First Financial Northwest, Inc. - 10-K filing on 2017-03-10

Loans Receivable

12 Months Ended

Dec. 31, 2016

Loans receivable at December 31, 2016, and 2015 are summarized as follows:



	December 31,
	2016		2015
	(In thousands)
One-to-four family residential:
Permanent owner occupied	$	137,834	$	147,229
Permanent non-owner occupied	111,601		106,543
	249,435		253,772
Multifamily:
Permanent	123,250		122,747
	123,250		122,747
Commercial real estate:
Permanent	303,694		244,211
	303,694		244,211
Construction/land: ⁽¹⁾
One-to-four family residential	67,842		52,233
Multifamily	111,051		46,666
Land	30,055		17,058
	208,948		115,957

Business	7,938		7,604
Consumer	6,922		6,979
Total loans	900,187		751,270
Less:
Loans in process (“LIP”)	72,026		53,854
Deferred loan fees, net	2,167		2,881
ALLL	10,951		9,463
Loans receivable, net	$	815,043	$	685,072

___________

⁽¹⁾

We previously excluded from the construction/land category “rollover” loans, which are loans that will convert upon completion of the construction period to permanent loans. These loans were classified according to the underlying collateral categories instead of being included in the construction/land category. In addition, we previously classified raw land or buildable lots, where the Company does not intend to finance the construction, as commercial real estate land loans and have now included these loans in the construction/land category. At December 31, 2016, we reclassified $62.9 million of multifamily loans, $26.9 million of commercial land loans and $2.6 million of one-to-four family residential as construction/land loans to facilitate the review of the composition of our loan portfolio. At December 31, 2015, $21.1 million of multifamily loans, $8.3 million of commercial land loans and no one-to-four family residential loans were reclassified to the construction/land category.

At December 31, 2016, and 2015 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. At December 31, 2016, the Company’s loan portfolio consists of one-to-four family residential loans which comprised 27.7%, commercial real estate and multifamily loans were 33.7% and 13.7%, respectively, and construction/land loans were 23.2% of the total loan portfolio. Consumer, and business loans accounted for the remaining 1.7% of the loan portfolio. Included in the one-to-four family residential, multifamily, commercial real estate and construction/land loan portfolios at December 31, 2016, were $949,000, $26.3 million, $39.5 million, and $12.7 million, 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, 2016, and 2015, was as follows:



December 31, 2016
Fixed Rate			Adjustable Rate
Term to Maturity	Principal Balance		Term to Rate Adjustment	Principal Balance
(In thousands)
Due within one year	$	23,513	Due within one year	$	214,794
After one year through three years	106,138		After one year through three years	32,448
After three years through five years	71,251		After three years through five years	118,350
After five years through ten years	145,063		After five years through ten years	29,922
Thereafter	158,708		Thereafter	—
	$	504,673		$	395,514



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

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, 2016
	One-to-Four Family Residential			Multifamily		Commercial Real Estate		Construction/ Land		Business		Consumer			Total
ALLL:	(In thousands)
Beginning balance	$	3,028		$	1,193	$	3,395	$	1,193	$	229	$	425		$	9,463
Charge-offs	—			—		—		—		—		(83		)	(83		)
Recoveries	165			1		104		—		—		1			271
(Recapture) provision	(642		)	5		394		1,599		8		(64		)	1,300
Ending balance	$	2,551		$	1,199	$	3,893	$	2,792	$	237	$	279		$	10,951

General reserve	$	2,349		$	1,199	$	3,867	$	2,711	$	237	$	279		$	10,642
Specific reserve	202			—		26		81		—		—			309

Loans: ⁽¹⁾
Total Loans	$	249,435		$	123,250	$	303,694	$	136,922	$	7,938	$	6,922		$	828,161
General reserve ⁽²⁾	224,363			121,686		299,987		136,427		7,938		6,819			797,220
Specific reserve ⁽³⁾	25,072			1,564		3,707		495		—		103			30,941

____________

⁽¹⁾ Net of LIP.

⁽²⁾ Loans collectively evaluated for impairment.

⁽³⁾ Loans individually evaluated for impairment.



	At or For the Year Ended December 31, 2015
	One-to-Four Family Residential			Multifamily			Commercial Real Estate			Construction/ Land		Business		Consumer			Total
ALLL:	(In thousands)
Beginning balance	$	3,691		$	1,606		$	4,476		$	519	$	47	$	152		$	10,491
Charge-offs	(27		)	(281		)	—			—		—		(54		)	(362		)
Recoveries	936			78			181			—		3		336			1,534
(Recapture) provision	(1,572		)	(210		)	(1,262		)	674		179		(9		)	(2,200		)
Ending balance	$	3,028		$	1,193		$	3,395		$	1,193	$	229	$	425		$	9,463

