As filed with the Securities and Exchange Commission on November 21, 2012
Registration No. 333-_______
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
 
FIRST NORTHWEST BANCORP
(Exact name of registrant as specified in its charter)
         
Washington
 
6036
 
46-1259100
(State or other jurisdiction of incorporation or
organization)
 
(Primary Standard Industrial
Classification Code Number)
 
(I.R.S. Employer Identification No.)
 
105 West 8th Street
Port Angeles, Washington 98362
(360) 457-0461
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
 
John F. Breyer, Jr., Esq.
Breyer & Associates PC
8180 Greensboro Drive, Suite 785
McLean, Virginia 22102
(703) 883-1100)
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
 
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this registration statement becomes effective.
 
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. x
 
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer o
Accelerated filer o
Non-accelerated filer x
Smaller reporting company o
   
(Do not check if a smaller reporting company)
 
 
CALCULATION OF REGISTRATION FEE
Title of Each Class of
Securities to be Registered
 
Amount to be
Registered (1)
 
Proposed Maximum
Offering Price Per Unit
 
Proposed Maximum
Aggregate Offering Price (1)
 
Amount of
Registration Fee
Common Stock, $0.01 par value
 
9,958,100
 
$10.00
 
$99,581,000.00
 
$13,583.00
 
(1)  Estimated solely for purposes of calculating the registration fee.  As described in the prospectus, the actual number of shares to be issued and sold are subject to adjustment based upon the estimated pro forma market value of the registrant and market and financial conditions.
 
The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities Exchange Commission, acting pursuant to said Section 8(a), may determine.
 
 
 
 
 
PROSPECTUS SUPPLEMENT
 
 
Interests in

FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION
OF PORT ANGELES 401(K) PLAN

Offering of Participation Interests up to 608,299 Shares of
First Northwest Bancorp
Common Stock


In connection with the conversion of First Federal Savings and Loan Association of Port Angeles (“First Federal”) from the mutual to the stock form of organization, First Federal is allowing participants in the First Federal Savings and Loan Association of Port Angeles 401(k) Plan (the “401(k) Plan”) to invest all or a portion of their accounts in participation interests in the common stock of First Northwest Bancorp (“First Northwest”). Based upon the value of the 401(k) Plan assets at December 31, 2011, First Northwest has registered a number of participation interests through the 401(k) Plan in order to enable the trustee to purchase up to 608,299 shares of First Northwest Bancorp common stock, at the purchase price of $10.00 per share. This prospectus supplement relates to the initial election of 401(k) Plan participants to direct the trustee of the 401(k) Plan to invest all or a portion of their 401(k) Plan accounts in units of the First Northwest Bancorp Employer Stock Fund (“Employer Stock Fund”) at the time of the stock offering. This prospectus supplement relates solely to the election of a participant to direct the purchase of First Northwest  common stock in the conversion and stock offering and not to any future purchases under the 401(k) Plan or otherwise.
 
The prospectus of First Northwest, dated ___________________, 2013, accompanies this prospectus supplement. It contains detailed information regarding the conversion and offering of First Northwest common stock and the financial condition, results of operations and business of First Federal. This prospectus supplement provides information regarding the 401(k) Plan. You should read this prospectus supplement together with the prospectus and keep both for future reference.
 
 

For a discussion of risks that you should consider, see the “Risk Factors” section of the prospectus.
 
The interests in the 401(k) Plan and the offering of First Northwest common stock have not been approved or disapproved by the Securities and Exchange Commission, the Federal Deposit Insurance Corporation, the Board of Governors of the Federal Reserve System, the Washington Department of Financial Institutions, or any state securities commission or agency, nor have these agencies passed upon the accuracy or adequacy of this prospectus supplement. Any representation to the contrary is a criminal offense.
 
The securities offered in this prospectus supplement and in the prospectus are not deposits or accounts and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.
 
This prospectus supplement contains information you should consider when making your investment decision. You should rely only on the information provided in this prospectus supplement and the related prospectus.  First Northwest has not authorized anyone else to provide you with different information. First Northwest is not making an offer of its common stock in any state where an offer is not permitted. The information in this prospectus supplement is accurate only as of the date of this prospectus supplement, regardless of the time of delivery of this prospectus supplement or any sale of First Northwest common stock.
 
The date of this prospectus supplement is ___________________, 2013.
 
 
 
 
 

TABLE OF CONTENTS

Page
 
THE OFFERING
1
   
Election to Purchase First Northwest Bancorp Common Stock in the Conversion
1
Securities Offered
1
Method of Directing Transfer
2
Time for Directing Transfer
2
Irrevocability of Transfer Direction
2
Subsequent Elections
2
Purchase of First Northwest Common Stock Through The Employer Stock Fund
3
Nature of a Participant’s Interest in Employer Stock Fund
3
Voting and Tender Rights of First Northwest Common Stock
3
   
DESCRIPTION OF THE 401(k) PLAN
4
   
Introduction
4
Eligibility and Participation
4
Contributions Under the 401(k) Plan
4
Limitations on Contributions
5
Investment of Contributions
6
Financial Data
10
Administration of the 401(k) Plan
11
Benefits Under the 401(k) Plan
11
Withdrawals and Distributions from the 401(k) Plan
12
Reports to 401(k) Plan Participants
12
Amendment and Termination
13
Federal Income Tax Consequences
13
ERISA and Other Qualification
14
Restrictions on Resale
14
Securities and Exchange Commission Reporting and Short-Swing Profit Liability
14
   
LEGAL OPINIONS
15
   
INVESTMENT ELECTION FORM    
A-1
 
 
i
 
 

THE OFFERING
 
Election to Purchase First Northwest Common Stock in the Conversion
 
In connection with the conversion and stock offering, you may elect to transfer all or part of your account balances in the 401(k) Plan to be used to purchase the common stock of First Northwest issued in the stock offering through an Employer Stock Fund, as described in more detail below. The trustee of the 401(k) Plan will purchase common stock of First Northwest through the Employer Stock Fund, in accordance with your directions. However, these directions are subject to purchase limitations in the Plan of Conversion of First Federal. Funds in the 401(k) Plan that you do not want to be used to purchase First Northwest common stock will remain invested in accordance with your investment instructions in effect at the time.
 
The shares of common stock are being offered at $10.00 per share in a subscription offering and community offering. In the subscription offering, the shares are being offered in the following descending order of priority:
 
Subscription offering:
 
                (1)
First, to depositors of First Federal with deposit account(s) totaling $50 or more as of the close of business on March 31, 2011.
 
                (2)
Second, to First Northwest’s employee stock ownership plan and 401(k) Plan.
 
                (3)
Third, to depositors of First Federal with deposit account(s) totaling $50 or more on deposit as of the close of business on _______________, 2012.
 
                (4)
Fourth, to any depositor or borrower of First Federal on the close of business on ________________, 2012, to the extent not included in a prior category.
 
If you fall into subscription categories (1), (3), or (4), you have subscription rights to purchase shares of First Northwest common stock in the subscription offering. You will separately receive offering materials in the mail, including a Stock Order Form. If you wish to purchase stock outside of the 401(k) Plan, you must complete and submit the Stock Order Form and payment to the Stock Information Center. Instead of placing an order outside of the 401(k) Plan through a Stock Order Form, as a 401(k) Plan participant, you may place an order to purchase shares of common stock of First Northwest through the 401(k) Plan, in the manner described below under “Method of Directing Transfer.” A 401(k) Plan participant who elects to purchase shares in the offering through self-directed purchases with the 401(k) Plan will receive the same subscription priority, and be subject to the same purchase limitations, as if the participant had elected to purchase shares using funds outside the 401(k) Plan.
 
In the event the stock offering is oversubscribed, i.e. there are more orders for shares of common stock than shares available for sale in the stock offering, and the trustee is unable to use the full amount allocated by you to purchase shares of common stock in the stock offering (based on your purchase priority), the amount that cannot be invested in the Employer Stock Fund, and any interest earned, will be reallocated according to your current investment elections on file.
 
If you choose not to direct the investment of your account balances towards the purchase of any shares in the stock offering, your account balances will remain in the investment funds of the 401(k) Plan as previously directed by you.
 
All elections to purchase participation interests in the Employer Stock Fund in the stock offering and any questions about this prospectus supplement should be addressed to Elaine Gentilo, Chief People Officer, telephone number: (360) 417-3107;  or by e-mail at Elaine.Gentilo@ourfirstfed.com.
 
Securities Offered
 
The securities offered in connection with this prospectus supplement are participation interests in the Employer Stock Fund which is being established under the 401(k) Plan in connection with the stock offering. The participation interests represent your indirect ownership of First Northwest common stock. At the purchase price of $10.00 per share, the 401(k) Plan may acquire up to 608,299 shares of First Northwest common stock in the stock offering, based on the fair market value of the Plan’s assets as of December 31, 2011 (assuming that each Employer Stock Fund unit is comprised entirely of First Northwest common stock). Only employees of First Federal may become participants in the 401(k) Plan. Your investment in the shares of common stock of First Northwest in the stock offering through the Employer Stock Fund is subject to the purchase priorities contained in the Plan of Conversion of First Federal.
 
 
1
 
 
 
Information relating to the 401(k) Plan is contained in this prospectus supplement and information relating to First Northwest, the conversion and stock offering, and the financial condition, results of operations and business of First Federal is contained in the prospectus delivered with this prospectus supplement. The address of our principal executive office is 105 West 8th Street, Port Angeles, Washington, 98362, and our telephone number is (360) 457-0461.
 
Method of Directing Transfer
 
Included with this prospectus supplement is an Investment Election Form. If you wish to direct some or all of your beneficial interest in the assets of the 401(k) Plan into the Employer Stock Fund to purchase First Northwest common stock in the stock offering, you should indicate that decision by completing and submitting the election form. If you do not wish to make an election at this time you do not need to take any action. Please note the following stipulations concerning this election:
 
                ·
You can direct all or a portion of your current account balance to the Employer Stock Fund.
 
                ·
Your election is subject to a minimum purchase of 25 shares which equates to $250.00.
 
                ·
Your election is subject to a maximum purchase of 20,000 shares which equates to $200,000.
 
                ·
The election period is expected to open ______________, 2013 and close ______________, 2013.
 
                ·
You will continue to have the ability to transfer amounts not invested in the Employer Stock Fund among all the other investment funds on a daily basis.
 
                ·
The amount not invested in the Employer Stock Fund needs to be segregated and held until the offering closes. Therefore, this money is not available for distributions, loans or withdrawals until the transaction is completed, which is after the closing of the stock offering.
 
Time for Directing Transfer
 
You must make your election through the Pentegra web site at www.pentegra.com.  Should you have any questions on how to access your account online, please call Elaine Gentilo, Chief People Officer at (360-417-3107), or contact her via email at Elaine.Gentilo@ourfirstfed.com.
 
Irrevocability of Transfer Direction
 
Once received in proper form, your executed Investment Election Form may not be modified, amended or revoked without our consent unless the stock offering has not been completed by ______________, 2013. See also “Investment of Contributions – First Northwest Common Stock Investment Election Procedures” below.
 
Subsequent Elections
 
After the offering, you will continue to be able to direct the investment of past balances and current contributions among the investment options available under the 401(k) Plan, including the Employer Stock Fund (the percentage invested in any option must be a whole percent). The allocation of your interest in the various investment options offered under the 401(k) Plan, including the Employer Stock Fund, may be changed daily. After the offering, you may transfer funds from the Employer Stock Fund to other investment options in the 401(k) Plan, and from other investment options in the 401(k) Plan to the Employer Stock Fund.  You may also elect to have future contributions to the 401(k) Plan invested in the Employer Stock Fund. Special restrictions may apply to transfers directed to or from the Employer Stock Fund by those participants who are our executive officers and principal shareholders and are subject to the provisions of Section 16(b) of the Securities Exchange Act of 1934, as amended. In particular, executive officers of First Northwest and First Federal will not be able to transfer their initial investment out of the Employer Stock Fund for a period of one year following consummation of the offering.
 
 
2
 
 
 
Purchase of First Northwest Common Stock Through the Employer Stock Fund
 
Shares of First Northwest common stock purchased through the 401(k) Plan will be held as part of the Employer Stock Fund. In the future, the 401(k) Plan trustee may require that Employer Stock Fund units consist of both shares of First Northwest common stock and cash.  In that case, funds transferred to the Employer Stock Fund for the purchase of First Northwest common stock in the stock offering would be used by the trustee to purchase both shares of the common stock and cash. Units of the Employer Stock Fund will be valued in the offering at $10.00 per unit. If in the future the 401(k) Plan Trustee requires that Employer Stock Fund units consist of both shares of First Northwest common stock and cash, then it is anticipated that between 94 and 97 percent (i.e., between $9.40 and $9.70) of a unit would be used to acquire First Northwest common stock, and that between three and six percent of the balance of the unit (i.e., between $0.30 and $0.60) would be used to acquire cash, through an interest in a money market or similar account.
 
All other persons who purchase our common stock in the stock offering outside of the 401(k) Plan will pay $10.00 per share for First Northwest common stock.
 
Nature of a Participant’s Interest in First Northwest Common Stock
 
First Northwest common stock will be held in the name of the 401(k) Plan trustee as part of the Employer Stock Fund, in its capacity as 401(k) Plan trustee. Because the 401(k) Plan actually purchases the Employer Stock Fund units, you will acquire a “participation interest” in the Employer Stock Fund units (and the underlying shares of First Northwest common stock and cash) and not own the units (and shares and cash) directly. The trustee will maintain individual accounts reflecting each participant’s individual interest in the Employer Stock Fund.
 
Voting and Tender Rights of First Northwest Common Stock
 
The plan administrator generally will exercise voting rights attributable to all of the First Northwest common stock held by the Employer Stock Fund under the 401(k) Plan. With respect to matters involving tender offers for First Northwest, the plan administrator will vote shares allocated to participants in the 401(k) Plan as directed by participants with interests in the Employer Stock Fund. The trustee will provide to you voting instruction rights reflecting your interest in the Employer Stock Fund. The number of shares of common stock held in the Employer Stock Fund that the trustee votes in the affirmative and negative on each matter will be proportionate to the voting instructions given by the participants. Where no voting or tender offer instructions are given by the participant, the shares shall be voted or tendered in the manner directed by the plan administrator.
 
 
3
 
 
 
DESCRIPTION OF THE 401(k) PLAN
 
Introduction
 
The 401(k) Plan is formally named the “First Federal Savings and Loan Association of Port Angeles 401(k) Plan.” This profit sharing plan contains a cash-or-deferred feature described at Section 401(k) of the Internal Revenue Code of 1986, as amended, to encourage employee savings and to allow eligible employees to supplement their income upon retirement.
 
Reference to Full Text of 401(k) Plan. The following statements are summaries of certain provisions of the 401(k) Plan. They are not meant to be a complete description of these provisions and are qualified in their entirety by the full text of the 401(k) Plan. Copies of the 401(k) Plan are available to all employees. You should submit your request to the plan administrator, First Federal Savings and Loan Association of Port Angeles, 105 West 8th Street, Port Angeles, Washington, 98362. We encourage you to read carefully the full text of the 401(k) Plan to understand your rights and obligations under the 401(k) Plan.
 
Tax and Securities Laws. Participants should consult with legal counsel regarding the tax and securities laws implications of participation in the 401(k) Plan. Any officers or beneficial owners of more than 10% of the outstanding shares of First Northwest common stock should consider the applicability of Sections 16(a) and 16(b) of the Securities Exchange Act of 1934, as amended, to his or her participation in the 401(k) Plan. See “Securities and Exchange Commission Reporting and Short Swing Profit Liability” on page 14 of this prospectus supplement.
 
Eligibility and Participation
 
All employees of First Federal Savings and Loan Association of Port Angeles are eligible to make 401(k) deferrals under the Plan as of the first day of the month coincident with or next following commencement of employment or attaining age 21, whichever occurs later. All employees of First Federal are eligible to be allocated matching contributions as of the first day of the month coincident with or next following the completion of one year of service or attaining age 21, whichever occurs later.   A year of service is generally a 12-month period during which the employee is credited with at least 1,000 hours of service, commencing with the date of employment, with subsequent 12 month periods determined by reference to the plan year.  As of December 31, 2011, there were 158 employees eligible to participate in the cash or deferred portion of the 401(k) Plan, and 119 employees had elected to participate.
 
Contributions Under the 401(k) Plan
 
401(k) Contributions . The 401(k) Plan permits you to defer receipt of up to 20% of your compensation, and to have that compensation contributed to the 401(k) Plan on your behalf.  For deferral purposes, a participant’s "compensation" is base salary plus commissions up to $50,000. However, no more than $255,000 (for 2013) of compensation may be taken into account for purposes of determining 401(k) contributions (and matching contributions). You may modify the rate of your future 401(k) contributions by filing a new deferral agreement with the plan administrator. Modifications to your rate of 401(k) contributions take effect as soon as practicable following when you make your revised deferral election. Suspension of your 401(k) contributions will be effective as of the next payroll period.
 
Catch-Up 401(k) Contributions . The 401(k) Plan permits each participant who has attained age 50 to defer up to an additional $5,500 (for 2013) into the 401(k) Plan. Catch-up 401(k) contributions are not subject to any 401(k) Plan contribution limitations other than the $5,500 dollar limitation.
 
Matching Contributions . The 401(k) Plan provides for matching contributions to the 401(k) Plan. Currently, the annual matching contribution rate is 50% of your 401(k) contributions (up to 6% of your compensation).  Catch-up contributions are matched. To be eligible for a matching contribution in any plan year, you must make 401(k) contributions during the plan year.
 
 
4
 
 
 
Rollover Contributions. You may also rollover or directly transfer accounts from another qualified plan or an individual retirement account (“IRA”), provided the rollover or direct transfer complies with applicable law. If you want to make a rollover contribution or direct transfer, you should contact the plan administrator.
 
Limitations on Contributions
 
Limitations on 401(k) Contributions. Although the 401(k) Plan allows you to defer receipt of up to 20% of your compensation each year as a 401(k) contribution, federal law limits your total 401(k) contributions under the 401(k) Plan, and any similar tax-qualified plans, to an aggregate $17,500 for 2013. This annual limitation may increase in future years to reflect increases in the cost of living. 401(k) contributions in excess of this limitation are considered excess deferrals, and will be included in an affected participant’s gross income for federal income tax purposes in the year the 401(k) contribution is made. In addition, any excess deferral will again be subject to federal income tax when distributed by the 401(k) Plan to the participant, unless the excess deferral, adjusted for any income or loss attributable to the excess deferral, is distributed to the participant not later than the first April 15th following the close of the taxable year in which the excess deferral is made. Any income on the excess deferral that is distributed not later than such date shall be treated, for federal income tax purposes, as earned and received by the participant in the taxable year in which the distribution is made.  This limitation does not apply to 401(k) catch-up contributions, which are subject to the $5,500 limitation described above.
 
Limitation on 401(k) and Matching Contributions for Highly Compensated Employees . Sections 401(k) and 401(m) of the Internal Revenue Code limit the amount of 401(k) contributions and matching contributions that may be made to the 401(k) Plan in any plan year on behalf of highly compensated employees (defined below) in relation to the amount of 401(k) contributions and matching contributions made by or on behalf of all other employees eligible to participate in the 401(k) Plan. Specifically, the percentage of 401(k) contributions made on behalf of a participant who is a highly compensated employee shall be limited so that the average actual deferral percentage for the group of highly compensated employees for the current plan year does not exceed the greater of (i) the average actual deferral percentage for the group of eligible employees who are non-highly compensated employees for the prior plan year multiplied by 1.25, or (ii) the average actual deferral percentage for the group of eligible employees who are non-highly compensated employees for the prior plan year, multiplied by two, provided that the difference in the average actual deferral percentage for eligible non-highly compensated employees does not exceed 2%. Similar discrimination rules apply to matching contributions. The discrimination rules do not apply to 401(k) catch-up contributions.
 
