First Northwest Bancorp - 10-Q quarterly report FY2017 Q1

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 September 30, 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 November 1, 2017, there were 11,839,707 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	33

Item 3 - Quantitative and Qualitative Disclosures About Market Risk	50

Item 4 - Controls and Procedures	50

PART II - OTHER INFORMATION

Item 1 - Legal Proceedings	51

Item 1A - Risk Factors	51

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds	51

Item 3 - Defaults Upon Senior Securities	51

Item 4 - Mine Safety Disclosures	51

Item 5 - Other Information	51

Item 6 - Exhibits	51

SIGNATURES	53

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	September 30, 2017			June 30, 2017

Cash and due from banks	$	12,717		$	14,510
Interest-bearing deposits in banks	12,292			9,782
Investment securities available for sale, at fair value	290,159			228,593
Investment securities held to maturity, at amortized cost	51,012			51,872
Loans receivable (net of allowance for loan losses of $8,608 and $8,523)	726,891			726,786
Federal Home Loan Bank (FHLB) stock, at cost	5,729			4,368
Accrued interest receivable	3,498			3,020
Premises and equipment, net	13,213			13,236
Mortgage servicing rights, net	1,112			986
Bank-owned life insurance, net	28,570			28,413
Real estate owned and repossessed assets	86			104
Prepaid expenses and other assets	5,020			6,006

Total assets	$	1,150,299		$	1,087,676


LIABILITIES AND SHAREHOLDERS' EQUITY

Deposits	$	850,933		$	823,760
Borrowings	111,657			77,427
Accrued interest payable	217			208
Accrued expenses and other liabilities	7,600			7,417
Advances from borrowers for taxes and insurance	1,964			1,143

Total liabilities	972,371			909,955

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 11,839,707 shares at September 30, 2017, and 11,902,146 shares at June 30, 2017	118			119
Additional paid-in capital	111,175			112,058
Retained earnings	78,725			77,515
Accumulated other comprehensive loss, net of tax	(717		)	(434		)
Unearned employee stock ownership plan (ESOP) shares	(11,373		)	(11,537		)

Total shareholders' equity	177,928			177,721

Total liabilities and shareholders' equity	$	1,150,299		$	1,087,676

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
	September 30,
	2017		2016
INTEREST INCOME
Interest and fees on loans receivable	$	7,928	$	6,719
Interest on mortgage-backed securities	1,280		1,124
Interest on investment securities	765		649
Interest on deposits and other	34		13
FHLB dividends	36		35

Total interest income	10,043		8,540
INTEREST EXPENSE
Deposits	911		647
Borrowings	669		542

Total interest expense	1,580		1,189

Net interest income	8,463		7,351
PROVISION FOR LOAN LOSSES	—		350

Net interest income after provision for loan losses	8,463		7,001
NONINTEREST INCOME
Loan and deposit service fees	913		913
Mortgage servicing fees, net of amortization	114		63
Net gain on sale of loans	377		269
Net gain on sale of investment securities	136		—
Increase in cash surrender value of bank-owned life insurance	158		170
Other income	—		29

Total noninterest income	1,698		1,444

NONINTEREST EXPENSE
Compensation and benefits	4,466		4,160
Real estate owned and repossessed assets expense, net	8		39
Data processing	604		764
Occupancy and equipment	1,022		897
Supplies, postage, and telephone	211		150
Regulatory assessments and state taxes	128		134
Advertising	142		129
Professional fees	466		357
FDIC insurance premium	69		119
Other	691		711

Total noninterest expense	7,807		7,460

INCOME BEFORE PROVISION FOR INCOME TAXES	2,354		985

PROVISION FOR INCOME TAXES	581		334

NET INCOME	$	1,773	$	651

Basic and diluted earnings per share	$	0.17	$	0.06

See selected notes to the consolidated financial statements.

FIRST NORTHWEST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands) (Unaudited)



	Three Months Ended
	September 30,
	2017			2016

NET INCOME	$	1,773		$	651

Other comprehensive loss, net of tax
Unrealized loss on securities:
Unrealized holding loss, net of tax benefit of $(99) and $(120), respectively	(193		)	(236		)
Reclassification adjustment for net gains on sales of securities realized in income, net of taxes of $(46) and $0, respectively	(90		)	—

Other comprehensive loss, net of tax	(283		)	(236		)

COMPREHENSIVE INCOME	$	1,490		$	415

See selected notes to the consolidated financial statements.

FIRST NORTHWEST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

For the Three Months Ended September 30, 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, 2016	12,676,660		$	127		$	122,595		$	77,301		$	(12,177	)	$	1,895		$	189,741

Net income									651									651
Common stock repurchased	(99,314	)	(1		)	(992		)	(340		)							(1,333		)
Restricted stock awards net of forfeitures	390,000		4			(4		)										—
Other comprehensive loss, net of tax															(236		)	(236		)
Share-based compensation						256												256
ESOP shares committed to be released						30						165						195

BALANCE, September 30, 2016	12,967,346		$	130		$	121,885		$	77,612		$	(12,012	)	$	1,659		$	189,274



BALANCE, June 30, 2017	11,902,146		$	119		$	112,058		$	77,515		$	(11,537	)	$	(434	)	$	177,721

Net income									1,773									1,773
Common stock repurchased	(96,900	)	(1		)	(968		)	(563		)							(1,532		)
Restricted stock awards net of forfeitures	50,000		—			—												—
Restricted stock awards canceled	(15,539	)	—			(282		)	—									(282		)
Other comprehensive loss, net of tax															(283		)	(283		)
Share-based compensation						321												321
ESOP shares committed to be released						46						164						210

BALANCE, September 30, 2017	11,839,707		$	118		$	111,175		$	78,725		$	(11,373	)	$	(717	)	$	177,928

See selected notes to the consolidated financial statements.



FIRST NORTHWEST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited)
	Three Months Ended
	September 30,
	2017			2016
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	1,773		$	651
Adjustments to reconcile net income to net cash from operating activities:
Depreciation	290			304
Amortization and accretion of premiums and discounts on investments, net	414			388
(Accretion) amortization of deferred loan fees, net	(45		)	101
Amortization of mortgage servicing rights, net	(1		)	55
Additions to mortgage servicing rights, net	(125		)	(105		)
Provision for loan losses	—			350
Loss on sale of real estate owned and repossessed assets, net	4			—
Deferred federal income taxes	682			530
Allocation of ESOP shares	210			195
Share-based compensation	321			256
Gain on sale of loans, net	(377		)	(269		)
Gain on sale of securities available for sale, net	(136		)	—
Impairment of real estate owned and repossessed assets	—			32
Increase in cash surrender value of life insurance, net	(158		)	(170		)
Origination of loans held for sale	(5,849		)	(10,339		)
Proceeds from loans held for sale	6,226			11,378
Change in assets and liabilities:
Increase in accrued interest receivable	(478		)	(75		)
Decrease in prepaid expenses and other assets	450			445
Increase (decrease) in accrued interest payable	9			(5		)
Increase (decrease) in accrued expenses and other liabilities	183			(9,674		)

Net cash from operating activities	3,393			(5,952		)

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available for sale	(89,313		)	—
Proceeds from maturities, calls, and principal repayments of securities available for sale	9,868			20,083
Proceeds from sales of securities available for sale	17,239			—
Proceeds from maturities, calls, and principal repayments of securities held to maturity	794			1,107
(Purchase) redemption of FHLB stock	(1,361		)	227
Purchase of bank-owned life insurance	—			(10,000		)
Proceeds from sale of real estate owned and repossessed assets	14			—
Loan originations, net of repayments, charge-offs, and recoveries	(60		)	(44,748		)
Purchase of premises and equipment, net	(267		)	(375		)

Net cash from investing activities	(63,086		)	(33,706		)

See selected notes to the consolidated financial statements.



