First Financial Northwest, Inc. - 10-K filing on 2016-03-10

Loans Receivable

12 Months Ended

Dec. 31, 2015

Loans receivable at December 31, 2015, and 2014 are summarized as follows:



	December 31,
	2015		2014
	(In thousands)
One-to-four family residential:
Permanent owner occupied	$	147,229	$	161,013
Permanent non-owner occupied	106,543		112,180
Construction non-owner occupied	—		500
	253,772		273,693
Multifamily:
Permanent	122,747		116,014
Construction	21,115		4,450
	143,862		120,464
Commercial real estate:
Permanent	244,211		239,211
Construction	—		6,100
Land	8,290		2,956
	252,501		248,267
Construction/land development: ⁽¹⁾
One-to-four family residential	52,233		19,860
Multifamily	25,551		17,902
Commercial	—		4,300
Land development	8,768		8,993
	86,552		51,055

Business	7,604		3,783
Consumer	6,979		7,130
Total loans	751,270		704,392
Less:
Loans in process ("LIP")	53,854		27,359
Deferred loan fees, net	2,881		2,604
ALLL	9,463		10,491
Loans receivable, net	$	685,072	$	663,938

___________

⁽¹⁾

Excludes construction loans that will convert to permanent loans. The Company considers these loans to be "rollovers" in that one loan is originated for both the construction loan and permanent financing. These loans are classified according to the underlying collateral. At December 31, 2015, the Company had $21.1 million, or 14.7% of the total multifamily loans, and no commercial or one-to-four family residential loans in these "rollover" type of loans. At December 31, 2014, the Company had $6.1 million, or 2.5% of the total commercial real estate portfolio, $4.5 million, or 3.7% of the total multifamily loans and $500,000, or 0.2% of the total one-to-four family residential loans in these rollover type of loans. At December 31, 2015 and December 31, 2014, $8.3 million and $3.0 million, respectively, of commercial real estate loans were not included in the construction/land development category because the Company classifies raw land or buildable lots when it does not intend to finance the construction as commercial real estate land loans.

At December 31, 2015, and 2014 there were no loans classified as held for sale.

Concentrations of Credit

Most of the Bank's lending activity occurs within the state of Washington. The primary market areas include King and to a lesser extent Pierce, Snohomish and Kitsap counties. The Company's loan portfolio consists of one-to-four family residential loans which comprised 33.8% of the total loan portfolio at December 31, 2015. Commercial real estate and multifamily loans were 33.6% and 19.1%, respectively, of the total loan portfolio at December 31, 2015, with construction/land development loans, consumer, and business loans accounting for the remaining 13.5% of the loan portfolio. Included in the one-to-four family residential, multifamily, commercial real estate, construction/land development, and consumer loan portfolios at December 31, 2015, were $13.5 million, $2.0 million, $59.9 million, $438,000, $198,000 of total loans, respectively, to the Company's five largest borrowing relationships.

The Company originates both adjustable and fixed interest rate loans. The composition of loans receivable at December 31, 2015, and 2014, was as follows:



December 31, 2015
Fixed Rate			Adjustable Rate
Term to Maturity	Principal Balance		Term to Rate Adjustment	Principal Balance
(In thousands)
Due within one year	$	17,476	Due within one year	$	122,992
After one year through three years	107,792		After one year through three years	28,316
After three years through five years	91,283		After three years through five years	90,779
After five years through ten years	99,348		After five years through ten years	41,239
Thereafter	151,879		Thereafter	166
	$	467,778		$	283,492



December 31, 2014
Fixed Rate			Adjustable Rate
Term to Maturity	Principal Balance		Term to Rate Adjustment	Principal Balance
(In thousands)
Due within one year	$	39,649	Due within one year	$	98,830
After one year through three years	70,416		After one year through three years	27,314
After three years through five years	128,142		After three years through five years	32,842
After five years through ten years	117,199		After five years through ten years	59,682
Thereafter	129,560		Thereafter	758
	$	484,966		$	219,426

The majority of the adjustable-rate loans are tied to the prime rate as published in The Wall Street Journal. The remaining adjustable-rate loans have interest rate adjustment limitations and are generally indexed to the FHLB Long-Term Bullet advance rates published by the FHLB. Future market factors may affect the correlation of the interest rate adjustment with the rates paid on short‑term deposits that have been primarily utilized to fund these loans.

