are recorded as a reduction of retained earnings; dividends on unallocated ESOP shares are recorded as a reduction of debt and accrued interest.

Compensation expense related to the ESOP was $159,000 and $307,000 for the three and six months ended December 31, 2015, respectively.

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Shares held by the ESOP as of the dates indicated are as follows:



	December 31, 2015		June 30, 2015
	(Dollars in thousands)
Allocated shares	17,509		17,509
Committed to be released shares	24,675		—
Unallocated shares	1,005,845		935,290

Total ESOP shares	1,048,029		952,799

Fair value of unallocated shares	$	14,233	$	11,532

Note 8 - Fair Value Accounting and Measurement

Fair value is the price to sell an asset or transfer a liability in an orderly transaction between market participants in the Company’s principal market. The Company has established and documented its process for determining the fair values of its assets and liabilities, where applicable. Fair value is based on quoted market prices, when available, for identical or similar assets or liabilities. In the absence of quoted market prices, management determines the fair value of the Company’s assets and liabilities using valuation models or third-party pricing services, both of which rely on market-based parameters when available, such as interest rate yield curves, option volatilities and credit spreads, or unobservable inputs. Unobservable inputs may be based on management’s judgment, assumptions, and estimates related to credit quality, liquidity, interest rates, and other relevant inputs.

Any changes to valuation methodologies are reviewed by management to ensure they are relevant and justified. Valuation methodologies are refined as more market-based data becomes available.

A three-level valuation hierarchy is used in determining fair value that is based on the transparency of the inputs used in the valuation process. The inputs used in determining fair value in each of the three levels of the hierarchy are as follows:

Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2 - Either: (i) quoted prices for similar assets or liabilities; (ii) observable inputs, such as interest rates or yield curves; or (iii) inputs derived principally from or corroborated by observable market data.

Level 3 - Unobservable inputs.

The hierarchy gives the highest ranking to Level 1 inputs and the lowest ranking to Level 3 inputs. The level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the overall fair value measurement.

Qualitative disclosures of valuation techniques - Securities available for sale: where quoted prices are available in an active market, securities are classified as Level 1. Level 1 instruments include highly liquid government bonds, securities issued by the U.S. Treasury, and exchange-traded equity securities.

If quoted prices are not available, management determines fair value using pricing models, quoted prices of similar securities, which are considered Level 2, or discounted cash flows. In certain cases, where there is limited activity in the market for a particular instrument, assumptions must be made to determine their fair value. Such instruments are classified as Level 3.

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Assets and liabilities measured at fair value on a recurring basis - Assets and liabilities are considered to be fair valued on a recurring basis if fair value is measured regularly (i.e., daily, weekly, monthly, or quarterly). The following tables show the Company’s assets measured at fair value on a recurring basis at the dates indicated:



	December 31, 2015
	Quoted Prices in Active Markets for Identical Assets or Liabilities		Significant Other Observable Inputs		Significant Unobservable Inputs
	(Level 1)		(Level 2)		(Level 3)		Total
	(In thousands)
Securities available-for-sale
Municipal bonds	$	—	$	26,475	$	—	$	26,475
Agency bonds	—		23,351		—		23,351
ABS agency	—		8,418		—		8,418
ABS corporate	—		29,307		—		29,307
SBA	—		9,828		—		9,828
MBS agency	—		159,466		—		159,466
MBS corporate	—		48,286		—		48,286
	$	—	$	305,131	$	—	$	305,131



	June 30, 2015
	Quoted Prices in Active Markets for Identical Assets or Liabilities		Significant Other Observable Inputs		Significant Unobservable Inputs
	(Level 1)		(Level 2)		(Level 3)		Total
	(In thousands)
Securities available-for-sale
Municipal bonds	$	—	$	17,274	$	—	$	17,274
Agency bonds	—		23,774		—		23,774
ABS agency	—		9,201		—		9,201
ABS corporate	—		29,634		—		29,634
SBA	—		34,328		—		34,328
MBS agency	—		176,877		—		176,877
MBS corporate	—		7,952		—		7,952
	$	—	$	299,040	$	—	$	299,040

Assets and liabilities measured at fair value on a nonrecurring basis - Assets are considered to be fair valued on a nonrecurring basis if the fair value measurement of the instrument does not necessarily result in a change in the amount recorded on the consolidated balance sheets. Generally, nonrecurring valuation is the result of the application of other accounting pronouncements that require assets or liabilities to be assessed for impairment or recorded at the lower of cost or fair value.

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following tables present the Company’s assets measured at fair value on a nonrecurring basis at the dates indicated:



	December 31, 2015
	Level 1		Level 2		Level 3		Total
	(In thousands)
Impaired loans	$	—	$	—	$	9,136	$	9,136
Real estate owned and repossessed assets	—		—		158		158

	$	—	$	—	$	9,294	$	9,294


	June 30, 2015
	Level 1		Level 2		Level 3		Total
	(In thousands)
Impaired loans	$	—	$	—	$	10,760	$	10,760
Real estate owned and repossessed assets	—		—		1,914		1,914

	$	—	$	—	$	12,674	$	12,674

The following tables present the techniques used to value assets measured at fair value on a nonrecurring basis at the dates indicated:



	December 31, 2015
	Fair Value		Valuation Technique	Unobservable Input	Range (Weighted-Average)¹
	(In thousands)
Impaired loans	$	9,136	Market comparable	Discount to appraisal	0% - 25% (2%)
Real estate owned and repossessed assets	158		Market comparable	Discount to appraisal	0% - 10% (9%)


¹Discount to appraisal disposition value.



	June 30, 2015
	Fair Value		Valuation Technique	Unobservable Input	Range (Weighted-Average)¹
	(In thousands)
Impaired loans	$	10,760	Market comparable	Discount to appraisal	0% - 25% (2%)
Real estate owned and repossessed assets	1,914		Market comparable	Discount to appraisal	0% - 8% (1%)


¹Discount to appraisal disposition value.

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following tables present the carrying value and estimated fair value of financial instruments at the dates indicated:



	December 31, 2015
	Carrying Amount		Estimated Fair Value		Fair Value Measurements Using:
					Level 1		Level 2			Level 3
	(In thousands)
Financial assets
Cash and cash equivalents	$	23,660	$	23,660	$	23,660	$	—		$	—
Investment securities available for sale	305,131		305,131		—		305,131			—
Investment securities held to maturity	58,872		60,089		—		60,089			—
Loans receivable, net	527,144		530,476		—		—			530,476
FHLB stock	4,197		4,197		—		4,197			—
Accrued interest receivable	2,868		2,868		—		2,868			—
Mortgage servicing rights, net	1,055		1,652		—		—			1,652

Financial liabilities
Demand deposits	$	538,791	$	538,791	$	538,791	$	—		$	—
Time deposits	146,302		146,273		—		146,273			—
Borrowings	75,154		78,716		—		78,716			—
Accrued interest payable	210		210		—		210		—	—



	June 30, 2015
	Carrying Amount		Estimated Fair Value		Fair Value Measurements Using:
	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
	(In thousands)
Financial assets
Cash and cash equivalents	$	45,030	$	45,030	$	45,030	$	—	$	—
Investment securities available for sale	299,040		299,040		—		299,040		—
Investment securities held to maturity	61,524		62,510		—		62,510		—
Loans held for sale	110		110		—		110		—
Loans receivable, net	487,887		493,270		—		—		493,270
FHLB stock	4,807		4,807		—		4,807		—
Accrued interest receivable	2,546		2,546		—		2,546		—
Mortgage servicing rights, net	1,187		1,837		—		—		1,837

Financial liabilities
Demand deposits	$	499,236	$	499,236	$	499,236	$	—	$	—
Time deposits	147,928		148,436		—		148,436		—
Borrowings	90,033		93,426		—		93,426		—
Accrued interest payable	265		265		—		265		—

Financial assets and liabilities other than investment securities are not traded in active markets. Estimated fair values require subjective judgments and are approximate. The estimates of fair value in the previous table are not necessarily representative of amounts that could be realized in actual market transactions, or of the underlying value of the Company. Fair value estimates, methods, and assumptions are set forth below for the Company's financial instruments:

Financial instruments with book value equal to fair value - The fair value of financial instruments that are short-term or reprice frequently and that have little or no risk are considered to have a fair value equal to book value. These instruments

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

include cash and due from banks, interest bearing deposits with banks, FHLB stock, accrued interest receivable, and accrued interest payable. FHLB stock is not publicly traded, however, it may be redeemed on a dollar-for-dollar basis, for any amount the Bank is not required to hold, subject to the FHLB's discretion. The fair value is therefore equal to the book value.