FIRST NORTHWEST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited)
	Three Months Ended
	September 30,
	2017			2016
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits	$	27,173		$	53,058
Proceeds from FHLB advances	132,445			47,774
Repayment of FHLB advances	(98,215		)	(53,356		)
Net increase in advances from borrowers for taxes and insurance	821			668
Net share settlement of stock awards	(282		)	—
Common stock repurchased	(1,532		)	(1,333		)

Net cash from financing activities	60,410			46,811

NET INCREASE IN CASH AND CASH EQUIVALENTS	717			7,153

CASH AND CASH EQUIVALENTS, beginning of period	24,292			22,650

CASH AND CASH EQUIVALENTS, end of period	$	25,009		$	29,803

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest on deposits and borrowings	$	1,571		$	1,194

Income taxes	$	—		$	1,450

NONCASH INVESTING ACTIVITIES
Unrealized loss on securities available for sale	$	(428	)	$	(356	)

Loans transferred to real estate owned and repossessed assets, net of deferred loan fees and allowance for loan losses	$	—		$	82

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 is a community-oriented financial institution providing commercial and consumer banking services to individuals and businesses in Western Washington State with offices in Clallam, Jefferson, Kitsap, and Whatcom counties. These services include deposit and lending transactions that are supplemented with 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, 2017. 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 months ended September 30, 2017, are not necessarily indicative of the results that may be expected for future periods.

On July 31, 2017, the Company reported its decision to change its fiscal year end to December 31 from a fiscal year ending on June 30. This change in fiscal year end makes the Company's and the Bank's year-end coincide with the regulatory reporting periods. As a result of the change in fiscal year, the Company will file a transition report on Form 10-KT covering the transition period from July 1, 2017 to December 31, 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.

Principles of consolidation - The accompanying consolidated financial statements include the accounts of First Northwest Bancorp and its wholly owned subsidiary, First Federal. All material intercompany accounts and transactions have been eliminated in consolidation.

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

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 anticipates completing the review of revenue streams and underlying revenue contracts within the scope of the guidance no later than November 2017. The Company will develop processes and procedures as a component of the review project 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 is not expected to 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 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 will change 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

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 do not anticipate an increase to the ALLL as a result of the implementation of this ASU. The Company continues to review the requirements of ASU 2016-13 and has reviewed preliminary testing of processes and procedures to ensure it is fully compliant with the amendments at the adoption date.

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.

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 September 30, 2017, are summarized as follows:



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(In thousands)
Available for Sale
Municipal bonds	$	16,277	$	435	$	(3	)	$	16,709
U.S. government agency issued asset-backed securities (ABS agency)	22,143		19		(343		)	21,819
Corporate issued asset-backed securities (ABS corporate)	22,589		56		(87		)	22,558
Corporate issued debt securities (Corporate debt)	19,846		—		(184		)	19,662
U.S. Small Business Administration securities (SBA)	48,221		95		(215		)	48,101
Mortgage-backed securities:
U.S. government agency issued mortgage-backed securities (MBS agency)	138,949		121		(988		)	138,082
Corporate issued mortgage-backed securities (MBS corporate)	23,262		108		(142		)	23,228

Total securities available for sale	$	291,287	$	834	$	(1,962	)	$	290,159

Held to Maturity
Municipal bonds	$	14,042	$	297	$	—		$	14,339
SBA	411		—		(1		)	410
Mortgage-backed securities:
MBS agency	36,559		527		(152		)	36,934

Total securities held to maturity	$	51,012	$	824	$	(153	)	$	51,683

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, 2017, are summarized as follows:



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(In thousands)
Available for Sale
Municipal bonds	$	21,540	$	686	$	(3	)	$	22,223
Agency bonds	5,050		—		(124		)	4,926
ABS agency	7,883		—		(235		)	7,648
ABS corporate	9,921		—		(108		)	9,813
SBA	14,195		36		(53		)	14,178
Mortgage-backed securities:
MBS agency	144,380		110		(1,054		)	143,436
MBS corporate	26,324		126		(81		)	26,369

Total securities available for sale	$	229,293	$	958	$	(1,658	)	$	228,593

Held to Maturity
Municipal bonds	$	14,120	$	306	$	—		$	14,426
SBA	443		—		(1		)	442
Mortgage-backed securities:
MBS agency	37,309		566		(122		)	37,753

Total securities held to maturity	$	51,872	$	872	$	(123	)	$	52,621

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 September 30, 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	$	—		$	—	$	(3	)	$	116	$	(3	)	$	116
ABS agency	—			—		(343		)	7,375		(343		)	7,375
ABS corporate	(87		)	12,578		—			—		(87		)	12,578
Corporate debt	(184		)	14,662		—			—		(184		)	14,662
SBA	(151		)	13,731		(64		)	8,109		(215		)	21,840
Mortgage-backed securities:
MBS agency	(64		)	22,360		(924		)	82,324		(988		)	104,684
MBS corporate	—			—		(142		)	6,595		(142		)	6,595

Total available for sale	$	(486	)	$	63,331	$	(1,476	)	$	104,519	$	(1,962	)	$	167,850

Held to Maturity
SBA	$	(1	)	$	252	$	—		$	—	$	(1	)	$	252
Mortgage-backed securities:
MBS agency	—			1,109		(152		)	18,872		(152		)	19,981

Total held to maturity	$	(1	)	$	1,361	$	(152	)	$	18,872	$	(153	)	$	20,233

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



	Less Than Twelve Months					Twelve Months or Longer					Total
	Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value
	(In thousands)
Available for Sale
Municipal bonds	$	(3	)	$	116	$	—		$	—	$	(3	)	$	116
Agency bonds	(52		)	2,498		(72		)	2,428		(124		)	4,926
ABS agency	—			—		(235		)	7,647		(235		)	7,647
ABS corporate	—			—		(108		)	9,813		(108		)	9,813
SBA	(53		)	8,405		—			—		(53		)	8,405
Mortgage-backed securities:
MBS agency	(968		)	102,738		(86		)	4,978		(1,054		)	107,716
MBS corporate	(81		)	6,894		—			—		(81		)	6,894

Total available for sale	$	(1,157	)	$	120,651	$	(501	)	$	24,866	$	(1,658	)	$	145,517

Held to Maturity
SBA	$	(1	)	$	261	$	—		$	—	$	(1	)	$	261
Mortgage-backed securities:
MBS agency	(121		)	18,522		(1		)	597		(122		)	19,119

Total held to maturity	$	(122	)	$	18,783	$	(1	)	$	597	$	(123	)	$	19,380

The Company may hold certain investment securities in an unrealized loss position that are not considered other than temporarily impaired ("OTTI"). At September 30, 2017, there were 50 investment securities with $2.1 million of unrealized losses and a fair value of approximately $188.1 million. At June 30, 2017, there were 42 investment securities with $1.8 million of unrealized losses and a fair value of approximately $164.9 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 months ended September 30, 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.



	September 30, 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	—		—		2,211		2,243
Due after five through ten years	21,135		21,006		3,035		3,011
Due after ten years	141,076		140,304		31,313		31,680

Total mortgage-backed securities	162,211		161,310		36,559		36,934

All other investment securities:
Due within one year	—		—		—		—
Due after one through five years	4,389		4,412		—		—
Due after five through ten years	29,536		29,547		9,555		9,733
Due after ten years	95,151		94,890		4,898		5,016

Total all other investment securities	129,076		128,849		14,453		14,749

Total investment securities	$	291,287	$	290,159	$	51,012	$	51,683



	June 30, 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	—		—		2,518		2,550
Due after five through ten years	19,009		18,919		3,260		3,233
Due after ten years	151,695		150,886		31,531		31,970

Total mortgage-backed securities	170,704		169,805		37,309		37,753

All other investment securities:
Due within one year	—		—		—		—
Due after one through five years	6,890		6,848		—		—
Due after five through ten years	22,042		22,124		9,637		9,817
Due after ten years	29,657		29,816		4,926		5,051

Total all other investment securities	58,589		58,788		14,563		14,868

Total investment securities	$	229,293	$	228,593	$	51,872	$	52,621

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 September 30,
	2017			2016
	(In thousands)
Proceeds from sales	$	17,239		$	—
Gross realized gains	269			—
Gross realized losses	(133		)	—