ALLL. When the Company classifies problem assets as either substandard or doubtful, pursuant to Federal regulations, it may establish a specific reserve in an amount deemed prudent to address the risk specifically or may allow the loss to be addressed in the general allowance. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been specifically allocated to the particular problem assets. When an insured institution classifies problem assets as a loss, pursuant to Federal regulations, it is required to charge-off such assets in the period in which they are deemed uncollectible. The determination as to the classification of the Company's assets and the amount of valuation allowances is subject to review by bank regulators, who can require the establishment of additional loss allowances.

Loan grades are used by the Company to identify and track potential problem loans which do not rise to the levels described for substandard, doubtful, or loss. The grades for watch and special mention are assigned to loans which have been criticized based upon known characteristics such as periodic payment delinquency or stale financial information from the borrower and/or guarantors. Loans identified as criticized (watch and special mention) or classified (substandard, doubtful or loss) are subject to problem loan reporting every three months.

The following tables summarize changes in the ALLL and loan portfolio by type of loan and reserve method for the periods indicated.



	At or For the Year Ended December 31, 2015
	One-to-Four Family Residential			Multifamily			Commercial Real Estate			Construction/ Land Development		Business		Consumer			Total
ALLL:	(In thousands)
Beginning balance	$	3,694		$	1,646		$	4,597		$	355	$	47	$	152		$	10,491
Charge-offs	(27		)	(281		)	—			—		—		(54		)	(362		)
Recoveries	936			78			181			—		3		336			1,534
(Recapture) provision	(1,575		)	(145		)	(1,236		)	586		179		(9		)	(2,200		)
Ending balance	$	3,028		$	1,298		$	3,542		$	941	$	229	$	425		$	9,463

General reserve	$	2,516		$	1,295		$	3,364		$	941	$	229	$	386		$	8,731
Specific reserve	512			3			178			—		—		39			732

Loans: ⁽¹⁾
Total Loans	$	253,772		$	133,388		$	252,501		$	43,172	$	7,604	$	6,979		$	697,416
General reserve ⁽²⁾	217,677			131,793			247,110			43,172		7,604		6,771			654,127
Specific reserve ⁽³⁾	36,095			1,595			5,391			—		—		208			43,289

____________

⁽¹⁾ Net of LIP.

⁽²⁾ Loans collectively evaluated for impairment.

⁽³⁾ Loans individually evaluated for impairment.



	At or For the Year Ended December 31, 2014
	One-to-Four Family Residential			Multifamily		Commercial Real Estate			Construction/ Land Development			Business		Consumer			Total
ALLL:	(In thousands)
Beginning balance	$	5,141		$	1,377	$	5,881		$	399		$	14	$	182		$	12,994
Charge-offs	(78		)	—		(311		)	(223		)	—		(30		)	(642		)
Recoveries	50			—		174			—			10		5			239
(Recapture) provision	(1,419		)	269		(1,147		)	179			23		(5		)	(2,100		)
Ending balance	$	3,694		$	1,646	$	4,597		$	355		$	47	$	152		$	10,491

General reserve	$	2,894		$	1,619	$	4,268		$	355		$	47	$	93		$	9,276
Specific reserve	800			27		329			—			—		59			1,215

Loans: ⁽¹⁾
Total Loans	$	273,565		$	120,271	$	247,968		$	24,316		$	3,783	$	7,130		$	677,033
General reserve ⁽²⁾	229,827			118,099		238,416			24,316			3,783		6,933			621,374
Specific reserve ⁽³⁾	43,738			2,172		9,552			—			—		197			55,659

_____________

⁽¹⁾ Net of LIP.

⁽²⁾ Loans collectively evaluated for impairment.

⁽³⁾ Loans individually evaluated for impairment.



