First Northwest Bancorp - 10-Q quarterly report FY2017 Q3

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 March 31, 2017



¨	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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.



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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ý

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 May 2, 2017, there were 12,077,846 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	37

Item 3 - Quantitative and Qualitative Disclosures About Market Risk	56

Item 4 - Controls and Procedures	56

PART II - OTHER INFORMATION

Item 1 - Legal Proceedings	57

Item 1A - Risk Factors	57

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds	57

Item 3 - Defaults Upon Senior Securities	57

Item 4 - Mine Safety Disclosures	57

Item 5 - Other Information	57

Item 6 - Exhibits	57

SIGNATURES	59

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	March 31, 2017			June 30, 2016

Cash and due from banks	$	11,791		$	12,841
Interest-bearing deposits in banks	11,397			9,809
Investment securities available for sale, at fair value	242,732			267,857
Investment securities held to maturity, at amortized cost	52,795			56,038
Loans held for sale	638			917
Loans receivable (net of allowance for loan losses of $8,328 and $7,239)	706,231			619,844
Federal Home Loan Bank (FHLB) stock, at cost	4,741			4,403
Accrued interest receivable	3,080			2,802
Premises and equipment, net	13,525			13,519
Mortgage servicing rights, net	1,046			998
Bank-owned life insurance, net	28,253			18,282
Real estate owned and repossessed assets	6			81
Prepaid expenses and other assets	5,067			2,711

Total assets	$	1,081,302		$	1,010,102


LIABILITIES AND SHAREHOLDERS' EQUITY

Deposits	$	807,715		$	723,287
Borrowings	86,553			80,672
Accrued interest payable	195			189
Accrued expenses and other liabilities	6,358			15,173
Advances from borrowers for taxes and insurance	1,944			1,040

Total liabilities	902,765			820,361

Shareholders' 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 12,077,846 shares at March 31, 2017, and 12,676,660 shares at June 30, 2016	121			127
Additional paid-in capital	113,517			122,595
Retained earnings	77,562			77,301
Accumulated other comprehensive (loss) income, net of tax	(980		)	1,895
Unearned employee stock ownership plan (ESOP) shares	(11,683		)	(12,177		)

Total shareholders' equity	178,537			189,741

Total liabilities and shareholders' equity	$	1,081,302		$	1,010,102

See selected notes to the consolidated financial statements.

FIRST NORTHWEST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

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



	Three Months Ended					Nine Months Ended
	March 31,					March 31,
	2017			2016		2017		2016
INTEREST INCOME
Interest and fees on loans receivable	$	7,479		$	6,047	$	21,391	$	17,315
Interest on mortgage-backed securities	1,298			1,356		3,494		3,909
Interest on investment securities	580			714		1,846		2,279
Interest on deposits and other	21			13		45		47
FHLB dividends	30			31		92		76

Total interest income	9,408			8,161		26,868		23,626
INTEREST EXPENSE
Deposits	718			558		2,061		1,569
Borrowings	585			597		1,683		1,994

Total interest expense	1,303			1,155		3,744		3,563

Net interest income	8,105			7,006		23,124		20,063
PROVISION FOR LOAN LOSSES	215			—		975		—

Net interest income after provision for loan losses	7,890			7,006		22,149		20,063
NONINTEREST INCOME
Loan and deposit service fees	821			844		2,623		2,655
Mortgage servicing fees, net of amortization	69			72		188		187
Net gain on sale of loans	284			20		713		88
Net gain on sale of investment securities	—			—		—		856
Increase in cash surrender value of bank-owned life insurance	178			37		541		59
Income from death benefit on bank-owned life insurance, net	768			—		768		—
Other income	81			78		141		347

Total noninterest income	2,201			1,051		4,974		4,192

NONINTEREST EXPENSE
Compensation and benefits	4,530			3,645		12,492		10,626
Real estate owned and repossessed assets (income) expenses, net	(50		)	15		2		(362		)
Data processing	597			686		2,048		1,994
Occupancy and equipment	985			899		2,884		2,620
Supplies, postage, and telephone	198			161		518		500
Regulatory assessments and state taxes	133			100		367		377
Advertising	179			199		468		640
Professional fees	371			421		1,052		1,320
FDIC insurance premium	54			108		180		331
FHLB prepayment penalty	—			—		—		779
Other	501			628		1,827		1,635

Total noninterest expense	7,498			6,862		21,838		20,460

INCOME BEFORE PROVISION FOR INCOME TAXES	2,593			1,195		5,285		3,795

PROVISION FOR INCOME TAXES	429			298		1,282		957

NET INCOME	$	2,164		$	897	$	4,003	$	2,838

Basic earnings per share	$	0.20		$	0.07	$	0.36	$	0.24

Diluted earnings per share	$	0.20		$	0.07	$	0.35	$	0.24

See selected notes to the consolidated financial statements.

FIRST NORTHWEST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands) (Unaudited)



	Three Months Ended				Nine Months Ended
	March 31,				March 31,
	2017		2016		2017			2016

NET INCOME	$	2,164	$	897	$	4,003		$	2,838

Other comprehensive income (loss), net of tax
Unrealized gain on securities:
Unrealized holding gain (loss), net of tax provision (benefit) of $133, $1,306, $(1,476), and $414, respectively	258		2,536		(2,875		)	800
Reclassification adjustment for net gains on sales of securities realized in income, net of taxes of $0, $0, $0, and $(291), respectively	—		—		—			(565		)

Other comprehensive income (loss), net of tax	258		2,536		(2,875		)	235

COMPREHENSIVE INCOME	$	2,422	$	3,433	$	1,128		$	3,073

See selected notes to the consolidated financial statements.

FIRST NORTHWEST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

For the Nine Months Ended March 31, 2017 and 2016

(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 Shareholders' Equity
	Shares		Amount

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

Net income									2,838									2,838
Common stock repurchased	(137,400	)	(1		)	(1,373		)	(358		)							(1,732		)
Other comprehensive income, net of tax															235			235
Purchase of ESOP shares												(1,253		)				(1,253		)
ESOP shares committed to be released						11						483						494

BALANCE, March 31, 2016	12,962,960		$	130		$	125,447		$	77,053		$	(12,352	)	$	985		$	191,263



BALANCE, June 30, 2016	12,676,660		$	127		$	122,595		$	77,301		$	(12,177	)	$	1,895		$	189,741

Net income									4,003									4,003
Common stock repurchased	(988,814	)	(10		)	(9,878		)	(3,742		)							(13,630		)
Restricted stock awards net of forfeitures	390,000		4			(4		)										—
Other comprehensive loss, net of tax															(2,875		)	(2,875		)
Share-based compensation						727												727
ESOP shares committed to be released						77						494						571

BALANCE, March 31, 2017	12,077,846		$	121		$	113,517		$	77,562		$	(11,683	)	$	(980	)	$	178,537

See selected notes to the consolidated financial statements.



FIRST NORTHWEST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited)
	Nine Months Ended
	March 31,
	2017			2016
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	4,003		$	2,838
Adjustments to reconcile net income to net cash from operating activities:
Depreciation	949			819
Amortization and accretion of premiums and discounts on investments, net	985			1,192
Amortization (accretion) of deferred loan fees, net	148			(64		)
Amortization of mortgage servicing rights, net	163			207
Additions to mortgage servicing rights, net	(211		)	(24		)
Provision for loan losses	975			—
Gain on sale of real estate owned and repossessed assets, net	(51		)	(503		)
Deferred federal income taxes	1,027			(380		)
Allocation of ESOP shares	571			494
Share-based compensation	727			—
Gain on sale of loans, net	(713		)	(88		)
Gain on sale of securities available for sale, net	—			(856		)
Impairment of real estate owned and repossessed assets	32			61
Increase in cash surrender value of life insurance, net	(541		)	(59		)
Income from death benefit on bank-owned life insurance, net	(768		)	—
Origination of loans held for sale	(22,019		)	(2,578		)
Proceeds from loans held for sale	23,011			2,776
Change in assets and liabilities:
Increase in accrued interest receivable	(278		)	(312		)
Increase in prepaid expenses and other assets	(565		)	(380		)
Increase (decrease) in accrued interest payable	6			(56		)
Decrease in accrued expenses and other liabilities	(8,815		)	(114		)

Net cash from operating activities	(1,364		)	2,973

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available for sale	(35,769		)	(103,945		)
Proceeds from maturities, calls, and principal repayments of securities available for sale	55,769			28,619
Proceeds from sales of securities available for sale	—			74,363
Proceeds from maturities, calls, and principal repayments of securities held to maturity	3,028			4,117
Proceeds from FHLB stock redemption	(338		)	236
Purchase of bank-owned life insurance	(10,000		)	—
Proceeds from sale of real estate owned and repossessed assets	191			3,287
Loan originations, net of repayments, charge-offs, and recoveries	(87,607		)	(87,506		)
Purchase of premises and equipment	(955		)	(1,884		)

Net cash from investing activities	(75,681		)	(82,713		)

See selected notes to the consolidated financial statements.



FIRST NORTHWEST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited)
	Nine Months Ended
	March 31,
	2017			2016
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits	$	84,428		$	62,576
Proceeds from FHLB advances	215,668			65,332
Repayment of FHLB advances	(209,787		)	(70,496		)
Repayment of notes payable	—			(109		)
Net increase in advances from borrowers for taxes and insurance	904			854
Purchase of ESOP shares	—			(1,253		)
Common stock repurchased	(13,630		)	(1,732		)

Net cash from financing activities	77,583			55,172

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	538			(24,568		)

CASH AND CASH EQUIVALENTS, beginning of period	22,650			45,030

CASH AND CASH EQUIVALENTS, end of period	$	23,188		$	20,462

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest on deposits and borrowings	$	3,738		$	3,619

Income taxes	$	2,186		$	1,592

NONCASH INVESTING ACTIVITIES
Unrealized (loss) gain on securities available for sale	$	(4,351	)	$	361

Loans transferred to real estate owned and repossessed assets, net of deferred loan fees and allowance for loan losses	$	97		$	1,076

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.

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, with funds borrowed from the Company, 8% of the common stock issued in the Conversion for a total of 1,048,029 shares.

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

The Bank provides commercial and consumer banking services to individuals and businesses in our primary market area and have expanded our lending activities to other regions of western Washington State in order to diversify our loan portfolio and increase our net interest margin. 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, 2016. 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 nine months ended March 31, 2017, are not necessarily indicative of the results that may be expected for the year ended June 30, 2017. 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.

The Company completed its stock offering and became a public company on January 29, 2015. 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 was dissolved on February 12, 2016, at which time the building owned by NOPS and rented in whole to First Federal became the property of the Bank. Craft3 was 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 into a membership 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.