Note 3 - Loans Receivable

Loans receivable consisted of the following at the dates indicated:



	September 30, 2017			June 30, 2017
	(In thousands)
Real Estate:
One-to-four family	$	323,675		$	328,243
Multi-family	58,989			58,101
Commercial real estate	194,813			202,038
Construction and land	81,985			71,630
Total real estate loans	659,462			660,012

Consumer:
Home equity	35,059			35,869
Other consumer	23,329			21,043
Total consumer loans	58,388			56,912

Commercial business loans	16,385			17,073

Total loans	734,235			733,997

Less:
Net deferred loan fees	858			904
Premium on purchased loans, net	(2,122		)	(2,216		)
Allowance for loan losses	8,608			8,523

Total loans receivable, net	$	726,891		$	726,786

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 September 30, 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	$	3,071		$	511	$	1,735		$	683	$	818		$	523		$	1,168		$	14	$	8,523
Provision for loan losses	(263		)	8		(93		)	75		(71		)	87			(1,043		)	1,300		—
Charge-offs	—			—		—			—		—			(70		)	—					(70		)
Recoveries	100			—		—			—		16			39			—					155
Ending balance	$	2,908		$	519	$	1,642		$	758	$	763		$	579		$	125		$	1,314	$	8,608



	At September 30, 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	$	2,908	$	519	$	1,642	$	758	$	763	$	579	$	125	$	1,314	$	8,608
General reserve	2,859		518		1,631		757		752		576		122		1,314		8,529
Specific reserve	49		1		11		1		11		3		3		—		79

Total loans	$	323,675	$	58,989	$	194,813	$	81,985	$	35,059	$	23,329	$	16,385	$	—	$	734,235
General reserves ⁽¹⁾	319,111		58,873		193,479		81,958		34,372		23,317		16,099		—		727,209
Specific reserves ⁽²⁾	4,564		116		1,334		27		687		12		286		—		7,026


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



	At or For the Three Months Ended September 30, 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	$	2,992		$	341	$	1,268	$	599		$	833		$	310		$	335	$	561		$	7,239
Provision for loan losses	(128		)	14		143		(14		)	(32		)	23			590		(246		)	350
Charge-offs	—			—		—		—			(2		)	(23		)	—		—			(25		)
Recoveries	85			—		—		—			11			21			1		—			118
Ending balance	$	2,949		$	355	$	1,411	$	585		$	810		$	331		$	926	$	315		$	7,682

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



	At June 30, 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	$	3,071	$	511	$	1,735	$	683	$	818	$	523	$	1,168	$	14	$	8,523
General reserve	2,988		510		1,718		682		797		501		961		14		8,171
Specific reserve	83		1		17		1		21		22		207		—		352

Total loans	$	328,243	$	58,101	$	202,038	$	71,630	$	35,869	$	21,043	$	17,073	$	—	$	733,997
General reserves ⁽¹⁾	323,592		57,983		200,467		71,602		35,160		21,021		16,784		—		726,609
Specific reserves ⁽²⁾	4,651		118		1,571		28		709		22		289		—		7,388


⁽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:



	September 30, 2017						June 30, 2017
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
	(In thousands)
With no allowance recorded:
One-to-four family	$	1,010	$	1,118	$	—	$	646	$	845	$	—
Multi-family	—		—		—		—		—		—
Commercial real estate	278		394		—		297		406		—
Construction and land	—		3		—		—		—		—
Home equity	377		526		—		379		410		—
Other consumer	—		139		—		—		124		—
Commercial business	—		5		—		—		—		—
Total	1,665		2,185		—		1,322		1,785		—

With an allowance recorded:
One-to-four family	3,554		3,834		49		4,005		4,295		83
Multi-family	116		116		1		118		118		1
Commercial real estate	1,056		1,061		11		1,274		1,278		17
Construction and land	27		51		1		28		52		1
Home equity	310		377		11		330		398		21
Other consumer	12		21		3		22		50		22
Commercial business	286		286		3		289		289		207
Total	5,361		5,746		79		6,066		6,480		352

Total impaired loans:
One-to-four family	4,564		4,952		49		4,651		5,140		83
Multi-family	116		116		1		118		118		1
Commercial real estate	1,334		1,455		11		1,571		1,684		17
Construction and land	27		54		1		28		52		1
Home equity	687		903		11		709		808		21
Other consumer	12		160		3		22		174		22
Commercial business	286		291		3		289		289		207
Total	$	7,026	$	7,931	$	79	$	7,388	$	8,265	$	352

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				Three Months Ended
	September 30, 2017				September 30, 2016
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(In thousands)
With no allowance recorded:
One-to-four family	$	778	$	12	$	2,274	$	32
Multi-family	—		—		—		—
Commercial real estate	318		—		468		2
Construction and land	—		—		—		—
Home equity	379		5		139		2
Other consumer	—		3		—		—
Commercial business	—		—		—		—
Total	1,475		20		2,881		36

With an allowance recorded:
One-to-four family	3,800		72		3,705		66
Multi-family	117		1		121		2
Commercial real estate	1,061		10		1,177		17
Construction and land	27		2		89		8
Home equity	312		7		370		7
Other consumer	20		—		84		1
Commercial business	288		4		358		5
Total	5,625		96		5,904		106

Total impaired loans:
One-to-four family	4,578		84		5,979		98
Multi-family	117		1		121		2
Commercial real estate	1,379		10		1,645		19
Construction and land	27		2		89		8
Home equity	691		12		509		9
Other consumer	20		3		84		1
Commercial business	288		4		358		5
Total	$	7,100	$	116	$	8,785	$	142

Interest income recognized on a cash basis on impaired loans for the three months ended September 30, 2017 and 2016, was $80,000 and $91,000, 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:



	September 30, 2017		June 30, 2017
	(In thousands)
One-to-four family	$	975	$	1,042
Commercial real estate	403		426
Construction and land	27		28
Home equity	377		398
Other consumer	12		21

Total nonaccrual loans	$	1,794	$	1,915

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 September 30, 2017 and June 30, 2017.

The following table presents past due loans, net of partial loan charge-offs, by class, as of September 30, 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	$	—	$	155	$	45	$	200	$	323,475	$	323,675
Multi-family	—		—		—		—		58,989		58,989
Commercial real estate	—		—		—		—		194,813		194,813
Construction and land	—		34		19		53		81,932		81,985
Total real estate loans	—		189		64		253		659,209		659,462

Consumer:
Home equity	394		43		—		437		34,622		35,059
Other consumer	83		—		—		83		23,246		23,329
Total consumer loans	477		43		—		520		57,868		58,388

Commercial business loans	—		—		—		—		16,385		16,385

Total loans	$	477	$	232	$	64	$	773	$	733,462	$	734,235

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, 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	$	—	$	206	$	—	$	206	$	328,037	$	328,243
Multi-family	—		—		—		—		58,101		58,101
Commercial real estate	—		—		—		—		202,038		202,038
Construction and land	—		34		20		54		71,576		71,630
Total real estate loans	—		240		20		260		659,752		660,012

Consumer:
Home equity	21		294		10		325		35,544		35,869
Other consumer	28		73		—		101		20,942		21,043
Total consumer loans	49		367		10		426		56,486		56,912

Commercial business loans	—		—		—		—		17,073		17,073

Total loans	$	49	$	607	$	30	$	686	$	733,311	$	733,997

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 September 30, 2017 and June 30, 2017, First Federal had $3.3 million and $3.3 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 September 30, 2017, by class of loans:



	Pass		Watch		Special Mention		Sub- Standard		Total
	(In thousands)
Real Estate:
One-to-four family	$	316,469	$	4,340	$	959	$	1,907	$	323,675
Multi-family	56,756		2,117		116		—		58,989
Commercial real estate	182,417		9,611		2,209		576		194,813
Construction and land	74,011		3,460		4,421		93		81,985
Total real estate loans	629,653		19,528		7,705		2,576		659,462