Securities - Fair values for investment securities are primarily measured using information from a third-party pricing service. The pricing service uses evaluated pricing models based on market data. In the event that limited or less transparent information is provided by the third-party pricing service, fair value is estimated using secondary pricing services or non-binding third-party broker quotes.

Loans held for sale - The fair value of loans held for sale is based on quoted market prices from Federal Home Loan Mortgage Corporation ("Freddie Mac"), which are updated daily and represent prices at which loans are exchanged in high volumes and in a liquid market.

Loans receivable, net - Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type, including fixed and variable one- to four-family residential real estate, commercial, and consumer loans. There is an accurate and reliable secondary market for one- to four-family residential mortgage production, and available market benchmarks are used to establish discount factors for estimating fair value for these types of loans. Commercial and consumer loans use market benchmarks when available; however, due to the varied term structures and credit issues involved, they mainly rely on cash flow projections and repricing characteristics within the loan portfolio. These amounts are discounted further by embedded probable losses expected to be realized in the portfolio.

Valuations of impaired loans, real estate owned and repossessed assets are periodically performed by management, and the fair values of these loans are carried at the fair value of the underlying collateral less estimated costs to sell. Fair value of the underlying collateral may be determined using an appraisal performed by a qualified independent appraiser.

Mortgage servicing rights - The estimated fair value of mortgage servicing rights is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income.

Deposits - The fair value of deposits with no stated maturity, such as non-interest bearing deposits, savings and interest checking accounts, and money market accounts, is equal to the amount payable on demand as of December 31, 2015 and June 30, 2015. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.

Borrowings - The fair value of FHLB advances and other borrowings are calculated using a discounted cash flow method, adjusted for market interest rates and terms to maturity.

Off-balance-sheet financial instruments - Commitments to extend credit represent all off-balance-sheet financial instruments. The fair value of these commitments is not significant.

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. Forward-looking statements are not statements of historical fact, are based on certain assumptions and are generally identified by the use of words such as “believes,” “expects,” “anticipates,” “estimates” or similar expressions. Forward‑looking statements include, but are not limited to:


•	statements of our goals, intentions and expectations;


•	statements regarding our business plans, prospects, growth and operating strategies;


•	statements regarding the quality of our loan and investment portfolios; and


•	estimates of our risks and future costs and benefits.

These forward‑looking statements are subject to significant risks and uncertainties. Actual results may differ materially from those contemplated by the forward‑looking statements due to, among others, the following factors:


•	changes in general economic conditions, either nationally or in our market area, that are worse than expected;


•	the credit risks of our lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in our allowance for loan losses and provision for loan losses that may be impacted by deterioration in the housing and commercial real estate markets;


•	fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate values in our market area;


•	a decrease in the secondary market demand for loans that we originate for sale;


•	management’s assumptions in determining the adequacy of the allowance for loan losses;


•	our ability to control operating costs and expenses, especially new costs associated with our operation as a public company;


•	whether our management team can implement our operational strategy;


•	our ability to successfully integrate any newly acquired assets, liabilities, customers, systems, and management personnel into our operations and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto;


•	our success in opening new branches:


•	increases in premiums for deposit insurance;


•	the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation;


•	changes in the levels of general interest rates, and the relative differences between short and long-term interest rates, deposit interest rates, our net interest margin and funding sources;


•	increased competitive pressures among financial services companies;


•	our ability to attract and retain deposits;


•	changes in consumer spending, borrowing and savings habits;


•	our ability to successfully manage our growth in compliance with regulatory requirements;

•

results of examinations of us by the Washington State Department of Financial Institutions, Department of Banks, the Federal Deposit Insurance Corporation, Federal Reserve Bank of San Francisco, or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to increase our reserve for loan losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits, which could adversely affect our liquidity and earnings;


•	legislative or regulatory changes that adversely affect our business, including the effects of the Dodd-Frank Act and Basel III, changes in regulatory policies and principles, or the interpretation of regulatory capital or other rules;


•	adverse changes in the securities markets;


•	changes in accounting policies and practices, as may be adopted by the financial institutions regulatory agencies, the Public Company Accounting Oversight Board or the Financial Accounting Standards Board;


•	costs and effects of litigation, including settlements and judgments;


•	inability of key third-party vendors to perform their obligations to us; and


•	other economic, competitive, governmental, regulatory and technical factors affecting our operations, pricing, products and services and other risks described elsewhere in our filings with the Securities and Exchange Commission, including this Form 10-Q.

These developments could have an adverse impact on our financial position and our results of operations.

Any of the forward looking statements that we make in this report and in other public statements we make may turn out to be wrong because of inaccurate assumptions we might make, because of the factors illustrated above or because of other factors that we cannot foresee. Any forward-looking statements are based upon management’s beliefs and assumptions at the time they are made. We undertake no obligation to publicly update or revise any forward-looking statements included or incorporated by reference in this document or to update the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking statements discussed in this report might not occur, and you should not put undue reliance on any forward-looking statements.

General

First Northwest Bancorp (or the "Company") is a bank holding company which primarily engages in the business activity of its subsidiary, First Federal Savings and Loan Association of Port Angeles ("First Federal" or the "Bank"). First Federal is a community-oriented financial institution primarily serving the North Olympic Peninsula region of Washington. We have ten full-service banking offices, including a full-service banking office that was opened during the quarter ended December 31, 2015 in Bellingham, Washington, which is located in Whatcom County. We offer a wide range of products and services focused on the lending and depository needs of the communities we serve. Historically, lending activities have been primarily directed toward the origination of first lien one- to four-family mortgage loans, and, to a lesser extent, commercial and multi-family real estate loans, construction and land loans (including lot loans), commercial business loans, and consumer loans, consisting primarily of home equity loans and lines of credit. During the past decade, recognizing our need to adapt to changing market conditions, we have revised our operating strategy to diversify our loan portfolio, expand our deposit product offerings and enhance our infrastructure. We have increased the origination of commercial real estate and multi-family real estate loans, and decreased reliance on originating and retaining longer-term, fixed-rate, residential mortgage loans. Since 2010, we have generally sold most newly originated and refinanced, conforming single-family owner-occupied mortgage loans into the secondary market, although in 2012, we began selectively retaining 30-year fixed-rate mortgages in the portfolio in an effort to enhance our net interest income. We have historically offered traditional consumer and business deposit products, including transaction accounts, savings and money market accounts and certificates of deposit for individuals, businesses and nonprofit organizations. Deposits are our primary source of funds for our lending and investing activities.

First Federal is significantly affected by prevailing economic conditions as well as government policies and regulations concerning, among other things, monetary and fiscal affairs, housing and financial institutions. Deposit flows are influenced by a number of factors, including interest rates paid on competing time deposits, available

alternative investments, account maturities, and the overall level of personal income and savings. Lending activities are influenced by the demand for funds, the number and quality of lenders, and regional economic cycles.

Our primary source of pre-tax income is net interest income. Net interest income is the difference between interest income, which is the income that we earn on our loans and investments, and interest expense, which is the interest that we pay on our deposits and borrowings. Changes in levels of interest rates affect our net interest income. A secondary source of income is noninterest income, which includes revenue we receive from providing products and services, including service charges on deposit accounts, mortgage banking income, earnings from bank-owned life insurance, and gains and losses from sales of securities.

An offset to net interest income is the provision for loan losses, which represents the periodic charge to operations which is required to adequately provide for probable losses inherent in our loan portfolio. As a loan's risk rating improves, property values increase, or recoveries of amounts previously charged off are received, a recapture of previously recognized provision for loan losses may be added to net interest income.

The noninterest expenses we incur in operating our business consist of salaries and employee benefits and expenses, occupancy and equipment expenses, federal deposit insurance premiums and regulatory assessments, data processing expenses, expenses related to real estate and personal property owned and other miscellaneous expenses.