In general, a highly compensated employee includes any employee who was a 5% owner of the employer at any time during the year or preceding year, or had compensation for the preceding year in excess of $115,000 (for 2013). This dollar amount may be adjusted to reflect increases in the cost of living.
 
401(k) contributions allocated to highly compensated employees that exceed the average deferral percentage limitation in any plan year are referred to as excess contributions. In order to prevent the disqualification of the 401(k) Plan, excess contributions, together with related income or losses may be distributed to the highly compensated employees before the close of the following plan year. Matching contributions related to the excess contributions (and excess deferrals) will be forfeited when the excess contributions or excess deferrals are returned.  Also, in order to prevent the disqualification of the 401(k) Plan, matching contributions that do not satisfy the limitation tests described above for matching contributions (excess matching contributions), together with any related income or losses will either be forfeited (if not vested) or distributed (if vested) from the matching contribution accounts of highly compensated employees. There are specific rules for determining which highly compensated employees will be affected by the excess contribution and excess matching contribution return rules, the amount of excess contributions and excess matching contributions that must be returned to the affected highly compensated employees, and the determination of the income or losses attributable to excess deferrals, excess contributions and excess matching contributions.
 
The employer will be subject to a 10% excise tax on any excess contributions and excess matching contributions unless the excess contributions and excess matching contributions, together with any income or losses attributable thereto, are distributed before the close of the first 2½ months following the plan year to which the excess contributions and excess matching contributions relate.
 
 
5
 
 
 
Limitations on Annual Additions and Benefits. Pursuant to the requirements of the Internal Revenue Code, the 401(k) Plan provides that the total amount of all contributions and forfeitures (annual additions) allocated on behalf of a participant during any plan year may not exceed the lesser of 100% of the participant’s total compensation for the plan year, or $51,000 (for 2013). The $51,000 limit may be increased from time to time to reflect increases in the cost of living. Annual additions for this purpose generally include 401(k) deferrals, matching contributions and profit sharing contributions to this or any other qualified plan sponsored by First Federal or an affiliated entity. Annual additions do not include rollover contributions or investment gains.
 
Deduction Limits. Matching contributions are subject to and limited by Internal Revenue Code deduction rules. Contributions will not be made to the extent they would be considered nondeductible. 401(k) contributions are neither subject to nor limited by the Internal Revenue Code deduction rules.
 
Top-Heavy Plan Requirements . If for any plan year the 401(k) Plan is a top-heavy plan, then minimum contributions may be required to be made to the 401(k) Plan on behalf of non-key employees. Contributions otherwise being made under the Plan may apply to satisfy these requirements.
 
In general, the 401(k) Plan will be regarded as a “top-heavy plan” for any plan year if, as of the last day of the preceding plan year, the aggregate balance of the accounts of participants who are key employees exceeds 60% of the aggregate balance of the accounts of all participants. Key employees generally include any employee who, at any time during the plan year, is (1) an employee of First Northwest, First Federal or related companies having annual compensation in excess of $165,000 (adjusted in the future for cost of living increases), who also is in an officer in an administrative or policy-making capacity, (2) a 5% owner of First Northwest (i.e., owns directly or indirectly more than 5% of the stock of First Northwest, or stock possessing more than 5% of the total combined voting power of all stock of First Northwest), or (3) a 1% owner of First Northwest having annual compensation in excess of $150,000.
 
Investment of Contributions
 
Investment Options. All amounts credited to participants’ accounts under the 401(k) Plan are held in trust. The trust is administered by Pentegra Trust Company, which is appointed by the First Federal Board of Directors.
 
You must instruct the trustee as to how funds held in your account are to be invested. In addition to the Employer Stock Fund, which will consist of shares of First Northwest common stock and cash, participants may elect to instruct the trustee to invest such funds in any or all of the following investment options:
 
S&P 500 Stock    Fund - The State Street Global Advisors (“SSgA”) S&P 500 Index Fund seeks an investment return that approximates as closely as practicable, before expenses, the performance of the S&P 500 ® over the long term. The Fund is managed using a "passive" or "indexing" investment approach, by which SSgA attempts to match, before expenses, the performance of the index. SSgA will typically attempt to invest in the securities comprising the index in the same proportions as they are represented in the index. In some cases, it may not be possible or practicable to purchase all of the securities comprising the index, or to hold them in the same weightings as they represent in the index. In those circumstances, SSgA may employ a sampling or optimization technique to construct the portfolio in question. The Fund's returns may vary from the returns of the index.
 
Stable Value Fund - The primary investment objective of the Invesco Stable Value Trust Fund will be to seek the preservation of principal and to provide interest income reasonably obtained under prevailing market conditions and rates, consistent with seeking to maintain required liquidity. The Fund’s returns are based on returns generated by an actively managed, highly diversified portfolio of investment grade, fixed and floating rate securities. The sub-adviser uses a building block approach to stable value portfolio construction by investing in a series of proprietary commingled fixed income portfolios. This strategy can provide much greater diversification than could be achieved by investing in individual bonds. This strategy also seeks to eliminate the unintended impact on portfolio characteristics created by participant cash flow. The sub-adviser takes diversification a step further by using its Diversified Return multi-manager approach for the core and intermediate bond portions of the portfolio. The style diversification provided by unaffiliated managers can lead to improved consistency. Portfolio quality will be rated AA or equivalent on average at a minimum. Duration, maturity selection, spread volatility, sector and security selection are each potential sources of return.  From time to time SSgA may purchase securities that are not yet represented in the index or sell securities that have not yet been removed from the index.
 
 
6
 
 
 
S&P Midcap Stock Fund - The SSgA S&P Mid Cap Index Fund seeks an investment return that approximates as closely as practicable, before expenses, the performance of the S&P MidCap 400 Index™ over the long term. The Fund is managed using a "passive" or "indexing" investment approach, by which SSgA attempts to match, before expenses, the performance of the index. SSgA will typically attempt to invest in the securities comprising the index in the same proportions as they are represented in the index. In some cases, it may not be possible or practicable to purchase all of the securities comprising the index, or to hold them in the same weightings as they represent in the index. In those circumstances, SSgA may employ a sampling or optimization technique to construct the portfolio in question. The Fund's returns may vary from the returns of the index. From time to time SSgA may purchase securities that are not yet represented in the index or sell securities that have not yet been removed from the index.
 
Short Term Investment Fund - The SSgA Short Term Investment Fund seeks to provide safety of principal, daily liquidity and a competitive yield over the long term. The Fund is not a "money market fund" registered with the Securities and Exchange Commission, and is not subject to the various rules and limitations that apply to such funds. There can be no assurance that the Fund will maintain a stable net asset value. The Fund invests in a diversified portfolio of U.S. dollar-denominated securities including, for example, securities issued or guaranteed by the U.S. Government or its agencies or instrumentalities; debt securities of domestic or foreign corporations; mortgage-backed and other asset-backed securities; taxable and tax-exempt municipal bonds; obligations of international agencies or supranational entities; inflation-indexed bonds; structured notes; loan participations; delayed funding loans and revolving credit facilities; and short-term investments, such as repurchase agreements, bank certificates of deposit, fixed time deposits, and bankers' acceptances.
 
Long Treasury Index Fund - The SSgA U.S. Long Treasury Index Fund seeks an investment return that approximates as closely as practicable, before expenses, the performance of the Barclays Capital U.S. Long Treasury Bond Index over the long term. The Fund is managed using a "passive" or "indexing" investment approach, by which SSgA attempts to replicate, before expenses, the performance of the index. The Fund may attempt to invest in the securities comprising the index in the same proportions as they are represented in the index. However, due to the large number of securities in the index and the fact that many of the securities comprising the index may be unavailable for purchase, it may not be possible for the Fund to purchase some of the securities comprising the index. In such a case, SSgA will select securities for the Fund that SSgA believes will track the characteristics of the index. The Fund's returns may vary from the returns of the index.
 
International Index Fund - The SSgA International Index Fund seeks an investment return that approximates as closely as practicable, before expenses, the performance of the MSCI EAFE ® Index over the long term. The Fund is managed using a "passive" or "indexing" investment approach, by which SSgA attempts to match, before expenses, the performance of the index. SSgA will typically attempt to invest in the securities comprising the index in the same proportions as they are represented in the index. In some cases, it may not be possible or practicable to purchase all of the securities comprising the index, or to hold them in the same weightings as they represent in the index. In those circumstances, SSgA may employ a sampling or optimization technique to construct the portfolio in question. The Fund's returns may vary from the returns of the index. From time to time SSgA may purchase securities that are not yet represented in the index or sell securities that have not yet been removed from the index.
 
Vanguard Growth Index Fund - The Fund seeks to track the performance of the MSCI US Prime Market Growth Index, a broadly diversified index made up of growth stocks of large U.S. companies. The Fund invests all, or substantially all, of its assets in the stocks that make up the index, holding each stock in approximately the same proportion as its weighting in the index.
 
Vanguard Value Index Fund - The Fund seeks to track the performance of the MSCI US Prime Market Value Index, a broadly diversified index predominantly made up of value stocks of large U.S. companies. The Fund invests all, or substantially all, of its assets in the stocks that make up the index, holding each stock in approximately the same proportion as its weighting in the index.
 
NASDAQ 100 Index Fund - The NASDAQ 100 Index Fund seeks an investment return that approximates as closely as practicable, before expenses, the performance of the Nasdaq-100 Index ® over the long term. The Fund is managed using a "passive" or "indexing" investment approach, by which SSgA attempts to match, before expenses, the performance of the index. SSgA will typically attempt to invest in the securities comprising the index in the same proportions as they are represented in the index. In some cases, it may not be possible or practicable to purchase all of the securities comprising the index, or to hold them in the same weightings as they represent in the index. In those circumstances, SSgA may employ a sampling or optimization technique to construct the portfolio in question. The Fund's returns may vary from the returns of the index. From time to time SSgA may purchase securities that are not yet represented in the index or sell securities that have not yet been removed from the index.
 
 
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Russell 2000 Small Cap Index Fund - The SSgA Russell Small Cap Index Fund seeks an investment return that approximates as closely as practicable, before expenses, the performance of the Russell 2000® Index over the long term. The Fund is managed using a "passive" or "indexing" investment approach, by which SSgA attempts to match, before expenses, the performance of the index. SSgA will typically attempt to invest in the securities comprising the index in the same proportions as they are represented in the index. In some cases, it may not be possible or practicable to purchase all of the securities comprising the index, or to hold them in the same weightings as they represent in the index. In those circumstances, SSgA may employ a sampling or optimization technique to construct the portfolio in question. The Fund's returns may vary from the returns of the index. From time to time SSgA may purchase securities that are not yet represented in the index or sell securities that have not yet been removed from the index.
 
US REIT Index Fund - The SSgA/Tuckerman REIT Index Fund seeks an investment return that approximates as closely as practicable, before expenses, the performance of the Dow Jones U.S. Select REIT Index SM over the long term. The Fund is managed using a "passive" or "indexing" investment approach, by which SSgA attempts to match, before expenses, the performance of the index. SSgA will typically attempt to invest in the securities comprising the index in the same proportions as they are represented in the index. In some cases, it may not be possible or practicable to purchase all of the securities comprising the index, or to hold them in the same weightings as they represent in the index. In those circumstances, SSgA may employ a sampling or optimization technique to construct the portfolio in question. The Fund's returns may vary from the returns of the index. From time to time SSgA may purchase securities that are not yet represented in the index or sell securities that have not yet been removed from the index.
 
Aggregate Bond Index Fund - The SSgA U.S. Bond Index Fund seeks an investment return that approximates as closely as practicable, before expenses, the performance of the Barclays Capital U.S. Aggregate Bond Index over the long term. The Fund is managed using a "passive" or "indexing" investment approach, by which SSgA attempts to replicate, before expenses, the performance of the index. The Fund may attempt to invest in the securities comprising the index in the same proportions as they are represented in the index. However, due to the large number of securities in the index and the fact that many of the securities comprising the index may be unavailable for purchase, it may not be possible for the Fund to purchase some of the securities comprising the index. In such a case, SSgA will select securities for the Fund that SSgA believes will track the characteristics of the index. The Fund's returns may vary from the returns of the index.
 
Target Retirement Income Funds - The SSgA Target Retirement Funds seek an investment return that approximates, as closely as practicable, before expenses, the performance of a custom benchmark index over the long term. Each Fund seeks to achieve its objective by investing in a set of underlying SSgA collective trust funds representing various asset classes. Each Fund (other than the SSgA Target Retirement Income Fund) is managed to a specific retirement year (target date) included in its name. Over time, the allocation to asset classes and funds change according to a predetermined “glide path”. (The glide path represents the shifting of asset classes over time and does not apply to the Income Fund.) Each Fund’s asset allocation will become more conservative as it approaches its target retirement date. This reflects the need for reduced investment risks as retirement approaches and the need for lower volatility of a portfolio, which may be a primary source of income after retiring. The allocations reflected in the glide path do not reflect tactical decisions made by SSgA to overweight or underweight a particular asset class based on its market outlook but rather management of each fund’s strategic allocation according to its glide path and applicable benchmark. Each Fund attempts to closely match the characteristics and returns of its custom benchmark as opposed to any attempts to outperform this benchmark. Once a Fund reaches its target retirement date, it will begin a five year transition period to the SSgA Target Retirement Income Fund resulting at the end of that five year period in an allocation to stocks and real estate that will remain fixed at approximately 35% of assets. The remainder of the Fund will be invested in fixed-income securities.  The available Target Retirement Income Funds are the following:
 
Target Retirement Income Fund .
 
Target Retirement 2010 Fund .
 
 
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Target Retirement 2015 Fund .
 
Target Retirement 2020 Fund .
 
Target Retirement 2025 Fund .
 
Target Retirement 2030 Fund .
 
Target Retirement 2035 Fund .
 
Target Retirement 2040 Fund .
 
Target Retirement 2045 Fund .
 
Target Retirement 2050 Fund .
 
Target Retirement 2055 Fund .
 
Government Short Term Investment Fund - The SSgA U.S. Government Short Term Investment Fund seeks to provide safety of principal, daily liquidity and a competitive yield over the long term. The Fund is not a "money market fund" registered with the Securities and Exchange Commission, and is not subject to the various rules and limitations that apply to such funds. There can be no assurance that the Fund will maintain a stable net asset value. The Fund invests in securities issued by the U.S. Government or its agencies or instrumentalities, and in repurchase agreements with respect to such securities. Obligations of certain agencies or instrumentalities of the U.S. Government, such as Ginnie Mae, are back by the full faith and credit of the U.S. Government; obligations of other agencies or instrumentalities of the U.S. Government may not be.
 
U.S. Inflation Protected Bond Index Securities Fund - The SSgA U.S. Inflation Protected Bond Index Fund seeks an investment return that approximates as closely as practicable, before expenses, the performance of the Barclays Capital U.S. Treasury Inflation Protected Securities (TIPS) Index over the long term. The Fund is managed using a "passive" or "indexing" investment approach, by which SSgA attempts to replicate, before expenses, the performance of the index. The Fund may attempt to invest in the securities comprising the index in the same proportions as they are represented in the index. However, it may not be possible for the Fund to purchase some of the securities comprising the index. In such a case, SSgA will select securities for the Fund that SsgA believes will track the characteristics of the index. The Fund's returns may vary from the returns of the index.
 
For further descriptions of these investment options, you may request a prospectus for each of the investment options from the plan administrator. If no investment direction is given, all contributions to a participant’s account will be invested in a target date fund.
 
The investment in First Northwest common stock (through the Employer Stock Fund) involves certain risks. No assurance can be given that units in the Employer Stock Fund purchased pursuant to the 401(k) Plan will thereafter be able to be sold at a price equal to or in excess of the purchase price. See also “Risk Factors” in the prospectus.
 
First Northwest Common Stock Investment Election Procedures. You may instruct the trustee to purchase First Northwest common stock by redirecting funds from your existing 401(k) Plan investments into the Employer Stock Fund by filing a completed Investment Election Form with the plan administrator on or prior to the election deadline. The amount of funds redirected into the Employer Stock Fund must  be allocated in whole dollar increments from investment options containing your 401(k) Plan funds. When you instruct the trustee to redirect the funds in your existing accounts into the Employer Stock Fund in order to purchase shares of units in the Employer Stock Fund, the trustee will liquidate funds from the appropriate investment option(s) and apply such redirected funds as requested, in order to effect the new allocation. Approximately 95% of the elected funds used to acquire units in the Employer Stock Fund will be invested in First Northwest common stock and the remaining 5% will be invested in a money market or similar account.
 
 
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For example, you may fund an election to purchase $1,000 worth of the Employer Stock Fund by redirecting the aggregate purchase price of $1,000 for the shares from the following investment options (provided the necessary funds are available in such investment options): (i) $100 from the Short Term Investment Fund; (ii) $300 from the S&P 500 Stock Fund; and (iii) $600 from the US REIT Index Fund. In such case, the trustee would liquidate the amount instructed from each of the selected accounts and the $1,000 will be used to acquire 100 Employer Stock Fund units (that is, approximately 95 shares of First Northwest common stock and $50.00 in cash through a money market or similar investment). If your instructions cannot be fulfilled because you do not have the required funds in one or more of the investment options to purchase the units in the Employer Stock Fund subscribed for, you will be required to file a revised Investment Election Form with the plan administrator by the election deadline. Once received in proper form, an executed election form may not be modified, amended or rescinded without our consent unless the stock offering has not been completed by ____________________, 2013.
 
Adjusting Your Investment Strategy. Until changed in accordance with the terms of the 401(k) Plan, future allocations of your contributions among the various investment options would remain unaffected by the election to purchase units in the  Employer Stock Fund through the 401(k) Plan in the stock offering. You may modify a prior investment allocation election or request the transfer of funds to another investment vehicle by telephone at 866.633.4015 or on the Internet at www.pentegra.com. Modifications and fund transfers relating to the Employer Stock Fund will be permitted on a daily basis.
 
Valuation of Accounts. The 401(k) Plan uses a unit system for valuing each investment fund. Under this system, your share in any investment fund is represented by units. The unit value is determined as of the close of business each regular business day. The total dollar value of your share in any investment fund as of any valuation date is determined by multiplying the number of units held by you by the unit value of the fund on that date. The sum of the values of the funds you select represents the total value of your 401(k) Plan account.
 
Financial Data
 
Employer Contributions. For the plan year ended  December 31, 2011, we made a matching contribution of $125,395.34 to the 401(k) Plan. Also for the plan year ended December 31, 2011, participants made 401(k) contributions in the amount of $355,473.89.
 
If we adopt other stock-based benefit plans, such as a stock option plan or a restricted stock plan, or if contributions are made to the employee stock ownership plan, which was formed as part of the conversion and stock offering, to repay a loan used by it to acquire First Northwest common stock, then we may decide to reduce our matching contributions under the 401(k) Plan, in order to reduce overall expenses. If we adopt a stock option plan or restricted stock plan, the plan would not be submitted for shareholder approval for at least six months following completion of the conversion.
 
Performance of First Northwest Common Stock. It is expected that the First Northwest common stock will be listed on the NASDAQ Capital Market. As of the date of this prospectus supplement, no shares of First Northwest common stock have been issued or are outstanding and there is no established market for our common stock. Accordingly, there is no record of the historical performance of First Northwest common stock.
 
Performance of Investment Options. The following table provides performance data with respect to the investment options available under the 401(k) Plan, based on information provided to First Federal by Pentegra, which provides recordkeeping services for the 401(k) Plan.
 
 
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The information set forth below with respect to the investment options has been reproduced from materials supplied by Pentegra Services, Inc., which administers the 401(k) Plan and is responsible for providing investment alternatives under the 401(k) Plan other than the Employer Stock Fund.  First Northwest   and First Federal take no responsibility for the accuracy of such information (N/A indicates that the investment option was not available during the applicable year).
 