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Recently issued accounting pronouncements - In August 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2015-14, Revenue from Contracts with Customers (Topic 606), which defers the effective date of ASU No. 2014-09 one year. ASU No. 2014-09 created Topic 606 and supersedes Topic 605, Revenue Recognition. The core principle of Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In general, the new guidance requires companies to use more judgment and make more estimates than under current guidance, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU No. 2015-14 is effective for public entities for interim and annual periods beginning after December 15, 2017; early adoption is permitted for interim and annual periods beginning after December 15, 2016. For financial reporting purposes, the standard allows for either full retrospective adoption, meaning the standard is applied to all of the periods presented, or modified retrospective adoption, meaning the standard is applied only to the most current period presented in the financial statements with the cumulative effect of initially applying the standard recognized at the date of initial application. A significant amount of the Company’s revenues are derived from net interest income on financial assets and liabilities, which are excluded from the scope of the amended guidance. With respect to noninterest income, the Company is in its preliminary stages of identifying and evaluating the revenue streams and underlying revenue contracts within the scope of the guidance. The Company is expecting to begin developing processes and procedures during 2017 to ensure it is fully compliant with these amendments. To date, the Company has not yet identified any significant changes in the timing of revenue recognition when considering the amended accounting guidance; however, the Company’s implementation efforts are ongoing and such assessments may change prior to the January 1, 2018 implementation date.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall: 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. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The adoption of ASU 2016-01 will not have a material impact on the Company's consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases. ASU 2016-02 is intended to increase transparency and comparability among organizations by requiring the recognition of lease assets and lease liabilities on the balance sheet and disclosure of key information about leasing arrangements. The principal change required by this ASU relates to lessee accounting, and is that for operating leases, a lessee is required to (1) recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in the statement of financial position, (2) recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis, and (3) classify all cash payments within operating activities in the statement of cash flows. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. ASU 2016-02 also changes disclosure requirements related to leasing activities, and requires certain qualitative disclosures along with specific quantitative disclosures. The amendments in ASU 2016-02 are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. Early application of the amendments in ASU 2016-02 is permitted. The Company expects to compile an inventory of all leased assets to determine the impact of ASU 2016-02 on its financial condition and results of operations. Once adopted, we expect to report higher assets and liabilities on our Consolidated Balance Sheets as a result of including right-of-use assets and lease liabilities related to certain banking offices and certain equipment under noncancelable operating lease agreements, which currently are not reflected in our Consolidated Balance Sheets. We do not expect the guidance to have a material impact on the Consolidated Statements of Income or Consolidated Statements of Changes in Shareholders' Equity.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. This ASU includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements. ASU 2016-09 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2016. The adoption of this ASU did not have a material impact on the Company's consolidated financial statements.

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Loss, which updates the guidance on recognition and measurement of credit losses for financial assets. The new requirements, known as the current expected credit loss model (CECL) will require entities to adopt an impairment model based on expected losses rather than incurred losses. ASU No. 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Upon adoption, the Company expects a change in the processes and procedures to calculate the allowance for loan losses, including changes in assumptions and estimates to consider expected credit losses over the life of the loan versus the current accounting practice that utilizes the incurred loss model. In addition, the current accounting policy and procedures for other-than-temporary impairment on investment securities available for sale will be replaced with an allowance approach. At this time, we anticipate the ALLL will increase as a result of the implementation of this ASU. The Company is reviewing the requirements of ASU 2016-13 and will begin developing and implementing processes and procedures to ensure it is fully compliant with the amendments at the adoption date.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The ASU provides specific guidance on eight classification issues in order to achieve more consistent reporting. The amendments in this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted. The adoption of ASU No. 2016-15 will not have a material impact on the Company's consolidated financial statements.

In January 2017, the FASB issued ASU 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments-Equity Method and Joint Ventures (Topic 323). This ASU amends the Codification for SEC staff announcements made at recent Emerging Issues Task Force (EITF) meetings. The SEC staff view is that a registrant should evaluate ASU updates that have not yet been adopted to determine the appropriate financial disclosures about the potential material effects of the ASU on the financial statements when adopted. If a registrant does not know or cannot reasonably estimate the impact of an ASU, then in addition to making a statement to that effect, the registrant should consider additional qualitative financial statement disclosures to assist the reader in assessing the significance of the impact. The staff expects the additional qualitative disclosures to include a description of the effect of the accounting policies expected to be applied compared to current accounting policies. Also, the registrant should describe the status of its process to implement the new standards and the significant implementation matters yet to be addressed. The amendments specifically addressed recent FASB guidance as well as any amendments issued prior to adoption, on revenue (ASU 2014-09), leases (ASU 2016-02) and credit losses on financial instruments (ASU 2016-13). The Company has adopted the amendments in this ASU and appropriate disclosures have been included in this Note for each recently issued accounting standard.

In March 2017, the FASB issued ASU 2017-08, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. The ASU shortens the amortization period for certain callable debt securities held at a premium using the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The amendments in this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019. Early adoption is permitted. The adoption of ASU No. 2017-08 will not 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 shareholders' 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 March 31, 2017, are summarized as follows:



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(In thousands)
Available for Sale
Municipal bonds	$	21,558	$	388	$	(5	)	$	21,941
U.S. Treasury and government agency issued bonds (Agency bonds)	5,050		—		(147		)	4,903
U.S. government agency issued asset-backed securities (ABS agency)	8,205		—		(401		)	7,804
Corporate issued asset-backed securities (ABS corporate)	22,714		211		—			22,925
U.S. Small Business Administration securities (SBA)	8,460		—		(60		)	8,400
Mortgage-backed securities:
U.S. government agency issued mortgage-backed securities (MBS agency)	149,021		112		(1,439		)	147,694
Corporate issued mortgage-backed securities (MBS corporate)	29,252		54		(241		)	29,065

Total securities available for sale	$	244,260	$	765	$	(2,293	)	$	242,732

Held to Maturity
Municipal bonds	$	14,196	$	303	$	(2	)	$	14,497
SBA	456		1		—			457
Mortgage-backed securities:
MBS agency	38,143		543		(179		)	38,507

Total securities held to maturity	$	52,795	$	847	$	(181	)	$	53,461

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, 2016, are summarized as follows:



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(In thousands)
Available for Sale
Municipal bonds	$	21,609	$	1,570	$	—		$	23,179
Agency bonds	15,036		15		(3		)	15,048
ABS agency	8,751		—		(816		)	7,935
ABS corporate	29,690		16		(325		)	29,381
SBA	9,335		166		—			9,501
Mortgage-backed securities:
MBS agency	139,449		2,228		(28		)	141,649
MBS corporate	41,164		100		(100		)	41,164

Total securities available for sale	$	265,034	$	4,095	$	(1,272	)	$	267,857

Held to Maturity
Municipal bonds	$	14,425	$	633	$	—		$	15,058
SBA	497		1		—			498
Mortgage-backed securities:
MBS agency	41,116		2,257		(1		)	43,372

Total securities held to maturity	$	56,038	$	2,891	$	(1	)	$	58,928

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 March 31, 2017:



	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	$	(5	)	$	114	$	—		$	—	$	(5	)	$	114
Agency bonds	(147		)	4,904		—			—		(147		)	4,904
ABS agency	—			—		(401		)	7,803		(401		)	7,803
SBA	(60		)	8,400		—			—		(60		)	8,400
Mortgage-backed securities:
MBS agency	(1,140		)	115,329		(299		)	17,607		(1,439		)	132,936
MBS corporate	(30		)	2,767		(211		)	11,170		(241		)	13,937

Total available for sale	$	(1,382	)	$	131,514	$	(911	)	$	36,580	$	(2,293	)	$	168,094

Held to Maturity
Municipal bonds	$	(2	)	$	972	$	—		$	—	$	(2	)	$	972
Mortgage-backed securities:
MBS agency	$	(145	)	$	17,321	$	(34	)	$	2,003	$	(179	)	$	19,324

Total held to maturity	$	(147	)	$	18,293	$	(34	)	$	2,003	$	(181	)	$	20,296

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
Agency bonds	$	(3	)	$	2,497	$	—		$	—	$	(3	)	$	2,497
ABS agency	—			—		(816		)	7,935		(816		)	7,935
ABS corporate	(325		)	21,521		—			—		(325		)	21,521
Mortgage-backed securities:
MBS agency	—			—		(28		)	6,771		(28		)	6,771
MBS corporate	(100		)	26,120		—			—		(100		)	26,120

Total available for sale	$	(428	)	$	50,138	$	(844	)	$	14,706	$	(1,272	)	$	64,844

Held to Maturity
Mortgage-backed securities:
MBS agency	$	—		$	652	$	(1	)	$	89	$	(1	)	$	741

Total held to maturity	$	—		$	652	$	(1	)	$	89	$	(1	)	$	741

The Company may hold certain investment securities in an unrealized loss position that are not considered other than temporarily impaired ("OTTI"). At March 31, 2017, there were 44 investment securities with $2.5 million of unrealized losses and a fair value of approximately $188.4 million. At June 30, 2016, there were 15 investment securities with $1.3 million of unrealized losses and a fair value of approximately $65.6 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 securities in an unrealized loss position 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 nine months ended March 31, 2017 or 2016.

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.



	March 31, 2017
	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	—		—		2,849		2,879
Due after five through ten years	17,090		16,932		1,506		1,509
Due after ten years	161,183		159,827		33,788		34,119

Total mortgage-backed securities	178,273		176,759		38,143		38,507

All other investment securities:
Due within one year	—		—		—		—
Due after one through five years	6,892		6,847		—		—
Due after five through ten years	34,815		35,107		9,700		9,862
Due after ten years	24,280		24,019		4,952		5,092

Total all other investment securities	65,987		65,973		14,652		14,954

Total investment securities	$	244,260	$	242,732	$	52,795	$	53,461



	June 30, 2016
	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	—		—		2,263		2,324
Due after five through ten years	18,089		18,668		3,701		3,768
Due after ten years	162,524		164,145		35,152		37,280

Total mortgage-backed securities	180,613		182,813		41,116		43,372

All other investment securities:
Due within one year	7,000		6,921		—		—
Due after one through five years	11,780		11,950		—		—
Due after five through ten years	14,440		14,668		9,711		10,094
Due after ten years	51,201		51,505		5,211		5,462

Total all other investment securities	84,421		85,044		14,922		15,556

Total investment securities	$	265,034	$	267,857	$	56,038	$	58,928

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 March 31,				Nine Months Ended March 31,
	2017		2016		2017		2016
	(In thousands)
Proceeds from sales	$	—	$	—	$	—	$	74,363
Gross realized gains	—		—		—		1,003
Gross realized losses	—		—		—		(147		)

Note 3 - Loans Receivable

Loans receivable consisted of the following at the dates indicated:



	March 31, 2017			June 30, 2016
	(In thousands)
Real Estate:
One-to-four family	$	323,166		$	308,471
Multi-family	56,932			46,125
Commercial real estate	198,262			161,182
Construction and land	66,448			50,351
Total real estate loans	644,808			566,129

Consumer:
Home equity	34,193			33,909
Other consumer	17,603			9,023
Total consumer loans	51,796			42,932

Commercial business loans	16,851			16,924

Total loans	713,455			625,985

Less:
Net deferred loan fees	1,114			1,182
Premium on purchased loans, net	(2,218		)	(2,280		)
Allowance for loan losses	8,328			7,239

Total loans receivable, net	$	706,231		$	619,844

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 March 31, 2017
	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	$	2,892	$	370	$	1,488	$	585	$	794		$	361		$	652	$	918		$	8,060
Provision for loan losses	147		128		184		104		(58		)	106			495		(891		)	215
Charge-offs	—		—		—		—		(79		)	(33		)	—		—			(112		)
Recoveries	25		—		—		—		125			14			1		—			165
Ending balance	$	3,064	$	498	$	1,672	$	689	$	782		$	448		$	1,148	$	27		$	8,328