Salaries and employee benefits consist primarily of salaries and wages paid to our employees, payroll taxes, expenses for health insurance, retirement plans and other employee benefits, including employee compensation expenses stemming from recognition of expense related to the ESOP and the adoption of new equity benefit plans. We cannot determine the actual amount of these new stock-related compensation and benefit expenses at this time because applicable accounting practices require that they be based on the fair market value of the shares of common stock at specific points in the future.

Critical Accounting Policies

There are no material changes to the critical accounting policies as disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2015.

Comparison of Financial Condition at December 31, 2015 and June 30, 2015

Assets. Total assets increased $21.0 million, or 2.2%, to $957.8 million at December 31, 2015, from $936.8 million at June 30, 2015, primarily due to an increase of $39.3 million, or 8.1%, in net loans receivable to $527.1 million at December 31, 2015, from $487.9 million at June 30, 2015, primarily as a result of increased originations in one- to four-family residential and multi-family loans.

Gross loans, excluding loans held for sale, increased $39.5 million, or 8.0%, to $533.4 million at December 31, 2015, from $493.9 million at June 30, 2015. The portfolio increase was mainly attributable to an increase in one- to four-family residential loans of $19.0 million, or 7.4%, to $275.7 million at December 31, 2015 from $256.7 million at June 30, 2015, as we continue to originate and retain in our portfolio, as well as identify and purchase, select one- to four-family residential loans from others. Commercial real estate loans increased $4.8 million, or 3.8%, to $130.4 million at December 31, 2015 from $125.6 million at June 30, 2015, and multi-family loans increased $11.0 million, or 33.2%, to $44.1 million at December 31, 2015 from $33.1 million at June 30, 2015, as we continue to focus on increasing these loans as a percentage of total loans. Additionally, we saw an increase in the balance of construction and land loans during the six months ended December 31, 2015 of $7.5 million, as successful business development efforts throughout the state of Washington began to produce additional loan volumes for the Bank. Our construction loans are geographically disbursed throughout the State of Washington and, as a result, these loans are susceptible to risks that may be different than the risks of construction lending in our primary market area. We manage all of our construction lending by utilizing a licensed third party vendor to assist us in monitoring our construction projects throughout the state of Washington. There were $37.1 million in undisbursed construction commitments at December 31, 2015, an increase of $29.2 million compared to $7.9 million at June 30, 2015. Undisbursed construction commitments at December 31, 2015 included $4.9 million of mainly custom one- to four-family residential construction; $22.5 million of commercial multi-family construction, primarily located in Puget Sound, Snohomish and King Counties; $6.8 million of commercial real estate, consisting of a hotel construction project in Franklin County; and $2.8 million of one- to four-family speculative construction l

ocated primarily in Thurston County. These increases were partially offset by decreases to commercial business, home equity and other consumer loans of $1.1 million, $1.1 million, and $511,000, respectively.

The following tables show our construction commitments by type and geographic concentrations at the dates indicated:



December 31, 2015		Olympic Peninsula		Puget Sound Region		Other Washington		Total
		(In thousands)
Construction Commitment
	One- to four-family residential	$	5,262	$	2,811	$	197	$	8,270
	Multi-family residential	—		24,714		—		24,714
	Commercial real estate	722		5,178		10,887		16,787
	Total Commitment	$	5,984	$	32,703	$	11,084	$	49,771

Construction Funds Disbursed
	One- to four-family residential	$	2,360	$	798	$	177	$	3,335
	Multi-family residential	—		2,189		—		2,189
	Commercial real estate	573		2,491		4,094		7,158
	Total disbursed	$	2,933	$	5,478	$	4,271	$	12,682

Undisbursed Commitment
	One- to four-family residential	$	2,902	$	2,013	$	20	$	4,935
	Multi-family residential	—		22,525		—		22,525
	Commercial real estate	149		2,687		6,793		9,629
	Total undisbursed	$	3,051	$	27,225	$	6,813	$	37,089

Land Funds Disbursed
	One- to four-family residential	$	8,797	$	942	$	—	$	9,739
	Commercial real estate	31		4,128		—		4,159
	Total disbursed for land	$	8,828	$	5,070	$	—	$	13,898



June 30, 2015		Olympic Peninsula		Puget Sound Region		Other Washington		Total
		(In thousands)
Construction Commitment
	One- to four-family residential	$	6,743	$	1,070	$	197	$	8,010
	Multi-family residential	—		4,145		—		4,145
	Commercial real estate	847		2,052				2,899
	Total Commitment	$	7,590	$	7,267	$	197	$	15,054

Construction Funds Disbursed
	One- to four-family residential	$	2,941	$	3	$	—	$	2,944
	Multi-family residential	—		3,358		—		3,358
	Commercial real estate	512		382		—		894
	Total disbursed	$	3,453	$	3,743	$	—	$	7,196

Undisbursed Commitment
	One- to four-family residential	$	3,802	$	1,067	$	197	$	5,066
	Multi-family residential	—		787		—		787
	Commercial real estate	335		1,670		—		2,005
	Total undisbursed	$	4,137	$	3,524	$	197	$	7,858

Land Funds Disbursed
	One- to four-family residential	$	9,342	$	926	$	—	$	10,268
	Commercial real estate	40		1,623		—		1,663
	Total disbursed for land	$	9,382	$	2,549	$	—	$	11,931

During the six months ended December 31, 2015, the Company originated $111.3 million of loans, of which $43.0 million, or 38.6%, were originated in the North Olympic Peninsula, $46.7 million, or 41.9%, in the Puget Sound region of Washington, and $21.7 million, or 19.5%, in other areas in Washington. During the same period, we purchased $13.0 million and originated $29.5 million of one- to four-family residential loans, of which $2.1 million were sold into the secondary market.

Our allowance for loan losses decreased $137,000, or 1.9%, from $7.1 million at June 30, 2015 to $7.0 million at December 31, 2015. The allowance for loan losses as a percentage of total loans decreased to 1.3% of total loans at December 31, 2015 from 1.4% at June 30, 2015, as improved credit quality measures have been sufficient to cover reserves for loan growth, as well as reserves for changes in the mix of loans and increased loan balances, during these periods.

Loans receivable, excluding loans held for sale, consisted of the following at the dates indicated:



	December 31, 2015			June 30, 2015
	(In thousands)
Real Estate:
One-to-four family	$	275,728		$	256,696
Multi-family	44,104			33,086
Commercial real estate	130,398			125,623
Construction and land	26,580			19,127
Total real estate loans	476,810			434,532

Consumer:
Home equity	35,288			36,387
Other consumer	7,687			8,198
Total consumer loans	42,975			44,585

Commercial business loans	13,623			14,764

Total loans	533,408			493,881
Less:
Net deferred loan fees	1,070			840
Premium on purchased loans, net	(1,780		)	(1,957		)
Allowance for loan losses	6,974			7,111
Loans receivable, net	$	527,144		$	487,887

Nonperforming loans decreased $2.6 million, or 53.1%, to $2.3 million at December 31, 2015, from $4.9 million at June 30, 2015, primarily as a result of a decrease in nonperforming one- to four-family loans of $2.6 million. Real estate owned and repossessed assets decreased $1.8 million, or 94.7%, to $158,000 at December 31, 2015 from $1.9 million at June 30, 2015, primarily due to the sale of a $1.4 million commercial real estate property. Nonperforming loans to total loans declined from 1.0% at June 30, 2015 to 0.4% at December 31, 2015. The allowance for loan losses as a percentage of nonperforming loans increased 112.5% from 145.6% at June 30, 2015 to 309.4% at December 31, 2015.

At December 31, 2015, there were $7.4 million in restructured loans, of which $6.5 million were performing in accordance with their modified payment terms and returned to accrual status. Classified loans decreased by $4.1 million, or 41.4%, to $5.8 million at December 31, 2015, from $9.9 million at June 30, 2015. Loans 30 days or more past due increased $985,000, or 40.7%, to $3.4 million at December 31, 2015, from $2.4 million at June 30, 2015.

The following table represents nonperforming assets at the dates indicated.