	At or For the Year Ended December 31, 2013
	One-to-Four Family Residential			Multifamily			Commercial Real Estate			Construction/ Land Development			Business			Consumer			Total
ALLL:	(In thousands)
Beginning balance	$	5,562		$	1,139		$	5,207		$	437		$	30		$	167		$	12,542
Charge-offs	(456		)	(346		)	(98		)	(582		)	(13		)	(101		)	(1,596		)
Recoveries	1,303			237			7			455			—			146			2,148
(Recapture) provision	(1,268		)	347			765			89			(3		)	(30		)	(100		)
Ending balance	$	5,141		$	1,377		$	5,881		$	399		$	14		$	182		$	12,994

General reserve	$	3,601		$	1,292		$	5,326		$	399		$	14		$	182		$	10,814
Specific reserve	1,540			85			555			—			—			—			2,180

Loans: ⁽¹⁾
Total Loans	$	280,674		$	117,181		$	247,402		$	23,127		$	1,142		$	9,201		$	678,727
General reserve ⁽²⁾	232,526			114,740			234,093			22,904			1,142			9,157			614,562
Specific reserve ⁽³⁾	48,148			2,441			13,309			223			—			44			64,165

______________

⁽¹⁾ Net of LIP.

⁽²⁾ Loans collectively evaluated for impairment.

⁽³⁾ Loans individually evaluated for impairment.

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. At December 31, 2015, total past due loans comprised 0.18% of total loans, net of LIP, as compared to 0.66% at December 31, 2014.

The following tables represent a summary at December 31, 2015, and 2014, of the aging of loans by type:



	Loans Past Due as of December 31, 2015
	30-59 Days		60-89 Days		90 Days and Greater		Total		Current		Total Loans ^{(1) (2)}
	(In thousands)
Real estate:
One-to-four family residential:
Owner occupied	$	678	$	483	$	—	$	1,161	$	146,068	$	147,229
Non-owner occupied	—		—		—		—		106,543		106,543
Multifamily	—		—		—		—		133,388		133,388
Commercial real estate	—		—		—		—		252,501		252,501
Construction/land development	—		—		—		—		43,172		43,172
Total real estate	678		483		—		1,161		681,672		682,833
Business	—		—		—		—		7,604		7,604
Consumer	—		78		19		97		6,882		6,979
Total	$	678	$	561	$	19	$	1,258	$	696,158	$	697,416

^{_________________________}

⁽¹⁾ There were no loans 90 days past due and still accruing interest at December 31, 2015.

⁽²⁾ Net of LIP.



	Loans Past Due as of December 31, 2014
	30-59 Days		60-89 Days		90 Days and Greater		Total		Current		Total Loans ^{(1) (2)}
	(In thousands)
Real estate:
One-to-four family residential:
Owner occupied	$	666	$	575	$	666	$	1,907	$	159,106	$	161,013
Non-owner occupied	—		—		164		164		112,388		112,552
Multifamily	1,965		—		—		1,965		118,306		120,271
Commercial real estate	—		325		11		336		247,632		247,968
Construction/land development	—		—		—		—		24,316		24,316
Total real estate	2,631		900		841		4,372		661,748		666,120
Business	—		—		—		—		3,783		3,783
Consumer	—		75		—		75		7,055		7,130
Total	$	2,631	$	975	$	841	$	4,447	$	672,586	$	677,033

^{________________________}

⁽¹⁾ There were no loans 90 days past due and still accruing interest at December 31, 2014.

⁽²⁾ Net of LIP.

Nonaccrual 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. Loans are placed on nonaccrual when they are 90 days delinquent or when, in management's opinion, the borrower is unable to meet scheduled payment obligations.

In order to return a nonaccrual loan to accrual status, each loan is evaluated on a case-by-case basis. The Company evaluates the borrower's financial condition to ensure that future loan payments are reasonably assured. The Company also takes into consideration the borrower's willingness and ability to make the loan payments and historical repayment performance. The Company requires the borrower to make loan payments consistently for a period of at least six months as agreed to under the terms of the loan agreement before the Company will consider reclassifying the loan to accrual status.