   
For the Year Ended December 31,
 
   
2011
   
2010
   
2009
 
S&P 500 Stock
    2.12 %     15.13 %     26.71 %
Stable Value
    2.41 %     3.66 %     2.78 %
S&P Midcap Stock
    -1.72 %     26.61 %     37.25 %
Short Term Investment
    0.25 %     0.28 %     0.59 %
Long Treasury Index
    N/A       N/A       N/A  
International Index
    -11.98 %     7.83 %     31.61 %
Vanguard Growth Index
    1.71 %     16.96 %     36.29 %
Vanguard Value Index
    1.00 %     14.28 %     19.58 %
NASDAQ 100 Index
    3.70 %     20.09 %     54.81 %
Russell 2000 Small Cap Index
    -4.18 %     26.71 %     26.87 %
US REIT Index
    9.35 %     27.85 %     27.58 %
Aggregate Bond Index
    7.83 %     6.59 %     6.39 %
Target Retirement Income
    4.79 %     9.75 %     14.75 %
Target Retirement 2010
    7.05 %     12.32 %     N/A  
Target Retirement 2015
    7.50 %     13.77 %     18.15 %
Target Retirement 2020
    6.08 %     14.71 %     N/A  
Target Retirement 2025
    5.08 %     15.30 %     21.80 %
Target Retirement 2030
    3.69 %     15.86 %     N/A  
Target Retirement 2035
    1.66 %     16.08 %     26.92 %
Target Retirement 2040
    0.18 %     16.31 %     N/A  
Target Retirement 2045
    0.21 %     16.23 %     27.41 %
Target Retirement 2050
    0.19 %     16.22 %     N/A  
Target Retirement 2055
    N/A       N/A       N/A  
Government Short Term Investment
    0.10 %     -0.05 %     0.31 %
U.S. Inflation Protected Bond Index Securities
    13.52 %     6.23 %     11.29 %

Additional information regarding the investment options may be available from Pentegra or First Federal. Participants should review any available additional information regarding these investments before making an investment decision under the 401(k) Plan.
 
Each participant should note that past performance is not necessarily an indicator of future results.
 
Administration of the 401(k) Plan
 
Trustees. The trustee is appointed by the Board of Directors of First Federal to serve at its pleasure. Currently, the 401(k) Plan Trustee is Pentegra Trust Company.
 
The trustee receives and holds the contributions to the 401(k) Plan in trust and distributes them to participants and beneficiaries in accordance with the provisions of the 401(k) Plan. The trustee is responsible for following participant directions, and effectuating the investment of the 401(k) Plan assets in Employer Stock Fund units and the other investment options.
 
Benefits Under the 401(k) Plan
 
Plan Benefits. Your 401(k) Plan benefit is based on the value of the vested portion of your 401(k) Plan accounts as of the valuation date next preceding the date of distribution to you.
 
 
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Vesting. You will always have a fully vested (nonforfeitable) interest in your 401(k) contribution account and rollover account. Your matching contribution account will become vested at 25% after your first year of employment, 50% after your second year of employment, 75% after your third year of employment, and 100% after four or more years of employment.  You also will become 100% vested in your matching contribution account if you are actively employed on your normal retirement date (age 65) or upon your death or disability. Forfeited amounts under the 401(k) Plan are generally used to reduce employer contribution obligations or to pay permitted 401(k) Plan expenses.
 
Withdrawals and Distributions from the 401(k) Plan
 
Withdrawals Prior to Termination of Employment. You may elect to receive an in-service distribution from your rollover account at any time. You may also receive an in-service distribution of all or part of your 401(k) deferrals (but not the earnings thereon) if you experience a hardship, as defined in the 401(k) Plan. Whether a hardship has occurred is determined in accordance with Internal Revenue Service rules. You may receive an in-service distribution of all or part of your vested 401(k) Plan accounts if you are 100% vested in the account and have attained age 59½.    You may also make a withdrawal from your matching contribution account if you have been a participant in the 401(k) Plan for five years, or the amount you are withdrawing has been held in the 401(k) Plan for at least two years. Only one in-service distribution is permitted from each of your Plan accounts per calendar year.
 
Loans are also permitted from your 401(k) Plan accounts, subject to the loan administration policies then in effect and qualified plan loan limitation rules in the Internal Revenue Code.
 
Distribution Upon Retirement or Disability. Upon your retirement or disability, you will receive your 401(k) Plan benefits in a lump sum payment or, if the value of your 401(k) Plan accounts exceeds $500, in annual installments over a period of time less than your life expectancy.  You elect the form of distribution.
 
Distribution Upon Death. If you die prior to your benefits being paid from the 401(k) Plan, your benefits will be paid to your surviving spouse or other properly designated beneficiary, or if there is no designated beneficiary, the beneficiary determined under the Plan rules. The death benefit may be paid in a distribution form permitted by the Plan, generally either a lump sum or annual installments.
 
Distribution Upon Termination for any Other Reason. If you terminate your employment for any reason other than retirement, disability or death and your vested 401(k) Plan account balances exceed $500, your distribution will commence to be made upon the April 1 of the year following the year in which you attain age 70½ , unless you request an earlier distribution date. Your vested 401(k) Plan accounts will be distributed in the same manner as if you retired or became disabled, as described above. If your vested account balances do not exceed $500, they will be distributed to you as soon as administratively practicable in a lump sum following your termination of employment.
 
Form of Distribution. Distributions from the 401(k) Plan will generally be in the form of cash.
 
Nonalienation of Benefits. Except with respect to federal income tax withholding and as provided with respect to a qualified domestic relations order, benefits payable under the 401(k) Plan shall not be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, charge, garnishment, execution, or levy of any kind, either voluntary or involuntary, and any attempt to anticipate, alienate, sell, transfer, assign, pledge, encumber, charge or otherwise dispose of any rights to benefits payable under the 401(k) Plan shall be void.
 
Reports to 401(k) Plan Participants
 
As soon as practicable after the end of each calendar quarter, the plan administrator will furnish to each participant a statement showing (i) balances in the participant’s accounts as of the end of that period, (ii) the amount of contributions allocated to his or her accounts for that period, and (iii) the number of units in each of the investment funds and the value thereof. Participants may also access information regarding their 401(k) Plan Accounts by using internet access made available by Pentegra, the plan administrator.
 
 
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Amendment and Termination
 
We intend to continue to participate in the 401(k) Plan. Nevertheless, we may amend or terminate the 401(k) Plan at any time. If the 401(k) Plan is terminated in whole or in part, then, regardless of other provisions in the 401(k) Plan, each participant affected by the termination shall become fully vested in all of his or her accounts.
 
Federal Income Tax Consequences
 
The following is a brief summary of the material federal income tax aspects of the 401(k) Plan. You should not rely on this summary as a complete or definitive description of the material federal income tax consequences relating to the 401(k) Plan. Statutory provisions change, as do their interpretations, and their application may vary in individual circumstances. Finally, the consequences under applicable state and local income tax laws may not be the same as under the federal income tax laws. Please consult your tax advisor with respect to any distribution from the 401(k) Plan and transactions involving the 401(k) Plan.
 
As a “tax-qualified retirement plan,” the Internal Revenue Code affords the 401(k) Plan special tax treatment, including:
 
                ·
the sponsoring employer is allowed an immediate tax deduction for the amount contributed to the 401(k) Plan each year;
 
                ·
participants pay no current income tax on their 401(k) contributions.  401(k) contributions are, however, subject to FICA (the Federal Insurance Contributions Act) and Medicare tax withholding;
 
                ·
participants pay no taxes on amounts contributed by the employer on their behalf;
 
                ·
earnings of the 401(k) Plan are tax-deferred, thereby permitting the tax-free accumulation of income and gains on investments; and
 
                ·
401(k) Plan distributions are eligible for tax-favored treatment.
 
We will administer the 401(k) Plan to comply with the requirements of the Internal Revenue Code as of the applicable effective date of any change in the law.
 
Taxation of Distributions. Generally, 401(k) Plan distributions are taxable as ordinary income for federal income tax purposes. States may also impose income taxes on 401(k) Plan distributions.
 
Rollovers and Direct Transfers to Another Qualified Plan or to an IRA; Mandatory Tax Withholding . Except as discussed below, you may roll over distributions from the 401(k) Plan to another tax-favored plan or to a traditional or “Roth” IRA without regard to whether the distribution is a lump sum distribution or a partial distribution.  (A Roth IRA generally provides for nondeductible contributions, no income tax on distributions that are “qualified distributions”, and exemption from certain minimum required distribution rules.)  You have the right to elect to have the trustee transfer all or any portion of an “eligible rollover distribution” directly to another qualified retirement plan (subject to the provisions of the recipient qualified plan) or to an IRA. If you transfer the eligible rollover distribution to a Roth IRA, then you must include the value of the distribution in current taxable income. If you do not elect to have an “eligible rollover distribution” transferred directly to another qualified plan or to an IRA, then the distribution will be subject to a mandatory federal withholding tax equal to 20% of the taxable distribution. Your state may also impose tax withholding on your taxable distribution. An “eligible rollover distribution” means any amount distributed from the 401(k) Plan except: (1) a distribution that is (a) one of a series of substantially equal periodic payments (not less frequently than annually) made for your life (or life expectancy) or the joint lives of you and your designated beneficiary or (b) for a specified period of ten years or more; (2) any amount required to be distributed under the minimum distribution rules; (3) hardship distributions, and (4) any other distributions excepted under applicable federal law.
 
 
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Ten-Year Averaging Rules. Under a special grandfather rule, if you have completed at least five years of participation in the 401(k) Plan before the taxable year in which the distribution is made, and you turned age 50 by 1986, you may elect to have your lump sum distribution taxed using a “ten-year averaging” rule. The election of the special averaging rule applies only to one lump sum distribution you or your beneficiary receive, provided such amount is received on or after you attain age 59½ and you elect to have any other lump sum distribution from a qualified plan received in the same taxable year taxed under the ten-year averaging rule or receive a lump sum distribution on account of your death.
 
Additional Tax on Early Distributions. A participant who receives a distribution from the 401(k) Plan prior to attaining age 59½ will be subject to an additional income tax equal to 10% of the amount of the distribution. The 10% additional income tax will not apply, however, in certain cases, including (but not limited to) distributions rolled over or directly transferred into an IRA or another qualified plan, or the distribution is (i) made to a beneficiary (or to the estate of a participant) on or after the death of the participant, (ii) attributable to the participant’s being disabled within the meaning of Section 72(m)(7) of the Internal Revenue Code, (iii) part of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the participant or the joint lives (or joint life expectancies) of the participant and his beneficiary, (iv) made to the participant after separation from service under the 401(k) Plan after attainment of age 55, (v) made to pay medical expenses to the extent deductible for federal income tax purposes, (vi) pursuant to a qualified domestic relations order or (vii) made to effect the distribution of excess contributions or excess deferrals.
 
This is a brief description of federal income tax aspects of the 401(k) Plan which are of general application under the Internal Revenue Code. It is not intended to be a complete or definitive description of the federal income tax consequences of participating in or receiving distributions from the 401(k) Plan. Accordingly, you are urged to consult a tax advisor concerning the federal, state and local tax consequences that may be particular to you of participating in and receiving distributions from the 401(k) Plan.
 
ERISA and Other Qualification
 
The 401(k) Plan is subject to certain provisions of the Employee Retirement Income Security Act of 1974, the primary federal law governing retirement plans, and is intended to be a qualified retirement plan under the Internal Revenue Code.
 
Restrictions on Resale
 
Any person receiving shares of First Northwest common stock under the 401(k) Plan who is an “affiliate” of First Northwest as the term “affiliate” is used in Rules 144 and 405 under the Securities Act of 1933, as amended (e.g., directors, officers and significant shareholders of First Northwest), may re-offer or resell such shares only pursuant to a registration statement or, assuming the availability thereof, pursuant to Rule 144 or some other exemption from the registration requirements of the Securities Act of 1933, as amended. Any person who may be an “affiliate” of First Northwest may wish to consult with counsel before transferring any First Northwest common stock owned by him or her. In addition, participants are advised to consult with counsel as to the applicability of Section 16 of the Securities Exchange Act of 1934, as amended, which may restrict the sale of First Northwest common stock acquired under the 401(k) Plan, or other sales of First Northwest common stock.
 
Securities and Exchange Commission Reporting and Short-Swing Profit Liability
 
Section 16 of the Securities Exchange Act of 1934, as amended, imposes reporting and liability requirements on officers, directors and persons beneficially owning more than 10% of public companies such as First Northwest. Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the filing of reports of beneficial ownership. Within ten days of becoming a person subject to the reporting requirements of Section 16(a), a Form 3 reporting initial beneficial ownership must be filed with the Securities and Exchange Commission. Certain changes in beneficial ownership, such as purchases, sales and participation in savings and retirement plans must be reported on a Form 4 within two business days of when a change occurs. Certain other changes in beneficial ownership, such as gifts and inheritances, may be reported on a Form 4 or annually on a Form 5 within 45 days after the close of our fiscal year. Ownership of First Northwest common stock in the Employer Stock Fund of the 401(k) Plan by our officers, directors and persons beneficially owning more than 10% of the outstanding First Northwest common stock must be reported to the Securities and Exchange Commission at least annually on a Form 4 or Form 5 by such individuals.
 
 
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Section 16(b) of the Securities Exchange Act of 1934, as amended, provides for the recovery by us of any profits realized by an officer, director or any person beneficially owning more than 10% of the First Northwest common stock resulting from the purchase and sale or sale and purchase of  First Northwest common stock within any six-month period. The Securities and Exchange Commission rules provide an exemption from the profit recovery provisions of Section 16(b) for certain transactions within an employee benefit plan, such as the 401(k) Plan, provided certain requirements are met. If you are subject to Section 16, you should consult with counsel regarding the applicability of Section 16 to specific transactions involving the 401(k) Plan.
 
LEGAL OPINIONS
 
The validity of the issuance of First Northwest common stock will be passed upon by Breyer & Associates PC, McLean, Virginia, which firm acted as special counsel for First Northwest and First Federal in connection with the conversion and stock offering.
 
 
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INVESTMENT ELECTION FORM
 
PARTICIPANT ELECTION TO INVEST IN
FIRST NORTHWEST BANCORP COMMON STOCK
(“EMPLOYER STOCK FUND”)

First Federal Savings and Loan Association of Port Angeles 401(k) Plan

If you would like to participate in the stock offering using amounts currently in your account in the First Federal Savings and Loan Association of Port Angeles 401(k) Plan, please complete this form and return it to Elaine Gentilo, Chief People Officer, First Federal Savings and Loan Association of Port Angeles, 105 West 8th Street, Port Angeles, Washington 98362 by no later than 4:00 p.m., Pacific time, on ______________, 2013.

Participant’s Name (Please Print):
   
Address:                                                                                                                                          
 
Street
 
City
State
Zip Code
 
Social Security Number:      
                                                             
1.             Background Information

First Financial Northwest (“First Northwest”) will be issuing shares of common stock, par value $0.01 per share, to certain eligible depositors of First Federal Savings and Loan of Port Angeles (“First Federal”) and the public in connection with the conversion of First Federal from the mutual to the stock form of organization.

Participants in the First Federal Savings and Loan Association of Port Angeles 401(k) Plan (the “401(k) Plan”) are being given an opportunity to direct the trustee of the 401(k) Plan to purchase First Northwest   common stock in the offering with amounts currently in their 401(k) Plan account by acquiring units of the Employer Stock Fund, an investment fund under the 401(k) Plan comprised of First Northwest common stock and cash. (Employees who would like to purchase shares of First Northwest common stock in the offering with funds other than amounts currently in their 401(k) Plan account may do so by completing the order form that accompanies the prospectus.) Units of the Employer Stock Fund will be valued in the stock offering at $10.00 per unit, and initially will be invested entirely in First Northwest common stock.  In the future Employer Stock Fund units may be comprised of both First Northwest Stock (likely between 94 and 97 percent of a unit) and cash or a cash equivalent (likely between three and six percent of a unit).

Because it is actually the 401(k) Plan that purchases the First Northwest common stock through the Employer Stock Fund, participants would acquire a “participation interest” (expressed as units of the Employer Stock Fund) in the shares and cash and would not own the shares and cash directly.

Prior to making a decision to direct the trustee to purchase units in the Employer Stock Fund, we strongly urge you to carefully review the prospectus and the prospectus supplement that accompany this Investment Election Form. Your decision to direct the transfer of amounts credited to your account balances to the Employer Stock Fund in order to purchase shares of First Northwest common stock in connection with the stock offering is irrevocable as of ______________.   However, after the offering, you may transfer funds from the Employer Stock Fund to other investment options in the 401(k) Plan, and from other investment options in the 401(k) Plan to the Employer Stock Fund.  Notwithstanding this irrevocability, participants may transfer out some or all of their units in the Employer Stock Fund, if any, and into one or more of the 401(k) Plan’s other investment funds at such times as are provided for under the 401(k) Plan’s rules for such transfers.

Investing in any stock entails some risks and we encourage you to discuss your investment decision with your investment advisor before completing this form. Neither the trustee, nor the plan administrator, nor any employee of First Northwest or First Federal is authorized to make any representations about this investment. You should not rely on any information other than information contained in the prospectus and the prospectus supplement in making your investment decision.

Any shares purchased by the 401(k) Plan based on your election will be subject to the conditions and restrictions otherwise applicable to First Northwest common stock purchased directly by you in the stock offering. These restrictions are described in the prospectus and the prospectus supplement.
 
 
A-1
 
 
 
2.             Investment Elections

If you would like to participate in the stock offering with amounts currently in your 401(k) Plan account, please complete the table below, indicating what percentage of each of your current funds you would like to transfer into the Employer Stock Fund.  Percentages will be adjusted to the nearest $10.00, so that whole shares will be purchased.  If the trustee is unable to fully implement your instructions due to an oversubscription in the stock offering, the portion that is not invested in the Employer Stock Fund will be reallocated according to your current investment elections on file.

Please refer to the prospectus supplement regarding the minimum and maximum amounts that can be used to purchase Employer Stock Fund units.

Indicate the percentage to be transferred from one or more of the following funds into the Employer Stock Fund:

 
Percentage
Fund
 
 
%
S&P 500 Stock
 
 
%
Stable Value
 
 
%
S&P Midcap Stock
 
 
%
Short Term Investment
 
 
%
Long Treasury Index
 
 
%
International Index
 
 
%
Vanguard Growth Index
 
 
%
Vanguard Value Index
 
 
%
NASDAQ 100 Index
 
 
%
Russell 2000 Small Cap Index
 
 
%
US REIT Index
 
 
%
Aggregate Bond Index
 
 
%
Target Retirement Income
 
 
%
Target Retirement 2010
 
 
%
Target Retirement 2015
 
 
%
Target Retirement 2020
 
 
%
Target Retirement 2025
 
 
%
Target Retirement 2030
 
 
%
Target Retirement 2035
 
 
%
Target Retirement 2040
 
 
%
Target Retirement 2045
 
 
%
Target Retirement 2050
 
 
%
Target Retirement 2055
 
 
%
Government Short Term Investment
 
 
%
U.S. Inflation Protected Bond Index Securities

Note:  If you do not complete this election, you will not participate in the offering by using your 401(k) Plan funds.
 
 
A-2
 
 
 
3.            Purchaser Information. The ability of participants in the Plan to purchase common stock in the stock offering and to direct their current account balances into the Employer Stock Fund may be based upon the participant’s status as an eligible account holder, supplemental eligible account holder or other member. Please indicate your status.

 
A.
[_]
Eligible Account Holder - Check here if you were a depositor of First Federal with deposit account(s) totaling $50 or more as of the close of business on March 31, 2011.

 
B.
[_]
Supplemental Eligible Account Holder - Check here if you were a depositor of First Federal with deposit account(s) totaling $50 or more on deposit as of the close of business on                                     , 2012.