	December 31, 2015			June 30, 2015
	(In thousands)
Nonperforming loans:
Real estate loans:
One- to four-family	$	1,670		$	4,232
Commercial real estate	139			147
Construction and land	166			159

Total real estate loans	1,975			4,538

Consumer loans:
Home equity	140			181
Other	139			164

Total consumer loans	279			345

Total nonperforming loans	2,254			4,883

Real estate owned:
One- to four-family	133			493
Commercial real estate	—			1,368

Total real estate owned	133			1,861

Repossessed assets	25			53

Total nonperforming assets	$	2,412		$	6,797

Nonaccrual and 90 days or more past due loans as a percentage of total loans	0.4		%	1.0		%

At December 31, 2015, total investment securities increased $3.4 million, or 0.9%, to $364.0 million at December 31, 2015, from $360.6 million at June 30, 2015, and mortgage-backed securities totaled $251.0 million at December 31, 2015, an increase of $20.7 million, or 9.0%, from $230.3 million at June 30, 2015. Other investment securities, including municipal bonds, were $113.1 million at December 31, 2015, a decrease of $17.1 million, or 13.1%, from $130.2 million at June 30, 2015. During the quarter ended December 31, 2015, $73.5 million of available for sale securities, consisting mainly of variable-rate small business association ("SBA") and adjustable rate U.S. government agency issued mortgage-backed securities ("MBS agency"), were sold, taking advantage of market conditions which allowed us to realize a net gain on sale. The cash received from the sale, $74.4 million, was reinvested into a combination of fixed-rate MBS agency securities and fixed and variable rate corporate issued mortgage-backed securities ("MBS corporate"). The MBS corporate securities are secured by residential or commercial real estate. This transaction was executed in order to improve our net interest margin by using the gain on sale of investments to offset the expense of prepayment penalties associated with the early repayment of $19.9 million of long-term FHLB advances. As of December 31, 2015, management believes the investment portfolio, including mortgage-backed securities, has a projected average life and average repricing term of 5.0 years and 4.6 years, respectively, based on the current interest rate environment. The investment portfolio contains 79.5% of amortizing securities at December 31, 2015, and the projected average life of our securities may vary due to prepayment activity, which, particularly in the mortgage-backed securities portfolio, is generally affected by changing interest rates. Management continues to focus on improving the mix of earning assets by originating loans and decreasing securities as a percentage of earning assets; however, we will continue to purchase investment securities as a source of interest income in lieu of carrying higher cash balances at nominal interest rates. For additional information, see Note 2 of the Notes to Consolidated Financial Statements contained in Item 1 of this Form 10-Q.

Liabilities. Total liabilities increased $22.3 million, or 3.0%, to $768.4 million at December 31, 2015, from $746.1 million at June 30, 2015. This increase was primarily the result of deposit account balances increasing $37.9 million, or 5.9%, to $685.1 million at December 31, 2015, from $647.2 million at June 30, 2015. Transaction, savings, and money market account deposits increased $39.6 million, or 7.9%, to $538.8 million at December 31, 2015 from $499.2 million at June 30, 2015, including an increase of $8.1 million in business transaction accounts. These increases were partially offset by a decrease in certificates of deposit of $1.6 million, or 1.1%, to $146.3

million at December 31, 2015, from $147.9 million at June 30, 2015. Increases in deposits were primarily the result of business and consumer development efforts with new and existing customers.

Borrowings decreased $14.8 million, or 16.4%, from $90.0 million at June 30, 2015 to $75.2 million at December 31, 2015, as $19.9 million of long-term FHLB borrowing were repaid and replaced mainly through deposit growth and short-term borrowings of $5.2 million on our Fed Funds advance account from the FHLB. Borrowings remaining at December 31, 2015 consisted of both long-term advances and short-term borrowings on our Fed Funds advance account from the FHLB.

Equity. Total equity decreased $1.3 million, or 0.7%, to $189.4 million at December 31, 2015, from $190.7 million at June 30, 2015. The decrease in total equity during the six months ended December 31, 2015 was primarily the result of a $2.3 million combined change in unrealized gain (loss) in market values, including the decrease related to the realized gain on the sale of $74.4 million of available for sale securities as noted above, and a decrease of $1.3 million related to additional unearned ESOP shares purchased, partially offset by net income of $1.9 million.

Comparison of Results of Operations for the Three Months Ended December 31, 2015 and 2014

General. The Company recorded net income for the three months ended December 31, 2015 of $713,000 compared to net income of $882,000 for the three months ended December 31, 2014, a decrease of $169,000, or 19.2%. This decrease was primarily the result of an increase in noninterest expense partially offset by increases in net interest and noninterest income.

Net Interest Income. Net interest income increased $1.2 million to $6.8 million for the three months ended December 31, 2015, from $5.6 million for the three months ended December 31, 2014. This increase was primarily the result of an increase in interest income related to increased average volumes of loans receivable and investment securities, partially offset by an increase in interest expense.

The net interest margin increased seven basis points to 2.94% for the three months ended December 31, 2015, from 2.87% for the same period in 2014. The net interest margin increased due primarily to an increase in the average balance of total loans receivable earning higher yields compared to cash and investment alternatives, as well as an increase in the average yield of investment and mortgage-backed securities. Subscriptions for the purchase of stock in our initial stock offering held as cash and due from banks at December 31, 2014 were deployed upon completion of the offering to purchase higher yielding investment and mortgage-backed securities. Reduced borrowing costs related to the prepayment of FHLB advances also contributed to improved margins during the quarter ended December 31, 2015. The average balance of cash and cash equivalents decreased $24.5 million from $54.2 million for the three months ended December 31, 2014 to $29.7 million for the three months ended December 31, 2015. Of the $1.2 million increase in net interest income during the three months ended December 31, 2015 compared to the same period in 2014, $1.0 million was the result of an increase in volume while $158,000 was attributable to changes in rates. Investment and mortgage-backed securities were the primary contributors to the increase in net interest income with a $669,000 increase due to volume and a $371,000 increase due to rate. The cost of average interest-bearing liabilities increased four basis points to 0.73% for the three months ended December 31, 2015, compared to 0.69% for the same period in the prior year, due primarily to increases in the average balance of certificates of deposit and money market account deposits at higher average rates compared to the prior year.

Interest Income. Total interest income increased $1.2 million, or 18.2%, to $7.9 million for the three months ended December 31, 2015 from $6.7 million for the comparable period in 2014. Interest income on loans increased $160,000, or 2.9%, during the three months ended December 31, 2015, primarily reflecting an increase in the average balance of loans receivable from $485.6 million at December 31, 2014 to $513.0 million at December 31, 2015, partially offset by a decrease in average yield from 4.62% at December 31, 2014 to 4.50% at December 31, 2015, as higher yielding loans continued to be replaced with loans with lower average yields.

Interest income on investment securities increased $446,000 to $776,000 for the three months ended December 31, 2015 compared to $330,000 for the three months ended December 31, 2014. The average balance of our investment securities increased $53.4 million, or 75.0%, to $124.6 million for the three months ended December 31, 2015 compared to $71.2 million for the three months ended December 31, 2014, as net proceeds received from the stock offering were used to purchase investment and mortgage-backed securities. The yield on investment securities for the three months ended December 31, 2015 increased 64 basis points due primarily to investments purchased with higher yields compared to the same period in 2014.

Interest income on mortgage backed securities increased $594,000 primarily due to an increase in the average balance of $88.3 million from $158.7 million for the three months ended December 31, 2014 to $247.0 million for the three months ended December 31, 2015. The yield on mortgage-backed securities for the three months ended December 31, 2015 increased 28 basis points, primarily due to investments purchased with higher yields compared to the same period in 2014.

The following table compares average earning asset balances, associated yields, and resulting changes in interest income for the periods shown:



	Three Months Ended December 31,
	2015				2014
	Average Balance Outstanding		Yield		Average Balance Outstanding		Yield		Increase/ (Decrease) in Interest Income
	(Dollars in thousands)
Loans receivable, net	$	512,974	4.50	%	$	485,595	4.62	%	$	160
Investment securities	124,575		2.49		71,213		1.85		446
Mortgage-backed securities	247,039		2.19		158,710		1.91		594
FHLB stock	4,460		3.05		9,920		0.08		32
Cash and due from banks	29,657		0.19		54,243		0.16		(8		)
Total interest-earning assets	$	918,705	3.46		$	779,681	3.45		$	1,224

Interest Expense. Total interest expense increased $65,000, or 5.8%, to $1.2 million for the three months ended December 31, 2015 from $1.1 million at December 31, 2014. Deposit costs increased for the three months ended December 31, 2015 compared to the same period in 2014 primarily due to higher average balances and an increase in rates paid on money market accounts and certificates of deposit as the result of targeted promotional efforts in new and existing market areas.