	At or For the Nine Months Ended March 31, 2017
	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	$	2,992		$	341	$	1,268	$	599	$	833		$	310		$	335	$	561		$	7,239
Provision for loan losses	(39		)	157		404		89		(116		)	203			811		(534		)	975
Charge-offs	—			—		—		—		(81		)	(116		)	—		—			(197		)
Recoveries	111			—		—		1		146			51			2		—			311
Ending balance	$	3,064		$	498	$	1,672	$	689	$	782		$	448		$	1,148	$	27		$	8,328



	At March 31, 2017
	One-to- four family		Multi-family		Commercial real estate		Construction and land		Home equity		Other consumer		Commercial business		Unallocated		Total
	(In thousands)
Total ALLL	$	3,064	$	498	$	1,672	$	689	$	782	$	448	$	1,148	$	27	$	8,328
General reserve	3,006		497		1,653		688		772		425		913		27		7,981
Specific reserve	58		1		19		1		10		23		235		—		347

Total loans	$	323,166	$	56,932	$	198,262	$	66,448	$	34,193	$	17,603	$	16,851	$	—	$	713,455
General reserves ⁽¹⁾	317,783		56,813		196,664		66,439		33,471		17,580		16,514		—		705,264
Specific reserves ⁽²⁾	5,383		119		1,598		9		722		23		337		—		8,191


⁽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 March 31, 2016
	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	$	2,863		$	287	$	1,006	$	390	$	1,030		$	287		$	139	$	972	$	6,974
Provision for loan losses	(344		)	27		53		64		(138		)	(4		)	130		212		—
Charge-offs	—			—		—		—		1			(28		)	—		—		(27		)
Recoveries	12			—		—		—		10			19			—		—		41
Ending balance	$	2,531		$	314	$	1,059	$	454	$	903		$	274		$	269	$	1,184	$	6,988



	At or For the Nine Months Ended March 31, 2016
	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	$	3,143		$	251	$	998	$	336	$	1,052		$	321		$	251		$	759	$	7,111
Provision for loan losses	(572		)	63		61		117		(134		)	56			(16		)	425		—
Charge-offs	(60		)	—		—		—		(68		)	(150		)	(7		)	—		(285		)
Recoveries	20			—		—		1		53			47			41			—		162
Ending balance	$	2,531		$	314	$	1,059	$	454	$	903		$	274		$	269		$	1,184	$	6,988



	At June 30, 2016
	One-to- four family		Multi-family		Commercial real estate		Construction and land		Home equity		Other consumer		Commercial business		Unallocated		Total
	(In thousands)
Total ALLL	$	2,992	$	341	$	1,268	$	599	$	833	$	310	$	335	$	561	$	7,239
General reserve	2,932		340		1,257		588		814		247		139		561		6,878
Specific reserve	60		1		11		11		19		63		196		—		361

Total loans	$	308,471	$	46,125	$	161,182	$	50,351	$	33,909	$	9,023	$	16,924	$	—	$	625,985
General reserves ⁽¹⁾	302,370		46,003		159,525		50,260		33,279		8,912		16,564		—		616,913
Specific reserves ⁽²⁾	6,101		122		1,657		91		630		111		360		—		9,072


⁽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:



	March 31, 2017						June 30, 2016
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
	(In thousands)
With no allowance recorded:
One-to-four family	$	1,322	$	1,548	$	—	$	2,386	$	2,728	$	—
Multi-family	—		—		—		—		—		—
Commercial real estate	310		411		—		475		558		—
Construction and land	—		—		—		—		—		—
Home equity	404		518		—		138		203		—
Other consumer	—		51		—		—		47		—
Commercial business	—		—		—		—		—		—
Total	2,036		2,528		—		2,999		3,536		—

With an allowance recorded:
One-to-four family	4,061		4,354		58		3,715		3,910		60
Multi-family	119		119		1		122		122		1
Commercial real estate	1,288		1,291		19		1,182		1,187		11
Construction and land	9		9		1		91		115		11
Home equity	318		386		10		492		527		19
Other consumer	23		52		23		111		137		63
Commercial business	337		337		235		360		360		196
Total	6,155		6,548		347		6,073		6,358		361

Total impaired loans:
One-to-four family	5,383		5,902		58		6,101		6,638		60
Multi-family	119		119		1		122		122		1
Commercial real estate	1,598		1,702		19		1,657		1,745		11
Construction and land	9		9		1		91		115		11
Home equity	722		904		10		630		730		19
Other consumer	23		103		23		111		184		63
Commercial business	337		337		235		360		360		196
Total	$	8,191	$	9,076	$	347	$	9,072	$	9,894	$	361

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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



	Three Months Ended				Nine Months Ended
	March 31, 2017				March 31, 2017
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(In thousands)
With no allowance recorded:
One-to-four family	$	1,512	$	27	$	1,859	$	43
Multi-family	—		—		—		—
Commercial real estate	310		1		410		7
Construction and land	—		—		—		—
Home equity	301		6		180		7
Other consumer	—		1		—		3
Commercial business	—		—		—		—
Total	2,123		35		2,449		60

With an allowance recorded:
One-to-four family	4,022		75		3,882		179
Multi-family	119		1		120		4
Commercial real estate	1,293		17		1,212		50
Construction and land	9		—		44		—
Home equity	376		7		365		18
Other consumer	30		—		62		1
Commercial business	338		4		349		14
Total	6,187		104		6,034		266

Total impaired loans:
One-to-four family	5,534		102		5,741		222
Multi-family	119		1		120		4
Commercial real estate	1,603		18		1,622		57
Construction and land	9		—		44		—
Home equity	677		13		545		25
Other consumer	30		1		62		4
Commercial business	338		4		349		14
Total	$	8,310	$	139	$	8,483	$	326

Interest income recognized on a cash basis on impaired loans for the three and nine months ended March 31, 2017, was $88,000 and $275,000, respectively.

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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



	Three Months Ended				Nine Months Ended
	March 31, 2016				March 31, 2016
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(In thousands)
With no allowance recorded:
One-to-four family	$	1,740	$	37	$	2,307	$	60
Multi-family	247		—		343		—
Commercial real estate	346		6		350		14
Construction and land	15		1		15		2
Home equity	160		3		207		10
Other consumer	—		1		4		2
Commercial business	52		—		26		—
Total	2,560		48		3,252		88

With an allowance recorded:
One-to-four family	4,307		96		3,779		175
Multi-family	124		2		180		4
Commercial real estate	1,062		12		1,020		41
Construction and land	160		9		154		9
Home equity	626		12		503		23
Other consumer	126		3		151		5
Commercial business	329		5		366		15
Total	6,734		139		6,153		272

Total impaired loans:
One-to-four family	6,047		133		6,086		235
Multi-family	371		2		523		4
Commercial real estate	1,408		18		1,370		55
Construction and land	175		10		169		11
Home equity	786		15		710		33
Other consumer	126		4		155		7
Commercial business	381		5		392		15
Total	$	9,294	$	187	$	9,405	$	360

Interest income recognized on a cash basis on impaired loans for the three and nine months ended March 31, 2016, was $105,000 and $277,000, 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:



	March 31, 2017		June 30, 2016
	(In thousands)
One-to-four family	$	1,484	$	2,413
Commercial real estate	443		474
Construction and land	9		91
Home equity	389		167
Other consumer	24		112

Total nonaccrual loans	$	2,349	$	3,257

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 March 31, 2017 and June 30, 2016.

The following table presents past due loans, net of partial loan charge-offs, by class, as of March 31, 2017:



	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	$	712	$	—	$	290	$	1,002	$	322,164	$	323,166
Multi-family	—		—		—		—		56,932		56,932
Commercial real estate	—		—		—		—		198,262		198,262
Construction and land	72		—		—		72		66,376		66,448
Total real estate loans	784		—		290		1,074		643,734		644,808

Consumer:
Home equity	—		297		—		297		33,896		34,193
Other consumer	136		30		—		166		17,437		17,603
Total consumer loans	136		327		—		463		51,333		51,796

Commercial business loans	—		—		—		—		16,851		16,851

Total loans	$	920	$	327	$	290	$	1,537	$	711,918	$	713,455

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, 2016:



	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	$	662	$	88	$	466	$	1,216	$	307,255	$	308,471
Multi-family	—		—		—		—		46,125		46,125
Commercial real estate	—		—		—		—		161,182		161,182
Construction and land	—		—		46		46		50,305		50,351
Total real estate loans	662		88		512		1,262		564,867		566,129

Consumer:
Home equity	344		—		2		346		33,563		33,909
Other consumer	105		—		—		105		8,918		9,023
Total consumer loans	449		—		2		451		42,481		42,932

Commercial business loans	—		—		—		—		16,924		16,924

Total loans	$	1,111	$	88	$	514	$	1,713	$	624,272	$	625,985

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 March 31, 2017 and June 30, 2016, First Federal had $3.7 million and $4.6 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 March 31, 2017, by class of loans:



	Pass		Watch		Special Mention		Sub- Standard		Total
	(In thousands)
Real Estate:
One-to-four family	$	316,828	$	3,282	$	714	$	2,342	$	323,166
Multi-family	56,813		—		119		—		56,932
Commercial real estate	190,960		4,414		2,354		534		198,262
Construction and land	63,187		300		2,882		79		66,448
Total real estate loans	627,788		7,996		6,069		2,955		644,808

Consumer:
Home equity	33,149		280		58		706		34,193
Other consumer	17,165		219		170		49		17,603
Total consumer loans	50,314		499		228		755		51,796

Commercial business loans	15,205		162		1,468		16		16,851

Total loans	$	693,307	$	8,657	$	7,765	$	3,726	$	713,455

The following table represents the internally assigned grade as of June 30, 2016, by class of loans:



	Pass		Watch		Special Mention		Sub- Standard		Total
	(In thousands)
Real Estate:
One-to-four family	$	302,841	$	2,100	$	367	$	3,163	$	308,471
Multi-family	39,955		6,048		122		—		46,125
Commercial real estate	153,783		5,736		1,105		558		161,182
Construction and land	45,986		3,560		643		162		50,351
Total real estate loans	542,565		17,444		2,237		3,883		566,129

Consumer:
Home equity	32,661		634		76		538		33,909
Other consumer	8,632		190		83		118		9,023
Total consumer loans	41,293		824		159		656		42,932

Commercial business loans	15,080		1,454		360		30		16,924

Total loans	$	598,938	$	19,722	$	2,756	$	4,569	$	625,985

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 March 31, 2017, by class of loans:



	Nonperforming		Performing		Total
	(In thousands)
Real Estate:
One-to-four family	$	1,484	$	321,682	$	323,166
Multi-family	—		56,932		56,932
Commercial real estate	443		197,819		198,262
Construction and land	9		66,439		66,448

Consumer:
Home equity	389		33,804		34,193
Other consumer	24		17,579		17,603

Commercial business	—		16,851		16,851

Total loans	$	2,349	$	711,106	$	713,455

The following table represents the credit risk profile based on payment activity as of June 30, 2016, by class of loans:



	Nonperforming		Performing		Total
	(In thousands)
Real Estate:
One-to-four family	$	2,413	$	306,058	$	308,471
Multi-family	—		46,125		46,125
Commercial real estate	474		160,708		161,182
Construction and land	91		50,260		50,351

Consumer:
Home equity	167		33,742		33,909
Other consumer	112		8,911		9,023

Commercial business	—		16,924		16,924

Total loans	$	3,257	$	622,728	$	625,985

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 initially 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

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

subsequently default, the method of determining impairment is generally the fair value of the collateral less estimated selling costs. Certain qualifying TDR loans are subsequently measured for impairment using the same factor applied to unimpaired loans in the corresponding segment and risk rating.