 
C.
[_]
Other Member - Check here if you were a depositor or borrower of First Federal on the close of business on                                    , 2012, to the extent not included in a prior category.

4.             Participant Signature and Acknowledgment - Required

By signing this investment election form, I authorize and direct the plan administrator and trustee to carry out my instructions. I acknowledge that I have been provided with and have received a copy of the prospectus and prospectus supplement relating to the issuance of First Northwest common stock that accompany this Investment Election Form. I am aware of the risks involved in investing in First Northwest common stock and understand that the trustee, plan administrator and any employee of First Northwest or First Federal are not responsible for my choice of investment. I understand that my failure to sign this acknowledgment will make this Investment Election Form null and void.

I ACKNOWLEDGE THAT THE SHARES OF COMMON STOCK, $.01 PAR VALUE PER SHARE, OF FIRST NORTHWEST ARE NOT DEPOSITS OR AN ACCOUNT AND ARE NOT FEDERALLY INSURED OR GUARANTEED BY FIRST NORTHWEST, FIRST FEDERAL OR BY THE FEDERAL GOVERNMENT.

If anyone asserts that the shares of First Northwest common stock are federally insured or guaranteed, or are as safe as an insured deposit, I should call the Federal Deposit Insurance Corporation (FDIC) Consumer Response Center at (800) _____-_______.


Participant’s Signature: __________________________________________ Date Signed: ________________

This form must be completed and returned to __________________,

First Federal Savings and Loan Association of Port Angeles
105 West 8th Street
Port Angeles, Washington 98362
by no later than
4:00 p.m., Pacific time, on ______________, 2013.
 
 
A-3
 
 
 
PROSPECTUS
SUBSCRIPTION AND COMMUNITY OFFERINGS
Up to 8,050,000 Shares of Common Stock
(Subject to increase to up to 9,257,500 shares)
 
  FIRST NORTHWEST BANCORP
 (Proposed Holding Company for First Federal)
 
         First Northwest Bancorp, a Washington corporation, is offering up to 8,050,000 shares of our common stock for sale in connection with the conversion of First Federal Savings and Loan Association of Port Angeles (“First Federal”) from the mutual to stock form of organization.  As part of the conversion, First Federal will become our wholly owned subsidiary.  We may increase the maximum number of shares that we sell in the offering by up to 15%, to 9,257,500 shares, as a result of the demand for shares or changes in market and financial conditions.  The shares of our common stock are being offered for sale at a price of $10.00 per share.  We expect our common stock will be listed on the Nasdaq Capital Market under the symbol “FNBC” upon completion of the offering.  There is currently no public market for the shares of our common stock and we cannot predict whether an active and liquid trading market for our common stock will develop.
 
We are offering these shares for sale first to our depositors and other eligible subscribers in a subscription offering.  Shares not subscribed for in the subscription offering will be offered in a community offering, with a preference given to natural persons residing in Clallam, Jefferson and Kitsap counties in the state of Washington. Any shares remaining unsold following completion of the subscription and community offerings will be offered to the public in a syndicated offering, or, in our discretion after consultation with our financial advisors, in a separate firm commitment underwritten public offering.  The subscription, community, syndicated and underwritten offerings are collectively referred to in this prospectus as the offering.  In order to complete the offering, we must sell, in the aggregate, at least 5,950,000 shares.  The minimum purchase is 25 shares.  The subscription offering is scheduled to end at 5:00 p.m., Pacific time, on _________ __, 2013 and we expect that the community offering will terminate at the same time.  However, we may extend this expiration date, without notice to you, until _________ __, 2013, unless the Washington Department of Financial Institutions and the Federal Deposit Insurance Corporation approve a later date, which may not be extended beyond _________ __, 2014.  Once submitted, orders are irrevocable unless the offering is terminated or extended beyond _________ __, 2013.  If the offering is extended beyond _________ __, 2013, subscribers will have the right to modify or rescind their purchase orders.  First Northwest Bancorp will hold all subscribers’ funds received before the completion of the conversion in a segregated account at First Federal until the conversion is completed or terminated.  We will pay interest on all funds received at a rate equal to First Federal’s statement savings rate, which is currently ___% per annum.  Funds will be returned promptly with interest if the conversion is terminated.
 
In addition to the shares that we will sell in the offering, we intend to establish a charitable foundation in connection with the conversion and fund it with $400,000 in cash and the remainder in shares of common stock so that the total amount contributed is equal to 8% of the gross offering proceeds received by First Northwest Bancorp in the offering.
 
Subscribers will not pay any commissions to purchase shares of common stock in the offering.  Sandler O’Neill + Partners, L.P.   will assist us in our selling efforts on a best efforts basis in the subscription and community offerings, and will serve as sole manager of any syndicated or underwritten offering.  Sandler O’Neill is not required to purchase any of the common stock that is being offered for sale in the subscription and community offerings.  Sandler O’Neill + Partners, L.P. has advised us that following the offering it intends to make a market in the common stock but is under no obligation to do so.
 
Investing in our common stock involves a high degree of risk, including the possible loss of principal.
Please read “Risk Factors” beginning on page __.
 
 
TERMS OF THE OFFERING
Price Per Share: $10.00; Minimum Subscription: 25 shares or $250
 
   
Minimum
   
Maximum
   
Maximum
as adjusted
 
                   
Number of Shares
    5,950,000       8,050,000       9,257,500  
Gross Offering Proceeds
  $ 59,500,000     $ 80,500,000     $ 92,575,000  
Estimated Selling Agent Fees and Expenses (1)
  $ 659,782     $ 851,638     $ 961,955  
Estimated Other Expenses
  $ 1,355,000     $ 1,355,000     $ 1,355,000  
Estimated Net Proceeds to First Northwest Bancorp
  $ 57,485,218     $ 78,293,362     $ 90,258,045  
Estimated Net Proceeds Per Share
  $ 9.66     $ 9.73     $ 9.75  

(1)
The amounts shown assume that all of the shares offered are sold in the subscription and community offerings with a fee of 1.00% payable on all shares (excluding insider purchases, shares purchased by our employee stock ownership plan and shares issued to our foundation, for which no selling agent fee will be paid) and reflect selling agent expenses, including legal fees, of $125,000. If all shares of common stock are sold in the syndicated offering or underwritten offering (excluding insider purchases and shares purchased by the employee stock ownership plan and our foundation, for which no selling agent fees will be paid), the selling fee
 
 
 
 
 
 
will be 5.25% and the maximum selling agent fees and expenses would increase to $2.9 million at the minimum, $3.9 million at the maximum and $4.5 million at the adjusted maximum. For additional information regarding selling agent fees and expenses, see “The Conversion and Offering – Marketing Arrangements.”
 
These securities are not deposits or accounts and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other governmental agency.

Neither the Securities and Exchange Commission, the Federal Deposit Insurance Corporation, the Board of Governors of the Federal Reserve System, the Washington Department of Financial Institutions, nor any other federal agency or state securities regulator has approved or disapproved these securities or determined if this prospectus is accurate or complete.  Any representation to the contrary is a criminal offense.

For information on how to subscribe, call the stock information center at (___) ___-____.

 
SANDLER O’NEILL & PARTNERS, L.P.
 
________ __, 2012

 
 
 

GRAPHIC

 
 
 

TABLE OF CONTENTS
 
You should rely only on the information contained in this prospectus or to which we have referred you.  We have not authorized anyone to provide you with information that is different.  This prospectus does not constitute an offer to sell, or the solicitation of an offer to buy, any of the securities offered hereby to any person in any jurisdiction in which such offer or solicitation would be unlawful.  The affairs of First Northwest Bancorp and its subsidiaries may change after the date of this prospectus.  Delivery of this prospectus and the sales of shares made hereunder does not mean otherwise.
 
   
Page
     
 
1
 
17
 
33
 
35
 
36
 
37
 
37
 
38
 
39
 
42
 
49
 
50
 
75
 
75
 
108
 
124
 
125
 
134
 
136
 
153
 
156
 
157
 
157
 
157
 
158
 
F-1

 
 
 
 
 
This summary provides an overview of the key aspects of the stock offering as described in more detail elsewhere in this prospectus and may not contain all the information that is important to you.  To completely understand the stock offering, you should read the entire prospectus carefully, including the sections entitled “Risk Factors” and “The Conversion and Stock Offering” beginning on pages __ and ___, respectively, and the consolidated financial statements and the notes to the consolidated financial statements beginning on page F-1, before making a decision to invest in our common stock.
 
Overview
 
As part of the conversion to stock ownership, First Northwest Bancorp is conducting this offering of between 5,950,000 and 8,050,000 shares of common stock to raise additional capital to support our continued growth.  We may increase the maximum number of shares that we sell in the offering by up to 15% to 9,257,500 shares, as a result of the demand for shares or changes in market and financial conditions.  The offering includes a subscription offering in which depositors of First Federal and certain other persons have prioritized subscription rights.  There are limitations on how many shares a person may purchase in the offering.  The amount of capital being raised is based on an appraisal of First Northwest Bancorp and a decision by management to offer all of our shares of common stock to the public and our decision to establish and fund our foundation.  Most of the terms and requirements of this offering are required by regulations of the Washington Department of Financial Institutions, or DFI, and the Federal Deposit Insurance Corporation, or FDIC.
 
The following tables show how many shares of common stock may be issued in the offering, contributed to the foundation, and subsequently issued if our proposed stock-based equity incentive plan is adopted.
 
   
Shares to be sold
to the
public in
this offering
   
Shares to be sold
to the
 employee stock
ownership plan (2)
   
Shares to be
issued to
the
foundation (3)
   
Total shares of
common stock to be
outstanding after
 the offering
 
   
Amount
      % (1)    
Amount
      % (1)    
Amount
   
%
   
Amount
   
%
 
                                                     
Minimum
    5,439,120       85.2 %     510,880       8.0 %     436,000       6.8 %     6,386,000       100.0 %
Midpoint
    6,398,400       85.1       601,600       8.0       520,000       6.9       7,520,000       100.0  
Maximum
    7,357,680       85.0       692,320       8.0       604,000       7.0       8,654,000       100.0  
Maximum, as adjusted
    8,460,852       85.0       796,648       8.0       700,600       7.0       9,958,100       100.0  
                                                                 
   
Shares that may be awarded under an
equity incentive plan
                                 
   
Restricted Stock
   
Stock Options
                                 
   
Amount
    % (1)    
Amount
    % (1)                                  
                                                                 
Minimum
    255,440       4.0 %     638,600       10.0 %                                
Midpoint
    300,800       4.0       752,000        10.0                                  
Maximum
    346,160       4.0       865,400        10.0                                  
Maximum, as adjusted
    398,324        4.0       995,810        10.0                                  
 
(1) As a percentage of total shares sold in the offering (including shares issued to the First Federal Community Foundation).
(2) Assumes 8% of the shares sold in the offering (including shares issued to the First Federal Community Foundation) are sold to the employee stock ownership plan.
(3) Assumes $400,000 in cash is contributed to the foundation and the remainder in shares of common stock so that the total amount contributed is equal to 8% of the gross offering proceeds received by First Northwest Bancorp in the offering.
 
 
 
 

First Northwest Bancorp
 
First Northwest Bancorp is a newly formed Washington corporation that will hold all of the outstanding shares of First Federal following the conversion to stock ownership.  First Northwest Bancorp is conducting the stock offering in connection with the conversion of First Federal from the mutual to the stock form of organization.  Upon completion of the offering, First Northwest Bancorp will be a bank holding company and its primary regulator will be the Board of Governors of the Federal Reserve System, or Federal Reserve.
 
First Federal Savings and Loan Association of Port Angeles
 
First Federal is a Washington chartered mutual savings bank and upon completion of the conversion will be the wholly-owned subsidiary of First Northwest Bancorp.  First Federal was organized on March 23, 1923, as a Washington State chartered mutual savings and loan association known as Lincoln Savings and Loan Association.  On October 1, 1934, Lincoln Savings and Loan Association converted to a federal charter and became known as First Federal Savings and Loan Association of Port Angeles.   Effective November 30, 2011, First Federal completed its charter conversion from a federal mutual savings and loan association to a Washington State chartered mutual savings bank.  As a mutual savings bank, First Federal has a board of trustees that oversees its activities.  Following the conversion, First Federal’s existing board of trustees will continue as a board of directors for First Federal and for First Northwest Bancorp.  For purposes of this prospectus, references herein to the board of directors also include the board of trustees of First Federal in its present mutual form.
 
First Federal is a community-based savings bank primarily serving the North Olympic Peninsula region of Washington through our nine full-service banking offices.  Eight of our branches are located within Clallam and Jefferson counties, Washington, and in December 2011, we opened a new lending center in Kitsap County, which became a full-service branch in October 2012.  In addition, in July 2012, we opened a loan production office in Bellingham, Washington. We are contemplating near-term expansion into the contiguous counties of Whatcom, Skagit, Island, Snohomish and San Juan, Washington and may also consider acquisitions of other financial institutions located in the Northwest.   Throughout most of our 89-year history, we have operated as a traditional savings and loan association, attracting deposits and investing those funds primarily in residential mortgage loans and investment securities.  During the past decade, recognizing our need to adapt to changing market conditions, we have strengthened our senior management team and revised our operating strategy to diversify our loan portfolio, expand our deposit product offerings and enhance our infrastructure.   We have gradually increased the origination of commercial real estate and multifamily real estate loans, and decreased reliance on originating and retaining longer-term, fixed-rate, owner occupied residential mortgage loans.  Since 2009, 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 adding 30-year fixed-rate mortgages to 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.  Over the past several years, we have added remote deposit capture, consumer and business on-line banking and consumer mobile banking capabilities.   At September 30, 2012, transaction and savings deposits comprised 71.9% of total deposits.
 
First Federal is a member of the Federal Home Loan Bank System, and its deposits are insured by the FDIC up to applicable limits.  First Federal is subject to comprehensive regulation, examination and supervision by the DFI and the FDIC.  At September 30, 2012, we had total assets of $781.8 million, deposits of $589.9 million, and equity of $78.5 million.  First Federal maintains a website at www.ourfirstfed.com .   The information on our website is not part of this prospectus.
 
Our Operating Strategy
 
Our objective is to develop First Federal into an independent high performing bank focused on meeting the needs of individuals, small businesses and community organizations in our primary market areas of Northwest Washington through exceptional service and competitive products. In addition, we expect to opportunistically expand into additional surrounding market areas.  After the conversion and offering, we intend to achieve our objective by implementing these strategies:
 
 
●
Improving our earnings by increasing our portfolio of higher yielding loans and our noninterest income. Through increased originations or purchases, we intend to prudently increase the percentage of our loan portfolio consisting of higher-yielding commercial real estate and
 
 
2
 
 
 
 
commercial business loans. These loan categories offer higher risk-adjusted returns, shorter maturities and more sensitivity to interest rate fluctuations than one- to four-family residential loans. We will pursue this strategy with the benefit of the addition of lending personnel experienced in these types of credits.  Our commercial and multi-family real estate loans have increased from $64.5 million, or 11.6% of total loans, at June 30, 2008 to $110.1 million, or 26.1% of total loans, at September 30, 2012.  The increase resulted in part from improved opportunities due to less competition for such loans from other financial institutions as a result of the weakened economic environment. We also intend to selectively add additional products to further diversify revenue sources and to capture more of each customer’s banking relationship by cross-selling our loan and deposit products and additional services to our customers. We will also continue to review opportunities to increase noninterest income through the origination and sale of loans and possible expansion into new areas such as wealth management services.
 
 
●
Focusing on asset quality. We believe that strong asset quality is a key to our long-term financial success.  We are focused on monitoring existing performing loans, resolving nonperforming loans and selling foreclosed assets. We have aggressively sought to reduce our level of nonperforming assets through write-downs, collections, modifications and sales of nonperforming loans and real estate owned. We have taken proactive steps to resolve our nonperforming loans, including negotiating repayment plans, forbearances, loan modifications and loan extensions with our borrowers when appropriate, and accepting short payoffs on delinquent loans, particularly when such payoffs result in a smaller loss to us than foreclosure. We also retain the services of independent firms to periodically review segments of our loan portfolio and comment regarding our loan policies and procedures. Beginning with the addition of our new president and chief executive officer in 2009 and continuing with the recent addition of our new chief credit officer in 2012, we have applied more conservative and stringent underwriting practices to our new loans, while also curtailing our originations of construction, land and land development loans (including lot loans).  Our exposure to higher risk construction, land and land development loans has declined to $18.0 million at September 30, 2012, compared to $49.8 million at June 30, 2008. Nonperforming assets have decreased from their recent peak of $18.9 million at June 30, 2010, to $14.3 million at September 30, 2012.
 
 
●
Attracting core deposits and other deposit products. Our strategy is to emphasize total relationship banking with our customers to internally fund our loan growth, rather than utilizing wholesale funding sources. We believe that a continued focus on customer relationships will help to increase our level of core deposits and locally-based retail certificates of deposit. In addition to our retail branches, we maintain state-of-the-art technology-based products, such as on-line personal financial management, business cash management, and business remote deposit products, that enable us to compete effectively with banks of all sizes. We recently enhanced our integrated mobile banking platform by introducing applications for both smartphones and iPads.
 
 
●
Expanding our presence in contiguous and nearby market areas and capturing business opportunities resulting from changes in the competitive environment.   We believe that opportunities currently exist in contiguous and nearby market areas to grow our franchise and complement our strong market share in our primary market areas.  In addition, by delivering high quality, customer-focused products and services, we expect to attract additional borrowers and depositors and thus increase our market share and revenue generation.  We anticipate our marketing efforts will enable organic growth as the local economy and loan demand strengthens.  We believe that community bank consolidation will continue to take place and further believe that, with our capital and liquidity positions after this offering, we will be positioned to take advantage of acquisitions or other business opportunities, including FDIC-assisted transactions and the acquisition of individual branches and/or de novo branch openings that meet our investment and market objectives , although we do not currently have any understandings or agreements regarding any specific acquisition transaction.  We intend to continue to be disciplined as it pertains to future expansion, acquisitions and de novo branching. Our primary focus will be on the Northwest Washington markets we know and understand, although we will consider additional select opportunities that may arise in other parts of the Northwest.
 
 
3
 
 
 
●
Hiring experienced employees with a customer service focus. Our ability to continue to attract and retain banking professionals with strong business banking and service skills, community relationships and significant knowledge of our markets and the markets we want to expand into will be key to our success. We believe that by focusing on experienced bankers who are established in their communities, we can enhance our market position and add profitable growth opportunities. We emphasize to our employees the importance of delivering exemplary customer service and seeking opportunities to build further relationships with our customers. Our goal is to compete by relying on the strength of our customer service and relationship banking approach.
 
For a more detailed description of our products and services, as well as our business operating strategy and goals, see “Business of First Federal” beginning on page __.
 
First Federal Community Foundation

To continue our long-standing commitment to our local communities, we intend to establish a charitable foundation, the First Federal Community Foundation, as a non-stock Washington corporation in connection with the conversion.  We will fund the foundation with $400,000 in cash and the remainder in shares of common stock so that the total amount contributed is equal to 8% of the gross offering proceeds received by First Northwest Bancorp in the offering.  Based on the purchase price of $10.00 per share, we will fund the foundation with 520,000 shares of our common stock at the midpoint of the offering range.  Our contribution to the foundation will reduce net earnings by $3.7 million, after tax, in the quarter in which the foundation is funded.  The foundation will make grants and donations to qualified charitable organizations and/or public entities in the communities in which First Federal maintains full service branches.  First Federal may make future contributions to the foundation as deemed appropriate by First Federal’s Board of Directors, subject to any capital needs and requirements or other regulatory limitations that may be applicable.  It is anticipated that the foundation will distribute at least 5% of its net investment assets each year.
 