The average balance of interest-bearing deposits increased $8.8 million, or 1.6%, to $569.3 million for the three months ended December 31, 2015 from $560.5 million for the three months ended December 31, 2014. This increase was attributable to increases in the average balances for money market accounts of $23.3 million, and certificates of deposit of $15.1 million, partially offset by a decrease in transaction accounts of $8.9 million and savings accounts of $20.7 million. The increase in the average balance of deposit accounts was primarily the result of market expansion, with pricing promotions on money market and certificates of deposit primarily offered through our newest branches located in Silverdale and Bellingham, Washington. We have also increased our focus on increasing our commercial business deposits as we develop commercial lending relationships. The decrease in savings account balances was primarily due to a reduction in deposits held at December 31, 2014 as subscriptions for the purchase of stock in our initial public offering.

Borrowing costs declined $63,000 to $671,000 for the three months ended December 31, 2015 from $734,000 for the comparable period in 2014 due to a decline of $8.4 million in the average balance of borrowings.

The following table details average balances, cost of funds and the change in interest expense for the periods shown:



	Three Months Ended December 31,
	2015				2014				Increase/ (Decrease) in Interest Expense
	Average Balance Outstanding		Rate		Average Balance Outstanding		Rate		Increase/ (Decrease) in Interest Expense
	(Dollars in thousands)
Savings accounts	$	89,657	0.04	%	$	110,366	0.04	%	$	—
Transaction accounts	96,893		0.02		105,785		0.01		2
Money market accounts	236,669		0.25		213,383		0.18		48
Certificates of deposit	146,081		0.96		130,951		0.83		78
Borrowings	81,631		3.29		90,033		3.26		(63		)
Total interest-bearing liabilities	$	650,931	0.73		$	650,518	0.69		$	65

Provision for Loan Losses. There was no provision for loan losses during the three months ended December 31, 2015 and December 31, 2014. This was primarily the result of continued improvement in our asset quality as reflected in the decrease in nonperforming loans, classified loans, and ratio of nonperforming loans to total loans. These improvements are primarily a result of improving economic conditions allowing some borrowers to better their financial condition. Management considers the allowance for loan losses at December 31, 2015 to be adequate to cover probable losses inherent in the loan portfolio. While management believes the estimates and assumptions used in its determination of the adequacy of the allowance are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future provisions will not exceed the amount of past provisions or that any increased provisions that may be required will not adversely impact our financial condition and results of operations. In addition, the determination of the amount of our allowance for loan losses is subject to review by bank regulators, as part of the routine examination process, which may result in the establishment of additional reserves based upon their judgment or information available to them at the time of their examination.

The following table details activity and information related to the allowance for loan losses for the periods shown:



	Three Months Ended December 31,
	2015			2014
	(Dollars in thousands)
Net charge-offs	$	(102	)	$	(317	)
Allowance for loan losses	6,974			7,666
Allowance for losses as a percentage of total gross loans receivable at the end of this period	1.3		%	1.5		%
Total nonaccruing loans	2,254			4,131
Allowance for loan losses as a percentage of nonaccrual loans at end of period	309.4		%	185.6		%
Nonaccrual and 90 days or more past due loans as a percentage of total loans	0.4		%	0.8		%
Total loans	$	533,408		$	500,326

Noninterest Income. Noninterest income increased $899,000, or 91.8%, to $1.9 million for the three months ended December 31, 2015, from $1.0 million for the three months ended December 31, 2014, primarily as a result of a net gain on sale of investment securities of $856,000.

The following table provides a detailed analysis of the changes in the components of noninterest income for the periods shown:



	Three Months Ended December 31,						Increase (Decrease)
	2015			2014			Amount			Percent
	(Dollars in thousands)
Loan and deposit service fees	$	882		$	824		$	58		7.0	%
Mortgage servicing fees, net of amortization	57			60			(3		)	(5.0	)
Net gain on sale of loans	26			41			(15		)	(36.6	)
Net gain on sale of investment securities	856			—			856			100.0
Decrease in cash surrender value of bank-owned life insurance	(17		)	(16		)	(1		)	(6.3	)
Other income	74			70			4			5.7
Total noninterest income	$	1,878		$	979		$	899		91.8	%

Noninterest Expense. Noninterest expense increased $2.3 million, or 42.6%, to $7.7 million for the three months ended December 31, 2015, compared to $5.4 million for the same period in 2014. Compensation and benefits increased $659,000 compared to the same period in the prior year, primarily due to the addition of personnel in loan production and in support of new market areas, including staffing of our newest branch in Bellingham, Washington. Increases are also a result of certain market rate and merit increase adjustments for employees and management and increased employee benefits expenses, including expenses related to the ESOP. We incurred an FHLB prepayment penalty of $779,000 during the quarter ended December 31, 2015 as a result of the early repayment of $19.9 million in long-term FHLB advances, which we expect to reduce our cost of funds and improve net interest margin. We have also realized increased occupancy, equipment, depreciation and amortization expense, supplies, postage, and telephone expense, and advertising expenses related to the opening of our newest branch located in Bellingham, Washington, during the three months ended December 31, 2015 as compared to the same period in 2014. We have also incurred additional noninterest expenses during the quarter compared to the same period last year relating to doing business as a public company, including increases in professional fees of $311,000. Increased regulatory assessments and state taxes was primarily the result of increased revenues, including the gain on sale of investment securities, for the three months ended December 31, 2015, compared to three months ended December 31, 2014.

The following table provides an analysis of the changes in the components of noninterest expense for the periods shown:



	Three Months Ended December 31,						Increase (Decrease)
	2015			2014			Amount			Percent
	(Dollars in thousands)
Compensation and benefits	$	3,708		$	3,049		$	659		21.6	%
Real estate owned and repossessed assets expense (income), net	(35		)	(146		)	111			(76.0	)
Data processing	653			622			31			5.0
Occupancy and equipment	908			768			140			18.2
Supplies, postage, and telephone	200			171			29			17.0
Regulatory assessments and state taxes	183			78			105			134.6
Advertising	252			144			108			75.0
Professional fees	439			128			311			243.0
FDIC insurance premium	99			131			(32		)	(24.4	)
FHLB prepayment penalty	779			—			779			100.0
Other	497			497			—			—
Total	$	7,683		$	5,442		$	2,241		41.2	%

Provision for Income Tax. An income tax expense of $242,000 was recorded for the three months ended December 31, 2015 compared to $256,000 for the three months ended December 31, 2014. This was generally due to a decrease in income before taxes of $183,000.

Comparison of Results of Operations for the Six Months Ended December 31, 2015 and 2014

General. The Company recorded net income for the six months ended December 31, 2015 of $1.9 million compared to net income of $1.7 million for the six months ended December 31, 2014, an increase of $210,000, or 12.1%, primarily related to increases in the average balance and interest earned on investment and mortgage-backed securities.

Net Interest Income. Net interest income increased $1.9 million to $13.1 million for the six months ended December 31, 2015, from $11.1 million for the six months ended December 31, 2014. This increase was the result of an increase in interest income related to increased average volumes of loans receivable and investment securities, partially offset by an increase in interest expense.

The net interest margin decreased six basis points to 2.85% for the six months ended December 31, 2015, from 2.91% for the same period in 2014. The net interest margin declined due primarily to a change in the asset mix as proceeds from the stock offering were deployed into the investment and mortgage-backed securities at lower average yields compared to the loan portfolio, representing a larger percentage of our assets at December 31, 2015 compared to the same period in 2014. The average balance of cash and due from banks decreased $2.7 million from $38.5 million for the six months ended December 31, 2014 to $35.8 million for the six months ended December 31, 2015. Of the $1.9 million increase in net interest income during the six months ended December 31, 2015 compared to the same period in 2014, $1.7 million was the result of an increase in volume, $1.4 million of which was due to an increase in the average balance of investment and mortgage-backed securities, while $228,000 was attributable to changes in rates, of which $552,000 was attributable to an increase in yields on investment and mortgage-backed securities partially offset by a $191,000 decline in average loan rates. The cost of average interest-bearing liabilities increased four basis points to 0.74% for the six months ended December 31, 2015, compared to 0.70% for the same period in the prior year, due primarily to increases in the average balance of certificates of deposit and money market account deposits at higher rates compared to the prior year.