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:



	March 31,		June 30,
	2017		2016
	(In thousands)
Total TDR loans	$	6,380	$	6,545
Allowance for loan losses related to TDR loans	320		267
Total nonaccrual TDR loans	538		944

The following table presents newly restructured and renewals or modifications of existing TDR loans by class that occurred during the three months ended March 31, 2017, by type of concession granted. No other TDR modifications occurred during the nine months ended March 31, 2017.



	Number of Contracts	Rate Modification		Term Modification		Combination Modification		Total Modifications
		(Dollars in thousands)
Pre-modification outstanding recorded investment
One- to four-family	2	$	95	$	89	$	—	$	184
Commercial real estate	1	—		—		134		134
	3	$	95	$	89	$	134	$	318
Post-modification outstanding recorded investment
One- to four-family	2	$	94	$	88	$	—	$	182
Commercial real estate	1	—		—		134		134
	3	$	94	$	88	$	134	$	316

The following is a summary of TDR loans which incurred a payment default within 12 months of the restructure date during the three and nine months ended March 31, 2017.



	Number of Contracts	Rate Modification		Term Modification		Combination Modification		Total Modifications
		(Dollars in thousands)
TDR loans that subsequently defaulted
One- to four-family	1	$	—	$	—	$	50	$	50

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents newly restructured and renewals or modifications of existing TDR loans by class that occurred during the three months ended March 31, 2016, by type of concession granted. No other TDR modifications occurred during the nine months ended March 31, 2016.



	Number of Contracts	Rate Modification		Term Modification		Combination Modification		Total Modifications
		(Dollars in thousands)
Pre-modification outstanding recorded investment
One- to four-family	4	$	—	$	86	$	149	$	235
	4	$	—	$	86	$	149	$	235
Post-modification outstanding recorded investment
One- to four-family	2	$	—	$	86	$	154	$	240
	2	$	—	$	86	$	154	$	240

The following is a summary of TDR loans which incurred a payment default within 12 months of the restructure date during the three and nine months ended March 31, 2016.



	Number of Contracts	Rate Modification		Term Modification		Combination Modification		Total Modifications
		(Dollars in thousands)
TDR loans that subsequently defaulted
One- to four-family	3	$	—	$	86	$	374	$	460

No additional funds are committed to be advanced in connection with impaired loans at March 31, 2017.

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



	March 31, 2017						June 30, 2016
	Accrual		Nonaccrual		Total		Accrual		Nonaccrual		Total
	(In thousands)
One-to-four family	$	3,899	$	277	$	4,176	$	3,473	$	812	$	4,285
Multi-family	119		—		119		122		—		122
Commercial real estate	1,154		261		1,415		1,182		132		1,314
Home equity	333		—		333		464		—		464
Commercial business	337		—		337		360		—		360

Total TDR loans	$	5,842	$	538	$	6,380	$	5,601	$	944	$	6,545

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 March 31, 2017 and June 30, 2016, was $56.4 million and $43.5 million, respectively. Deposits and weighted-average interest rates at the dates indicated are as follows:



	Weighted-Average Interest Rate		March 31, 2017			Weighted-Average Interest Rate		June 30, 2016
	(Dollars in thousands)
Savings	0.06	%	$	98,304		0.04	%	$	91,656
Transaction accounts	0.01	%	244,440			0.01	%	213,442
Money market accounts	0.33	%	287,129			0.26	%	259,076
Certificates of deposit and jumbo certificates	1.16	%	177,842			1.09	%	159,113

			$	807,715				$	723,287

Weighted-average interest rate			0.38		%			0.34		%

Maturities of certificates at the dates indicated are as follows:



	March 31, 2017		June 30, 2016
	(In thousands)
Within one year or less	$	67,687	$	61,903
After one year through two years	62,735		45,368
After two years through three years	27,294		30,169
After three years through four years	9,828		11,150
After four years through five years	10,224		10,434
After five years	74		89

	$	177,842	$	159,113

Deposits at March 31, 2017 and June 30, 2016, included $55.2 million and $51.2 million, respectively, in public fund deposits. Investment securities with a carrying value of $42.1 million and $47.4 million were pledged as collateral for these deposits at March 31, 2017 and June 30, 2016, 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				Nine Months Ended
	March 31,				March 31,
	2017		2016		2017		2016
	(In thousands)
Savings	$	9	$	9	$	28	$	28
Transaction accounts	4		3		12		10
Insured money market accounts	212		158		602		444
Certificates of deposit and jumbo certificates	493		388		1,419		1,087

	$	718	$	558	$	2,061	$	1,569

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 5 - Federal Taxes on Income

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. Due to this limitation, the Company currently has a 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 effective tax rates were 24.3% and 24.9% for the nine months ended March 31, 2017 and 2016, respectively. The Company's tax rate is reduced from the statutory tax rate in part as a result of permanent tax exclusions of noninterest income from bank-owned life insurance ("BOLI") and tax-exempt interest.

Note 6 - Earnings per Share

Basic earnings per share is computed by dividing income available to common shareholders 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. In addition, nonvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are considered participating securities and are included in the computation of earnings per share. Certain of the Company's nonvested restricted stock awards qualify as participating securities.

The following table presents a reconciliation of the components used to compute basic and diluted earnings per share for the three and nine months ended March 31, 2017 and 2016.



	Three Months Ended				Nine Months Ended
	March 31,				March 31,
	2017		2016		2017		2016
	(In thousands, except share and per share data)
Numerator:
Net income	$	2,164	$	897	$	4,003	$	2,838

Denominator:
Basic weighted average common shares outstanding	10,812,035		12,056,112		11,213,238		12,074,666
Dilutive restricted stock grants	107,706		—		65,318		—
Diluted weighted average common shares outstanding	10,919,741		12,056,112		11,278,556		12,074,666

Basic earnings per share	$	0.20	$	0.07	$	0.36	$	0.24

Diluted earnings per share	$	0.20	$	0.07	$	0.35	$	0.24

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

As of March 31, 2017, 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 March 31, 2017, there were 938,037 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 March 31, 2017, 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 nine months ended March 31, 2017.

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 for the three months ended March 31, 2017 and 2016 was $203,000 and $188,000, respectively. For the nine months ended March 31, 2017 and 2016 compensation expense related to the ESOP was $571,000 and $494,000, respectively.

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



	March 31, 2017		June 30, 2016
	(Dollars in thousands)
Allocated shares	70,356		70,356
Committed to be released shares	39,636		—
Unallocated shares	938,037		977,673

Total ESOP shares	1,048,029		1,048,029

Fair value of unallocated shares	$	14,540	$	12,456

Note 8 - Stock-based Compensation

On November 16, 2015, the Company's shareholders approved the First Northwest Bancorp 2015 Equity Incentive Plan (the "EIP"), which provides for the grant of incentive stock options, non-qualified stock options, restricted stock and restricted stock units to eligible participants. The cost of awards under the EIP generally is based on the fair value of the awards on their grant date. The maximum number of shares that may be utilized for awards under the EIP is 1,834,050. The EIP provides for the use of authorized but unissued shares or shares that have been reacquired by First Northwest to fund share-based awards.

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

During the nine months ended March 31, 2017, 402,500 shares of restricted stock were awarded and no stock options were granted. There were no awards or related expenses during the three and nine months ended March 31, 2016. Awarded shares of restricted stock vest over five years from the date of grant as long as the eligible participant remains in service to the Company. The Company recognizes compensation expense for the restricted stock awards based on the fair value of the shares at the award date.

For the three and nine months ended March 31, 2017, total compensation expense for the EIP was $217,000 and $727,000, respectively.

Included in the above compensation expense for the three and nine months ended March 31, 2017, was directors' compensation of $95,000 and $285,000, respectively.

The following table provides a summary of changes in non-vested restricted stock awards for the three and nine months ended March 31, 2017:



	For the Three Months Ended
	March 31, 2017
		Weighted-Average
		Grant Date
	Shares	Fair Value
Non-vested at January 1, 2017	390,000	$	12.70
Granted	—
Vested	—
Forfeited	—

Non-vested at March 31, 2017	390,000

Expected to vest assuming a 3% forfeiture rate over the vesting term	378,300



	For the Nine Months Ended
	March 31, 2017
			Weighted-Average
			Grant Date
	Shares		Fair Value
Non-vested at July 1, 2016	—
Granted	402,500		$	12.70
Vested	—
Forfeited	(12,500	)	12.70

Non-vested at March 31, 2017	390,000

Expected to vest assuming a 3% forfeiture rate over the vesting term	378,300

As of March 31, 2017, there was $4.2 million of total unrecognized compensation cost related to non-vested shares granted as restricted stock awards. The cost is expected to be recognized over the remaining weighted-average vesting period of approximately 4.3 years.

Note 9 - 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

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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:



	March 31, 2017
	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	$	—	$	21,941	$	—	$	21,941
Agency bonds	—		4,903		—		4,903
ABS agency	—		7,804		—		7,804
ABS corporate	—		22,925		—		22,925
SBA	—		8,400		—		8,400
MBS agency	—		147,694		—		147,694
MBS corporate	—		29,065		—		29,065
	$	—	$	242,732	$	—	$	242,732



	June 30, 2016
	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	$	—	$	23,179	$	—	$	23,179
Agency bonds	—		15,048		—		15,048
ABS agency	—		7,935		—		7,935
ABS corporate	—		29,381		—		29,381
SBA	—		9,501		—		9,501
MBS agency	—		141,649		—		141,649
MBS corporate	—		41,164		—		41,164
	$	—	$	267,857	$	—	$	267,857

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:



	March 31, 2017
	Level 1		Level 2		Level 3		Total
	(In thousands)
Impaired loans	$	—	$	—	$	8,191	$	8,191
Real estate owned and repossessed assets	—		—		6		6

	$	—	$	—	$	8,197	$	8,197


	June 30, 2016
	Level 1		Level 2		Level 3		Total
	(In thousands)
Impaired loans	$	—	$	—	$	9,072	$	9,072
Real estate owned and repossessed assets	—		—		81		81

	$	—	$	—	$	9,153	$	9,153

At March 31, 2017 and June 30, 2016, there were no impaired loans with discounts to appraisal disposition value or other unobservable inputs. The following tables present the techniques used to value assets measured at fair value on a nonrecurring basis at the dates indicated:



	March 31, 2017
	Fair Value		Valuation Technique	Unobservable Input	Range (Weighted-Average)¹
	(In thousands)
Real estate owned and repossessed assets	$	6	Market comparable	Discount to appraisal	0% - 10% (10%)


¹Discount to appraisal disposition value.