General reserve	$	2,516		$	1,190		$	3,270		$	1,140	$	229	$	386		$	8,731
Specific reserve	512			3			125			53		—		39			732

Loans: ⁽¹⁾
Total Loans	$	253,772		$	122,747		$	244,211		$	62,103	$	7,604	$	6,979		$	697,416
General reserve ⁽²⁾	217,677			121,152			239,765			61,158		7,604		6,771			654,127
Specific reserve ⁽³⁾	36,095			1,595			4,896			495		—		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			Business		Consumer			Total
ALLL:	(In thousands)
Beginning balance	$	5,141		$	1,269	$	5,101		$	1,287		$	14	$	182		$	12,994
Charge-offs	(78		)	—		(311		)	(223		)	—		(30		)	(642		)
Recoveries	50			—		174			—			10		5			239
(Recapture) provision	(1,422		)	337		(488		)	(545		)	23		(5		)	(2,100		)
Ending balance	$	3,691		$	1,606	$	4,476		$	519		$	47	$	152		$	10,491

General reserve	$	2,891		$	1,579	$	4,172		$	494		$	47	$	93		$	9,276
Specific reserve	800			27		304			25			—		59			1,215

Loans: ⁽¹⁾
Total Loans	$	273,193		$	116,014	$	239,211		$	37,702		$	3,783	$	7,130		$	677,033
General reserve ⁽²⁾	229,455			113,842		230,155			37,206			3,783		6,933			621,374
Specific reserve ⁽³⁾	43,738			2,172		9,056			496			—		197			55,659

______________

⁽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, 2016, total past due loans comprised 0.06% of total loans, net of LIP, as compared to 0.18% at December 31, 2015.

The following tables represent a summary at December 31, 2016, and 2015, of the aging of loans by type:



	Loans Past Due as of December 31, 2016
	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	$	304	$	—	$	169	$	473	$	137,361	$	137,834
Non-owner occupied	—		—		—		—		111,601		111,601
Multifamily	—		—		—		—		123,250		123,250
Commercial real estate	—		—		—		—		303,694		303,694
Construction/land	—		—		—		—		136,922		136,922
Total real estate	304		—		169		473		812,828		813,301
Business	—		—		—		—		7,938		7,938
Consumer	—		—		—		—		6,922		6,922
Total	$	304	$	—	$	169	$	473	$	827,688	$	828,161

^{_________________________}

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

⁽²⁾ Net of LIP.



	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	—		—		—		—		122,747		122,747
Commercial real estate	—		—		—		—		244,211		244,211
Construction/land	—		—		—		—		62,103		62,103
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.

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, 2016, and 2015 by type of loan



	December 31,
	2016		2015
	(In thousands)
One-to-four family residential	$	798	$	996
Consumer	60		89
Total nonaccrual loans	$	858	$	1,085

Nonperforming loans, net of LIP, were $858,000 and $1.1 million at December 31, 2016, and 2015, respectively. Foregone interest on nonaccrual loans for the years ended December 31, 2016, 2015, and 2014 were $51,000, $103,000 and $126,000, respectively.

The following tables summarize the loan portfolio at December 31, 2016, and 2015, by type and payment activity:



	December 31, 2016
	One-to-Four Family Residential		Multifamily		Commercial Real Estate		Construction / Land		Business		Consumer		Total ⁽³⁾
	(In thousands)
Performing ⁽¹⁾	$	248,637	$	123,250	$	303,694	$	136,922	$	7,938	$	6,862	$	827,303
Nonperforming ⁽²⁾	798		—		—		—		—		60		858
Total	$	249,435	$	123,250	$	303,694	$	136,922	$	7,938	$	6,922	$	828,161

____________

⁽¹⁾ There were $137.0 million of owner-occupied one-to-four family residential loans and $111.6 million of non-owner occupied one-to-four family residential loans classified as performing.

⁽²⁾ There were $798,000 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, 2015
	One-to-Four Family Residential		Multifamily		Commercial Real Estate		Construction/ Land		Business		Consumer		Total ⁽³⁾
	(In thousands)
Performing ⁽¹⁾	$	252,776	$	122,747	$	244,211	$	62,103	$	7,604	$	6,890	$	696,331
Nonperforming ⁽²⁾	996		—		—		—		—		89		1,085
Total	$	253,772	$	122,747	$	244,211	$	62,103	$	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.

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, 2016, and 2015.