Interest Income. Total interest income increased $2.1 million, or 15.9%, to $15.5 million for the six months ended December 31, 2015 from $13.3 million for the comparable period in 2014. Interest income on loans increased $133,000, or 1.2%, during the six months ended December 31, 2015 compared to the same period in the prior year, as a result of an increase of $14.2 million in the average balance of loans receivable partially offset by a decrease of eight basis points in average loan yields. Lower average loan yields reflect higher yielding loans that continued to pay off and were replaced with loans at lower interest rates during the six months ended December 31, 2015 compared to the same period in 2014.

Interest income on investment securities increased $918,000 to $1.6 million for the six months ended December 31, 2015 compared to $647,000 for the six months ended December 31, 2014. The average balance of our investment securities increased $63.6 million to $130.7 million for the six months ended December 31, 2015 compared to $67.1 million for the six months ended December 31, 2014, as net proceeds received from the stock offering was used to purchase investment and mortgage-backed securities. The yield on investment securities for the six months ended December 31, 2015 increased 46 basis points compared to the same period in 2014 due primarily to investments purchased with higher yields.

Interest income on mortgage backed securities increased $1.0 million primarily due to an increase in the average balance of $81.7 million from $162.0 million for the six months ended December 31, 2014 to $243.7 million for the six months ended December 31, 2015. The yield on mortgage-backed securities for the six months ended December 31, 2015 increased 21 basis points primarily due to investments purchased with higher yields compared to the same period in 2014.

The following table compares average earning asset balances, associated yields, and resulting changes in interest income for the periods shown:



	Six Months Ended December 31,
	2015				2014
	Average Balance Outstanding		Yield		Average Balance Outstanding		Yield		Increase/ (Decrease) in Interest Income
	(Dollars in thousands)
Loans receivable, net	$	501,617	4.49	%	$	487,425	4.57	%	$	133
Investment securities	130,709		2.39		67,130		1.93		918
Mortgage-backed securities	243,681		2.10		162,028		1.89		1,020
FHLB stock	4,630		1.94		9,971		0.10		40
Cash and due from banks	35,814		0.19		38,469		0.14		7
Total interest-earning assets	$	916,451	3.37		$	765,023	3.49		$	2,118

Interest Expense. Total interest expense increased $185,000, or 8.3%, to $2.4 million for the six months ended December 31, 2015 from $2.2 million at December 31, 2014. Deposit costs increased for the six months ended December 31, 2015 compared to the same period in 2014 primarily due to higher average balances and an increase in rates paid on money market accounts and certificates of deposit as the result of targeted promotional efforts in new and existing market areas.

The average balance of interest-bearing deposits increased $21.7 million, or 4.0%, to $567.8 million for the six months ended December 31, 2015 from $546.1 million for the six months ended December 31, 2014. This increase was attributable to increases in the average balances for money market accounts of $21.4 million and certificates of deposit of $14.8 million, partially offset by decreases in savings accounts of $8.1 million and transaction accounts of $6.4 million. In addition to promotional efforts on money market and certificates of deposit, we have also increased our focus on increasing our commercial business deposits as we develop commercial lending relationships.

Borrowing costs decreased $73,000 to $1.4 million for the six months ended December 31, 2015 from $1.5 million for the comparable period in 2014, primarily due to a decline of $4.9 million in the average balance of borrowings.

The following table details average balances, cost of funds and the change in interest expense for the periods shown:



	Six Months Ended December 31,
	2015				2014				Increase/ (Decrease) in Interest Expense
	Average Balance Outstanding		Rate		Average Balance Outstanding		Rate		Increase/ (Decrease) in Interest Expense
	(Dollars in thousands)
Savings accounts	$	89,558	0.04	%	$	97,675	0.04	%	$	—
Transaction accounts	98,502		0.01		104,895		0.01		2
Money market accounts	233,404		0.25		212,009		0.18		95
Certificates of deposit	146,335		0.96		131,486		0.82		161
Borrowings	85,831		3.26		90,742		3.24		(73		)
Total interest-bearing liabilities	$	653,630	0.74		$	636,807	0.70		$	185

Provision for Loan Losses. There was no provision for loan losses during the six months ended December 31, 2015 and December 31, 2014, primarily the result of continued improvement in our asset quality. These improvements are reflected in decreases in nonperforming loans, classified loans, and our allowance for loan losses as a percentage of total loans. Also showing improvement was an increase in the allowance for loan losses as a percentage of nonperforming loans. These improvements are primarily a result of improving economic conditions allowing some borrowers to better their financial condition.

The following table details activity and information related to the allowance for loan losses for the periods shown:



	Six Months Ended December 31,
	2015			2014
	(Dollars in thousands)
Net charge-offs	$	(137	)	$	(406	)
Allowance for loan losses	6,974			7,666
Allowance for losses as a percentage of total gross loans receivable at the end of this period	1.3		%	1.5		%
Total nonaccruing loans	2,254			4,131
Allowance for loan losses as a percentage of nonaccrual loans at end of period	309.4		%	185.6		%
Nonaccrual and 90 days or more past due loans as a percentage of total loans	0.4		%	0.8		%
Total loans	$	533,408		$	500,326

Noninterest Income. Noninterest income increased $1.0 million, or 48.1%, to $3.1 million for the six months ended December 31, 2015, from $2.1 million for the six months ended December 31, 2014, primarily as a result of an increase in the net gain on sale of investment securities of $856,000 used to offset the prepayment penalty on $19.9 million of FHLB advances that were repaid prior to maturity. We also saw increased loan and deposit service fees of $152,000 and other income of $101,000, partially offset by a decrease in net gain on sale of loans of $70,000 and mortgage servicing fees, net of amortization, of $18,000. Loan and deposit service fees increased primarily as the result of changes in the fee structure on deposits, and other income increased primarily as the result of a gain resulting from the dissolution of our subsidiary Craft3. The decline in the gain on sale of loans and mortgage servicing fees, net of amortization, between the periods was the result of decreased loan sales as we retained most of our longer-term, fixed-rate mortgage loan originations as part of our efforts to increase net interest margin while staying consistent with our management of interest rate risk.

The following table provides a detailed analysis of the changes in the components of noninterest income for the periods shown:



	Six Months Ended December 31,				Increase (Decrease)
	2015		2014		Amount			Percent
	(Dollars in thousands)
Loan and deposit service fees	$	1,811	$	1,659	$	152		9.2	%
Mortgage servicing fees, net of amortization	115		133		(18		)	(13.5	)
Net gain on sale of loans	68		138		(70		)	(50.7	)
Net gain on sale of investment securities	856		—		856			100.0
Increase in cash surrender value of bank-owned life insurance	22		23		(1		)	(4.3	)
Other income	269		168		101			60.1
Total noninterest income	$	3,141	$	2,121	$	1,020		48.1	%

Noninterest Expense. Noninterest expense increased $2.6 million, or 23.6%, to $13.6 million for the six months ended December 31, 2015, compared to $11.0 million for the same period in 2014. Compensation and benefits increased $892,000 compared to the same period in the prior year as a result of certain market rate and merit increase adjustments for employees and management, additions to management and staff needed to facilitate our growing operations and service new market areas, and increased employee benefits expenses, including expenses related to the employee stock ownership plan. We have also incurred additional noninterest expenses during the first six months of fiscal 2016 compared to the same period last year relating to doing business as a public company, including increases in professional fees of $602,000. We incurred an FHLB prepayment penalty of $779,000 during the six months ended December 31, 2015 as a result of the early repayment of $19.9 million in long-term FHLB advances, which we expect to reduce our cost of funds and improve net interest margin. Other expense increased $199,000, primarily as a result of increased professional development fees for management and staff and an increase

in expense for reserves for unused commitments, primarily commercial construction projects. These expenses exceeded the benefit of a $315,000 decrease in expenses related to real estate owned and repossessed assets, net, which was primarily due to a $352,000 gain on the sale of commercial real estate owned, during six months ended December 31, 2015 compared to the comparable period in 2014.