	June 30, 2016
	Fair Value		Valuation Technique	Unobservable Input	Range (Weighted-Average)¹
	(In thousands)
Real estate owned and repossessed assets	$	81	Market comparable	Discount to appraisal	0% - 10% (5%)


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:



	March 31, 2017
	Carrying Amount		Estimated Fair Value		Fair Value Measurements Using:
					Level 1		Level 2			Level 3
	(In thousands)
Financial assets
Cash and cash equivalents	$	23,188	$	23,188	$	23,188	$	—		$	—
Investment securities available for sale	242,732		242,732		—		242,732			—
Investment securities held to maturity	52,795		53,461		—		53,461			—
Loans held for sale	638		638		—		638			—
Loans receivable, net	706,231		702,472		—		—			702,472
FHLB stock	4,741		4,741		—		4,741			—
Accrued interest receivable	3,080		3,080		—		3,080			—
Mortgage servicing rights, net	1,046		1,668		—		—			1,668

Financial liabilities
Demand deposits	$	629,873	$	629,873	$	629,873	$	—		$	—
Time deposits	177,842		177,415		—		177,415			—
Borrowings	86,553		89,565		—		89,565			—
Accrued interest payable	195		195		—		195		—	—



	June 30, 2016
	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	$	22,650	$	22,650	$	22,650	$	—	$	—
Investment securities available for sale	267,857		267,857		—		267,857		—
Investment securities held to maturity	56,038		58,928		—		58,928		—
Loans held for sale	917		917		—		917		—
Loans receivable, net	619,844		631,754		—		—		631,754
FHLB stock	4,403		4,403		—		4,403		—
Accrued interest receivable	2,802		2,802		—		2,802		—
Mortgage servicing rights, net	998		1,703		—		—		1,703

Financial liabilities
Demand deposits	$	564,174	$	564,174	$	564,174	$	—	$	—
Time deposits	159,113		160,354		—		160,354		—
Borrowings	80,672		85,867		—		85,867		—
Accrued interest payable	189		189		—		189		—

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:

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Financial instruments with a carrying amount 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 the carrying amount. These instruments 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 carrying amount.

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, net - 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 March 31, 2017 and June 30, 2016. 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.

Note 10 - Subsequent Event

In August 2016, First Federal entered into a partnership with the Peninsula College Foundation forming 202 Master Tenant, LLC. An initial equity contribution of $274,000 was made in September 2016. All remaining documentation was received and the final contribution of $1.2 million was made subsequent to March 31, 2017. This investment was made in order to receive a historic tax credit that we expect to utilize and meets the criteria for reporting under the equity method of accounting.

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, including but not limited to our loan growth;


•	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 and home loan centers;


•	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 twelve banking locations in Washington State, eight of which are located within Clallam and Jefferson counties, one in Kitsap County, two in Whatcom County, and a home lending center ("HLC") in King County. Our HLC is located in Seattle, Washington and is focused on the origination of loans secured by one- to four-family residential properties, which may be sold into the secondary market or retained in our loan portfolio, subject to management's growth and investment objectives.

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. While we have a large concentration of first lien one- to four-family mortgage loans, 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 higher-yielding commercial real estate, multi-family real estate, and construction loans, and strive to decrease our historical reliance on originating and retaining longer-term, fixed-rate, residential mortgage loans. We may sell conforming single-family owner-occupied fixed-rate mortgage loans into the secondary market to increase noninterest income and improve our interest rate risk, or we may retain select loans in our portfolio to enhance interest income. We offer 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 award of benefits under our equity incentive plan. The actual amount of these new stock-related compensation and benefit expenses are based on the fair market value of the shares of common stock at specific points in the future, and it is difficult to determine exactly what those costs will be.

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, 2016.

Comparison of Financial Condition at March 31, 2017 and June 30, 2016

Assets. Total assets increased $71.2 million, or 7.0%, to $1.1 billion at March 31, 2017, from $1.0 billion at June 30, 2016, primarily due to an increase of $86.4 million, or 13.9%, in net loans receivable to $706.2 million at March 31, 2017, from $619.8 million at June 30, 2016, primarily as a result of increases in commercial real estate, construction and land, and one- to four-family residential loans.

Total loans, excluding loans held for sale, increased $87.5 million, or 14.0%, to $713.5 million at March 31, 2017, from $626.0 million at June 30, 2016. The portfolio increase was mainly attributable to an increase in commercial real estate loans of $37.1 million, or 23.0%, to $198.3 million at March 31, 2017 from $161.2 million at June 30, 2016. One- to four-family residential loans increased $14.7 million, or 4.8%, to $323.2 million at March 31, 2017 from $308.5 million at June 30, 2016, the result of loan originations of $53.3 million and a loan pool purchase of $30.3 million, offset by normal amortization and prepayment activity. The loan pool purchase included jumbo loans secured by residential properties located in Washington State. Multi-family loans increased $10.8 million, or 23.4%, to $56.9 million at March 31, 2017 from $46.1 million at June 30, 2016, and other consumer loans increased $8.6 million, or 95.6%, to $17.6 million at March 31, 2017 from $9.0 million at June 30, 2016, mainly the result of auto loans originated through our indirect lending program.

Additionally, the balance of construction and land loans increased $16.1 million, or 31.9%, during the nine months ended March 31, 2017 to $66.4 million at March 31, 2017 from $50.4 million at June 30, 2016. 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 $40.4 million in undisbursed construction

commitments at March 31, 2017, an increase of $10.5 million compared to $29.9 million at June 30, 2016. Undisbursed construction commitments at March 31, 2017 included $12.9 million of multi-family residential, $13.4 million of one- to four-family residential, and $14.1 million of commercial real estate construction projects. Commercial real estate construction commitments include $9.7 million of one- to four-family speculative construction projects, of which there was $7.3 million located in King County and $2.4 million located in Thurston County, Washington.

Home equity loans increased $284,000, and commercial business loans decreased $73,000, during the nine months ended March 31, 2017. We continue to focus on increasing our loan balances as a percentage of earning assets.

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



March 31, 2017		North Olympic Peninsula ⁽¹⁾		Puget Sound Region ⁽²⁾		Other Washington		Total
		(In thousands)
Construction Commitment
	One- to four-family residential	$	17,474	$	6,274	$	—	$	23,748
	Multi-family residential	—		43,300		—		43,300
	Commercial real estate	1,938		14,478		9,610		26,026
	Total commitment	$	19,412	$	64,052	$	9,610	$	93,074

Construction Funds Disbursed
	One- to four-family residential	$	7,624	$	2,760	$	—	$	10,384
	Multi-family residential	—		30,369		—		30,369
	Commercial real estate	1,557		9,513		871		11,941
	Total disbursed	$	9,181	$	42,642	$	871	$	52,694

Undisbursed Commitment
	One- to four-family residential	$	9,850	$	3,514	$	—	$	13,364
	Multi-family residential	—		12,931		—		12,931
	Commercial real estate	381		4,965		8,739		14,085
	Total undisbursed	$	10,231	$	21,410	$	8,739	$	40,380

Land Funds Disbursed
	One- to four-family residential	$	7,332	$	693	$	—	$	8,025
	Commercial real estate	—		5,729		—		5,729
	Total disbursed for land	$	7,332	$	6,422	$	—	$	13,754

(1) Includes Clallam and Jefferson counties.
(2) Includes Kitsap, Mason, Thurston, Pierce, King, Snohomish, Skagit, Whatcom, and Island counties.



June 30, 2016		North Olympic Peninsula		Puget Sound Region		Other Washington		Total
		(In thousands)
Construction Commitment
	One- to four-family residential	$	6,621	$	5,779	$	—	$	12,400
	Multi-family residential	—		24,823		—		24,823
	Commercial real estate	2,165		15,140		11,050		28,355
	Total Commitment	$	8,786	$	45,742	$	11,050	$	65,578

Construction Funds Disbursed
	One- to four-family residential	$	1,889	$	2,623	$	—	$	4,512
	Multi-family residential	—		12,301		—		12,301
	Commercial real estate	1,104		7,342		10,400		18,846
	Total disbursed	$	2,993	$	22,266	$	10,400	$	35,659

Undisbursed Commitment
	One- to four-family residential	$	4,732	$	3,156	$	—	$	7,888
	Multi-family residential	—		12,522		—		12,522
	Commercial real estate	1,061		7,798		650		9,509
	Total undisbursed	$	5,793	$	23,476	$	650	$	29,919

Land Funds Disbursed
	One- to four-family residential	$	8,009	$	870	$	—	$	8,879
	Commercial real estate	724		2,960		2,129		5,813
	Total disbursed for land	$	8,733	$	3,830	$	2,129	$	14,692

During the nine months ended March 31, 2017, the Company originated $163.3 million of loans, of which $67.7 million, or 41.5%, were originated in the North Olympic Peninsula, $85.3 million, or 52.2%, in the Puget Sound region of Washington, and $10.3 million, or 6.3%, in other areas in Washington. During the same period, we purchased $30.3 million and originated $53.3 million of one- to four-family residential loans, of which $21.4 million were sold into the secondary market. We expect lending activity from our HLC to increase over time, and we intend to retain in our portfolio originations of one- to four-family residential loans in order to meet our loan growth objectives, while selling off excess production into the secondary market and relying less on the purchase of one- to four-family residential loan pools.

Our allowance for loan losses increased $1.1 million, or 15.3%, to $8.3 million at March 31, 2017, from $7.2 million at June 30, 2016, primarily due to an increase in total loans. The allowance for loan losses as a percentage of total loans remained the same at 1.2% of total loans at both March 31, 2017 and June 30, 2016. There was no material change in our allowance for loan losses as a percentage of total loans during the period as our asset quality has remained stable. We believe our allowance for loan losses is adequate, with normal fluctuations in the balance of nonperforming assets and other credit quality measures expected as we increase our loan portfolio.

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



	March 31, 2017			June 30, 2016
	(In thousands)
Real Estate:
One-to-four family	$	323,166		$	308,471
Multi-family	56,932			46,125
Commercial real estate	198,262			161,182
Construction and land	66,448			50,351
Total real estate loans	644,808			566,129

Consumer:
Home equity	34,193			33,909
Other consumer	17,603			9,023
Total consumer loans	51,796			42,932

Commercial business loans	16,851			16,924

Total loans	713,455			625,985
Less:
Net deferred loan fees	1,114			1,182
Premium on purchased loans, net	(2,218		)	(2,280		)
Allowance for loan losses	8,328			7,239
Loans receivable, net	$	706,231		$	619,844

Nonperforming loans decreased $908,000, or 27.9%, to $2.3 million at March 31, 2017, from $3.3 million at June 30, 2016, primarily as a result of a decrease in nonperforming one- to four-family loans of $929,000. Real estate owned and repossessed assets decreased $75,000, or 92.6%, to $6,000 at March 31, 2017 from $81,000 at June 30, 2016. Nonperforming loans to total loans declined to 0.3% at March 31, 2017 from 0.5% at June 30, 2016, and the allowance for loan losses as a percentage of nonperforming loans increased to 354.5% at March 31, 2017 from 222.3% at June 30, 2016.

