FNWB Company Profile

First Northwest Bancorp, a Washington corporation, was formed on August 14, 2012 for the purpose of becoming the bank holding company for First Federal Savings and Loan Association of Port Angeles ("First Federal” or the “Bank”) in connection with First Federal’s mutual to stock conversion. The mutual to stock conversion was completed on January 29, 2015, through the sale and issuance of 13,100,360 shares of common stock by First Northwest Bancorp, including 933,360 shares contributed to our foundation, the First Federal Community Foundation ("Foundation"), established in connection with the mutual to stock conversion. The primary focus of the Foundation is to promote and support charitable services, affordable housing initiatives, local community development projects, and local economic development initiatives in the Banks primary market areas. The Foundation was also funded with a $400,000 charitable contribution made by the Bank.

As a bank holding company, First Northwest Bancorp is subject to regulation by the Board of Governors of the Federal Reserve System (“Federal Reserve”). First Federal changed its charter from a federal mutual savings and loan association to a Washington State chartered mutual savings bank effective November 30, 2011, and is examined and regulated by the Washington State Department of Financial Institutions, Division of Banks (“DFI”) and by the Federal Deposit Insurance Corporation (“FDIC”). First Federal is required to have certain reserves set by the Federal Reserve and is a member of the Federal Home Loan Bank of Des Moines (“FHLB” or “FHLB of Des Moines”), which is one of the 11 regional banks in the Federal Home Loan Bank System (“FHLB System”).

We offer a wide range of products and services focused on the lending and depository needs of the communities we serve. Historically, lending activities have been primarily directed toward the origination of first lien one- to four-family mortgage loans, and, to a lesser extent, commercial and multi-family real estate loans, construction and land loans (including lot loans), commercial business loans, and consumer loans, consisting primarily of home equity loans and lines of credit. During the past decade, recognizing our need to adapt to changing market conditions, we have revised our operating strategy to diversify our loan portfolio, expand our deposit product offerings and enhance our infrastructure. We have increased the origination of commercial real estate and multi-family real estate loans and decreased reliance on originating and retaining longer-term, fixed-rate, residential mortgage loans. Since 2010, we have generally sold most newly originated and refinanced, conforming single-family owner-occupied mortgage loans into the secondary market, although in 2012, we began selectively retaining 30-year fixed-rate mortgages in the portfolio in an effort to enhance our net interest income. We have historically offered traditional consumer and business deposit products, including transaction accounts, savings and money market accounts and certificates of deposit for individuals, businesses and nonprofit organizations. Deposits are our primary source of funds for our lending and investing activities. Although we intend to expand primarily through internal growth, we will also consider prudent acquisitions of other financial institutions and bank branches in the Puget Sound region.

Fixed-rate residential mortgages are offered with repayment terms between 10 and 30 years, and we use Freddie Mac posted daily pricing, as well as other economic considerations, to establish pricing for our residential mortgage loans. Adjustable-rate residential mortgage products with similar amortization terms are also offered; however, the interest rate is typically fixed for an initial period. For example, the interest rate and payment will remain fixed between one to seven years with annual adjustments thereafter. Future interest rate adjustments are usually limited to increases or decreases of no more than 2% per adjustment and carry a typical lifetime cap of 5% to 6% above the initial interest rate, with no borrower prepayment restrictions. Currently, we are retaining adjustable-rate mortgages that we originate in our portfolio.

Borrower demand for adjustable-rate mortgage loans typically increases when borrowers expect lower mortgage rates in the future. Adjustable-rate mortgage loans could increase credit risk because as interest rates rise, the borrower’s payments rise, increasing the potential for default. In addition, adjustable-rate mortgages may be offered with an initial discounted rate, which may be less than the fully indexed rate and lower than comparable fixed-rate loans, which could also contribute to a higher risk of delinquency, default and foreclosure when the interest rate and payment on the loan adjusts. To mitigate and balance this risk for both the borrower and First Federal, these loans usually contain both periodic and lifetime interest rate caps that limit the amount of payment changes. In addition, depending on market conditions, we may underwrite the borrower at a higher interest rate and payment amount than the initial discount rate. We do not offer adjustable-rate mortgages with deep discount teaser rates.

Commercial and Multi-Family Real Estate Lending These loans are generally priced at a higher rate of interest than one- to four-family residential loans, as these loans have higher loan balances, are more difficult to evaluate and monitor, and involve a greater degree of risk than one- to four-family residential loans. Repayment on loans secured by commercial or multi-family properties is dependent on successful management or utilization of the land and improvements by the property owner to create gross revenues and sufficient net operating income to meet the debt service requirements and provide a return to the owner. Changes in economic and real estate market conditions can affect net operating income, capitalization rates, and ultimately the valuation and marketability of the collateral. As a result, we analyze market data including, but not limited to, vacancy rates, absorption percentages, leasing rates and competing projects under development. Interest rate, occupancy and capitalization rate stress testing are required as part of our underwriting analysis. If the borrower is a corporation, we generally require and obtain personal guarantees from the corporate principals, which include underwriting of their personal financial statements, tax returns, cash flows and individual credit reports, which provides us with additional support and a secondary source for repayment of the debt.

Construction and Land Lending, Construction loan applications require the borrower to provide architectural and working plans, a material specifications list, detailed cost breakdown and a construction contract. Construction loan advances are based on progress payments for “work in place” based on detailed line item construction budgets. Independent construction inspectors are used to evaluate the construction draw request relative to the progress and “work in place.” Our construction administrator reviews all construction projects, inspection reports and construction loan advance requests to ensure they are appropriate and in compliance with all loan conditions. Other risk management tools include title insurance, date down endorsements and periodic lien inspections prior to the payment of construction loan advances. In some cases, general contractors may be required to provide sub-contractor lien releases for any work performed prior to the filing of our deed of trust or prior to each construction loan advance.