The following table provides an analysis of the changes in the components of noninterest expense for the periods shown:



	Six Months Ended December 31,						Increase (Decrease)
	2015			2014			Amount			Percent
	(Dollars in thousands)
Compensation and benefits	$	6,981		$	6,089		$	892		14.6	%
Real estate owned and repossessed assets expense (income), net	(377		)	(62		)	(315		)	508.1
Data processing	1,308			1,232			76			6.2
Occupancy and equipment	1,721			1,562			159			10.2
Supplies, postage, and telephone	339			331			8			2.4
Regulatory assessments and state taxes	277			163			114			69.9
Advertising	441			272			169			62.1
Professional fees	899			297			602			202.7
FDIC insurance premium	223			267			(44		)	(16.5	)
FHLB prepayment penalty	779			—			779			100.0
Other	1,007			808			199			24.6
Total	$	13,598		$	10,959		$	2,639		24.1	%

Provision for Income Tax. An income tax expense of $659,000 was recorded for the six months ended December 31, 2015 compared to $555,000 for the six months ended December 31, 2014, and was generally due to an increase in income before taxes of $314,000.

Average Balances, Interest and Average Yields/Cost

The following table sets forth, for the periods indicated, information regarding average balances of assets and liabilities as well as the total dollar amounts of interest income from average interest‑earning assets and interest expense on average interest‑bearing liabilities, resultant yields, interest rate spread, net interest margin (otherwise known as net yield on interest‑earning assets), and the ratio of average interest‑earning assets to average interest-bearing liabilities. Also presented are the weighted average yields on interest-earning assets, rates paid on interest-bearing liabilities and the resultant spread at December 31, 2015 and 2014. Income and all average balances are monthly average balances, which management deems to be not materially different than daily averages. Nonaccruing loans have been included in the table as loans carrying a zero yield.



	At December 31, 2015		Three Months Ended December 31,														Six Months Ended December 31,
	At December 31, 2015		2015							2014							2015							2014
	Yield/ Rate		Average Balance Outstanding			Interest Earned/ Paid		Yield/ Rate		Average Balance Outstanding			Interest Earned/ Paid		Yield/ Rate		Average Balance Outstanding			Interest Earned/ Paid		Yield/ Rate		Average Balance Outstanding			Interest Earned/ Paid		Yield/ Rate

Interest-earning assets:	(Dollars in thousands)
Loans receivable, net ⁽¹⁾	4.20	%	$	512,974		$	5,766	4.50	%	$	485,595		$	5,606	4.62	%	$	501,617		$	11,268	4.49	%	$	487,425		$	11,135	4.57	%
Investment securities	2.39		124,575			776		2.49		71,213			330		1.85		130,709			1,565		2.39		67,130			647		1.93
Mortgage-backed securities	2.67		247,039			1,351		2.19		158,710			757		1.91		243,681			2,553		2.10		162,028			1,533		1.89
FHLB dividends	2.16		4,460			34		3.05		9,920			2		0.08		4,630			45		1.94		9,971			5		0.10
Cash and cash equivalents	0.34		29,657			14		0.19		54,243			22		0.16		35,814			34		0.19		38,469			27		0.14
Total interest-earning assets ⁽²⁾	3.57		918,705			7,941		3.46		779,681			6,717		3.45		916,451			15,465		3.37		765,023			13,347		3.49

Interest-bearing liabilities:
Savings accounts	0.04		$	89,657		$	10	0.04		$	110,366		10		0.04		$	89,558		$	19	0.04		$	97,675		19		0.04
Transaction accounts	0.01		96,893			4		0.02		105,785			2		0.01		98,502			7		0.01		104,895			5		0.01
Money market accounts	0.22		236,669			145		0.25		213,383			97		0.18		233,404			286		0.25		212,009			191		0.18
Certificates of deposit	0.99		146,081			351		0.96		130,951			273		0.83		146,335			699		0.96		131,486			538		0.82
Total deposits	0.30		569,300			510		0.36		560,485			382		0.27		567,799			1,011		0.36		546,065			753		0.28
Borrowings	3.20		81,631			671		3.29		90,033			734		3.26		85,831			1,397		3.26		90,742			1,470		3.24
Total interest-bearing liabilities	0.58		650,931			1,181		0.73		650,518			1,116		0.69		653,630			2,408		0.74		636,807			2,223		0.70

Net interest income						$	6,760						$	5,601						$	13,057						$	11,124
Net interest rate spread	2.99							2.73							2.76							2.63							2.79
Net earning assets			$	267,774						$	129,163						$	262,821						$	128,216
Net interest margin ⁽³⁾								2.94							2.87							2.85							2.91
Average interest-earning assets to average interest-bearing liabilities			141.1		%					119.9		%					140.2		%					120.1		%

(1) The average loans receivable, net balances include nonaccruing loans.

(2) Includes interest-bearing deposits (cash) at other financial institutions.

(3) Net interest income divided by average interest-earning assets.

Rate/Volume Analysis

The following table presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. It distinguishes between the changes related to outstanding balances and due to the changes in interest rates. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii) changes in rate (i.e., changes in rate multiplied by old volume). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate.



	Three Months Ended									Six Months Ended
	December 31, 2015 vs. 2014									December 31, 2015 vs. 2014
	Increase (Decrease) Due to						Total Increase			Increase (Decrease) Due to						Total Increase
	Volume			Rate			(Decrease)			Volume			Rate			(Decrease)
	(In thousands)
Interest earning assets:
Loans receivable	$	316		$	(156	)	$	160		$	324		$	(191	)	$	133
Investment and mortgage-backed securities	669			371			1,040			1,386			552			1,938
FHLB stock	(1		)	33			32			(3		)	43			40
Other⁽¹⁾	(10		)	2			(8		)	(2		)	9			7
Total interest-earning assets	$	974		$	250		$	1,224		$	1,705		$	413		$	2,118

Interest-bearing liabilities:
Savings accounts	$	—		$	—		$	—		$	—		$	—		$	—
Interest-bearing transaction accounts	—			2			2			—			2			2
Money market accounts	10			38			48			19			76			95
Certificates of deposit	31			47			78			61			100			161
Borrowings	(68		)	5			(63		)	(80		)	7			(73		)
Total interest-bearing liabilities	$	(27	)	$	92		$	65		$	—		$	185		$	185

Net change in interest income	$	1,001		$	158		$	1,159		$	1,705		$	228		$	1,933

(1) Includes interest-bearing deposits (cash) at other financial institutions.

Off-Balance Sheet Activities

In the normal course of operations, First Federal engages in a variety of financial transactions that are not recorded in the financial statements. These transactions involve varying degrees of off-balance sheet credit, interest rate and liquidity risks. These transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of credit. For the six months ended December 31, 2015 and the year ended June 30, 2015, we engaged in no off-balance sheet transactions likely to have a material effect on the financial condition, results of operations or cash flows.

Contractual Obligations

At December 31, 2015, our scheduled maturities of contractual obligations were as follows:



	Within 1 Year		After 1 Year Through 3 Years		After 3 Years Through 5 Years		Beyond 5 Years		Total Balance
	(In thousands)

Certificates of deposit	$	75,533	$	46,523	$	24,068	$	178	$	146,302
FHLB advances	—		—		60,000		10,000		70,000
Operating leases	143		286		180		1,343		1,952
Borrower taxes and insurance	1,027		—		—		—		1,027
Deferred compensation	36		188		35		101		360
Total contractual obligations	$	76,739	$	46,997	$	84,283	$	11,622	$	219,641

Commitments and Off-Balance Sheet Arrangements

The following table summarizes our commitments and contingent liabilities with off-balance sheet risks as of December 31, 2015:



	Amount of Commitment Expiration - Per Period
	Total Amounts Committed		Due in One Year
	(In thousands)
Commitments to originate loans:
Fixed-rate	$	1,053	$	1,053
Adjustable-rate	50		50
Unfunded commitments under lines of credit or existing loans	68,319		68,319
Standby letters of credit	202		202
Total	$	69,624	$	69,624

Liquidity Management

Liquidity is the ability to meet current and future financial obligations of a short-term and long-term nature. Our primary sources of funds consist of deposit inflows, loan repayments, maturities and sales of securities and borrowings from the FHLB. While maturities and scheduled amortization of loans and securities are usually predictable sources of funds, deposit flows, calls of investment securities and borrowed funds, and prepayments on loans and investment securities are greatly influenced by general interest rates, economic conditions and competition, which can cause those sources of funds to fluctuate.