The Conversion and Stock Offering
 
We do not have shareholders in our current mutual form of ownership.  The conversion is a series of transactions by which we are reorganizing from a mutual savings bank structure to a stock holding company which will be 100% owned by shareholders.  As a result of the conversion, First Federal will be owned directly by First Northwest Bancorp.  Voting rights in First Northwest Bancorp will be vested solely in the shareholders following the conversion.
 
The chart below shows our structure before the conversion and offering:
 
 
 
Depositors
 
 
       
 
 
First Federal
 
 
 
 
4
 
 
The chart below shows our structure after the conversion and offering:
 
 
 
Shareholders
 
 
     
   
100% of common stock
     
 
 
First Northwest Bancorp
 
 
       
   
100% of common stock
       
 
 
First Federal
 
 
 
Terms of the Offering
 
We are offering between 5,950,000 and 8,050,000 shares of common stock to those with subscription rights in the following order of priority:
 
 
(1)
Depositors who held at least $50 with us as of the close of business on March 31, 2011.
 
 
(2)
Tax qualified plans, including our employee stock ownership plan and 401(k) plan, will receive nontransferable subscription rights to purchase in the aggregate up to 10% of the shares of common stock in the offering, including shares issued to the foundation.  We expect the employee stock ownership plan to purchase 8% of the common stock sold in the offering.
 
 
(3)
Depositors of First Federal, other than directors and executive officers and their associates employed, appointed or elected for the first time to such office after March 31, 2011, who held at least $50 with us as of the close of business on ________ __, 2012.
 
 
(4)
Depositors and borrowers with us as of the close of business on ________ __, 2012 to the extent not already included in a prior category.
 
In addition to the shares that we will sell in the offering, we intend to establish a charitable foundation in connection with the conversion and fund it with $400,000 in cash and the remainder in shares of common stock so that the total amount contributed is equal to 8% of the gross offering proceeds received by First Northwest Bancorp in the offering.

We may increase the maximum number of shares that we sell in the offering by up to 15% to 9,257,500 shares with the approval of the DFI and the FDIC and without any notice to you as a result of market demand, regulatory considerations or changes in financial conditions.  If we increase the offering up to 9,257,500 shares, you will not have the opportunity to change or cancel your stock order.  The offering price is $10.00 per share.  All purchasers will pay the same purchase price per share.  No commission will be charged to purchasers in the offering.
 
If we receive subscriptions for more shares than are to be sold in the subscription offering, shares will be allocated in order of the priorities described above under a formula outlined in the plan of conversion. Shares of common stock not subscribed for in the subscription offering will be offered to the general public in a community offering with a preference given to natural persons residing in Clallam, Jefferson, and Kitsap counties, Washington.   The community offering may commence concurrently with, during or promptly after the subscription offering.  Any shares remaining unsold following completion of the subscription and community offerings will be offered to the public in a syndicated offering or firm commitment offering, which would begin as promptly as practicable after the subscription and community offerings.  See “The Conversion and Stock Offering - Subscription Offering and Subscription Rights,” “- Community Offering” and “- Syndicated or Firm Commitment Underwritten Community Offering.”
 
 
5
 
 
 
Sandler O’Neill + Partners, L.P., our selling agent in connection with the offering, will use its best efforts to assist us in selling our common stock in the subscription and community offerings.  Sandler O’Neill + Partners, L.P. is not obligated to purchase any shares of common stock in the subscription and community offerings.  For further information about the role of Sandler O’Neill + Partners, L.P. in the offering, see “The Conversion and Stock Offering - Marketing Arrangements.”
 
Reasons for the Conversion and Offering
 
The primary reasons for our decision to conduct the conversion and the offering are to:
 
 
●
increase our capital to give us the financial strength to:
         
      o
better enable us to serve our customers in our market area;
         
      o
support our continued growth and expansion through additional branching activities or acquisitions, including FDIC-assisted transactions, although we have no current understandings or agreements with respect to any such acquisitions or expansion activities; and
         
      o
increase our lending activities, particularly our emphasis on commercial business and commercial real estate lending, and explore the development of new products and services.
         
  ●
provide us with additional financial resources, including the ability to offer our stock as consideration for future acquisitions of other community banks;
     
  ●
help us maintain and further expand our philanthropic endeavors to the communities we serve through the formation and funding of the First Federal Community Foundation;
     
  ●
help us attract and retain qualified management through stock-based compensation plans;
     
  ●
provide our customers and other members of our communities with the opportunity to become owners of First Federal through the purchase of our common stock; and
     
  ●
structure our business in a form that will enable us to have more flexible access to the capital markets.
 
How We Determined the Offering Range and the $10.00 Price Per Share
 
The amount of common stock we are offering is based on an independent appraisal by RP Financial, LC. (“RP Financial”), an appraisal firm experienced in appraisals of financial institutions, of the estimated pro forma market value of First Northwest Bancorp, assuming the conversion and offering are completed.  The appraisal was based in part on our consolidated financial condition and results of operations, the pro forma effect of the additional capital raised by the sale of shares of our common stock in the offering, our establishment and funding with stock and cash of the foundation and an analysis of a peer group of publicly-traded companies utilized by RP Financial in its appraisal that RP Financial considers comparable to First Northwest Bancorp.
 
RP Financial concluded that, as of November 9, 2012, the estimated pro forma market value of First Northwest Bancorp was $75.2 million.  This pro forma market value is the midpoint of a valuation range established by regulation with a minimum of $63.9 million and a maximum of $86.5 million, inclusive of shares to be issued to the foundation.  Based on this market value and a $10.00 per share purchase price, the number of shares of our common stock that will be offered for sale will range from 5,950,000 to 8,050,000 with a midpoint of 7,000,000.  The $10.00 per share price was selected primarily because it is the price most commonly used in mutual-to-stock conversions of financial institutions.  If a greater demand for shares of our common stock or a change in financial or market conditions warrant, the offering range may be increased by up to 15.0%.  At this adjusted maximum of the offering range, the estimated pro forma market value is $99.6 million and the number of shares of common stock offered for sale will be 9,257,500.
 
In preparing its appraisal, RP Financial considered the information in this prospectus, including our financial statements.  RP Financial also had various discussions with management and considered the following factors, among others:
 
  ●
certain historical, financial and other information relating to First Federal;
 
 
6
 
 
  ●
the projected results of operations and financial condition of First Northwest Bancorp;
     
  ●
the economic and demographic conditions in our existing market area;
     
  ●
a comparative evaluation of the operating and financial characteristics of First Federal with the peer group companies discussed below;
     
  ●
the impact of the conversion and the offering on First Northwest Bancorp’s shareholders’ equity and earnings potential;
     
  ● 
the proposed dividend policy of First Northwest Bancorp; and
     
  ●
the trading market for the securities of the peer group institutions and general conditions in the stock market for all publicly traded thrift institutions.
 
RP Financial did not perform a detailed analysis of the separate components of our assets and liabilities.  We did not impose any limitations on RP Financial in connection with its appraisal.
 
RP Financial also considered that we intend to issue shares of First Northwest Bancorp common stock to the First Federal Community Foundation, a charitable foundation that will be established in connection with the conversion. The intended contribution of shares of common stock to the foundation has the effect of reducing the number of shares that may be offered in the offering.  The foundation will be funded with $400,000 in cash and the remainder in shares of common stock so that the total amount contributed is equal to 8% of the gross offering proceeds received by First Northwest Bancorp in the offering.  We will not receive any conversion proceeds in connection with the issuance of these shares, and thus, our pro forma book value and earnings will be lower, resulting in a lower pro forma value for First Northwest Bancorp.  See “– First Northwest Bancorp has Established a Foundation” and “Comparison of Valuation and Pro Forma Information With and Without the Foundation.” RP Financial’s independent valuation will be updated before we complete our offering.
 
RP Financial relied primarily on a comparative market value methodology in determining the pro forma market value of our common stock.  In applying this methodology, RP Financial analyzed financial and operational comparisons of First Federal with a selected peer group of publicly traded savings institutions that RP Financial considered comparable to us.  The peer group used by RP Financial consists of ten companies listed in the table below.  The pro forma market value of First Northwest Bancorp’s common stock was determined by RP Financial based on the market pricing ratios of the peer group, subject to certain valuation adjustments based on differences between First Federal and the institutions comprising the peer group.  RP Financial took into account the significant volatility in the broader stock market and the after market pricing characteristics of recently converted savings institutions.  RP Financial utilized the results of this overall analysis to establish pricing ratios that resulted in the determination of the pro forma market value.
 
The selection criteria for the peer group included consideration of geographic location, earnings and asset size.  The peer group companies are:
 
Peer Group (Ticker Symbol)
 
City and State
 
Assets (1)
 
       
(In millions)
 
           
HF Financial Corp. (HFFC)
 
Sioux Falls, SD
  $ 1,193  
HopFed Bancorp, Inc. (HFBC)
 
Hopkinsville, KY
    1,026  
First Financial Northwest, Inc. (FFNW)
 
Renton, WA
    999  
Timberland Bancorp, Inc. (TSBK)
 
Hoquiam, WA
    729  
First Savings Financial Group, Inc. (FSFG)
 
Clarksville, IN
    587  
First Clover Leaf Financial Corp. (FCLF)
 
Edwardsville, IL
    538  
First Capital, Inc. (FCAP)
 
Corydon, IN
    454  
Wayne Savings Bancshares, Inc. (WAYN)
 
Wooster, OH
    409  
River Valley Bancorp (RIVR)
 
Madison, IN
    408  
Eagle Bancorp Montana, Inc. (EBMT)
 
Helena, MT
    327  

(1) As of June 30, 2012
 
 
7
 
 
Two measures investors use to analyze whether a stock might be a good investment are the ratio of the offering price to the issuer’s “book value” and the ratio of the offering price to the issuer’s annual net income.  RP Financial considered these ratios, among other factors, in preparing its appraisal.  Book value is the same as total shareholders’ equity, and represents the difference between the issuer’s assets and liabilities.  Tangible book value is equal to total shareholders’ equity less intangible assets.  Reported earnings reflect the net income (loss) recorded for the twelve months ended September 30, 2012.  Core earnings represent earnings adjusted for non-operating items.
 
The following table presents a summary of selected pricing ratios for the peer group companies and First Northwest Bancorp (on a pro forma basis).  The pricing ratios are based on book value, earnings and other information as of and for the twelve months ended September 30, 2012 or the last twelve months for which data is available, stock price information as of November 9, 2012, as reflected in RP Financial’s appraisal report, dated November 9, 2012, and the number of shares assumed to be outstanding as described in “Pro Forma Data.”  Compared to the average pricing of the peer group, our pro forma pricing ratios at the maximum of the offering range indicated a discount of 23.5% on a price-to-book value basis, and a discount of 27.9% on a price-to-tangible book value basis.
 
   
Price-to-
earnings multiple
 
Price-to-core
earnings multiple
 
Price-to-book
value ratio
   
Price-to-tangible
book value ratio
 
                     
First Northwest Bancorp
                   
Minimum of offering range
 
NM*
 
NM*
    49.31 %     49.31 %
Midpoint of offering range
 
NM*
 
NM*
    54.17 %     54.17 %
Maximum of offering range
 
NM*
 
NM*
    58.41 %     58.41 %
Maximum of offering range, as  adjusted
 
NM*
 
NM*
    62.70 %     62.70 %
                         
Valuation of peer group companies using stock market prices as of November 9, 2012
                       
Average
 
19.94x
 
20.45x
    76.35 %     81.05 %
Median
 
17.87x
 
18.67x
    72.86 %     76.43 %
*Not meaningful.

Our board of directors reviewed the appraisal report of RP Financial, including the methodology and the assumptions used, and determined that the valuation range was reasonable and adequate.
 
The independent appraisal does not indicate per share market value.  Do not assume or expect that the valuation of First Northwest Bancorp as indicated above means that, after the conversion and the offering, the shares of common stock will trade at or above the $10.00 offering price.  Furthermore, the pricing ratios presented above were utilized by RP Financial to estimate our market value and not to compare the relative value of shares of our common stock with the value of the capital stock of the peer group.  The value of the capital stock of a particular company may be affected by a number of factors such as financial performance, asset size and market location.
 
For a more complete discussion of the amount of common stock we are offering for sale and the independent appraisal, see “The Conversion and Offering—How We Determined our Price and the Number of Shares to be Issued in the Stock Offering.”
 
RP Financial will update its appraisal before we complete the offering.  If, as a result of demand for the shares or changes in market conditions, RP Financial determines that our pro forma market value has increased, we may sell up to 9,257,500 shares in the offering without notice to you.  If our pro forma market value at that time is either below $63.9 million or above $99.6 million, then, after consulting with the DFI and the FDIC, we may:
 
 
●
set a new offering range;
 
 
●
take such other actions as may be permitted by the DFI, the FDIC, the Federal Reserve and the Securities and Exchange Commission (“SEC”); or
 
 
8
 
 
 
●
terminate the offering and promptly return all funds, with interest.
 
If we set a new offering range, we will be required to cancel your stock order and promptly return your subscription funds, with interest calculated at the statement savings rate, and cancel any authorization to withdraw funds from your deposit accounts for the purchase of shares of common stock. You will have the opportunity to place a new stock order.
 
Termination of the Offering
 
The subscription offering and community offering will end at 5:00 p.m., Pacific time, on _________ __, 2013, unless extended.  The community offering and any syndicated offering or underwritten offering must be completed 45 days after the end of the subscription offering, or by ______ ___, 2013.  If fewer than the minimum number of shares are subscribed for in the subscription offering, and we do not get orders for at least the minimum number of shares by _________ __, 2013, we will either:
 
(1)           promptly return any payment you made to us, with interest, or cancel any withdrawal authorization you gave us; or
 
(2)           extend the offering, if allowed, and give you notice of the extension and of your rights to cancel, change or confirm your order.  If we extend the offering and you do not respond to the notice, then we will cancel your order and return your payment, with interest, or cancel any withdrawal authorization you gave us.  We must complete or terminate the offering by _________ __, 2014.
 
How We Will Use the Proceeds Raised From the Sale of Common Stock
 
We intend to use the net proceeds received from the stock offering as follows:
 
   
Minimum
   
Maximum
   
Maximum,
as adjusted
 
   
(Dollars in thousands)
 
                         
Retained by First Northwest Bancorp                                                               
  $ 23,634     $ 32,223     $ 37,163  
Loan to employee stock ownership plan
    5,109       6,923       7,966  
Contributed to First Federal                                                               
    28,743       39,147       45,129  
Net proceeds from stock offering                                                               
  $ 57,485     $ 78,293     $ 90,258  
 
First Northwest Bancorp will purchase all of the capital stock of First Federal to be issued in the offering in exchange for a portion of the net proceeds.  In no event will less than 50% of the net proceeds be transferred to First Federal in exchange for its shares.  The portion of the net proceeds used by First Northwest Bancorp to purchase the capital stock of First Federal will be added to First Federal’s general funds for general corporate purposes.  The net proceeds First Federal receives from First Northwest Bancorp are initially expected to be invested in short-term liquid investments.  In addition, a majority of the net proceeds retained by First Northwest Bancorp, excluding the amount needed to fund the loan to the employee stock ownership plan, is expected to be invested in short-term liquid assets, providing additional funds for reinvestment in earning assets.  See “How We Intend to Use the Proceeds of the Offering.”
 
Except as described above, neither First Northwest Bancorp nor First Federal has any specific plans for the investment of the proceeds of this offering, nor have they allocated a specific portion of the proceeds to any particular use.  For a discussion of our business reasons for undertaking the conversion, see “The Conversion and Stock Offering - Our Reasons for the Conversion.”
 
Our Dividend Policy
 
Following completion of the stock offering, our board of directors will have the authority to declare dividends on our shares of common stock, subject to statutory and regulatory requirements. However, no decision has been made with respect to the payment of dividends.  Any dividends are not guaranteed and will depend upon our ability to pay them.  See “Our Policy Regarding Dividends.”
 
 
9
 
 
Plans to List the Common Stock for Trading on the Nasdaq Capital Market
 
We plan to list our common stock for trading on the Nasdaq Capital Market under the symbol “FNBC” and have submitted an application to The Nasdaq Stock Market LLC for this purpose.  Sandler O’Neill + Partners, L.P.   has advised us that it currently intends to become a market maker in the common stock, but it is under no obligation to do so.  We cannot assure you that other market makers will be obtained or that an active and liquid trading market for the shares of common stock will develop, or if developed will be maintained.  After shares of the common stock begin trading, you may contact a stockbroker to buy or sell shares.  Due to the unpredictability of the stock market and other factors, persons purchasing shares may not be able to sell their shares when they want to, or at a price equal to or above $10.00 per share.
 
Limitations on the Purchase of Common Stock in the Conversion
 
The minimum purchase is 25 shares.
 
The maximum purchase in the subscription offering by any person or group of persons through a single deposit account is $200,000 of common stock, which equals 20,000 shares.
 
The maximum purchase by any person in the community offering is $200,000 of common stock, which equals 20,000 shares.
 
The maximum purchase in the subscription offering and community offering combined by any person, related persons or persons acting together is $400,000 of common stock, which equals 40,000 shares.
 
If any of the following persons purchase common stock, their purchases when combined with your purchases cannot exceed $400,000 or 40,000 shares:
 
  (1)
your spouse, or your relatives or your spouse’s relatives living in your house;
     
  (2)
companies or other entities in which you have a 10% or greater equity or substantial beneficial interest or in which you serve as a senior officer or partner;
     
  (3) 
a trust or other estate if you have a substantial beneficial interest in the trust or estate or you are a trustee or fiduciary for the trust or other estate; or
     
  (4)
other persons who may be acting together with you (including, but not limited to, persons who file jointly a Schedule 13G or Schedule 13D Beneficial Ownership Report with the SEC, persons living at the same address or persons exercising subscription rights through qualifying deposits registered at the same address, whether or not related).
 
Subject to DFI and FDIC approval, we may increase or decrease the purchase limitations in the offering at any time.  Our tax-qualified benefit plans, including our employee stock ownership plan, are authorized to purchase up to 10% of the shares sold in the offering (including shares issued to the First Federal Community Foundation) without regard to these purchase limitations, which is the amount intended to be purchased.  See “The Conversion and Stock Offering - Limitations on Stock Purchases.”
 
How to Purchase Common Stock
 
Once we receive your order, you cannot cancel or change it without our consent.  If First Northwest Bancorp changes the offering range to fewer than 5,950,000 shares or more than 9,257,500 shares, all subscribers will be notified and given the opportunity to change or cancel their orders.  If you do not respond to the notice, we will return your funds promptly with interest or cancel your withdrawal authorization.
 
If you want to place an order for shares, you must complete and return the enclosed Stock Order and Certification Form (“stock order form”) along with full payment.  Instructions for completing your stock order form are included with the form.  Your order must be received by us (not postmarked) by 5:00 p.m., Pacific time, on _______ ___, 2013.  Delivery of an original stock order form (we reserve the right to reject copies or facsimiles) and
 
 
10
 
 
full payment may be made by overnight courier to the address listed on the top of the stock order form, by mail, using the Stock Order Reply envelope provided, or in person at the Stock Information Center.  Please do not mail stock order forms to any First Federal branch office. You must sign the stock order form.
 
You may pay for shares in any of the following ways:
 
  ●
By personal check, bank check or money order made payable to First Northwest Bancorp .
     
  ●
By authorizing a withdrawal from a savings or certificate of deposit account at First Federal, designated on the stock order form.   To use funds in an individual retirement account (“IRA”) at First Federal, you must transfer your account to a self-directed IRA at an unaffiliated institution or broker.  Because transferring your account will take time, please contact the stock information center as soon as possible for assistance.
 
You may not designate withdrawal from First Federal accounts with check-writing privileges; instead, please submit a check.  If you request that we directly withdraw the funds from such an account, we reserve the right to interpret that as your authorization to treat those funds as if we had received a check for the designated amount, and we will immediately withdraw the amount from your checking account. First Federal is not permitted to lend funds to anyone for the purpose of purchasing shares of common stock in the offering.  Additionally, you may not use a First Federal line of credit or third-party check to pay for shares of our common stock.
 