The following table is a summary of nonaccrual loans at December 31, 2015, and 2014 by type of loan



	December 31,
	2015		2014
	(In thousands)
One-to-four family residential	$	996	$	830
Commercial real estate	—		434
Consumer	89		75
Total nonaccrual loans	$	1,085	$	1,339

Nonperforming loans, net of LIP, were $1.1 million and $1.3 million at December 31, 2015, and 2014, respectively. Foregone interest on nonaccrual loans for the years ended December 31, 2015, 2014, and 2013 were $103,000, $126,000 and $650,000, respectively.

The following tables summarize the loan portfolio at December 31, 2015, and 2014, by type and payment activity:



	December 31, 2015
	One-to-Four Family Residential		Multifamily		Commercial Real Estate		Construction / Land Development		Business		Consumer		Total ⁽³⁾
	(In thousands)
Performing ⁽¹⁾	$	252,776	$	133,388	$	252,501	$	43,172	$	7,604	$	6,890	$	696,331
Nonperforming ⁽²⁾	996		—		—		—		—		89		1,085
Total	$	253,772	$	133,388	$	252,501	$	43,172	$	7,604	$	6,979	$	697,416

____________


⁽¹⁾	There were $146.2 million of owner-occupied one-to-four family residential loans and $106.5 million of non-owner occupied one-to-four family residential loans classified as performing.


⁽²⁾	There were $996,000 of owner-occupied one-to-four family residential loans and no non-owner occupied one-to-four family residential loans classified as nonperforming.


⁽³⁾	Net of LIP.



	December 31, 2014
	One-to-Four Family Residential		Multifamily		Commercial Real Estate		Construction/ Land Development		Business		Consumer		Total ⁽³⁾
	(In thousands)
Performing ⁽¹⁾	$	272,735	$	120,271	$	247,534	$	24,316	$	3,783	$	7,055	$	675,694
Nonperforming ⁽²⁾	830		—		434		—		—		75		1,339
Total	$	273,565	$	120,271	$	247,968	$	24,316	$	3,783	$	7,130	$	677,033

_____________

⁽¹⁾There were $160.3 million of owner-occupied one-to-four family residential loans and $112.4 million of non-owner occupied one-to-four family residential loans classified as performing.

⁽²⁾There were $666,000 of owner-occupied one-to-four family residential loans and $164,000 of non-owner occupied one-to-four family residential loans classified as nonperforming.

⁽³⁾Net of LIP.

Impaired loans. The loan portfolio is constantly being monitored by management for delinquent loans and changes in the financial condition of each borrower. When an issue is identified with a borrower and it is determined that the loan needs to be classified as nonperforming and/or impaired, an evaluation of the collateral is performed prior to the end of the financial reporting period and, if necessary, an appraisal is ordered in accordance with the Company's appraisal policy guidelines. Based on this evaluation, any additional provision for loan loss or charge-offs that may be needed is recorded prior to the end of the financial reporting period.

There were no commitments to advance funds related to impaired loans at December 31, 2015, and 2014.

The following tables present a summary of loans individually evaluated for impairment at December 31, 2015, and 2014, by the type of loan:



	At or For the Year Ended December 31, 2015
	Recorded Investment ⁽¹⁾		Unpaid Principal Balance ⁽²⁾		Related Allowance
	(In thousands)
Loans with no related allowance:
One-to-four family residential:
Owner occupied	$	3,169	$	3,441	$	—
Non-owner occupied	23,285		23,310		—
Multifamily	415		414		—
Commercial real estate	2,675		2,857		—
Consumer	132		183		—
Total	29,676		30,205		—
Loans with an allowance:
One-to-four family residential:
Owner occupied	2,120		2,189		85
Non-owner occupied	7,521		7,573		427
Multifamily	1,180		1,180		3
Commercial real estate	2,716		2,717		178
Consumer	76		76		39
Total	13,613		13,735		732
Total impaired loans:
One-to-four family residential:
Owner occupied	5,289		5,630		85
Non-owner occupied	30,806		30,883		427
Multifamily	1,595		1,594		3
Commercial real estate	5,391		5,574		178
Consumer	208		259		39
Total	$	43,289	$	43,940	$	732

_________________

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

⁽²⁾ Contractual loan principal balance.