Management regularly adjusts our investments in liquid assets based upon an assessment of the expected loan demand, expected deposit flows, the yields available on interest-earning deposits and securities, and the objectives of our interest-rate risk and investment policies.

Our most liquid assets are cash and cash equivalents followed by available for sale securities. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. At December 31, 2015, cash and cash equivalents totaled $23.7 million. Securities classified as available-for-sale, whose aggregate market value exceeds cost, provide additional sources of liquidity and had a market value of $305.1 million at December 31, 2015. In addition, at December 31, 2015, we had FHLB stock of $4.2 million and have pledged collateral to support borrowings from the FHLB of $75.2 million. We have also established a borrowing arrangement with the Federal Reserve Bank of San Francisco; however, no collateral has been pledged as of December 31, 2015.

At December 31, 2015, we had $1.1 million in loan commitments outstanding and an additional $68.5 million in undisbursed loans and standby letters of credit, including $37.1 million in undisbursed construction loan commitments.

Certificates of deposit due within one year of December 31, 2015 totaled $75.5 million, or 51.6% of certificates of deposit. The large percentage of certificates of deposit that mature within one year reflects customers' hesitancy to invest their funds for longer periods at historically low interest rates. Management believes, based on past experience, that a significant portion of our certificates of deposit will be renewed or rolled into money market accounts. If these maturing deposits are not renewed, however, we will be required to seek other sources of funds, including other certificates of deposit and borrowings. We have the ability to attract and retain deposits by adjusting the interest rates offered. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on certificates of deposit. In addition, we believe that our branch network, which is presently comprised of nine full-service retail banking offices located throughout our primary market area, and the general cash flows from our existing lending and investment activities, will afford us sufficient long-term liquidity. For additional information, see the Consolidated Statements of Cash Flows in Item 1 of this Form 10-Q.

Capital Resources

First Federal is subject to minimum capital requirements imposed by the FDIC. Capital adequacy requirements are quantitative measures established by regulation that require First Federal to maintain minimum amounts and ratios of capital.

At December 31, 2015, First Federal exceeded all regulatory capital requirements. Consistent with our goals to operate a sound and profitable organization, our policy is for First Federal to maintain a “well-capitalized” status under the capital categories of the FDIC. Based on capital levels at December 31, 2015, First Federal was considered to be well-capitalized.

The following table shows the capital ratios of First Federal at December 31, 2015.



	Actual					Minimum Capital Requirements				Minimum Required to Be Well-Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio		Amount		Ratio
					(Dollars in thousands)
Tier 1 Capital to total adjusted assets⁽¹⁾	$	130,596	14.2	%		$	36,782	4.0	%	$	45,977	5.0	%
Common Equity Tier 1 Capital to risk-weighted assets⁽²⁾	130,596		22.6			25,970		4.5		37,512		6.5
Tier 1 Capital to risk-weighted assets⁽²⁾	130,596		22.6			34,627		6.0		46,169		8.0
Total Capital to risk-weighted assets⁽²⁾	137,788		23.9			46,169		8.0		57,712		10.0

______________

(1) Based on adjusted average assets of $919.5 million.

(2) Based on risk-weighted assets of $577.1 million.

Bank holding companies are subject to capital adequacy requirements of the Federal Reserve under the Bank Holding Company Act of 1956, as amended, and the regulations of the Federal Reserve. For a bank holding company with less than $1.0 billion in assets, the capital guidelines apply on a bank only basis and the Federal Reserve expects the holding company's subsidiary banks to be well-capitalized under the prompt corrective action regulations.

Effect of Inflation and Changing Prices. The consolidated financial statements and related financial data presented in this report have been prepared according to generally accepted accounting principles in the United States, which require the measurement of financial and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs and the effect that general inflation may have on both short-term and long-term interest rates. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution's performance than do general levels of inflation. Although inflation expectations do affect

interest rates, interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

There has not been any material change in the market risk disclosures contained in First Northwest Bancorp’s Annual Report on Form 10-K for the fiscal year ended June 30, 2015.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures.

An evaluation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) was carried out under the supervision and with the participation of the Company's Chief Executive Officer (Principal Executive Officer), Chief Financial Officer (Principal Financial and Accounting Officer), and other members of the Company's management team as of the end of the period covered by this quarterly report. The Company's Chief Executive Officer and Chief Financial Officer concluded that as of December 31, 2015, the Company's disclosure controls and procedures were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is (i) accumulated and communicated to the Company's management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission's rules and forms.

(b) Changes in Internal Controls.

There have been no changes in the Company's internal control over financial reporting (as defined in 13a-15(f) of the Exchange Act) that occurred during the quarter ended December 31, 2015, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. The Company also continued to implement suggestions from its internal auditor and independent auditors to strengthen existing controls.

The Company intends to continually review and evaluate the design and effectiveness of its disclosure controls and procedures and to improve its controls and procedures over time and to correct any deficiencies that it may discover in the future. The goal is to ensure that senior management has timely access to all material financial and non-financial information concerning the Company's business. While the Company believes the present design of its disclosure controls and procedures is effective to achieve its goal, future events affecting its business may cause the Company to modify its disclosure controls and procedures. The Company does not expect that its disclosure controls and procedures and internal control over financial reporting will prevent every error or instance of fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns in controls or procedures can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any control procedure is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

For information regarding the Company’s risk factors, see “Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2015. As of December 31, 2015, the risk factors of the Company have not changed materially from those disclosed in the Form 10-K.

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

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits



3.1	Articles of Incorporation, as amended (1)
3.2	Bylaws (1)
4.1	Form of Stock Certificate of the Company (1)
10.1	Form of Employee Severance Compensation Plan (1)
10.2	Form of Employment Agreement with Laurence J. Hueth, Regina M. Wood, Christopher A. Donohue, Kelly A. Liske and Jeffrey S. Davis (2)
10.3	First Federal Fiscal Year 2016 Cash Incentive Plan (3)
10.4	Form of Participation Agreement under the First Federal Fiscal Year 2016 Cash Incentive Plan (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 pursuant to Section 906 of the Sarbanes-Oxley Act
101	The following materials from the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 2015, formatted in Extensible Business Reporting Language (XBRL): (1) Consolidated Balance Sheets; (2) Consolidated Statements of Income; (3) Consolidated Statements of Comprehensive Income ; (4) Consolidated Statements of Cash Flows; and (5) Selected Notes to Consolidated Financial Statements

___________________


(1)	Filed as an exhibit to the Company’s Registration Statement on Form S-1, as amended (File No. 333-185101) and incorporated herein by reference.


(2)	Filed as an exhibit to the Company's Report on Form 8-K filed August 3, 2015 (File No. 001-36741) and incorporated herein by reference.


(3)	Filed as an exhibit to the Company's Report on Form 8-K filed August 27, 2015 (File No. 001-36741) and incorporated herein by reference.

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 NORTHWEST BANCORP

Date: February 16, 2016	/s/ Laurence J. Hueth

	Laurence J. Hueth
	President, Chief Executive Officer and Director
	(Principal Executive Officer)


Date: February 16, 2016	/s/ Regina M. Wood

	Regina M. Wood
	Executive Vice President and Chief Financial Officer
	(Principal Financial and Accounting Officer)

EXHIBIT INDEX



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 pursuant to Section 906 of the Sarbanes-Oxley Act
101	The following materials from the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 2015, formatted in Extensible Business Reporting Language (XBRL): (1) Consolidated Balance Sheets; (2) Consolidated Statements of Income; (3) Consolidated Statements of Comprehensive Income ; (4) Consolidated Statements of Cash Flows; and (5) Selected Notes to Consolidated Financial Statements

First Northwest Bancorp - 10-Q quarterly report FY2016 Q2

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