At March 31, 2017, there were $6.4 million in TDR loans, of which $5.8 million were performing in accordance with their modified payment terms and returned to accrual status. Classified loans, consisting solely of substandard loans, decreased by $843,000, or 18.5%, to $3.7 million at March 31, 2017, from $4.6 million at June 30, 2016.

The following table represents nonperforming assets at the dates indicated.



	March 31, 2017			June 30, 2016
	(In thousands)
Nonperforming loans:
Real estate loans:
One- to four-family	$	1,484		$	2,413
Commercial real estate	443			474
Construction and land	9			91

Total real estate loans	1,936			2,978

Consumer loans:
Home equity	389			167
Other	24			112

Total consumer loans	413			279

Total nonperforming loans	2,349			3,257

Real estate owned:
One- to four-family	—			—
Construction and land	—			22

Total real estate owned	—			22

Repossessed assets	6			59

Total nonperforming assets	$	2,355		$	3,338

Nonaccrual and 90 days or more past due loans as a percentage of total loans	0.3		%	0.5		%

During the nine months ended March 31, 2017, total investment securities decreased $28.4 million, or 8.8%, to $295.5 million at March 31, 2017, from $323.9 million at June 30, 2016, primarily the result of calls, prepayments, and amortization. Mortgage-backed securities totaled $214.9 million at March 31, 2017, a decrease of $9.0 million, or 4.0%, from $223.9 million at June 30, 2016. Other investment securities, including municipal bonds and other asset-backed securities, were $80.6 million at March 31, 2017, a decrease of $19.4 million, or 19.4%, from $100.0 million at June 30, 2016. As of March 31, 2017, the investment portfolio, including mortgage-backed securities, had an estimated projected average life and average repricing term of 4.9 years and 4.5 years, respectively, based on the interest rate environment at that time. The investment portfolio contains 85.5% of amortizing securities at March 31, 2017, 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 may purchase investment securities as a source of additional interest income and also 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 $82.4 million, or 10.0%, to $902.8 million at March 31, 2017, from $820.4 million at June 30, 2016. This increase was primarily the result of deposit account balances increasing $84.4 million, or 11.7%, to $807.7 million at March 31, 2017, from $723.3 million at June 30, 2016. Transaction, savings, and money market account deposits increased $65.7 million, or 11.6%, to $629.9 million at March 31, 2017 from $564.2 million at June 30, 2016, including an increase in personal and business transaction accounts of $19.8 million and $11.2 million, respectively. Deposit account increases were primarily the result of our continuing efforts to expand commercial and consumer deposit relationships in Silverdale and Bellingham, Washington, as well as within our historic Clallam and Jefferson County, Washington locations.

Borrowings increased $5.9 million, or 7.3%, to $86.6 million at March 31, 2017 from $80.7 million at June 30, 2016, as we utilized short-term FHLB advances.

Accrued expenses and other liabilities decreased $8.8 million, primarily as a result of a liability for an investment security purchased during the quarter ended June 30, 2016 that was settled during the quarter ended September 30, 2016.

Equity. Total shareholders' equity decreased $11.2 million, or 5.9%, to $178.5 million at March 31, 2017, from $189.7 million at June 30, 2016, primarily due to a decrease of $13.6 million related to the repurchase of common stock under the Company's stock repurchase plans and a $2.9 million decrease due to unrealized changes in market values of available for sale securities. These decreases were partially offset by increases due to net income of $4.0 million, share-based compensation of $727,000, and ESOP shares committed to be released of $571,000. During the nine months ended March 31, 2017, we repurchased 988,814 shares of our common stock, at an average cost of $13.78 per share, pursuant to the Company's stock repurchase plans.

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

General. The Company recorded net income for the three months ended March 31, 2017 of $2.2 million compared to net income of $897,000 for the three months ended March 31, 2016, an increase of $1.3 million, or 141.2%, primarily as a result of an increase in noninterest income of $1.2 million and an increase in net interest income of $1.1 million, partially offset by increases in noninterest expense of $636,000 and the provision for loan losses of $215,000.

Net Interest Income. Net interest income increased $1.1 million to $8.1 million for the three months ended March 31, 2017, from $7.0 million for the three months ended March 31, 2016, primarily the result of an increase in interest income related to an increase in the average volume of loans receivable.

The net interest margin increased 12 basis points to 3.18% for the three months ended March 31, 2017, from 3.06% for the same period in 2016. The net interest margin increased due primarily to an increase in the average balance of total loans receivable earning higher yields than cash and investment alternatives, coupled with a reduction in the average balance of lower yielding cash and investment alternatives. Reduced borrowing costs related to the prepayment of long-term FHLB advances also contributed to improved net interest margins during the three months ended March 31, 2017, as compared to the same period one year prior. The average balance of interest-bearing deposits in banks decreased $1.7 million to $9.8 million for the three months ended March 31, 2017 from $8.1 million for the three months ended March 31, 2016. Of the $1.1 million increase in net interest income during the three months ended March 31, 2017 compared to the same period in 2016, $1.2 million was the result of an increase in volume, partially offset by a decrease of $143,000 attributable to changes in rates. Loans receivable was the primary contributor to the increase in net interest income with a $1.8 million increase due to volume, partially offset by a $355,000 decrease due to rate. The yield on average interest-earning assets increased 13 basis points to 3.69% for the three months ended March 31, 2017, compared to 3.56% for the same period in the prior year, due primarily to the increase in the average balance of loans receivable. The cost of average interest-bearing liabilities decreased two basis points to 0.68% for the three months ended March 31, 2017, compared to 0.70% for the same period in the prior year, due primarily to the decrease in the average rate paid on FHLB borrowings, partially offset by an increase in deposit costs.

Interest Income. Total interest income increased $1.2 million, or 15.3%, to $9.4 million for the three months ended March 31, 2017 from $8.2 million for the comparable period in 2016. Interest income on loans increased $1.4 million, or 23.7%, during the three months ended March 31, 2017, primarily reflecting an increase in the average balance of loans receivable to $704.1 million for the three months ended March 31, 2017 from $543.5 million for the three months ended March 31, 2016, combined with a decrease in average yield to 4.25% for the three months ended March 31, 2017 from 4.45% for the three months ended March 31, 2016, as higher yielding loans were repaid and replaced with loans at lower average yields.

Interest income on investment securities decreased $134,000 to $580,000 for the three months ended March 31, 2017 compared to $714,000 for the three months ended March 31, 2016, primarily the result of a decrease in the average balance of $26.2 million, or 23.2%, to $86.6 million for the three months ended March 31, 2017 compared to $112.8 million for the three months ended March 31, 2016. The average yield on investment securities for the three months ended March 31, 2017 increased 15 basis points mainly due to increased rates paid on adjustable-rate securities compared to the same period in 2016.

Interest income on mortgage backed securities decreased $58,000 primarily due to a decrease in the average balance of $34.1 million to $214.6 million for the three months ended March 31, 2017 from $248.7 million for the three months ended March 31, 2016. The average yield on mortgage-backed securities for the three months ended March 31, 2017 increased to 2.42% for the three months ended March 31, 2017 compared to 2.18% for the same period in 2016, as securities purchased have produced higher yields than those previously held in portfolio and there has been an increase in rates paid on adjustable-rate securities.

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



	Three Months Ended March 31,
	2017				2016
	Average Balance Outstanding		Yield		Average Balance Outstanding		Yield		Increase/ (Decrease) in Interest Income
	(Dollars in thousands)
Loans receivable, net	$	704,075	4.25	%	$	543,480	4.45	%	$	1,432
Investment securities	86,610		2.68		112,819		2.53		(134		)
Mortgage-backed securities	214,637		2.42		248,681		2.18		(58		)
FHLB stock	4,735		2.53		4,223		2.94		(1		)
Interest-bearing deposits in banks	9,795		0.86		8,071		0.64		8
Total interest-earning assets	$	1,019,852	3.69		$	917,274	3.56		$	1,247

Interest Expense. Total interest expense increased $148,000, or 12.8%, to $1.3 million for the three months ended March 31, 2017 from $1.2 million for the three months ended March 31, 2016, primarily due to increases in the average balance and cost of deposits. The rates paid on money market accounts and certificates of deposit increased as the result of targeted promotional efforts in new and existing market areas.

The average balance of interest-bearing deposits increased $86.2 million, or 14.6%, to $675.0 million for the three months ended March 31, 2017 from $588.8 million for the three months ended March 31, 2016, primarily the result of an increase in the average balance of money market accounts and certificates of deposit of $45.2 million and $24.2 million, respectively. The average balances of both transaction and savings accounts increased $10.2 million and $6.5 million, respectively. These increases were primarily the result of pricing promotions and the development of consumer and commercial customer relationships as we continue to focus on increasing our customer deposit base in new and existing markets.

Borrowing costs declined $12,000 to $585,000 for the three months ended March 31, 2017 from $597,000 for the comparable period in 2016 due to a decrease in the average rate paid on borrowings.

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



	Three Months Ended March 31,
	2017				2016				Increase/ (Decrease) in Interest Expense
	Average Balance Outstanding		Rate		Average Balance Outstanding		Rate		Increase/ (Decrease) in Interest Expense
	(Dollars in thousands)
Savings accounts	$	97,362	0.04	%	$	90,904	0.04	%	$	—
Transaction accounts	111,292		0.01		101,071		0.01		1
Money market accounts	290,730		0.29		245,561		0.26		54
Certificates of deposit	175,583		1.12		151,290		1.03		105
Borrowings	89,208		2.62		75,855		3.15		(12		)
Total interest-bearing liabilities	$	764,175	0.68		$	664,681	0.70		$	148

Provision for Loan Losses. The provision for loan losses was $215,000 for the three months ended March 31, 2017 compared to no provision for loan losses during the three months ended March 31, 2016, due primarily to the growth in our loan portfolio. Management considers the allowance for loan losses at March 31, 2017 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 March 31,
	2017			2016
	(Dollars in thousands)
Net charge-offs	$	53		$	14
Allowance for loan losses	8,328			6,988
Allowance for losses as a percentage of total gross loans receivable at the end of this period	1.2		%	1.2		%
Total nonaccruing loans	2,349			3,873
Allowance for loan losses as a percentage of nonaccrual loans at end of period	354.5		%	180.4		%
Nonaccrual and 90 days or more past due loans as a percentage of total loans	0.3		%	0.7		%
Total loans	$	713,455		$	580,289

Noninterest Income. Noninterest income increased $1.2 million, or 109.4%, to $2.2 million for the three months ended March 31, 2017, from $1.1 million for the three months ended March 31, 2016, primarily due to income from a death benefit on BOLI of $768,000 related to the death of a former Bank executive, an increase in net gain on sale of loans of $264,000, and an increase in the cash surrender value of bank-owned life insurance of $141,000. The increase in net gain on sale of loans was primarily the result of an increase in the sale of our originations of one- to four family residential loans. The increase in the cash surrender value of BOLI was primarily a result of increased returns on the policies underlying BOLI and an increase in the BOLI asset of $10.0 million due to the purchase of additional BOLI.