Consumer:
Home equity	34,076		318		33		632		35,059
Other consumer	22,805		306		172		46		23,329
Total consumer loans	56,881		624		205		678		58,388

Commercial business loans	14,004		1,410		971		—		16,385

Total loans	$	700,538	$	21,562	$	8,881	$	3,254	$	734,235

The following table represents the internally assigned grade as of June 30, 2017, by class of loans:



	Pass		Watch		Special Mention		Sub- Standard		Total
	(In thousands)
Real Estate:
One-to-four family	$	321,596	$	3,680	$	1,153	$	1,814	$	328,243
Multi-family	56,103		1,880		118		—		58,101
Commercial real estate	188,956		10,243		2,232		607		202,038
Construction and land	65,175		2,197		4,161		97		71,630
Total real estate loans	631,830		18,000		7,664		2,518		660,012

Consumer:
Home equity	34,913		215		57		684		35,869
Other consumer	20,676		159		173		35		21,043
Total consumer loans	55,589		374		230		719		56,912

Commercial business loans	14,143		1,464		1,451		15		17,073

Total loans	$	701,562	$	19,838	$	9,345	$	3,252	$	733,997

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 September 30, 2017, by class of loans:



	Nonperforming		Performing		Total
	(In thousands)
Real Estate:
One-to-four family	$	975	$	322,700	$	323,675
Multi-family	—		58,989		58,989
Commercial real estate	403		194,410		194,813
Construction and land	27		81,958		81,985

Consumer:
Home equity	377		34,682		35,059
Other consumer	12		23,317		23,329

Commercial business	—		16,385		16,385

Total loans	$	1,794	$	732,441	$	734,235

The following table represents the credit risk profile based on payment activity as of June 30, 2017, by class of loans:



	Nonperforming		Performing		Total
	(In thousands)
Real Estate:
One-to-four family	$	1,042	$	327,201	$	328,243
Multi-family	—		58,101		58,101
Commercial real estate	426		201,612		202,038
Construction and land	28		71,602		71,630

Consumer:
Home equity	398		35,471		35,869
Other consumer	21		21,022		21,043

Commercial business	—		17,073		17,073

Total loans	$	1,915	$	732,082	$	733,997

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:



	September 30,		June 30,
	2017		2017
	(In thousands)
Total TDR loans	$	5,790	$	6,145
Allowance for loan losses related to TDR loans	71		315
Total nonaccrual TDR loans	558		673

There were no newly restructured and renewals or modifications of existing TDR loans during the three months ended September 30, 2017 and 2016.

The following is a summary of TDR loans which incurred a payment default within 12 months of the restructure date during the three months ended September 30, 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	$	—	$	87	$	—	$	87

The following is a summary of TDR loans which incurred a payment default within 12 months of the restructure date during the three months ended September 30, 2016.



	Number of Contracts	Rate Modification		Term Modification		Combination Modification		Total Modifications
		(Dollars in thousands)
TDR loans that subsequently defaulted
One- to four-family	1	$	—	$	—	$	86	$	86

No additional funds were committed to be advanced in connection with impaired loans at September 30, 2017.

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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



	September 30, 2017						June 30, 2017
	Accrual		Nonaccrual		Total		Accrual		Nonaccrual		Total
	(In thousands)
One-to-four family	$	3,590	$	323	$	3,913	$	3,608	$	421	$	4,029
Multi-family	116		—		116		118		—		118
Commercial real estate	931		235		1,166		1,145		252		1,397
Home equity	309		—		309		312		—		312
Commercial business	286		—		286		289		—		289

Total TDR loans	$	5,232	$	558	$	5,790	$	5,472	$	673	$	6,145

Note 4 - Deposits

The aggregate amount of time deposits in excess of the Federal Deposit Insurance Corporation ("FDIC") insured limit, currently $250,000, at September 30, 2017 and June 30, 2017, was $82.3 million and $68.0 million, respectively. Deposits and weighted-average interest rates at the dates indicated are as follows:



	Weighted-Average Interest Rate	September 30, 2017			Weighted-Average Interest Rate	June 30, 2017
	(Dollars in thousands)
Savings	0.05%	$	103,108		0.06%	$	98,894
Transaction accounts	0.01%	255,158			0.01%	245,889
Money market accounts	0.31%	261,474			0.31%	267,503
Certificates of deposit and jumbo certificates	1.26%	231,193			1.19%	211,474

		$	850,933			$	823,760

Weighted-average interest rate		0.45		%		0.42		%

Maturities of certificates at the dates indicated are as follows:



	September 30, 2017		June 30, 2017
	(In thousands)
Within one year or less	$	120,708	$	106,448
After one year through two years	69,269		59,137
After two years through three years	22,457		25,767
After three years through four years	11,153		9,569
After four years through five years	7,585		10,498
After five years	21		55

	$	231,193	$	211,474

Deposits at September 30, 2017 and June 30, 2017, included $51.6 million and $54.5 million, respectively, in public fund deposits. Investment securities with a carrying value of $41.3 million and $41.8 million were pledged as collateral for these deposits at September 30, 2017 and June 30, 2017, respectively. This exceeds the minimum collateral requirements established by the Washington Public Deposit Protection Commission.

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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



	Three Months Ended
	September 30,
	2017		2016
	(In thousands)
Savings	$	14	$	10
Transaction accounts	4		4
Insured money market accounts	206		187
Certificates of deposit and jumbo certificates	687		446

	$	911	$	647

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 24.7% and 33.9% for the three months ended September 30, 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 months ended September 30, 2017 and 2016.

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



	Three Months Ended
	September 30,
	2017		2016
	(In thousands, except share data)
Numerator:
Net income	$	1,773	$	651

Denominator:
Basic weighted average common shares outstanding	10,631,508		11,647,106
Dilutive restricted stock grants	70,753		186,399
Diluted weighted average common shares outstanding	10,702,261		11,833,505

Basic earnings per share	$	0.17	$	0.06

Diluted earnings per share	$	0.17	$	0.06

Unallocated ESOP shares are not included as outstanding for either basic or diluted earnings per share calculations. As of September 30, 2017 and 2016, there were 913,113 and 964,461 shares in the ESOP that remain unallocated, respectively.

Potential dilutive shares are excluded from the computation of EPS if their effect is anti-dilutive. Restricted stock awards of 2,718 shares were not included in the computation of diluted EPS at September 30, 2017. There were no anti-dilutive shares at September 30, 2016.

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.

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 September 30, 2017 and 2016 was $210,000 and $195,000, respectively.

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



	September 30, 2017		June 30, 2017
	(Dollars in thousands)
Allocated shares	121,695		121,695
Committed to be released shares	13,221		—
Unallocated shares	913,113		926,334

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

Fair value of unallocated shares	$	15,614	$	14,608

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 8 - Stock-based Compensation

On November 16, 2015, the Company's shareholders approved the First Northwest Bancorp 2015 Equity Incentive Plan (the "2015 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 2015 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 2015 EIP is 1,834,050. The 2015 EIP provides for the use of authorized but unissued shares or shares that have been reacquired by First Northwest to fund share-based awards. At September 30, 2017, there were 1,394,050 total shares available for grant under the 2015 EIP, including 84,014 shares available to be granted as restricted stock.

During the three months ended September 30, 2017, 50,000 shares of restricted stock were awarded and no stock options were granted. There were 402,500 shares of restricted stock awarded during the three months ended September 30, 2016. Awarded shares of restricted stock vest over 5 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 months ended September 30, 2017 and 2016, total compensation expense for the 2015 EIP was $321,000 and $256,000, respectively.

Included in the above compensation expense for the three months ended September 30, 2017 and 2016, was directors' compensation of $98,000 and $92,000, respectively.