	At or For the Year Ended December 31, 2014
	Recorded Investment ⁽¹⁾		Unpaid Principal Balance ⁽²⁾		Related Allowance
	(In thousands)
Loans with no related allowance:
One-to-four family residential:
Owner occupied	$	3,308	$	3,661	$	—
Non-owner occupied	29,224		29,266		—
Commercial real estate	4,553		4,851		—
Consumer	118		153		—
Total	37,203		37,931		—
Loans with an allowance:
One-to-four family residential:
Owner occupied	2,554		2,624		121
Non-owner occupied	8,652		8,704		679
Multifamily	2,172		2,172		27
Commercial real estate	4,999		4,999		329
Consumer	79		79		59
Total	18,456		18,578		1,215
Total impaired loans:
One-to-four family residential:
Owner occupied	5,862		6,285		121
Non-owner occupied	37,876		37,970		679
Multifamily	2,172		2,172		27
Commercial real estate	9,552		9,850		329
Consumer	197		232		59
Total	$	55,659	$	56,509	$	1,215

_____________

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

⁽²⁾ Contractual loan principal balance.

The following table presents a summary of recorded investment in impaired loans, and interest income recognized on impaired loans at December 31, 2015, 2014 and 2013 by the type of loan:



	Year Ended December 31,
	2015				2014				2013
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(In thousands)
Loans with no related allowance:
One-to-four family residential:
Owner occupied	$	3,180	$	110	$	3,302	$	158	$	4,773	$	146
Non-owner occupied	25,350		1,409		29,105		1,762		29,277		1,697
Multifamily	1,575		30		113		—		1,143		—
Commercial real estate	4,180		187		3,971		291		7,065		344
Construction/land development	—		—		—		—		3,417		—
Consumer	125		2		81		4		539		—
Total	34,410		1,738		36,572		2,215		46,214		2,187

Loans with an allowance:
One-to-four family residential:
Owner occupied	2,131		89		2,975		124		4,249		169
Non-owner occupied	7,801		415		10,395		500		14,545		623
Multifamily	1,430		77		2,187		147		1,414		138
Commercial real estate	3,312		147		6,532		267		7,817		356
Consumer	77		3		20		3		—		—
Total	14,751		731		22,109		1,041		28,025		1,286

Total impaired loans:
One-to-four family residential:
Owner occupied	5,311		199		6,277		282		9,022		315
Non-owner occupied	33,151		1,824		39,500		2,262		43,822		2,320
Multifamily	3,005		107		2,300		147		2,557		138
Commercial real estate	7,492		334		10,503		558		14,882		700
Construction/land development	—		—		—		—		3,417		—
Consumer	202		5		101		7		539		—
Total	$	49,161	$	2,469	$	58,681	$	3,256	$	74,239	$	3,473

Troubled Debt Restructurings. The following is a summary of information pertaining to TDRs:



	December 31,
	2015		2014
	(In thousands)
Performing TDRs	$	42,128	$	54,241
Nonaccrual TDRs	131		—
Total TDRs	$	42,259	$	54,241

The accrual status of a loan may change after it has been classified as a TDR. Management considers the following in determining the accrual status of restructured loans: (1) if the loan was on accrual status prior to the restructuring, the borrower has demonstrated performance under the previous terms, and a credit evaluation shows the borrower's capacity to continue to perform under the restructured terms (both principal and interest payments), the loan will remain on accrual at the time of the restructuring; (2) if the loan was on nonaccrual status before the restructuring, and the Company's credit evaluation shows the borrower's capacity to meet the restructured terms, the loan would remain as nonaccrual for a minimum of six months until the borrower has demonstrated a reasonable period of sustained repayment performance (thereby providing reasonable assurance as to the ultimate collection of principal and interest in full under the modified terms).