We will pay interest on your subscription funds at the rate First Federal pays on statement savings accounts from the date it receives your funds until the date the conversion is completed or terminated.  All funds received before the completion of the conversion will be held in a segregated account at First Federal.  All funds authorized for withdrawal from deposit accounts with First Federal will earn interest at the applicable account rate until the conversion is completed.  There will be no early withdrawal penalty for withdrawals from certificates of deposit at First Federal used to pay for stock.
 
As indicated above, it may be possible for you to subscribe for shares of common stock using funds you hold within an IRA.  However, only a self-directed retirement account may hold common stock.  First Federal’s IRAs are not self-directed, so they cannot be invested in common stock.  If you wish to use some or all of the funds in your First Federal IRA, the applicable funds must be transferred to a self-directed account with an independent trustee, such as a brokerage firm.  If you do not have such an account, you will need to establish one before placing your stock order.  An annual administrative fee may be payable to the independent trustee.   Because individual circumstances differ and processing of retirement fund orders takes additional time, we recommend that you contact the stock information center promptly, preferably at least two weeks before the end of the offering period, for assistance with purchases using your IRA or other retirement account that you may have.   Whether you may use these funds for the purchase of shares in the stock offering may depend on timing constraints and possible limitations imposed by the institution where the funds are held.
 
Purchases of Common Stock by Our Officers and Directors
 
Collectively, our directors and executive officers intend to subscribe for 91,300 shares regardless of the number of shares sold in the offering.  This number equals 1.2% of the 7,520,000 shares that would be sold at the midpoint of the offering range, including shares issued to the First Federal Community Foundation.  If fewer shares are sold in the offering, then executive officers and directors will own a greater percentage of First Northwest Bancorp.  These shares do not include any shares that may be awarded or issued in the future under any stock-based equity incentive plan we intend to adopt or any shares that may be earned by employees under the employee stock ownership plan.  Directors and executive officers will pay the same $10.00 per share price for these shares as everyone else who purchases shares in the conversion.
 
These proposed purchases of common stock by our directors and executive officers (1.4% and 1.1% of the aggregate shares sold in the offering, including shares issued to the First Federal Community Foundation, at the minimum and maximum of the offering range, respectively), together with the purchase by the employee stock ownership plan (8% of the aggregate shares sold in the offering and including shares issued to the First Federal Community Foundation) as well as the potential acquisition of common stock through the proposed equity incentive plan (an amount equal to 14% of the aggregate shares sold in the offering and issued to the First Federal Community
 
 
11
 
 
Foundation) will result in ownership by insiders of First Northwest Bancorp in excess of 23.4% and 23.1% of the total shares sold in the offering at the minimum and maximum of the offering range, respectively.  As a result, it could be more difficult to obtain majority support for shareholder proposals opposed by the board and management.  See “Risk Factors - Risks Related to This Offering - The amount of common stock we will control, our articles of incorporation and bylaws, and state and federal law could discourage hostile acquisitions of control of First Northwest Bancorp.”  In addition, we intend to fund the foundation with $400,000 in cash and the remainder in shares of common stock so that the amount contributed is equal to 8% of the gross offering proceeds received by First Northwest Bancorp in the offering.  Although the directors of the foundation include two of our directors, Federal regulations impose a pro-rata voting limitation on the common stock held by the foundation.  This limitation provides that these shares must be voted in the same ratio as all other shares voting on all proposals considered by our shareholders.
 
Tax Consequences of the Conversion
 
As a general matter, the conversion and offering will not be taxable transactions for federal or state income tax purposes to First Northwest Bancorp, First Federal, or persons eligible to subscribe in the subscription offering.  Silver Freedman & Taff, L.L.P. has issued an opinion to us to the effect that consummation of the transactions contemplated by the conversion and offering qualifies as a tax-free transaction for federal income tax purposes and should not result in the imposition of income taxes to First Northwest Bancorp, First Federal, or persons eligible to subscribe in the subscription offering.  The Platt Irwin Law Firm has issued an opinion to us to the effect that consummation of the transactions contemplated by the conversion and offering should qualify as a tax-free transaction for Washington State income tax purposes and should not result in the imposition of income taxes to First Northwest Bancorp, First Federal or persons eligible to subscribe in the subscription offering.  See “The Conversion and Stock Offering - Effects of the Conversion - Tax Effects of the Conversion.”
 
Benefits to Management from the Offering
 
We intend to establish an employee stock ownership plan, which will purchase 8% of the aggregate shares sold in the offering, including shares issued to the First Federal Community Foundation, or, alternatively, in the open market after the conversion.  A loan from First Northwest Bancorp to the employee stock ownership plan, funded by a portion of the proceeds from this offering, will be used to purchase these shares.  The loan will accrue interest at the applicable long-term federal interest rate as published by the Internal Revenue Service (“IRS”) in effect at the time the employee stock ownership loan is made.  The employee stock ownership plan will provide a retirement benefit to all employees eligible to participate in the plan.
 
Currently, we intend to adopt and present to shareholders for approval at an annual or special meeting of shareholders, at least six months following the completion of the offering, an equity incentive plan that will provide for grants of stock options and restricted stock awards to directors, officers and employees.  Implementation of the equity incentive plan would be subject to prior shareholder approval.  If we adopt the equity incentive plan, some of these individuals will be awarded shares of our common stock at no cost to them.  As a result, both the employee stock ownership plan and the equity incentive plan will increase the voting control of management without any cash being paid by the recipient.
 
If we adopt an equity incentive plan within one year of the closing of the conversion, the number of options granted or restricted shares awarded under the proposed equity incentive plan may not, pursuant to Federal regulations, exceed 10% and 4%, respectively, of the total shares sold in this offering (including shares sold to our employee stock ownership plan and issued to the foundation).
 
The employee stock ownership plan and our proposed equity incentive plan will increase our future compensation costs, thereby reducing our earnings.  We cannot determine the actual amount of these new stock-related compensation and benefit expenses at this time because applicable accounting practices generally require that they be based on the fair market value of the options or shares of common stock at the date of the grant; however, we expect them to be significant.  We will recognize expenses for our employee stock ownership plan when shares are committed to be released to participants’ accounts, and will recognize expenses for restricted stock awards and stock options generally over the vesting period of awards made to recipients.  We estimate, once these plans are adopted, the increase in compensation expense will be approximately $1.3 million per year on an after-tax basis, based on the maximum of the valuation range and a stock price of $10.00 per share.   See “Risk Factors - Risks Related to this Offering – Our operating expenses are high as a percentage of net interest income making it more
 
 
12
 
 
difficult to maintain profitability. After this offering, our compensation expenses will increase and our return on equity will be low compared to other companies.  These factors could negatively impact the price of our stock” and “Management - Benefits.”  Additionally, shareholders will experience a reduction in their ownership interest if newly issued shares of common stock are used to fund stock options and restricted stock awards.  In the event newly issued shares of our common stock are used to fund stock options and restricted stock awards in an amount equal to 10% and 4%, respectively, of the total shares sold in this offering, including shares to be issued to the foundation, shareholders would experience dilution in their ownership interest of 9.09% and 3.85%, respectively, or 6.47% in the aggregate.
 
The following table summarizes the stock benefits that our officers, directors and employees may receive following the offering at the minimum and maximum of the offering range.  It assumes that the proposed equity incentive plan is approved by shareholders within one year after completion of the offering to permit the (i) granting of options to purchase a number of shares equal to 10% of the shares outstanding after the offering (including shares issued to the First Federal Community Foundation) and (ii) awarding of a number of shares of common stock equal to 4% of the shares sold in the offering (including shares issued to the First Federal Community Foundation).  It further assumes that, at the maximum of the offering range, a total of 8,654,000 shares will be sold to the public and issued to the foundation and that our tangible regulatory capital is 10% or more following the offering.
 
Plan/Awards
 
Individuals
Eligible to
Receive Awards
 
Number
of Shares Based
on Minimum of
Offering Range
   
Number
of Shares Based
on Maximum of
Offering Range
   
As a % of
Outstanding
Shares Issued in
the Offering (1)
   
Value of
Benefits Based
on Minimum of
Offering Range (2)
   
Value of
Benefits Based
on Maximum of
Offering Range (1)
 
                         
(Dollars in thousands)
 
Employee stock ownership plan
 
Employees
    510,880       692,320       8.0 %   $ 5,109     $ 6,923  
                                             
Restricted stock
 
Directors/ Employees
    255,440       346,160       4.0 %     2,554       3,462  
                                             
Stock options
 
Directors/ Employees
    638,600       865,400       10.0 %     2,529       3,427  
          1,404,920       1,903,880       22.0 %   $ 10,192     $ 13,812  
 
(1)
Including shares to be issued to the foundation.
(2) 
For purposes of this table, fair value of shares held in the employee stock ownership plan and the restricted stock awards is assumed to be the offering price of $10.00 per share.  The actual value of the shares held in the employee stock ownership plan and restricted stock awards will be determined based on their fair value as of the allocation date and the date the grants are made, respectively.  The fair value of stock options has been estimated at $3.96 per option using the Black-Scholes option pricing model with the following assumptions: a grant-date share price and option exercise price of $10.00; dividend yield of 0.0%; expected option life of 10 years; risk free interest rate of 1.65% (based on the ten-year Treasury Note rate); and a volatility rate of 27.88% based on an index of publicly traded savings and loan holding companies.  The actual expense of the stock options will be determined by the grant-date fair value of the options, which will depend on a number of factors, including the assumptions used in the option pricing model ultimately adopted .
 
The value of the restricted stock awards will be based on the price of First Northwest Bancorp’s common stock at the time those shares are granted, which, subject to shareholder approval, cannot occur until at least six months after the offering is completed.  The following table presents the total value of all restricted shares to be available for award and issuance under the equity incentive plan, assuming the shares for the plan are issued in a range of market prices from $8.00 per share to $14.00 per share.
 
 
Share
Price
   
255,440
Shares
Awarded at
Minimum of
Range
   
300,800
Shares
Awarded at
Midpoint of
Range
   
346,160
Shares
Awarded at
Maximum of
Range
   
398,324
Shares
Awarded at
Maximum of
Range,
as adjusted
 
 
(Dollars in thousands, except per share price)
 
  $ 8.00     $ 2,044     $ 2,406     $ 2,769     $ 3,187  
  $ 10.00     $ 2,554     $ 3,008     $ 3,462     $ 3,983  
  $ 12.00     $ 3,065     $ 3,610     $ 4,154     $ 4,780  
  $ 14.00     $ 3,576     $ 4,211     $ 4,846     $ 5,577  
 
 
13
 
 
The grant-date fair value of the options granted under the equity incentive plan will be based in part on the price of First Northwest Bancorp’s common stock at the time the options are granted, which, subject to shareholder approval, cannot occur until at least six months after the offering is completed.  The value also will depend on the various assumptions utilized in estimating the value using the Black-Scholes option pricing model.  The following table presents the total estimated value of the options to be available for grant under the equity incentive plan, assuming the market price and exercise price for the stock options are equal, with a range of market prices for the shares from $8.00 per share to $14.00 per share.

 
Market/
Exercise
Price Per Share
   
Grant-Date
Fair Value
Per Option
   
638,600
Options
at Minimum
of Range
   
752,000
Options
at Midpoint
of Range
   
865,400
Options
at Maximum
of Range
   
995,810
Options
at Maximum of Range,
as adjusted
 
 
(Dollars in thousands, except per share information)
 
  $ 8.00     $ 3.17     $ 2,024     $ 2,384     $ 2,743     $ 3,157  
  $ 10.00     $ 3.96     $ 2,529     $ 2,978     $ 3,427     $ 3,943  
  $ 12.00     $ 4.75     $ 3,033     $ 3,572     $ 4,111     $ 4,730  
  $ 14.00     $ 5.54     $ 3,538     $ 4,166     $ 4,794     $ 5,517  
 
We also will enter into employment agreements with our chief executive officer and members of the executive management team, and have adopted a severance plan to provide separation benefits to all other staff in the event of a change of control.  For a further discussion of benefits to management, see “Management.”
 
Conditions to Completing the Conversion and Offering
 
We are conducting the conversion and offering under the terms of our plan of conversion.  We cannot complete the conversion and offering unless:
 
  ●
our plan of conversion is approved by at least a majority of votes eligible to be cast by eligible depositors and eligible borrowers of First Federal;
     
  ●
we sell at least the minimum number of shares of common stock offered;
     
  ●
we receive approval from the DFI and no objection from the FDIC to complete the conversion and offering; and
     
  ●
we receive approval from the Federal Reserve for the formation of the bank holding company.
 
Stock Information Center
 
If you have any questions regarding the offering or our conversion to stock form, please call the Stock Information Center, toll free, at (___) ___-____, to speak to a registered representative of Sandler O’Neill + Partners, L.P.  The Stock Information Center is open Monday through Friday, between _:00 a.m. and _:00 p.m., Pacific time.  You can also stop into our Stock Information Center located at 105 West 8th Street, Port Angeles, Washington, Tuesday through Thursday from _:00 a.m. to _:00 p.m. to speak with a registered representative of Sandler O’Neill + Partners, L.P.  The Stock Information Center will be closed weekends and bank holidays.  The banking operations portion of our office is separate and apart from the Stock Information Center and will not have offering materials.  In addition, our banking office personnel may not, by law, assist with investment-related questions about the offering.
 
Delivery of Prospectus
 
To ensure that you receive a prospectus at least 48 hours before the offering deadline, we may not mail prospectuses any later than five days prior to such date or hand-deliver any prospectus later than two days prior to the date.  Stock order forms may only be distributed with or preceded by a prospectus.  We are not obligated to deliver a prospectus or order form by means other than U.S. mail.
 
 
14
 
 
By signing the stock order form, you are acknowledging your receipt of a prospectus and your understanding that the shares are not a deposit account and are not insured or guaranteed by First Northwest Bancorp or First Federal, or the FDIC or any other federal or state governmental agency.
 
We will make reasonable attempts to provide a prospectus and offering materials to holders of subscription rights.  The subscription offering and all subscription rights will expire at 5:00 p.m., Pacific time, on _________ __, 2013, whether or not we have been able to locate each person entitled to subscription rights.
 
Delivery of Stock Certificates
 
Certificates representing shares of common stock issued in the offering will be mailed to the persons entitled to receive them at the certificate registration address noted on the order form, as soon as practicable following completion of the offering.  Until certificates for the shares of common stock are available and delivered to purchasers, purchasers may not be able to sell the shares of common stock which they ordered, even though the common stock will have begun trading.
 
Subscription Rights
 
You are not allowed to transfer your subscription rights, and we will act to ensure that you do not do so. With the exception of individual retirement account stock purchases, the subscription rights of a qualifying account may not be transferred to an account that is in a different form of ownership. Adding or deleting a name or otherwise altering the form of beneficial ownership of a qualifying account will result in the loss of your subscription rights. You will be required to certify that you are purchasing shares solely for your own account and that you have no agreement or understanding with another person involving the transfer of the shares that you purchase. We will not accept any stock orders that we believe involve the transfer of subscription rights. Depositors who enter into agreements to allow other investors to participate in the subscription offering may be violating federal and state law and may be subject to civil enforcement actions or criminal prosecution.
 
First Northwest Bancorp Has Established a Foundation
 
In connection with the conversion, First Northwest Bancorp plans to establish a foundation, the First Federal Community Foundation, in order to further its commitment to the local community.  The establishment and funding of the foundation is subject to the approval by at least a majority of the votes eligible to be cast by the depositors and borrowers of First Federal.  The foundation is anticipated to distribute at least 5% of its assets each year to support charitable organizations and activities that enhance the quality of life for residents within its market area.  The First Federal Community Foundation will allow the local communities to share in the anticipated future success of First Northwest Bancorp through cash dividends payable on the common stock and potential appreciation of the value of the common stock, as well as enable First Northwest Bancorp and its related entities to develop a unified charitable donation strategy.  Directors of the foundation will be charged with the specific development of a donation strategy consistent with the regulations set forth in Section 501(c)(3) of the Internal Revenue Code.
 
First Northwest Bancorp will fund the foundation with $400,000 in cash and the remainder in shares of common stock so that the amount contributed is equal to 8% of the gross offering proceeds received by First Northwest Bancorp in the offering.  Accordingly, based on the minimum and maximum of the offering range, respectively, a minimum of 436,000 shares and a maximum of 604,000 shares, will be contributed.  There are no current plans by First Northwest Bancorp to provide additional funding beyond this initial funding to the foundation.  However, First Northwest Bancorp may make future contributions as deemed appropriate by First Northwest Bancorp’s Board of Directors, subject to any capital needs and requirements or other regulatory limitations that may be applicable.  As a result of the foundation’s establishment and funding, the appraisal will be reduced and First Northwest Bancorp will sell fewer shares of common stock than if the conversion were completed without the foundation.  The foundation will be issued shares of common stock from authorized but unissued shares.  We will not receive any proceeds in connection with the issuance of these shares, and thus our pro forma book value and earnings will be lower, resulting in a lower pro forma value for First Northwest Bancorp.   See “Taxation – The First Federal Community Foundation.”
 
 
15
 
 
Issuing shares of common stock to the foundation will:
 
 
●
dilute the ownership interests of purchasers of shares of our common stock in the offering; and
 
 
●
result in an expense, and a reduction in earnings, during the quarter in which the contribution is made, equal to the full amount of the contribution offset in part by a corresponding tax benefit.
 
We have selected Stephen E. Oliver and David T. Flodstrom, who currently serve as directors of First Federal, to serve as the directors of the foundation. As required by Federal regulations, an additional person has been selected to serve on the board of directors of the foundation who will not be one of our officers, directors or employees and who will have experience with local charitable organizations and grant making.  We have selected Karen McCormick, the former President and Chief Executive Officer of First Federal, who served in that capacity until September 2009.  Given Ms. McCormick’s vast knowledge and experience and her commitment to the community of Port Angeles, we believe she is a highly qualified candidate to serve as the foundation’s independent director.  Federal regulations impose a pro-rata voting limitation on the common stock held by the foundation.  This limitation provides that these shares must be voted in the same ratio as all other shares voting on all proposals considered by our shareholders.
 
See “Risk Factors – Risks Related to the Contribution to the Foundation – The contribution to the First Federal Community Foundation will decrease our profits for 2013,” “Comparison of Valuation and Pro Forma Information With and Without the Foundation” and “Business of First Federal – The First Federal Community Foundation.”
 
Restrictions on the Acquisition of First Northwest Bancorp
 
Federal regulations, as well as provisions contained in the articles of incorporation, restrict the ability of any person, firm or entity to acquire First Northwest Bancorp or a controlling interest in its capital stock.  These restrictions include the requirement that a potential acquirer of common stock obtain the prior approval of the Federal Reserve before acquiring in excess of 10% of the voting stock of First Northwest Bancorp.  See “Risk Factors - Risks Related to the Offering - The amount of common stock we will control, our articles of incorporation and bylaws, and state and federal law could discourage hostile acquisitions of control of First Northwest Bancorp.”
 
Important Risks in Owning First Northwest Bancorp’s Common Stock
 
Before you decide to purchase stock, you should read the “Risk Factors” section immediately following this summary.
 
 
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You should consider these risk factors, in addition to the other information in this prospectus, in deciding whether to make an investment in First Northwest Bancorp’s stock.
 
Risks Related to Our Business
 
The current weak economic conditions in the market areas we serve may continue to adversely impact our earnings and could increase the credit risk associated with our loan portfolio.
 