The following table provides a summary of changes in non-vested restricted stock awards for the three months ended September 30, 2017:



	For the Three Months Ended
	September 30, 2017
			Weighted-Average
			Grant Date
	Shares		Fair Value
Non-vested at July 1, 2017	390,000		$	12.70
Granted	50,000		16.07
Vested	(62,461	)	12.70
Canceled (1)	(15,539	)	12.70

Non-vested at September 30, 2017	362,000		13.17

—%	362,000

(1) A surrender of vested stock awards by a participant surrendering the number of shares valued at the current stock price at the vesting date to cover the total cost of the vested shares. The surrendered shares are canceled and are unavailable for reissue.

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



	For the Three Months Ended
	September 30, 2016
			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 September 30, 2016	390,000		12.70

—%	390,000

As of September 30, 2017, there was $4.5 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 3.9 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 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.

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

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



	September 30, 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	$	—	$	16,709	$	—	$	16,709
ABS agency	—		21,819		—		21,819
ABS corporate	—		22,558		—		22,558
Corporate debt	—		19,662		—		19,662
SBA	—		48,101		—		48,101
MBS agency	—		138,082		—		138,082
MBS corporate	—		23,228		—		23,228
	$	—	$	290,159	$	—	$	290,159



	June 30, 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	$	—	$	22,223	$	—	$	22,223
Agency bonds	—		4,926		—		4,926
ABS agency	—		7,648		—		7,648
ABS corporate	—		9,813		—		9,813
SBA	—		14,178		—		14,178
MBS agency	—		143,436		—		143,436
MBS corporate	—		26,369		—		26,369
	$	—	$	228,593	$	—	$	228,593

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:



	September 30, 2017
	Level 1		Level 2		Level 3		Total
	(In thousands)
Impaired loans	$	—	$	—	$	7,026	$	7,026
Real estate owned and repossessed assets	—		—		86		86

	$	—	$	—	$	7,112	$	7,112


	June 30, 2017
	Level 1		Level 2		Level 3		Total
	(In thousands)
Impaired loans	$	—	$	—	$	7,388	$	7,388
Real estate owned and repossessed assets	—		—		104		104

	$	—	$	—	$	7,492	$	7,492

At September 30, 2017 and June 30, 2017, 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:



	September 30, 2017
	Fair Value		Valuation Technique	Unobservable Input	Range (Weighted-Average)¹
	(In thousands)
Real estate owned and repossessed assets	$	86	Market comparable	Discount to appraisal	0% - 10% (10%)


¹Discount to appraisal disposition value.



	June 30, 2017
	Fair Value		Valuation Technique	Unobservable Input	Range (Weighted-Average)¹
	(In thousands)
Real estate owned and repossessed assets	$	104	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:



	September 30, 2017
	Carrying Amount		Estimated Fair Value		Fair Value Measurements Using:
					Level 1		Level 2			Level 3
	(In thousands)
Financial assets
Cash and cash equivalents	$	25,009	$	25,009	$	25,009	$	—		$	—
Investment securities available for sale	290,159		290,159		—		290,159			—
Investment securities held to maturity	51,012		51,683		—		51,683			—
Loans receivable, net	726,891		723,089		—		—			723,089
FHLB stock	5,729		5,729		—		5,729			—
Accrued interest receivable	3,498		3,498		—		3,498			—
Mortgage servicing rights, net	1,112		1,692		—		—			1,692

Financial liabilities
Demand deposits	$	619,740	$	619,740	$	619,740	$	—		$	—
Time deposits	231,193		230,731		—		230,731			—
Borrowings	111,657		114,247		—		114,247			—
Accrued interest payable	217		217		—		217		—	—



	June 30, 2017
	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	$	24,292	$	24,292	$	24,292	$	—	$	—
Investment securities available for sale	228,593		228,593		—		228,593		—
Investment securities held to maturity	51,872		52,621		—		52,621		—
Loans receivable, net	726,786		723,848		—		—		723,848
FHLB stock	4,368		4,368		—		4,368		—
Accrued interest receivable	3,020		3,020		—		3,020		—
Mortgage servicing rights, net	986		1,600		—		—		1,600

Financial liabilities
Demand deposits	$	612,286	$	612,286	$	612,286	$	—	$	—
Time deposits	211,474		211,072		—		211,072		—
Borrowings	77,427		80,338		—		80,338		—
Accrued interest payable	208		208		—		208		—

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

Financial instruments with 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

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 September 30, 2017 and June 30, 2017. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.

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

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

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

Certain matters discussed in this Quarterly Report on Form 10-Q constitute forward‑looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of historical fact, are based on certain assumptions and are generally identified by the use of words such as “believes,” “expects,” “anticipates,” “estimates” or similar expressions. Forward‑looking statements include, but are not limited to:


•	statements of our goals, intentions and expectations;


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


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


•	estimates of our risks and future costs and benefits.

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


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


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


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


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


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


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


•	whether our management team can implement our operational strategy, 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, the 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 providing commercial and consumer banking services to individuals and businesses in Western Washington State. 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. Our business plan includes the intent to extend our operations further throughout the Puget Sound Region in order to diversify our loan portfolio and increase our net interest margin. The Puget Sound region extends from Whatcom County in the north on the Canadian border to Thurston and Pierce counties to the south. Other key metropolitan areas within the Puget Sound region include Bellingham (Whatcom County), Burlington (Skagit County), Everett (Snohomish County), Seattle (King County), Tacoma (Pierce County) and Olympia, the state capital (Thurston County).

We offer a wide range of products and services focused on the lending and depository needs of the communities we serve. Historically, lending activities have been primarily directed toward the origination of first lien one- to four-family mortgage loans, and, to a lesser extent, commercial and multi-family real estate loans, construction and land loans (including lot loans), commercial business loans, and consumer loans, consisting primarily of home equity loans and lines of credit. 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.

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, 2017.

Comparison of Financial Condition at September 30, 2017 and June 30, 2017

Assets. Total assets increased $62.6 million, or 5.8%, to $1.2 billion at September 30, 2017, from $1.1 billion at June 30, 2017, primarily due to an increase of $60.7 million, or 21.6%, in investment securities to $341.2 million at September 30, 2017, from $280.5 million at June 30, 2017. The increase in investment securities was part of management's strategic plan to leverage low cost deposits and borrowings to generate additional interest income from investments.

Our total loans, excluding loans held for sale, remained relatively stable, increasing $238,000 to $734.2 million at September 30, 2017 from $734.0 million at June 30, 2017, a result of new loan originations partially offset by normal amortization, prepayment activity, and one- to four-family residential sales and commercial real estate loan participations. One- to four-family residential, commercial real estate, home equity, and commercial business loans decreased $4.6 million, $7.2 million, $810,000, and $688,000, respectively, while multi-family, construction and land, and other consumer loans increased $888,000, $10.4 million, and $2.3 million, respectively, during the quarter.

Construction and land loans increased $10.4 million, or 14.5%, to $82.0 million at September 30, 2017 from $71.6 million at June 30, 2017, as a result of our strategic decision to focus on increasing construction loan origination activity as real estate values and general economic conditions in our market areas continued to improve. 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 $50.8 million in undisbursed construction commitments at September 30, 2017, an increase of $18.8 million, or 58.8%, compared to $32.0 million at June 30, 2017. Undisbursed construction commitments at September 30, 2017 included $26.5 million of multi-family residential, $14.8 million of one- to four-family residential, and $9.5 million of commercial real estate construction projects. Commercial real estate construction commitments include $12.0 million of one- to four-family speculative construction projects, of which there was $7.3 million located in King County and $4.5 million located in Thurston County, Washington.

Other consumer loans increased $2.3 million, or 11.0%, to $23.3 million at September 30, 2017 from $21.0 million at June 30, 2017, primarily the result of auto loans originated through our indirect lending program.