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



	Three Months Ended March 31,				Increase (Decrease)
	2017		2016		Amount			Percent
	(Dollars in thousands)
Loan and deposit service fees	$	821	$	844	$	(23	)	(2.7	)%
Mortgage servicing fees, net of amortization	69		72		(3		)	(4.2	)
Net gain on sale of loans	284		20		264			1,320.0
Net gain on sale of investment securities	—		—		—			—
Increase in cash surrender value of bank-owned life insurance	178		37		141			381.1
Income from death benefit on bank-owned life insurance, net	768		—		768			100.0
Other income	81		78		3			3.8
Total noninterest income	$	2,201	$	1,051	$	1,150		109.4	%

Noninterest Expense. Noninterest expense increased $636,000, or 9.3%, to $7.5 million for the three months ended March 31, 2017, compared to $6.9 million for the same period in 2016, primarily as a result of an increase in compensation and benefits expense of $885,000. Compensation and benefits expense increased as a result of additional expenses related to stock awards, adding staff to manage the growth of our operations, providing for annual merit increases, and rewarding our staff and management for performance through incentive programs and sales commissions. We also re-established the accrual for executive cash incentives as a result of earnings improvement during the quarter ended March 31, 2017. In addition, occupancy and equipment expenses increased primarily due to our market expansion and growth. We believe that these expenses are necessary to support and maintain the infrastructure needed for prudent and sustainable growth. There was also a $54,000 decrease in FDIC

insurance premiums as compared to the same quarter in 2016 due to an adjustment for a change in the FDIC's calculation of assessments due beginning July 1, 2016. Other expenses decreased as a result of decreased expenses related to professional development and loss on disposal of fixed assets.

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



	Three Months Ended March 31,					Increase (Decrease)
	2017			2016		Amount			Percent
	(Dollars in thousands)
Compensation and benefits	$	4,530		$	3,645	$	885		24.3	%
Real estate owned and repossessed assets (income) expense, net	(50		)	15		(65		)	(433.3	)
Data processing	597			686		(89		)	(13.0	)
Occupancy and equipment	985			899		86			9.6
Supplies, postage, and telephone	198			161		37			23.0
Regulatory assessments and state taxes	133			100		33			33.0
Advertising	179			199		(20		)	(10.1	)
Professional fees	371			421		(50		)	(11.9	)
FDIC insurance premium	54			108		(54		)	(50.0	)
Other	501			628		(127		)	(20.2	)
Total	$	7,498		$	6,862	$	636		9.3	%

Provision for Income Tax. An income tax expense of $429,000 was recorded for the three months ended March 31, 2017 compared to $298,000 for the three months ended March 31, 2016, generally due to an increase in income before taxes of $1.4 million. The provision for income taxes was lower as a percentage of income before taxes during the three months ended March 31, 2017 as compared to the same period in 2016, primarily due to income from the death benefit on BOLI, which is exempt from federal income taxes. For additional information, see Note 5 of the Notes to Consolidated Financial Statements contained in Item 1 of this Form 10-Q.

Comparison of Results of Operations for the Nine Months Ended March 31, 2017 and 2016

General. The Company recorded net income for the nine months ended March 31, 2017 of $4.0 million compared to net income of $2.8 million for the nine months ended March 31, 2016, an increase of $1.2 million, or 41.1%, primarily the result of an increase in net interest income after provision of loan losses partially offset by an increase in noninterest expense.

Net Interest Income. Net interest income increased $3.1 million to $23.1 million for the nine months ended March 31, 2017, from $20.1 million for the nine months ended March 31, 2016, primarily the result of an increase in interest income related to the increased average volume of loans receivable.

The net interest margin increased 18 basis points to 3.12% for the nine months ended March 31, 2017, from 2.94% for the same period in 2016. The net interest margin increased due primarily to an increase in the average balance of total loans receivable coupled with a reduction in the average balance of lower yielding cash and investment alternatives. Reduced borrowing costs related to the prepayment of long-term FHLB advances also contributed to improved margins. The average balance of net loans receivable increased $155.2 million, while the average balance of interest-bearing deposits in banks decreased $7.5 million, and the average balance of investments and mortgage-backed securities decreased $69.7 million for the nine months ended March 31, 2017 compared to the same period in 2016. Of the $3.1 million increase in net interest income during the nine months ended March 31, 2017 compared to the same period in 2016, $3.9 million was the result of an increase in volume, primarily due to loans receivable, partially offset by an $819,000 decline attributable to changes in rates. The decline in rates was mainly attributable to a $1.1 million decline due to lower average loan rates, partially offset by a $345,000 increase due to higher average yields on investment and mortgage-backed securities. The cost of average interest-bearing liabilities decreased four basis points to 0.68% for the nine months ended March 31, 2017, compared to 0.72% for

the same period in the prior year, due primarily to a decrease in the average balance of, and rates paid on, borrowings.

Interest Income. Total interest income increased $3.2 million, or 13.7%, to $26.9 million for the nine months ended March 31, 2017 from $23.6 million for the comparable period in 2016. Interest income on loans increased $4.1 million, or 23.5%, during the nine months ended March 31, 2017 compared to the same period in the prior year, primarily a result of an increase of $155.2 million in the average balance of loans receivable partially offset by a decrease of 23 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.

Interest income on investment securities decreased $433,000 to $1.8 million for the nine months ended March 31, 2017 compared to $2.3 million for the nine months ended March 31, 2016, primarily due to a decrease in the average balance of investment securities of $34.3 million to $90.4 million for the nine months ended March 31, 2017 compared to $124.7 million for the nine months ended March 31, 2016, the result of calls, prepayments, and amortization. The yield on investment securities for the nine months ended March 31, 2017 increased 28 basis points compared to the same period in 2016 due primarily to adjustable-rate securities repricing at higher rates compared to the same period in 2016.

Interest income on mortgage backed securities decreased $415,000, primarily due to a decrease in the average balance of $35.4 million to $209.9 million for the nine months ended March 31, 2017, from $245.3 million for the nine months ended March 31, 2016, the result of prepayments, and amortization.

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



	Nine Months Ended March 31,
	2017				2016
	Average Balance Outstanding		Yield		Average Balance Outstanding		Yield		Increase/ (Decrease) in Interest Income
	(Dollars in thousands)
Loans receivable, net	$	670,772	4.25	%	$	515,580	4.48	%	$	4,076
Investment securities	90,403		2.72		124,745		2.44		(433		)
Mortgage-backed securities	209,949		2.22		245,348		2.12		(415		)
FHLB stock	4,290		2.86		4,495		2.25		16
Interest-bearing deposits in banks	12,248		0.49		19,708		0.32		(2		)
Total interest-earning assets	$	987,662	3.63		$	909,876	3.46		$	3,242

Interest Expense. Total interest expense increased $181,000, or 5.1%, to $3.7 million for the nine months ended March 31, 2017 from $3.6 million for the nine months ended March 31, 2016, primarily due to higher average balances of, and an increase in rates paid on, money market accounts and certificates of deposit.

The average balance of interest-bearing deposits increased $79.7 million, or 13.9%, to $654.5 million for the nine months ended March 31, 2017 from $574.8 million for the nine months ended March 31, 2016. This increase was attributable to increases in the average balances for money market accounts of $42.4 million, certificates of deposit of $22.0 million, transaction accounts of $9.4 million, and savings accounts of $5.9 million. In addition to promotional efforts on money market and certificates of deposit, we continued to focus on increasing our commercial business deposits as we develop commercial lending relationships.

Borrowing costs decreased $311,000 to $1.7 million for the nine months ended March 31, 2017 from $2.0 million for the comparable period in 2016, due to a decline of $4.5 million in the average balance, and a 34 basis point decrease in the average cost, of borrowings.

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



	Nine Months Ended March 31,
	2017				2016				Increase/ (Decrease) in Interest Expense
	Average Balance Outstanding		Rate		Average Balance Outstanding		Rate		Increase/ (Decrease) in Interest Expense
	(Dollars in thousands)
Savings accounts	$	95,873	0.04	%	$	90,007	0.04	%	$	—
Transaction accounts	108,773		0.01		99,358		0.01		2
Money market accounts	279,849		0.29		237,456		0.25		158
Certificates of deposit	169,962		1.11		147,986		0.98		332
Borrowings	77,997		2.88		82,506		3.22		(311		)
Total interest-bearing liabilities	$	732,454	0.68		$	657,313	0.72		$	181

Provision for Loan Losses. There was $975,000 in provision for loan losses during the nine months ended March 31, 2017 compared to no provision for the nine months ended March 31, 2016, primarily the result of loan growth.

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



	Nine Months Ended March 31,
	2017			2016
	(Dollars in thousands)
Net charge-offs (recoveries)	$	114		$	(123	)
Allowance for loan losses	8,328			6,988
Allowance for losses as a percentage of total loans receivable at the end of this period	1.2		%	1.2		%
Total nonaccruing loans	2,349			3,873
Allowance for loan losses as a percentage of nonaccrual loans at end of period	354.5		%	180.4		%
Nonaccrual and 90 days or more past due loans as a percentage of total loans	0.3		%	0.7		%
Total loans	$	713,455		$	580,289

Noninterest Income. Noninterest income increased $782,000, or 18.7%, to $5.0 million for the nine months ended March 31, 2017, from $4.2 million for the nine months ended March 31, 2016. The increase in noninterest income was primarily the result of income from a death benefit on BOLI of $768,000 related to the death of a former Bank executive, an increase in the net gain on sale of loans of $625,000, and an increase in the cash surrender value of bank-owned life insurance of $482,000. The increase in the cash surrender value of BOLI was primarily a result of increased returns on the policies underlying BOLI and an increase to the BOLI asset of $10.0 million due to the purchase of additional BOLI. The increase in net gain on sale of loans was primarily the result of an increase in the sale of our originations of one- to four family residential loans. These increases were partially offset by the absence of a gain on sale of securities of $856,000 during the nine months ended March 31, 2016 that was not present in the same period in 2017. In addition, other income decreased $206,000, or 59.4%, primarily due to income related to the dissolution of our Craft3 subsidiary during the nine months ended March 31, 2016.

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



	Nine Months Ended March 31,				Increase (Decrease)
	2017		2016		Amount			Percent
	(Dollars in thousands)
Loan and deposit service fees	$	2,623	$	2,655	$	(32	)	(1.2	)%
Mortgage servicing fees, net of amortization	188		187		1			0.5
Net gain on sale of loans	713		88		625			710.2
Net gain on sale of investment securities	—		856		(856		)	(100.0	)
Increase in cash surrender value of bank-owned life insurance	541		59		482			816.9
Income from death benefit on bank-owned life insurance, net	768		—		768			100.0
Other income	141		347		(206		)	(59.4	)
Total noninterest income	$	4,974	$	4,192	$	782		18.7	%

Noninterest Expense. Noninterest expense increased $1.4 million, or 6.7%, to $21.8 million for the nine months ended March 31, 2017, compared to $20.5 million for the same period in 2016, primarily as a result of a $1.9 million increase in compensation and benefits and a $364,000 increase related to real estate owned and repossessed assets. The increase in compensation and benefits expense was partially attributable to stock awards issued during the nine months ended March 31, 2017 as part of our 2015 Equity Incentive Plan, which will be expensed over a five year vesting period, and resulted in additional compensation and benefits of $727,000 compared to the same period in 2016. In addition to rewarding our staff and management for performance through incentive programs and sales commissions reflected by our growth since June 30, 2016, the opening of our HLC located in Seattle, Washington, and our newest branch in Bellingham, Washington have significantly contributed to our increased compensation and benefits and occupancy and equipment expense during the nine months ended March 31, 2017 as compared to the same period in 2016. Other noninterest expense increased $192,000, primarily as a result of increased expenses related to loan and deposit products and other organizational expenses. Real estate owned and repossessed assets expenses were minimal at $2,000 during the nine months ended March 31, 2017 as compared to income of $362,000 during nine months ended March 31, 2016, due primarily to the sale of a commercial real estate owned property. We expect increased noninterest expenses as we continue to grow and expand into new markets.