The following tables present a summary of loans individually evaluated for impairment at December 31, 2016, and 2015, by the type of loan:



	At December 31, 2016
	Recorded Investment ⁽¹⁾		Unpaid Principal Balance ⁽²⁾		Related Allowance
	(In thousands)
Loans with no related allowance:
One-to-four family residential:
Owner occupied	$	2,216	$	2,475	$	—
Non-owner occupied	16,634		16,652		—
Multifamily	1,564		1,564		—
Commercial real estate	2,952		3,029		—
Construction/land	—		—		—
Consumer	103		223		—
Total	23,469		23,943		—
Loans with an allowance:
One-to-four family residential:
Owner occupied	1,896		1,965		51
Non-owner occupied	4,326		4,347		151
Multifamily	—		—		—
Commercial real estate	755		755		26
Construction/land	495		495		81
Consumer	—		—		—
Total	7,472		7,562		309
Total impaired loans:
One-to-four family residential:
Owner occupied	4,112		4,440		51
Non-owner occupied	20,960		20,999		151
Multifamily	1,564		1,564		—
Commercial real estate	3,707		3,784		26
Construction/land	495		495		81
Consumer	103		223		—
Total	$	30,941	$	31,505	$	309

_________________

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

⁽²⁾ Contractual loan principal balance.



	At 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		—
Construction/land	—		—		—
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	2,221		2,222		125
Construction/land	495		495		53
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	4,896		5,079		125
Construction/land	495		495		53
Consumer	208		259		39
Total	$	43,289	$	43,940	$	732

_____________

⁽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 for the years ended December 31, 2016, 2015 and 2014 by the type of loan:



	Year Ended December 31,
	2016				2015				2014
	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	$	2,566	$	156	$	3,180	$	110	$	3,302	$	158
Non-owner occupied	20,653		1,061		25,350		1,409		29,105		1,762
Multifamily	1,344		106		1,575		30		113		—
Commercial real estate	2,295		253		4,180		187		3,971		291
Construction/land	—		—		—		—		—		—
Consumer	117		12		125		2		81		4
Total	26,975		1,588		34,410		1,738		36,572		2,215

Loans with an allowance:
One-to-four family residential:
Owner occupied	2,026		104		2,131		89		2,975		124
Non-owner occupied	5,520		236		7,801		415		10,395		500
Multifamily	236		—		1,430		77		2,187		147
Commercial real estate	2,192		42		2,817		129		6,036		250
Construction/land	396		17		495		18		496		17
Consumer	30		—		77		3		20		3
Total	10,400		399		14,751		731		22,109		1,041

Total impaired loans:
One-to-four family residential:
Owner occupied	4,592		260		5,311		199		6,277		282
Non-owner occupied	26,173		1,297		33,151		1,824		39,500		2,262
Multifamily	1,580		106		3,005		107		2,300		147
Commercial real estate	4,487		295		6,997		316		10,007		541
Construction/land	396		17		495		18		496		17
Consumer	147		12		202		5		101		7
Total	$	37,375	$	1,987	$	49,161	$	2,469	$	58,681	$	3,256

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



	December 31,
	2016		2015
	(In thousands)
Performing TDRs	$	30,083	$	42,128
Nonaccrual TDRs	174		131
Total TDRs	$	30,257	$	42,259

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,
	2016					2015
	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
Principal and interest with interest rate concession	19	4,265		4,265		2	426		426
Advancement of maturity date	5	1,121		1,121		2	248		248
Commercial real estate:
Principal and interest with interest rate concession	—	—		—		1	775		775
Advancement of maturity date	1	511		511		2	866		866
Interest-only payments with interest rate concession	1	495		495		1	496		496
Interest-only payments with advancement of maturity date	—	—		—		1	2,004		2,004
Total	26	$	6,392	$	6,392	15	$	6,254	$	6,254

At December 31, 2016 and 2015, 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, 2016 and 2015. For the years ended December 31, 2016 and 2015, 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, 2016, and 2015, the Company had no loans rated as doubtful or loss.

The following tables represent a summary of loans at December 31, 2016, and 2015 by type and risk category:



	December 31, 2016
	One-to-Four Family Residential		Multifamily		Commercial Real Estate		Construction/ Land		Business		Consumer		Total ⁽¹⁾
	(In thousands)
Risk Rating:
Pass	$	245,237	$	123,250	$	300,655	$	136,427	$	7,938	$	6,674	$	820,181
Special mention	2,847		—		3,039		—		—		188		6,074
Substandard	1,351		—		—		495		—		60		1,906
Total	$	249,435	$	123,250	$	303,694	$	136,922	$	7,938	$	6,922	$	828,161

_____________

⁽¹⁾ Net of LIP.



	December 31, 2015
	One-to-Four Family Residential		Multifamily		Commercial Real Estate		Construction / Land		Business		Consumer		Total ⁽¹⁾
	(In thousands)
Risk Rating:
Pass	$	247,239	$	122,747	$	240,402	$	61,607	$	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	$	122,747	$	244,211	$	62,103	$	7,604	$	6,979	$	697,416

______________

⁽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,
	2016			2015			2014
	(In thousands)
Balance at beginning of year	$	118		$	138		$	548
Additions	—			—			—
Change in director or executive status during year	(40		)
Repayments	(18		)	(20		)	(410		)
Balance at end of year	$	60		$	118		$	138