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



September 30, 2017		North Olympic Peninsula ⁽¹⁾		Puget Sound Region ⁽²⁾		Other Washington		Total
		(In thousands)
Construction Commitment
	One- to four-family residential	$	18,581	$	13,849	$	—	$	32,430
	Multi-family residential	—		56,932		—		56,932
	Commercial real estate	1,146		17,945		9,720		28,811
	Total commitment	$	19,727	$	88,726	$	9,720	$	118,173

Construction Funds Disbursed
	One- to four-family residential	$	11,131	$	6,478	$	—	$	17,609
	Multi-family residential	—		30,467		—		30,467
	Commercial real estate	701		12,458		6,188		19,347
	Total disbursed	$	11,832	$	49,403	$	6,188	$	67,423

Undisbursed Commitment
	One- to four-family residential	$	7,450	$	7,371	$	—	$	14,821
	Multi-family residential	—		26,465		—		26,465
	Commercial real estate	445		5,487		3,532		9,464
	Total undisbursed	$	7,895	$	39,323	$	3,532	$	50,750

Land Funds Disbursed
	One- to four-family residential	$	6,812	$	874	$	—	$	7,686
	Commercial real estate	—		6,876		—		6,876
	Total disbursed for land	$	6,812	$	7,750	$	—	$	14,562

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



June 30, 2017		North Olympic Peninsula		Puget Sound Region		Other Washington		Total
		(In thousands)
Construction Commitment
	One- to four-family residential	$	17,200	$	9,794	$	—	$	26,994
	Multi-family residential	—		35,643		—		35,643
	Commercial real estate	1,449		14,935		9,646		26,030
	Total Commitment	$	18,649	$	60,372	$	9,646	$	88,667

Construction Funds Disbursed
	One- to four-family residential	$	9,744	$	3,682	$	—	$	13,426
	Multi-family residential	—		26,105		—		26,105
	Commercial real estate	1,068		9,957		6,114		17,139
	Total disbursed	$	10,812	$	39,744	$	6,114	$	56,670

Undisbursed Commitment
	One- to four-family residential	$	7,456	$	6,112	$	—	$	13,568
	Multi-family residential	—		9,538		—		9,538
	Commercial real estate	381		4,978		3,532		8,891
	Total undisbursed	$	7,837	$	20,628	$	3,532	$	31,997

Land Funds Disbursed
	One- to four-family residential	$	7,111	$	936	$	—	$	8,047
	Commercial real estate	—		6,913		—		6,913
	Total disbursed for land	$	7,111	$	7,849	$	—	$	14,960

During the three months ended September 30, 2017, the Company originated $73.3 million of loans, of which $21.6 million, or 29.5%, were originated in the North Olympic Peninsula, $51.2 million, or 69.7%, in the Puget Sound region of Washington, and $133,000, or 0.2%, in other areas in Washington. During the same period, we originated $19.4 million of one- to four-family residential loans, of which $5.8 million were sold into the secondary market. We continue to focus on increasing lending activities from our HLC with the objective of retaining 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, which we anticipate would allow us to rely less on the purchase of one- to four-family residential loan pools.

Our allowance for loan losses increased $85,000, or 1.0%, to $8.6 million at September 30, 2017, from $8.5 million at June 30, 2017. The allowance for loan losses as a percentage of total loans remained the same at 1.2% of total loans at both September 30, 2017 and June 30, 2017. There was no material change in our allowance for loan losses as a percentage of total loans during the period as our asset quality and balance of total loans has remained relatively 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:



	September 30, 2017			June 30, 2017
	(In thousands)
Real Estate:
One-to-four family	$	323,675		$	328,243
Multi-family	58,989			58,101
Commercial real estate	194,813			202,038
Construction and land	81,985			71,630
Total real estate loans	659,462			660,012

Consumer:
Home equity	35,059			35,869
Other consumer	23,329			21,043
Total consumer loans	58,388			56,912

Commercial business loans	16,385			17,073

Total loans	734,235			733,997
Less:
Net deferred loan fees	858			904
Premium on purchased loans, net	(2,122		)	(2,216		)
Allowance for loan losses	8,608			8,523
Loans receivable, net	$	726,891		$	726,786

Nonperforming loans decreased $121,000, or 6.3%, to $1.8 million at September 30, 2017, from $1.9 million at June 30, 2017, primarily as a result of a decrease in nonperforming one- to four-family loans of $67,000, commercial real estate loans of $23,000, home equity loans of $21,000, consumer loans of $9,000. Real estate owned and repossessed assets decreased $18,000, or 17.3%, to $86,000 at September 30, 2017 from $104,000 at June 30, 2017. Nonperforming loans to total loans declined to 0.2% at September 30, 2017 from 0.3% at June 30, 2017, and the allowance for loan losses as a percentage of nonperforming loans increased to 479.8% at September 30, 2017 from 445.1% at June 30, 2017.

At September 30, 2017, there were $5.8 million in TDR loans, of which $5.2 million were performing in accordance with their modified payment terms and returned to accrual status. At both September 30, 2017 and June 30, 2017, the balance of classified loans, consisting solely of substandard loans, was $3.3 million.

The following table represents nonperforming assets at the dates indicated.



	September 30, 2017			June 30, 2017
	(In thousands)
Nonperforming loans:
Real estate loans:
One- to four-family	$	975		$	1,042
Commercial real estate	403			426
Construction and land	27			28

Total real estate loans	1,405			1,496

Consumer loans:
Home equity	377			398
Other	12			21

Total consumer loans	389			419

Total nonperforming loans	1,794			1,915

Real estate owned:
One- to four-family	86			86

Total real estate owned	86			86

Repossessed assets	—			18

Total nonperforming assets	$	1,880		$	2,019

Nonaccrual and 90 days or more past due loans as a percentage of total loans	0.2		%	0.3		%

During the three months ended September 30, 2017, total investment securities increased $60.7 million, or 21.6%, to $341.2 million at September 30, 2017, from $280.5 million at June 30, 2017, primarily due to purchases, prepayments, and amortization. Our management made a strategic decision during the quarter ended September 30, 2017 to leverage our capital using a combination of cash received from our growth in customer deposits and additional borrowings from the Federal Home Loan Bank ("FHLB") to purchase various liquid investment securities to generate additional net interest income. The majority of investments purchased during the quarter have variable rates, generally resetting quarterly based on a specified index and margin, and are expected to closely match changes in short-term borrowing rates. The average repricing term of our investment securities portfolio was estimated at 3.5 years as of September 30, 2017, as compared to 4.1 years as of June 30, 2017. We anticipate the variable rate securities purchased as part of this strategy will help to mitigate our interest rate risk and manage price volatility in our investment portfolio. While we expect the results of this strategy will be accretive to earnings and help us to leverage a portion of the capital we hold in excess of well-capitalized levels at this time, we continue to focus on growing our loan portfolio and improving our earning asset mix over the long term.

At September 30, 2017, U.S. government agency issued mortgage-backed securities ("MBS agency") still comprised the largest portion of our investment portfolio at 51.2%, and totaled $197.9 million at September 30, 2017, a decrease during the quarter of $9.2 million, or 4.4%, from $207.1 million at June 30, 2017. Other investment securities were $143.3 million at September 30, 2017, an increase of $70.0 million, or 95.4%, from $73.4 million at June 30, 2017. The increase in investment securities included the purchase of U.S. Agency Mortgage-Backed Securities ("MBS Agency") of $7.5 million, Small Business Administration ("SBA") securities of $31.1 million, corporate issued asset-backed securities ("ABS Corporate") of $12.5 million, corporate issued debt securities ("Corporate Debt") of $19.4 million, and Asset Backed Agency Securities ("ABS Agency") of $14.0 million, partially offset by the sales of MBS Agency securities of $6.7 million, U.S. Government Agency Securities ("US Agency") of $5.1 million and municipal bonds of $4.7 million. As of September 30, 2017, the investment portfolio, including mortgage-backed securities, had an estimated projected average life of 5.3 years compared to 4.7 years as of June 30, 2017, based on the interest rate environment at those times. The investment portfolio contains 84.1% of amortizing securities at September 30, 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 as part of our leveraging strategy 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 $62.4 million, or 6.9%, to $972.4 million at September 30, 2017, from $910.0 million at June 30, 2017, primarily the result of an increase in FHLB borrowings and customer deposits. FHLB borrowings increased $34.3 million, or 44.3%, to $111.7 million at September 30, 2017, from $77.4 million at June 30, 2017, as we utilized FHLB short-term Fed Funds borrowings during the quarter in order to manage our cash flow needs and partially fund the purchase of investment securities. FHLB short-term Fed Funds borrowings increased to $51.7 million at September 30, 2017 from $17.4 million at June 30, 2017, while long-term FHLB advances remained at $60.0 million at both September 30, 2017 and June 30, 2017. Customer deposits increased $27.2 million, or 3.3%, to $850.9 million at September 30, 2017, from $823.8 million at June 30, 2017, the result of an increase of $9.3 million, or 3.8%, in transaction accounts, $19.7 million, or 9.3%, in certificates of deposit, and $4.2 million, or 4.3%, in savings accounts, partially offset by a decrease of $6.0 million, or 2.3%, in money market accounts. 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.