The following table presents for the periods indicated TDRs and their recorded investment prior to the modification and after the modification:



	Year Ended December 31,
	2015					2014
	Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
	(Dollars in thousands)
TDRs that occurred during the period:
One-to-four family residential:
Interest only payments with interest rate concession	6	$	1,439	$	1,439	12	$	2,522	$	2,522
Principal and interest with interest rate concession	2	426		426		6	1,174		1,174
Advancement of maturity date	2	248		248		9	1,722		1,722
Commercial real estate:
Principal and interest with interest rate concession	1	775		775		—	—		—
Advancement of maturity date	2	866		866		—	—		—
Interest-only payments with interest rate concession	1	496		496		2	3,470		3,470
Interest-only payments with advancement of maturity date	1	2,004		2,004		—	—		—
Total	15	$	6,254	$	6,254	29	$	8,888	$	8,888

At December 31, 2015 and 2014, the Company had no commitments to extend additional credit to borrowers whose loan terms have been modified in a TDR. All TDRs are also classified as impaired loans and are included in the loans individually evaluated for impairment in the calculation of the ALLL.

TDRs resulted in no charge-offs to the ALLL for the years ended December 31, 2015 and 2014. For the year ended December 31, 2015 and 2014, there were no payment defaults on loans modified as TDRs within the previous 12 months.

Credit Quality Indicators. The Company utilizes a nine-point risk rating system and assigns a risk rating for all credit exposures. The risk rating system is designed to define the basic characteristics and identify risk elements of each credit extension. Credits risk rated 1 through 5 are considered to be “pass” credits. Pass credits can be assets where there is virtually no credit risk, such as cash secured loans with funds on deposit with the Bank. Pass credits also include credits that are on the Company's watch list, where the borrower exhibits potential weaknesses, which may, if not checked or corrected, negatively affect the borrower’s financial capacity and threaten their ability to fulfill debt obligations in the future. Credits classified as special mention are risk rated 6 and possess weaknesses that deserve management’s close attention. Special mention assets do not expose the Company to sufficient risk to warrant adverse classification in the substandard, doubtful or loss categories. Substandard credits are risk rated 7. An asset is considered substandard if it is inadequately protected by the current net worth and payment capacity of the borrower or of any collateral pledged. Substandard assets include those characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful are risk rated 8 and have all the weaknesses inherent in those credits classified as substandard with the added characteristic that the weaknesses present make collection or liquidation in full highly questionable and improbable, on the basis of currently existing facts, conditions and values. Assets classified as loss are risk rated 9 and are considered uncollectible and cannot be justified as a viable asset for the Company. As of December 31, 2015, and 2014, the Company had no loans rated as doubtful or loss.

The following tables represent a summary of loans at December 31, 2015, and 2014 by type and risk category:



	December 31, 2015
	One-to-Four Family Residential		Multifamily		Commercial Real Estate		Construction/ Land Development		Business		Consumer		Total ⁽¹⁾
	(In thousands)
Risk Rating:
Pass	$	247,239	$	133,388	$	248,196	$	43,172	$	7,604	$	6,702	$	686,301
Special mention	3,840		—		3,809		—		—		188		7,837
Substandard	2,693		—		496		—		—		89		3,278
Total	$	253,772	$	133,388	$	252,501	$	43,172	$	7,604	$	6,979	$	697,416

_____________

⁽¹⁾ Net of LIP.



	December 31, 2014
	One-to-Four Family Residential		Multifamily		Commercial Real Estate		Construction / Land Development		Business		Consumer		Total ⁽¹⁾
	(In thousands)
Risk Rating:
Pass	$	263,094	$	116,891	$	235,841	$	24,316	$	3,783	$	6,833	$	650,758
Special mention	4,157		1,416		10,529		—		—		—		16,102
Substandard	6,314		1,964		1,598		—		—		297		10,173
Total	$	273,565	$	120,271	$	247,968	$	24,316	$	3,783	$	7,130	$	677,033

______________

⁽¹⁾ Net of LIP.

Certain executive officers and directors have loans with the Bank. The aggregate dollar amount of these loans outstanding to related parties is summarized as follows:



	Year Ended December 31,
	2015			2014			2013
	(In thousands)
Balance at beginning of year	$	138		$	548		$	498
Additions	—			—			353
Repayments	(20		)	(410		)	(303		)
Balance at end of year	$	118		$	138		$	548