  As a result of the concentration of our customer base in the North Olympic Peninsula region of Washington, in particular Clallam, Jefferson and Kitsap counties which we consider to be our primary market areas, the deterioration of businesses in the North Olympic Peninsula region, or one or more businesses with a large employee base in that area, could have a material adverse effect on our business, financial condition, liquidity, results of operations and prospects.  In particular, in the current economic downturn, Washington has experienced substantial home price declines and increased foreclosures and has experienced above average unemployment rates.
 
Continued weakness or a further deterioration in economic conditions in the market areas we serve could result in the following consequences, any of which could have a materially adverse impact on our business, financial condition and results of operations:
 
  ●
loan delinquencies, problem assets and foreclosures may increase;
     
  ●
demand for our products and services may decline, possibly resulting in a decrease in our total loans or assets;
     
  ●
collateral for loans made may decline further in value, exposing us to increased risk of loss on existing loans and reducing customers’ borrowing power;
     
  ●
the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us; and
     
  ● 
the amount of our deposits may decrease and the composition of our deposits may be adversely affected.

There are local factors that may have further adverse impact on the economies in our primary market areas.  For example, a study that was released in early 2012 found that areas of the Port Angeles harbor contained high concentration levels of pollution.  Some of the pollutants were the result of a former mill and have been found near a paper mill owned by Nippon Paper Industries, USA.  Nippon Paper Industries, USA employs approximately 242 people in the Port Angeles area and it is possible that these environmental issues may require them to reduce their operations in Port Angeles.  In addition, the Olympic Medical Center, which employs approximately 1,100 people and is one of the largest employers in the region, is currently unprofitable and has announced that without healthcare reform it may be required to merge with another hospital.  If it were to be acquired, or reduce its operations, there could be a reduction in the number of jobs, which would further increase unemployment in our market area.

A current water conservation proposal could adversely affect the value of undeveloped lots in our market area.

There are proposals from the Washington Department of Ecology that propose restrictions to conserve water in rivers and streams that constitute salmon habitats, as well as the underground water in related aquifers. New water use regulations proposed for both the Dungeness Valley in the east end of Clallam County and the Quilcene and Chimacum areas in Jefferson County would severely limit daily use of water from new wells and increase the cost of water usage, including the requirement of permit fees to drill new wells.  These proposals, if adopted, could have a severe adverse impact on the value of undeveloped lots in our market area.  At September 30, 2012, we had loans on approximately 79 lots aggregating $5.8 million that we believe could be adversely affected by these proposals.
 
 
17
 

Our proposed strategy of pursuing acquisitions exposes us to financial, execution and operational risks that could adversely affect us.
 
After we complete the conversion and related offering, we plan to pursue a strategy of supplementing organic growth by acquiring other financial institutions or their businesses that we believe will help us fulfill our strategic objectives and enhance our earnings.  There are risks associated with this strategy, however, including the following:
 
  ●
We may be exposed to potential asset quality issues or unknown or contingent liabilities of the financial institutions, businesses, assets and liabilities we acquire.  If these issues or liabilities exceed our estimates, our results of operations and financial condition may be materially negatively affected;
     
  ●
Our growth initiatives may require us to recruit experienced personnel to assist in such initiatives, which will increase our compensation costs. The failure to identify, hire and retain such personnel would place significant limitations on our ability to execute our growth strategy;
     
  ●
Our strategic efforts may divert resources or management’s attention from ongoing business operations and may subject us to additional regulatory scrutiny;
     
  ●
The acquisition of other entities generally requires integration of systems, procedures and personnel of the acquired entity into our company to make the transaction economically successful.  This integration process is complicated and time consuming and can also be disruptive to the customers of the acquired business.  If the integration process is not conducted successfully and with minimal effect on the acquired business and its customers, we may not realize the anticipated economic benefits of particular acquisitions within the expected time frame, and we may lose customers or employees of the acquired business.  We may also experience greater than anticipated customer losses even if the integration process is successful;
     
  ●
To finance a future acquisition, we may borrow funds, thereby increasing our leverage and diminishing our liquidity, or raise additional capital, which could dilute the interests of our existing shareholders; and
     
  ●
We expect our income will increase following our acquisitions, however, we also expect our general and administrative expenses to also increase.  Ultimately, we would expect our efficiency ratio to improve; however, if we are not successful in our integration process, this may not occur, and our acquisitions or branching activities may not be accretive to earnings in the short or long-term.
 
We may engage in FDIC-assisted transactions, which could present additional risks to our business.

We may have opportunities to acquire the assets and liabilities of failed banks in FDIC-assisted transactions.  Although these FDIC-assisted transactions typically provide for FDIC assistance to an acquirer to mitigate certain risks, such as sharing exposure to loan losses and providing indemnification against certain liabilities of the failed institution, we are (and would be in future transactions) subject to many of the same risks we would face in acquiring another bank in a negotiated transaction, including risks associated with maintaining customer relationships and failure to realize the anticipated acquisition benefits in the amounts and within the timeframes we expect.  In addition, because these acquisitions are structured in a manner that would not allow us the time and access to information normally associated with preparing for and evaluating a negotiated acquisition, we may face additional risks in FDIC-assisted transactions, including additional strain on management resources, management of problem loans, problems related to integration of personnel and operating systems and impact to our capital resources requiring us to raise additional capital.  We cannot give assurance that we will be successful in overcoming these risks or any other problems encountered in connection with a FDIC-assisted transaction.  Our inability to overcome these risks could have a material adverse effect on our business, financial condition and results of operations.
 
Our business may be adversely affected by credit risk associated with residential property.
 
At September 30, 2012, $273.6 million, or 64.8% of our total loan portfolio, was secured by one- to four-family mortgage loans and home equity loans.  This type of lending is generally sensitive to regional and local economic conditions that significantly impact the ability of borrowers to meet their loan payment obligations,
 
 
18
 
 
making loss levels difficult to predict. The decline in residential real estate values as a result of the downturn in the Washington housing market has reduced the value of the real estate collateral securing these types of loans and increased the risk that we would incur losses if borrowers default on their loans, as reflected by our recent charge-off experience on these loans.  Net charge-offs during fiscal 2012 and 2011 related to residential properties totaled $2.4 million and $702,000, respectively, or 45.0% and 26.8% of total net charge-offs during these periods, respectively. These declines may have a greater effect on our earnings and capital than on the earnings and capital of financial institutions whose loan portfolios are more diversified.   Further, a significant amount of our home equity lines of credit consist of second mortgage loans. For those home equity lines secured by a second mortgage, it is unlikely that we will be successful in recovering all or a portion of our loan proceeds in the event of default unless we are prepared to repay the first mortgage loan and such repayment and the costs associated with a foreclosure are justified by the value of the property.  For these reasons, we may experience higher rates of delinquencies, default and losses.
 
Our non-owner-occupied real estate loans may expose us to increased credit risk.
 
At September 30, 2012, $29.7 million, or 13.2% of our one- to four-family loans and 7.0% of our total loan portfolio, consisted of loans secured by non-owner-occupied residential properties. Loans secured by non-owner-occupied properties generally expose a lender to greater risk of nonpayment and loss than loans secured by owner-occupied properties because repayment of such loans depend primarily on the tenant’s continuing ability to pay rent to the property owner, who is our borrower, or, if the property owner is unable to find a tenant, the property owner’s ability to repay the loan without the benefit of a rental income stream. In addition, the physical condition of non-owner-occupied properties is often below that of owner-occupied properties due to lax property maintenance standards, which has a negative impact on the value of the collateral properties. Furthermore, some of our non-owner-occupied residential loan borrowers have more than one loan outstanding with us, which may expose us to a greater risk of loss compared to an adverse development with respect to an owner-occupied residential mortgage loan.
 
A significant portion of our business involves commercial real estate lending which is subject to various risks that could adversely impact our results of operations and financial condition.
 
Since June 30, 2008, we have increased the amount of our commercial real estate and multi-family loans from $64.5 million, or 11.6%, of our total gross loan portfolio to $110.1 million, or 26.1% of our total gross loan portfolio at September 30, 2012. We have been increasing and intend to continue to increase, subject to market demand, our origination of commercial real estate loans after this offering.  The credit risk related to this type of loan is considered to be greater than the risk related to one- to four-family residential loans because the repayment of commercial real estate loans typically is dependent on the successful operation and income stream of the borrowers’ business and the value of the real estate securing the loan as collateral, which can be significantly affected by economic conditions.
 
Our increased focus on this type of lending will increase our risk profile relative to traditional one- to four-family lenders.  Although commercial real estate loans are intended to enhance the average yield of our earning assets, they do involve a different, and possibly higher, level of risk of delinquency or collection than generally associated with one- to four-family loans for a number of reasons.  Among other factors, these loans involve larger balances to a single borrower or groups of related borrowers.  Since commercial real estate loans generally have large balances, if we make any errors in judgment in the collectability of these loans, we may need to significantly increase our provision for loan losses since any resulting charge-offs will be larger on a per loan basis.  Consequently, this could materially adversely affect our future earnings.  Collateral evaluation and financial statement analysis in these types of loans also requires a more detailed analysis at the time of loan underwriting and on an ongoing basis.  Finally, if we foreclose on a commercial real estate loan, our holding period for the collateral, if any, typically is longer than for a one- to four-family residence because the secondary market for most types of commercial real estate is not readily liquid, so we have less opportunity to mitigate credit risk by selling part or all of our interest in these assets.  See “Business of First Federal - Lending Activities -- Commercial Real Estate Lending.”  At September 30, 2012, we had $5.3 million of nonperforming commercial real estate loans and no nonperforming multi-family loans in our portfolio.
 
 
19
 

Repayment of our commercial business loans is often dependent on the cash flows of the borrower, which may be unpredictable, and the collateral securing these loans may fluctuate in value.
 
At September 30, 2012, we had $9.2 million or 2.2% of total loans in commercial business loans.  Commercial business lending involves risks that are different from those associated with residential and commercial real estate lending. Real estate lending is generally considered to be collateral based lending with loan amounts based on predetermined loan to collateral values and liquidation of the underlying real estate collateral being viewed as the primary source of repayment in the event of borrower default. Our commercial business loans are primarily made based on the cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. The borrowers’ cash flow may be unpredictable, and collateral securing these loans may fluctuate in value. Although commercial business loans are often collateralized by equipment, inventory, accounts receivable, or other business assets, the liquidation of collateral in the event of default is often an insufficient source of repayment because accounts receivable may be uncollectible and inventories may be obsolete or of limited use, among other things.
 
A portion of our loan portfolio is serviced by third parties, which may limit our ability to foreclose on such loans.

When a loan goes into default, it is the responsibility of the third-party servicer to enforce the borrower’s obligation to repay the outstanding indebtedness. We are reliant on the servicer to bring the loan current, enter into a satisfactory loan modification or foreclose on the property on behalf of First Federal. We must comply with any loan modification entered into by the servicer even if we would not otherwise agree to the modified terms, which may result in a reduction in our interest income due to the loan modification.  Delays in foreclosing on property, whether caused by restrictions under state or federal law or the failure of a third party servicer to timely pursue foreclosure action, can increase our potential loss on such property, due to other factors such as lack of maintenance, unpaid property taxes and adverse changes in market conditions. These delays may adversely affect our ability to limit our credit losses.

Our lending limit may restrict our growth.

At September 30, 2012, there was no specified maximum amount that we could have loaned to any one borrower and the borrower’s related entities under applicable State of Washington regulations.  Our internal policy, however, limits loans to one borrower and the borrower’s related entities to 15% of our unimpaired capital and surplus, or approximately $11.8 million at September 30, 2012, without the express prior consent of our board of directors.  These amounts are significantly less than that of many of our competitors and may discourage potential commercial borrowers who have credit needs in excess of our lending limit from doing business with us. Our lending limit also impacts the efficiency of our commercial lending operation because it tends to lower our average loan size, which means we have to generate a higher number of transactions to achieve the same portfolio volume.  We can accommodate larger loans by selling participations in those loans to other financial institutions, but this strategy is not efficient or always available. We may not be able to attract or maintain clients seeking larger loans or may not be able to sell participations in these loans on terms we consider favorable.
 
Our allowance for loan losses may prove to be insufficient to absorb losses in our loan portfolio.
 
Lending money is a substantial part of our business and each loan carries a certain risk that it will not be repaid in accordance with its terms, or that any underlying collateral will not be sufficient to assure repayment. This risk is affected by, among other things:
 
  ●
cash flow of the borrower and/or the project being financed;
     
  ●
the changes and uncertainties as to the future value of the collateral, in the case of a collateralized loan;
     
  ●
the duration of the loan;
     
  ●
the character and creditworthiness of a particular borrower; and
     
  ●
changes in economic and industry conditions.
 
 
20
 
 
We maintain an allowance for loan losses, which we believe is an appropriate reserve to provide for probable losses in our loan portfolio. The allowance is funded by provisions for loan losses charged to expense. The amount of this allowance is determined by our management through periodic reviews and consideration of several factors, including, but not limited to:
 
  ●
our general reserve, based on our historical default and loss experience, certain macroeconomic factors, and management’s expectations of future events;
     
  ●
our specific reserve, based on our evaluation of nonperforming loans and their underlying collateral; and
     
  ●
an unallocated reserve to provide for other credit losses inherent in our portfolio that may not have been contemplated in the other loss factors.
 
The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks and future trends, all of which may undergo material changes. Continuing deterioration in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may require an increase in the allowance for loan losses. Slower sales, excess inventory and declining prices in the housing market have been the primary causes of the recent increases in delinquencies and foreclosure in our loan portfolio.  If current weak conditions in the housing and real estate markets continue, we expect we will continue to experience further delinquencies and credit losses.  In addition, bank regulatory agencies periodically review our allowance for loan losses and may require an increase in the provision for possible loan losses or the recognition of further loan charge-offs, based on judgments different than those of management. In addition, if charge-offs in future periods exceed the allowance for loan losses we will need additional provisions to replenish the allowance for loan losses. Any additional provisions will result in a decrease in net income and possibly capital, and may have a material adverse effect on our financial condition and results of operations.

Our independent public accounting firm has identified certain significant deficiencies in our internal controls over financial reporting. If we fail to remediate these internal control deficiencies, address the potential for future deficiencies and maintain an effective system of internal controls over financial reporting, we may not be able to accurately report our financial results.
 
During its audit of our financial statements for the year ended June 30, 2012, our independent registered public accounting firm identified certain deficiencies in our internal controls, including deficiencies considered to be significant deficiencies. A significant deficiency is a deficiency, or a combination of deficiencies, in internal controls over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the registrant’s financial reporting.
 
Specifically, our independent auditors identified a significant deficiency concerning our ability to properly identify new troubled debt restructurings and monitor delinquent troubled debt restructurings and nonaccrual loans which has resulted in our allowance for loan losses being understated at certain calculation dates and certain disclosures related to our allowance for loan losses being misstated.
 
Management has taken steps to address these identified deficiencies through implementation of additional internal control procedures. However, it is possible that these deficiencies may not be fully remediated by these actions, or that we or our independent auditors may identify significant deficiencies in our internal control over financial reporting in the future. Any failure or difficulties in implementing and maintaining these controls could cause us to fail to meet the periodic reporting obligations that we will be subject to after this offering or result in material misstatements in our financial statements.

If our nonperforming assets increase, our earnings will be adversely affected.
 
At September 30, 2012, our nonperforming assets, which consist of nonaccruing loans and real estate owned, were $14.3 million, or 1.8% of total assets.  Our nonperforming assets adversely affect our net income in various ways:
 
 
21
 
 
  ●
we record interest income only on a cash basis for nonaccrual loans and any nonperforming investment securities and we do not record interest income for real estate owned;
     
  ●
we must provide for probable loan losses through a current period charge to the provision for loan losses;
     
  ●
noninterest expense increases when we write down the value of properties in our real estate owned portfolio to reflect changing market values or recognize other-than-temporary impairment on nonperforming investment securities;
     
  ● 
there are legal fees associated with the resolution of problem assets, as well as carrying costs, such as taxes, insurance, and maintenance fees related to our real estate owned; and
     
  ●
the resolution of nonperforming assets requires the active involvement of management, which can distract them from more profitable activity.
 
If additional borrowers become delinquent and do not pay their loans and we are unable to successfully manage our nonperforming assets, our losses and troubled assets could increase significantly, which could have a material adverse effect on our financial condition and results of operations.
 
If our real estate owned is not properly valued or sufficiently reserved to cover actual losses, or if we are required to increase our valuation reserves, our earnings could be reduced.

We obtain updated valuations in the form of appraisals and broker price opinions when a loan has been foreclosed and the property taken in as real estate owned and at certain other times during the asset’s holding period.  Our net book value of the loan at the time of foreclosure and thereafter is compared to the updated market value of the foreclosed property less estimated selling costs (fair value).  A charge-off is recorded for any excess in the asset’s net book value over its fair value.  If our valuation process is incorrect, or if property values decline, the fair value of our real estate owned may not be sufficient to recover our carrying value in such assets, resulting in the need for additional charge-offs.  In addition, bank regulators periodically review our real estate owned and may require us to recognize further charge-offs.  Significant charge-offs to our real estate owned could have a material adverse effect on our financial condition and results of operations.

Impairment of our investment and mortgage-backed securities could require charges to earnings, which could result in a negative impact on our results of operations.
 
In assessing the impairment of our investment and mortgage-backed securities, we consider the length of time and extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuers, whether the decline in market value was affected by macroeconomic conditions and whether we have the intent to sell the security or will be required to sell the security before its anticipated recovery.  During the years ended June 30, 2012 and 2011, we recognized a noncash other than temporary impairment charge of $419,000 and $829,000, respectively, on collateralized debt obligations secured by trust preferred securities. There can be no assurance that future declines in market value of our investment securities will not result in other than temporary impairment of these assets, which would lead to accounting charges that could have a material adverse effect on our net income and capital levels.
 
Decreased volumes and lower gains on sales of mortgage loans sold could adversely impact our noninterest income.

We originate and sell one- to four-family mortgage loans. Our mortgage banking income is a significant portion of our noninterest income.  We generate gains on the sale of one- to four-family mortgage loans pursuant to programs currently offered by Freddie Mac and other secondary market purchasers. Any future changes in their purchase programs, our eligibility to participate in such programs, the criteria for loans to be accepted or laws that significantly affect the activity of such entities could, in turn, materially adversely affect our results of operations.  Further, in a rising or higher interest rate environment, our originations of mortgage loans may decrease, resulting in fewer loans that are available to be sold to investors.  This would result in a decrease in mortgage banking revenues and a corresponding decrease in noninterest income.  In addition, our results of operations are affected by the
 
 
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amount of noninterest expense associated with mortgage banking activities, such as salaries and employee benefits, occupancy, equipment and data processing expense and other operating costs.  During periods of reduced loan demand, our results of operations may be adversely affected to the extent that we are unable to reduce expenses commensurate with the decline in loan originations.

We use estimates in determining the fair value of certain assets, such as mortgage servicing rights.  If our estimates prove to be incorrect, we may be required to write down the value of these assets which could adversely affect our earnings.

A substantial portion of our one- to four-family loans are sold into the secondary market, including loans for which we retain the servicing rights. At September 30, 2012, our mortgage servicing rights totaled $1.7 million.  We use a financial model from an outside firm that uses, wherever possible, quoted market prices to value our mortgage servicing rights. This model is complex and also uses assumptions related to interest and discount rates, prepayment speeds, delinquency and foreclosure rates and ancillary fee income.

Valuations are highly dependent upon the reasonableness of our assumptions and the predictability of the relationships that drive the results of the model. The primary risk associated with mortgage servicing rights is that they will lose a substantial portion of their value as a result of higher than anticipated prepayments occasioned by declining interest rates. Conversely, these assets generally increase in value in a rising interest rate environment to the extent that prepayments are slower than anticipated. If prepayment speeds increase more than estimated or delinquency and default levels are higher than anticipated we may be required to write down the value of our mortgage servicing rights which could have a material adverse effect on our net income and capital levels.
 