Equity. Total shareholders' equity increased $207,000 to $177.9 million at September 30, 2017, from $177.7 million at June 30, 2017, mainly the result of net income of $1.8 million, partially offset by decreases in additional paid-in capital of $883,000 as a result of share repurchases during the quarter.

Comparison of Results of Operations for the Three Months Ended September 30, 2017 and 2016

General. Net income increased $1.1 million, or 172.4%, to $1.8 million for the three months ended September 30, 2017 compared to $651,000 for the three months ended September 30, 2016, primarily as a result of an increase in net interest income of $1.1 million coupled with a $350,000 decline in the provision for loan losses, partially offset by an increase in noninterest expense of $391,000.

Net Interest Income. Net interest income increased $1.1 million to $8.5 million for the three months ended September 30, 2017, from $7.4 million for the three months ended September 30, 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 14 basis points to 3.20% for the three months ended September 30, 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 investment alternatives, coupled with an increase in the average yield on investment and mortgage-backed securities. Of the $1.1 million increase in net interest income during the three months ended September 30, 2017 compared to the same period in 2016, $669,000 was the result of an increase in volume and $443,000 was attributable to changes in rates. Loans receivable was the primary contributor to the increase in net interest income with a $1.0 million increase due to volume and $160,000 increase due to rate. The yield on average interest-earning assets increased 23 basis points to 3.79% for the three months ended September 30, 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 increased 11 basis points to 0.79% for the three months ended September 30, 2017, compared to 0.68% for the same period in the prior year, due primarily to an increase in deposit costs to 0.52% for the three months ended September 30, 2017 compared to 0.41% for the same period in 2016.

Interest Income. Total interest income increased $1.5 million, or 17.6%, to $10.0 million for the three months ended September 30, 2017 from $8.5 million for the comparable period in 2016. Interest income on loans increased $1.2 million, or 18.0%, during the three months ended September 30, 2017, primarily reflecting an increase in the average balance of loans receivable to $727.9 million for the three months ended September 30, 2017 from $629.3 million for the three months ended September 30, 2016, combined with a higher average yield of 4.36% for the three months ended September 30, 2017 from 4.27% for the three months ended September 30, 2016.

Interest income on investment securities increased $116,000 to $765,000 for the three months ended September 30, 2017 compared to $649,000 for the three months ended September 30, 2016, primarily the result of an increase in the average balance of $13.6 million, or 14.2%, to $109.4 million for the three months ended September 30, 2017 compared to $95.8 million for the three months ended September 30, 2016. The average yield on investment securities for the three months ended September 30, 2017 increased nine basis points mainly due to increased rates paid on adjustable-rate securities coupled with higher average yields on recent securities purchased as compared to the same period in 2016.

Interest income on mortgage backed securities increased $156,000 to $1.3 million for the three months ended September 30, 2017 compared to $1.1 million for the three months ended September 30, 2016, and the average yield increased to 2.49% for the three months ended September 30, 2017 compared to 2.08% 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 September 30,
	2017				2016
	Average Balance Outstanding		Yield		Average Balance Outstanding		Yield		Increase/ (Decrease) in Interest Income
	(Dollars in thousands)
Loans receivable, net	$	727,879	4.36	%	$	629,261	4.27	%	$	1,209
Investment securities	109,420		2.80		95,778		2.71		116
Mortgage-backed securities	205,941		2.49		215,991		2.08		156
FHLB stock	5,324		2.70		3,891		3.60		1
Interest-bearing deposits in banks	10,104		1.35		15,148		0.34		21
Total interest-earning assets	$	1,058,668	3.79		$	960,069	3.56		$	1,503

Interest Expense. Total interest expense increased $391,000, or 32.9%, to $1.6 million for the three months ended September 30, 2017 from $1.2 million for the three months ended September 30, 2016, primarily due to increases in FHLB advances and the average balance and cost of deposits. The rates paid on 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 $66.6 million, or 10.6%, to $698.4 million for the three months ended September 30, 2017 from $631.8 million for the three months ended September 30, 2016, primarily the result of an increase in the average balance of, and interest paid on, certificates of deposit. The average balance of certificates of deposit increased $59.4 million to $223.3 million for the three months ended September 30, 2017 from $163.8 million for the three months ended September 30, 2016, and the average cost increased 14 bps to 1.23% for the three months ended September 30, 2017 as compared to 1.09% for the same period in 2016. Comparing those same periods, the average balance of money market accounts decreased $4.2 million, while the average balances of both transaction and savings accounts increased $5.3 million and $6.2 million, respectively. Increases in the average cost and balances of deposits 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 increased $127,000 to $669,000 for the three months ended September 30, 2017 from $542,000 for the comparable period in 2016 due to a $33.6 million increase in the average balance of FHLB borrowings.

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



	Three Months Ended September 30,
	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	$	100,718	0.06	%	$	94,493	0.04	%	$	4
Transaction accounts	111,675		0.01		106,412		0.02		—
Money market accounts	262,779		0.31		267,027		0.28		19
Certificates of deposit	223,253		1.23		163,819		1.09		241
Borrowings	101,476		2.64		67,921		3.19		127
Total interest-bearing liabilities	$	799,901	0.79		$	699,672	0.68		$	391

Provision for Loan Losses. There were no provision for loan losses for the three months ended September 30, 2017 compared to $350,000 for the three months ended September 30, 2016, as loan balances remained relatively stable during the most recent quarter and credit quality continued to improve. In comparison, the provision for loan losses during the same period in 2016 was primarily due to the growth in total loans. Management

considers the allowance for loan losses at September 30, 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 September 30,
	2017			2016
	(Dollars in thousands)
Net charge-offs	$	85		$	93
Allowance for loan losses	8,608			7,682
Allowance for losses as a percentage of total gross loans receivable at the end of this period	1.2		%	1.2		%
Total nonaccruing loans	1,794			2,865
Allowance for loan losses as a percentage of nonaccrual loans at end of period	479.8		%	268.1		%
Nonaccrual and 90 days or more past due loans as a percentage of total loans	0.2		%	0.4		%
Total loans	$	734,235		$	670,175

Noninterest Income. Noninterest income increased $254,000, or 17.6%, to $1.7 million for the three months ended September 30, 2017, from $1.4 million for the three months ended September 30, 2016, due to an increase in the net gain on sale of investment securities of $136,000, an increase in the gain on sale of loans of $108,000, and an increase in mortgage servicing fees, net of amortization of $51,000, partially offset by decreases in other income of $29,000 and the cash surrender value of BOLI of $12,000. The gain on sale of investment securities during the most recent quarter was the result of the sale of certain investment securities at gains used to offset securities sold at losses as we repositioned the portfolio as part of our leverage strategy. The increase in gain on sale of loans was the result of one- to four-family residential loans originated and sold during the most recent quarter.