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



	Nine Months Ended March 31,					Increase (Decrease)
	2017		2016			Amount			Percent
	(Dollars in thousands)
Compensation and benefits	$	12,492	$	10,626		$	1,866		17.6	%
Real estate owned and repossessed assets expense (income), net	2		(362		)	364			100.6
Data processing	2,048		1,994			54			2.7
Occupancy and equipment	2,884		2,620			264			10.1
Supplies, postage, and telephone	518		500			18			3.6
Regulatory assessments and state taxes	367		377			(10		)	(2.7	)
Advertising	468		640			(172		)	(26.9	)
Professional fees	1,052		1,320			(268		)	(20.3	)
FDIC insurance premium	180		331			(151		)	(45.6	)
FHLB prepayment penalty	—		779			(779		)	(100.0	)
Other	1,827		1,635			192			11.7
Total	$	21,838	$	20,460		$	1,378		6.7	%

Provision for Income Tax. An income tax expense of $1.3 million was recorded for the nine months ended March 31, 2017, compared to $957,000 for the nine months ended March 31, 2016. The provision for income taxes was lower as a percentage of income before taxes during the nine months ended March 31, 2017 as compared to the same period in 2016, primarily due to changes in the proportion of pretax income to income exempt from taxation. The income from a death benefit on BOLI, which is exempt from federal income taxes, contributed to this change. For additional information, see Note 5 of the Notes to Consolidated Financial Statements contained in Item 1 of this Form 10-Q.

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 March 31, 2017 and 2016. 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 March 31, 2017		Three Months Ended March 31,														Nine Months Ended March 31,
	At March 31, 2017		2017							2016							2017							2016
	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⁾	4.29	%	$	704,075		$	7,479	4.25	%	$	543,480		$	6,047	4.45	%	$	670,772		$	21,391	4.25	%	$	515,580		$	17,315	4.48	%
Investment securities	2.73		86,610			580		2.68		112,819			714		2.53		90,403			1,846		2.72		124,745			2,279		2.44
Mortgage-backed securities	2.69		214,637			1,298		2.42		248,681			1,356		2.18		209,949			3,494		2.22		245,348			3,909		2.12
FHLB dividends	2.57		4,735			30		2.53		4,223			31		2.94		4,290			92		2.86		4,495			76		2.25
Interest-bearing deposits in banks	0.75		9,795			21		0.86		8,071			13		0.64		12,248			45		0.49		19,708			47		0.32
Total interest-earning assets ⁽²⁾	3.78		1,019,852			9,408		3.69		917,274			8,161		3.56		987,662			26,868		3.63		909,876			23,626		3.46

Interest-bearing liabilities:
Savings accounts	0.06		$	97,362		$	9	0.04		$	90,904		9		0.04		$	95,873		$	28	0.04		$	90,007		28		0.04
Transaction accounts	0.01		111,292			4		0.01		101,071			3		0.01		108,773			12		0.01		99,358			10		0.01
Money market accounts	0.33		290,730			212		0.29		245,561			158		0.26		279,849			602		0.29		237,456			444		0.25
Certificates of deposit	1.16		175,583			493		1.12		151,290			388		1.03		169,962			1,419		1.11		147,986			1,087		0.98
Total deposits	0.38		674,967			718		0.43		588,826			558		0.38		654,457			2,061		0.42		574,807			1,569		0.36
Borrowings	2.74		89,208			585		2.62		75,855			597		3.15		77,997			1,683		2.88		82,506			1,994		3.22
Total interest-bearing liabilities	0.61		764,175			1,303		0.68		664,681			1,155		0.70		732,454			3,744		0.68		657,313			3,563		0.72

Net interest income						$	8,105						$	7,006						$	23,124						$	20,063
Net interest rate spread	3.17							3.01							2.86							2.95							2.74
Net earning assets			$	255,677						$	252,593						$	255,208						$	252,563
Net interest margin ⁽³⁾								3.18							3.06							3.12							2.94
Average interest-earning assets to average interest-bearing liabilities			133.5		%					138.0		%					134.8		%					138.4		%

(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 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									Nine Months Ended
	March 31, 2017 vs. 2016									March 31, 2017 vs. 2016
	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, net	$	1,787		$	(355	)	$	1,432		$	5,224		$	(1,148	)	$	4,076
Investments	(352		)	160			(192		)	(1,193		)	345			(848		)
FHLB stock	4			(5		)	(1		)	(3		)	19			16
Other⁽¹⁾	3			5			8			(18		)	16			(2		)
Total interest-earning assets	$	1,442		$	(195	)	$	1,247		$	4,010		$	(768	)	$	3,242

Interest-bearing liabilities:
Interest-bearing transaction accounts	$	1		$	—		$	1		$	1		$	1		$	2
Money market accounts	30			24			54			77			81			158
Certificates of deposit	63			42			105			164			168			332
Borrowings	106			(118		)	(12		)	(112		)	(199		)	(311		)
Total interest-bearing liabilities	$	200		$	(52	)	$	148		$	130		$	51		$	181

Net change in interest income	$	1,242		$	(143	)	$	1,099		$	3,880		$	(819	)	$	3,061

(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 nine months ended March 31, 2017 and the year ended June 30, 2016, 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 March 31, 2017, 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	$	67,687	$	90,029	$	20,052	$	74	$	177,842
FHLB advances	26,553		20,000		40,000		—		86,553
Operating leases	300		490		396		1,667		2,853
Borrower taxes and insurance	1,944		—		—		—		1,944
Deferred compensation	66		68		27		352		513
Total contractual obligations	$	96,550	$	110,587	$	60,475	$	2,093	$	269,705

Commitments and Off-Balance Sheet Arrangements

The following table summarizes our commitments and contingent liabilities with off-balance sheet risks as of March 31, 2017:



	Amount of Commitment Expiration
	Within 1 Year		After 1 Year Through 3 Years		After 3 Years Through 5 Years		Beyond 5 Years		Total Amounts Committed
	(In thousands)
Commitments to originate loans:
Fixed-rate	$	50	$	—	$	—	$	—	$	50
Adjustable-rate	408		—		—		—		408
Unfunded commitments under lines of credit or existing loans	34,383		18,129		3,941		21,330		77,783
Standby letters of credit	124		109		—		—		233
Total commitments	$	34,965	$	18,238	$	3,941	$	21,330	$	78,474

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 investments in liquid assets based upon an assessment of expected loan demand, expected deposit flows, 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 March 31, 2017, cash and cash equivalents totaled $23.2 million. Securities classified as available-for-sale provide additional sources of liquidity and had a market value of $242.7 million at March 31, 2017. In addition, at March 31, 2017, we had FHLB stock of $4.7 million and have pledged collateral to support borrowings from the FHLB of $86.6 million. We have also established a borrowing arrangement with the Federal Reserve Bank of San Francisco; however, no collateral has been pledged as of March 31, 2017.

At March 31, 2017, we had $458,000 in loan commitments outstanding and an additional $78.0 million in undisbursed loans and standby letters of credit, including $40.4 million in undisbursed construction loan commitments.

Certificates of deposit due within one year of March 31, 2017 totaled $67.7 million, or 38.1% 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 12 banking locations, including our HLC, located throughout our 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.

The Company is a separate legal entity from the Bank and provides for its own liquidity to pay its operating expenses and other financial obligations. At March 31, 2017, the Company (on an unconsolidated basis) had liquid assets of $27.9 million.

Capital Resources

At March 31, 2017, shareholders' equity totaled $178.5 million, or 16.5% of total assets. Our book value per share of common stock was $14.78 at March 31, 2017, compared to $14.97 at June 30, 2016. Consistent with our goals to operate a sound and profitable organization, our policy for First Federal is to maintain its “well-capitalized” status in accordance with regulatory standards.

At March 31, 2017, the Bank and consolidated Company exceeded all regulatory capital requirements, and the Bank was considered "well capitalized" under FDIC regulatory capital guidelines.

The following table provides the capital requirements and actual results at March 31, 2017.



	Actual					Minimum Capital Requirements				Minimum Required to be Well-Capitalized
	Amount		Ratio			Amount		Ratio		Amount		Ratio
					(Dollars in thousands)
Tier I leverage capital (to average assets)
Bank only	$	137,971	13.1	%		$	42,241	4.0	%	$	52,801	5.0	%
Consolidated company	180,676		16.7			43,383		4.0		54,229		5.0
Common equity tier I (to risk-weighted assets)
Bank only	137,971		19.2			32,326		4.5		46,693		6.5
Consolidated company	180,676		25.0			32,576		4.5		47,054		6.5
Tier I risk-based capital (to risk-weighted assets)
Bank only	137,971		19.2			43,102		6.0		57,469		8.0
Consolidated company	180,676		25.0			43,434		6.0		57,912		8.0
Total risk-based capital (to risk-weighted assets)
Bank only	146,499		20.4			57,469		8.0		71,836		10.0
Consolidated company	189,204		26.1			57,912		8.0		72,390		10.0

In addition to the minimum common equity Tier 1 ("CET1"), Tier 1 and total capital ratios, the Bank now has to maintain a capital conservation buffer consisting of additional CET1 capital above the required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses based on percentages of eligible retained income that could be utilized for such actions. This new capital conservation buffer requirement began to be phased in starting in January 2016 at 0.625% of risk-weighted assets

and will increase each year until fully implemented to an amount equal to 2.5% of risk-weighted assets in January 2019.

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, 2016.

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 March 31, 2017, 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 March 31, 2017, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

The Company intends to continually review and 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, 2016. As of March 31, 2017, 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


(a)	Not applicable.


(b)	Not applicable.



Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Repurchased as Part of Publicly Announced Plan	Maximum Number of Shares that May Yet Be Repurchased Under the Plan

January 1, 2017 - January 31, 2017	—	$	—	—	487,356
February 1, 2017 - February 28, 2017	—	—		—	487,356
March 1, 2017 - March 31, 2017	76,100	15.72		76,100	411,256
Total	76,100	$	15.72	76,100

On September 27, 2016, the Company announced that its Board of Directors had authorized the repurchase of up to 1,300,756 shares, or approximately 10% of its shares of common stock issued and outstanding as of September 30, 2016. The repurchase program permits shares to be repurchased in the open market or private transactions, through block trades, and pursuant to any trading plan that may be adopted in accordance with the SEC's Rule 10b5-1.

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)
10.5	First Northwest Bancorp 2015 Equity Incentive Plan
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 March 31, 2017, 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: May 9, 2017	/s/ Laurence J. Hueth

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


Date: May 9, 2017	/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 March 31, 2017, 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 FY2017 Q3

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