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



	Three Months Ended September 30,				Increase (Decrease)
	2017		2016		Amount			Percent
	(Dollars in thousands)
Loan and deposit service fees	$	913	$	913	$	—		—	%
Mortgage servicing fees, net of amortization	114		63		51			81.0
Net gain on sale of loans	377		269		108			40.1
Net gain on sale of investment securities	136		—		136			100.0
Increase in cash surrender value of bank-owned life insurance	158		170		(12		)	(7.1	)
Other income	—		29		(29		)	(100.0	)
Total noninterest income	$	1,698	$	1,444	$	254		17.6	%

Noninterest Expense. Noninterest expense increased $347,000, or 4.7%, to $7.8 million for the three months ended September 30, 2017, compared to $7.5 million for the same period in 2016, primarily as a result of an increase in compensation and benefits expense of $306,000. 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. In addition, occupancy and equipment expenses increased due to our branch and HLC

expansion and growth as well as increased general operating expenses as we updated and improved our technology and infrastructure in support of prudent and sustainable growth. Data processing costs decreased and professional fees increased as we continued to use external consultants and services to assist with certain matters related to our business.

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



	Three Months Ended September 30,				Increase (Decrease)
	2017		2016		Amount			Percent
	(Dollars in thousands)
Compensation and benefits	$	4,466	$	4,160	$	306		7.4	%
Real estate owned and repossessed assets expense (income), net	8		39		(31		)	(79.5	)
Data processing	604		764		(160		)	(20.9	)
Occupancy and equipment	1,022		897		125			13.9
Supplies, postage, and telephone	211		150		61			40.7
Regulatory assessments and state taxes	128		134		(6		)	(4.5	)
Advertising	142		129		13			10.1
Professional fees	466		357		109			30.5
FDIC insurance premium	69		119		(50		)	(42.0	)
Other	691		711		(20		)	(2.8	)
Total	$	7,807	$	7,460	$	347		4.7	%

Provision for Income Tax. An income tax expense of $581,000 was recorded for the three months ended September 30, 2017 compared to $334,000 for the three months ended September 30, 2016, generally due to an increase in income before taxes of $1.4 million. 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 September 30, 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 September 30, 2017		Three Months Ended September 30,
	At September 30, 2017		2017							2016
	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⁾	4.35	%	$	727,879		$	7,928	4.36	%	$	629,261		$	6,719	4.27	%
Investment securities	2.29		109,420			765		2.80		95,778			649		2.71
Mortgage-backed securities	2.66		205,941			1,280		2.49		215,991			1,124		2.08
FHLB dividends	2.50		5,324			36		2.70		3,891			35		3.60
Interest-bearing deposits in banks	0.99		10,104			34		1.35		15,148			13		0.34
Total interest-earning assets ⁽²⁾	3.72		1,058,668			10,043		3.79		960,069			8,540		3.56

Interest-bearing liabilities:
Savings accounts	0.05		$	100,718		$	14	0.06		$	94,493		10		0.04
Transaction accounts	0.01		111,675			4		0.01		106,412			4		0.02
Money market accounts	0.31		262,779			206		0.31		267,027			187		0.28
Certificates of deposit	1.26		223,253			687		1.23		163,819			446		1.09
Total deposits	0.45		698,425			911		0.52		631,751			647		0.41
Borrowings	2.57		101,476			669		2.64		67,921			542		3.19
Total interest-bearing liabilities	0.70		799,901			1,580		0.79		699,672			1,189		0.68

Net interest income						$	8,463						$	7,351
Net interest rate spread	3.02							3.00							2.88
Net earning assets			$	258,767						$	260,397
Net interest margin ⁽³⁾								3.20							3.06
Average interest-earning assets to average interest-bearing liabilities			132.3		%					137.2		%

(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
	September 30, 2017 vs. 2016
	Increase (Decrease) Due to						Total Increase
	Volume			Rate			(Decrease)
	(In thousands)
Interest earning assets:
Loans receivable, net	$	1,049		$	160		$	1,209
Investments	39			233			272
FHLB stock	13			(12		)	1
Other⁽¹⁾	(4		)	25			21
Total interest-earning assets	$	1,097		$	406		$	1,503

Interest-bearing liabilities:
Savings accounts	$	1		$	3		$	4
Interest-bearing transaction accounts	1			(1		)	—
Money market accounts	(3		)	22			19
Certificates of deposit	162			79			241
Borrowings	267			(140		)	127
Total interest-bearing liabilities	$	428		$	(37	)	$	391

Net change in interest income	$	669		$	443		$	1,112

(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 three months ended September 30, 2017 and the year ended June 30, 2017, 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 September 30, 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	$	120,708	$	91,726	$	18,738	$	21	$	231,193
FHLB advances	51,657		40,000		20,000				111,657
Operating leases	310		510		428		1,695		2,943
Borrower taxes and insurance	1,964		—		—		—		1,964
Deferred compensation	91		74		29		431		625
Total contractual obligations	$	174,730	$	132,310	$	39,195	$	2,147	$	348,382

Commitments and Off-Balance Sheet Arrangements

The following table summarizes our commitments and contingent liabilities with off-balance sheet risks as of September 30, 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	$	110	$	—	$	—	$	—	$	110
Adjustable-rate	25		—		—		—		25
Unfunded commitments under lines of credit or existing loans	31,884		12,363		3,849		42,608		90,704
Standby letters of credit	124		59		—		—		183
Total commitments	$	32,143	$	12,422	$	3,849	$	42,608	$	91,022

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 September 30, 2017, cash and cash equivalents totaled $25.0 million. Securities classified as available-for-sale provide additional sources of liquidity and had a market value of $290.2 million at September 30, 2017. In addition, at September 30, 2017, we had FHLB stock of $5.7 million and have pledged collateral to support borrowings from the FHLB of $111.7 million. We have also established a borrowing arrangement with the Federal Reserve Bank of San Francisco; however, since no collateral has been pledged as of September 30, 2017, we are currently unable to borrow funds under that borrowing arrangement.

At September 30, 2017, we had $135,000 in loan commitments outstanding and an additional $90.9 million in undisbursed loans and standby letters of credit, including $50.8 million in undisbursed construction loan commitments.

Certificates of deposit due within one year of September 30, 2017 totaled $120.7 million, or 52.2% 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 September 30, 2017, the Company (on an unconsolidated basis) had liquid assets of $24.0 million.

Capital Resources

At September 30, 2017, shareholders' equity totaled $177.9 million, or 15.5% of total assets. Our book value per share of common stock was $15.03 at September 30, 2017, compared to $14.93 at June 30, 2017. 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 September 30, 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 September 30, 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	$	141,724	12.8	%		$	44,169	4.0	%	$	55,211	5.0	%
Consolidated company	178,602		15.8			45,199		4.0		56,498		5.0
Common equity tier I (to risk-weighted assets)
Bank only	141,724		18.8			33,907		4.5		48,976		6.5
Consolidated company	178,602		23.6			34,058		4.5		49,195		6.5
Tier I risk-based capital (to risk-weighted assets)
Bank only	141,724		18.8			45,209		6.0		60,278		8.0
Consolidated company	178,602		23.6			45,411		6.0		60,548		8.0
Total risk-based capital (to risk-weighted assets)
Bank only	150,552		20.0			60,278		8.0		75,348		10.0
Consolidated company	187,430		24.8			60,548		8.0		75,685		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, 2017.

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 September 30, 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 September 30, 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, 2017. As of September 30, 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 Plans	Maximum Number of Shares that May Yet Be Repurchased Under the Plans

July 1, 2017 - July 31, 2017	—	$	—	—	235,556
August 1, 2017 - August 31, 2017	54,700	15.87		54,700	180,856
September 1, 2017 - September 30, 2017	42,200	15.72		42,200	1,166,659
Total	96,900	$	15.81	96,900

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. The Company repurchased 1,162,100 shares, or approximately 8.9%, of its common stock through this repurchase program which ended on September 27, 2017.

On September 26, 2017, the Board of Directors authorized the repurchase of up to 1,166,659 shares, or approximately 10% of its shares of common stock issued and outstanding as of September 18, 2017. 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 (4)
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 September 30, 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.


(4)	Filed as Appendix A to the Company's Definitive Proxy Statement on Schedule 14A filed on September 25, 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: November 8, 2017	/s/ Laurence J. Hueth

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


Date: November 8, 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 September 30, 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 Q1

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