New lines of business or new products and services may subject us to additional risk.
 
From time to time, we may implement new lines of business or offer new products and services within existing lines of business.  Currently, we are expanding our existing commercial real estate and commercial business lending programs and will evaluate the expansion into new areas such as wealth management services.  There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and/or new products and services, we may invest significant time and resources. Initial timetables for the introduction and development of new lines of business and/or new products or services may not be achieved and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives and shifting market preferences, may also impact the successful implementation of a new line of business and/or a new product or service. Furthermore, any new line of business and/or new product or service could have a significant impact on the effectiveness of our system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business and/or new products or services could have a material adverse effect on our business, results of operations and financial condition.
 
If we are unable to effectively integrate new personnel hired to carry out our business plan our business may be adversely affected.
 
We have recently hired a number of experienced bankers, and we expect to hire additional personnel in order to successfully implement our business plan.  The difficulties in hiring and training new personnel include integrating personnel with different business backgrounds, and combining different corporate cultures, while retaining other key employees.  The process of integrating personnel could cause an interruption of, or loss of momentum in, our operations and the loss of customers and key personnel.  In addition, we may not realize expected revenue increases and other projected benefits from the increased emphasis in these lending areas.  Any delays or difficulties encountered in connection with integrating and growing this portion of our operations could have an adverse effect on our business and results of operations or otherwise adversely affect our ability to achieve the anticipated results.
 
We are subject to interest rate risk.
 
Our earnings and cash flows are largely dependent upon our net interest income. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Reserve. Changes in monetary policy, including
 
 
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changes in interest rates, could influence not only the interest we receive on loans and investments and the amount of interest we pay on deposits and borrowings, but these changes could also affect (i) our ability to originate loans and obtain deposits, (ii) the fair value of our financial assets and liabilities and (iii) the average duration of our mortgage-backed securities portfolio and other interest-earning assets. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, our net interest income, and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings.
 
Although management believes it has implemented effective asset and liability management strategies to reduce the potential effects of changes in interest rates on our results of operations, any substantial, unexpected or prolonged change in market interest rates could have a material adverse effect on our financial condition and results of operations. Also, our interest rate risk modeling techniques and assumptions likely may not fully predict or capture the impact of actual interest rate changes on our balance sheet.  See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Asset and Liability Management and Market Risk.”
 
Liquidity risk could impair our ability to fund operations and jeopardize our financial condition.
 
Liquidity is essential to our business.  An inability to raise funds through deposits, borrowings, the sale of loans or other sources could have a substantial negative effect on our liquidity.  Our access to funding sources in amounts adequate to finance our activities or the terms of which are acceptable to us could be impaired by factors that affect us specifically or the financial services industry or economy in general.  Factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our business activity as a result of a downturn in the Washington markets in which our loans are concentrated or adverse regulatory action against us.  Our ability to borrow could also be impaired by factors that are not specific to us, such as a disruption in the financial markets or negative views and expectations about the prospects for the financial services industry in light of the recent turmoil faced by banking organizations and the continued deterioration in credit markets.  See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity.”
 
We are dependent on the services of our president and chief executive officer and other members of our management team and a loss of these individuals may impair our operations and disrupt relationships with certain customers.
 
We rely heavily on our president and chief executive officer, Levon L. Mathews, our executive officers, Laurence J. Hueth, Clifford A. Frydenberg, Elaine T. Gentilo, Gina E. Lowman and Joyce L. Ruiz, and certain other key support personnel, which make up our management team.  These individuals have been instrumental in developing and implementing our operating strategy that was initiated by Mr. Mathews in 2009 when Mr. Mathews joined First Federal.  In addition, since our business is primarily relationship-driven, these individuals have developed extensive customer relationships.  The loss of the services of any one of these individuals could have a material adverse impact on our operations because we have fewer management-level personnel that have the experience and expertise to readily replace these individuals.   If the loss of Mr. Mathews, our other executive officers, or certain key support personnel were to occur, we would most likely have to search outside of First Federal for qualified replacements.  This search may be prolonged and we cannot assure you that First Federal would be able to locate and hire qualified replacements without interruption of, or loss of momentum in, our operations.  Our current market area, which is considered a remote area, may make it more difficult for us to find qualified replacements.  The characteristics of a remote area, such as ours, include, among others, smaller communities, sparse population and distance from more populated areas, which may not be as attractive to potential qualified candidates, as densely populated urban areas.  Changes in our management team and their responsibilities may be disruptive to our business and operations and could have a material adverse effect on our business, financial condition and results of operations.  In addition, the loss of these members of our management team could result in the loss of some of our customers.  While we believe our relationship with our management team is good, we cannot guarantee that all the members of our management team will remain with our organization.
 
We operate in a highly competitive industry.
 
We face substantial competition in all areas of our operations from a variety of different competitors, many of which are larger and may have more financial resources.  These competitors primarily include national, regional
 
 
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and internet banks within the various markets in which we operate. We also face competition from many other types of financial institutions, including, savings and loans, credit unions, mortgage banking finance companies, brokerage firms, insurance companies and other financial intermediaries. The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation.  Banks, securities firms and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking.  Also, technology has lowered barriers to entry and made it possible for nonbanks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems.  Many of our competitors in these sectors have fewer regulatory constraints and may have lower cost structures.  Additionally, due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services as well as better pricing for those products and services than we can.
 
Our ability to compete successfully depends on a number of factors including the following:  
 
 
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the ability to develop, maintain and build upon long-term customer relationships;
 
 
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the ability to expand our market position;
 
 
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the scope, relevance and pricing of products and services offered to meet customer needs and demands;
 
 
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the rate at which we introduce new products and services relative to our competitors;
 
 
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customer satisfaction with our products and service; and
 
 
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industry and general economic trends.
 
Failure to perform in any of these areas could significantly weaken our competitive position, which could adversely affect our growth and profitability, which, in turn, could have a material adverse effect on our financial condition and results of operations. See “Business of First Federal - Competition.”
 
We operate in a highly regulated environment and may be adversely affected by changes in federal and state laws and regulations, including new financial reform legislation recently enacted by Congress that is expected to increase our costs of operations.
 
We are subject to extensive examination, supervision and comprehensive regulation by the FDIC and the DFI, and First Northwest Bancorp, following the conversion, will be subject to examination and supervision by the Federal Reserve.  The FDIC, DFI and the Federal Reserve govern the activities in which we may engage, primarily for the protection of depositors and the Deposit Insurance Fund.  These regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the ability to impose restrictions on an institution’s operations, reclassify assets, determine the adequacy of an institution’s allowance for loan losses and determine the level of deposit insurance premiums assessed.
 
Additionally, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) has significantly changed the bank regulatory structure and has affected the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies.  The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations, and to prepare numerous studies and reports for Congress.  The federal agencies are given significant discretion in drafting and implementing rules and regulations, and consequently, many of the details and much of the impact of the Dodd-Frank Act may not be known for many months or years.
 
Certain provisions of the Dodd-Frank Act are expected to have a near term impact on First Federal.  For example, a provision of the Dodd-Frank Act eliminates the federal prohibitions on paying interest on demand deposits, thus allowing businesses to have interest bearing checking accounts.  Depending on competitive responses, this significant change to existing law could have an adverse impact on our interest expense.
 
 
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The Dodd-Frank Act also broadens the base for FDIC insurance assessments.  Assessments are now based on the average consolidated total assets less tangible equity capital of a financial institution.  The Dodd-Frank Act also permanently increased the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor.
 
The Dodd-Frank Act requires publicly traded companies to give stockholders a non-binding vote on executive compensation and so-called “golden parachute” payments and authorizes the SEC to promulgate rules that would allow stockholders to nominate their own candidate using a company’s proxy materials.  The legislation also directs the Federal Reserve to promulgate rules prohibiting excessive compensation paid to bank holding company executives, regardless of whether the company is publicly traded.
 
The Dodd-Frank Act creates a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws.  The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices.  The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets.  Financial institutions such as First Federal with $10 billion or less in assets will continue to be examined for compliance with the consumer laws by their primary bank regulators.
 
It is difficult to predict at this time what specific impact the Dodd-Frank Act and the yet to be written implementing rules and regulations will have on community banks.  However, it is expected that at a minimum they will increase our operating and compliance costs and could increase our interest expense.  Any additional changes in our regulation and oversight, whether in the form of new laws, rules or regulations, could make compliance more difficult or expensive or otherwise materially adversely affect our business, financial condition or prospects.
 
The short-term and long-term impact of the changing regulatory capital requirements and anticipated new capital rules is uncertain.

In June 2012, the Federal Reserve, FDIC and the OCC proposed rules that would substantially amend the regulatory risk-based capital rules applicable to First Northwest Bancorp and First Federal.  The proposed rules were subject to a public comment period that has expired and there is no date set for the adoption of final rules.

Various provisions of the Dodd-Frank Act increase the capital requirements of bank holding companies, such as First Northwest Bancorp. The leverage and risk-based capital ratios of these entities may not be lower than the leverage and risk-based capital ratios for insured depository institutions. The proposed rules include new minimum risk-based capital and leverage ratios, which would be phased in during 2013 and 2014, and would refine the definition of what constitutes “capital” for purposes of calculating those ratios. The proposed new minimum capital level requirements applicable to First Northwest Bancorp and First Federal under the proposals would be: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 4% for all institutions. The proposed rules would also establish a “capital conservation buffer” of 2.5% above the new regulatory minimum capital ratios, and would result in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The new capital conservation buffer requirement would be phased in beginning in January 2016 at 0.625% of risk-weighted assets and would increase each year until fully implemented in January 2019. An institution would be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations would establish a maximum percentage of eligible retained income that could be utilized for such actions. While the proposed Basel III changes and other regulatory capital requirements will likely result in generally higher regulatory capital standards, it is difficult at this time to predict when or how any new standards will ultimately be applied to First Northwest Bancorp and First Federal.

In addition, in the current economic and regulatory environment, regulators of banks and bank holding companies have become more likely to impose capital requirements on bank holding companies and banks that are more stringent than those required by applicable existing regulations.

The application of more stringent capital requirements for First Northwest Bancorp and First Federal could, among other things, result in lower returns on invested capital, require the raising of additional capital, and result in
 
 
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regulatory actions if we were to be unable to comply with such requirements.  Furthermore, the imposition of liquidity requirements in connection with the implementation of Basel III could result in our having to lengthen the term of our funding, restructure our business models, and/or increase our holdings of liquid assets. Implementation of changes to asset risk weightings for risk based capital calculations, items included or deducted in calculating regulatory capital and/or additional capital conservation buffers could result in management modifying its business strategy and could limit our ability to make distributions, including paying out dividends or buying back shares.

Increases in deposit insurance premiums and special FDIC assessments will negatively impact our earnings.
 
The Dodd-Frank Act established 1.35% of total insured deposits as the minimum reserve ratio. The FDIC has adopted a plan under which it will meet this ratio by the statutory deadline of September 30, 2020, which has increased assessments. The Dodd-Frank Act requires the FDIC to offset the effect on institutions with assets less than $10 billion of the increase in the minimum reserve ratio to 1.35% from the former minimum of 1.15%. The FDIC has not announced how it will implement this offset. In addition to the statutory minimum ratio, the FDIC must set a designated reserve ratio or DRR, which may exceed the statutory minimum. The FDIC has set 2.0% as the DRR.

As required by the Dodd-Frank Act, the FDIC has adopted final regulations under which insurance premiums are based on an institution’s total assets minus its tangible equity instead of its deposits. While our FDIC insurance premiums initially may be reduced by these regulations, it is possible that our future insurance premiums will increase under the final regulations.

If our investment in the Federal Home Loan Bank of Seattle becomes impaired, our earnings and shareholders’ equity could decrease.
 
At September 30, 2012, we owned $10.7 million in Federal Home Loan Bank of Seattle (“FHLB”) stock.  Our stock purchase requirement is based, in part, upon the outstanding principal balance of advances from the FHLB and is calculated in accordance with the FHLB’s Capital Plan. Our FHLB stock has a par value of $100, is carried at cost, and it is subject to recoverability testing per applicable accounting standards . The FHLB has announced that it had a risk-based capital deficiency under the regulations of the Federal Housing Finance Agency, its primary regulator, as of December 31, 2008, and that it would suspend future dividends and the repurchase and redemption of outstanding common stock. As a result, the FHLB has not paid a dividend since the fourth quarter of 2008. In August 2009, under the Federal Housing Finance Agency’s prompt corrective action regulations, the FHLB received a capital classification of “undercapitalized” and has subsequently remained so classified, due to, among other things, risk-based capital deficiencies as of March 31, 2009 and June 30, 2009, the deterioration in the value of its private-label mortgage-backed securities and the amount of accumulated unrealized losses stemming from that deterioration, and the amount of its retained earnings. On October 25, 2010, the FHLB entered into a consent order with the Federal Housing Finance Agency.  The consent order required, among other matters, the FHLB meet and maintain certain minimum financial requirements. The FHLB has communicated that with the exception of a retained earnings requirement, it is in compliance with the minimum financial requirements and has continued taking the specified actions and is working toward meeting the agreed-upon milestones and timelines for completing capital management, asset composition, and other operational and risk management improvements as indicated in the consent order.  As a result, we have not recorded an impairment on our investment in FHLB stock.  Further deterioration in the FHLB’s financial position may, however, result in future impairment in the value of those securities.  We will continue to monitor the financial condition of the FHLB as it relates to, among other things, the recoverability of our investment.
 
We rely on communications, information, operating and financial control systems technology from third-party service providers, and we may suffer an interruption in those systems.
 
We rely heavily on third-party service providers for much of our communications, information, operating and financial control systems technology, including our internet banking services and data processing systems. Any failure or interruption of these services or systems or breaches in security of these systems could result in failures or interruptions in our customer relationship management, general ledger, deposit, servicing and/or loan origination systems. The occurrence of any failures or interruptions may require us to identify alternative sources of such services, and we cannot assure you that we could negotiate terms that are as favorable to us, or could obtain services with similar functionality as found in our existing systems without the need to expend substantial resources, if at all.
 
 
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New or changes in existing tax, accounting, and regulatory rules and interpretations could significantly impact strategic initiatives, results of operations, cash flows, and financial condition.
 
The financial services industry is extensively regulated. Federal and state banking regulations are designed primarily to protect the deposit insurance funds and consumers, not to benefit our shareholders. Regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operation of an institution, the classification of assets by the institution and the adequacy of an institution’s allowance for loan losses. Additionally, actions by regulatory agencies or significant litigation against us could require us to devote significant time and resources to defending our business and may lead to penalties that materially affect us. The significant federal and state banking regulations that affect us are described in this prospectus under the heading “How We are Regulated.” These regulations, along with the currently existing tax, accounting, securities, insurance, and monetary laws, regulations, rules, standards, policies, and interpretations control the methods by which financial institutions conduct business, implement strategic initiatives and tax compliance, and govern financial reporting and disclosures. These laws, regulations, rules, standards, policies, and interpretations are constantly evolving and may change significantly over time.
 
We participate in a multiple employer defined benefit pension plan for the benefit of our employees. If we were to withdraw from this plan, we could incur a substantial expense in connection with the withdrawal.
 
We participate in the Pentegra Defined Benefit Plan for Financial Institutions, a multiple employer pension plan for the benefit of our employees. Effective February 1, 2006, we did not allow additional employees to participate in this plan.  On January 31, 2010, we froze the future accrual of benefits under this plan with respect to those participating employees, and paid the normal contribution amount of $475,000 in December 2010. In connection with our decision to freeze our benefit accruals under the plan, we considered withdrawing from the plan. Based upon the value of the plan’s assets at September 30, 2012, if we had chosen to withdraw from the plan as of that date, we would have incurred an additional expense of up to approximately $8.7 million.

The actual expense that would be incurred in connection with a withdrawal from the plan is primarily dependent upon the timing of the withdrawal, the total value of the plan’s assets at the time of withdrawal, general market interest rates at that time, expenses imposed on withdrawal, and other conditions imposed by Pentegra as set forth in the plan. If we choose to withdraw from the plan in the future, we could incur a substantial expense in connection with the withdrawal.
 
Our net unrealized built-in-losses and other losses could be substantially limited as to future use if we experience an ownership change as defined in the Internal Revenue Code.

If we experience an ownership change, our future use of our net unrealized built-in-losses and other losses that exist immediately prior to such ownership change (collectively “Pre-Change Losses”) will become subject to the restrictions and limitations imposed under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), but in the case of net unrealized built-in-losses only if the amount thereof exceeds a specified threshold amount.  Although we do not expect that the conversion and offering itself will result in an ownership change, without taking into account the effects or likelihood of future transactions in our common stock, we could be close to the “ownership change” threshold upon completion of the offering.

In general, an ownership change will occur if there is a cumulative increase in our ownership by “5% shareholders” (as defined in the Code) that exceeds 50% over a rolling three-year period.  If we experience an ownership change our Pre-Change Losses will be subject to an annual limitation on their use, which is generally equal to the fair market value of our outstanding stock immediately before the ownership change multiplied by the long-term tax-exempt rate, which is currently 3.26% for ownership changes occurring in August 2012.  If we experienced an ownership change in connection or shortly after the conversion and offering, we do not believe the restrictions imposed under Section 382, if applicable to us, would have a material adverse effect on our results of operations or financial condition.

The determination of an ownership change under Section 382 of the Code is often complex particularly in our case, because of the absence of precedents involving mutual to stock conversions.
 
 
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Risks Related to this Offering
 
Our operating expenses are high as a percentage of our net interest income, making it more difficult to maintain profitability.  After this offering, our expenses will increase.  Our return on equity also will be low compared to other companies.  These factors could negatively impact the price of our stock.
 
Like many smaller financial institutions, our noninterest expense, which consists primarily of the costs associated with operating our business, represents a high percentage of the income we generate.  The cost of generating our income is measured by our efficiency ratio, which represents noninterest expense divided by the sum of our net interest income and our noninterest income.  The lower our efficiency ratio is, the more effective our ability to generate income from our operations.  For the three months ended September 30, 2012 and 2011 and the years ended June 30, 2012, 2011 and 2010, our efficiency ratios were 74.5%, 83.2%, 83.3%, 76.7% and 85.7%, respectively.  Generally, this means that we spent approximately $0.75, $0.83, $0.83, $0.77 and $0.86 during these respective time periods to generate $1.00 of income.
 
The proceeds we will receive from the sale of our common stock will increase our capital substantially.  It will take us a significant period of time to fully deploy these proceeds in our business operations.  Our compensation expenses will increase as a result of the costs associated with the employee stock ownership plan, the proposed stock-based equity incentive plan and the other costs of being a public company.  In addition the FDIC could increase insurance premiums, which would increase noninterest expense.  See “How We Are Regulated – Insurance of Accounts and Regulation by the FDIC.”  Therefore, we expect our return on equity to be less than many of our regional and national peers.  This low return on equity could hurt our stock price.  We do not know when or if we will achieve returns on equity that are comparable to industry peers.  For further information regarding pro forma income and expenses, see “Pro Forma Data.”
 
The final aggregate purchase price of the shares of common stock in the offering will be based on an independent appraisal and may not be indicative of the actual value of First Northwest Bancorp.
 
The appraisal is not intended, and should not be construed, as a recommendation of any kind as to the advisability of purchasing shares of common stock.  The valuation is based on estimates and projections of a number of matters, all of which are subject to change from time to time.  After our shares begin trading, the trading price of our common stock will be determined by the marketplace and may be influenced by many factors, including prevailing interest rates, the overall performance of the economy, investor perceptions of First Northwest Bancorp and the outlook for the financial institutions industry in our region and in general.
 
There may be a limited trading market in our common stock, which would hinder your ability to sell our common stock and may lower the market price of the stock.
 
First Northwest Bancorp has never issued stock and, therefore, there is no current trading market for the shares of common stock.  While we expect our common stock to be quoted on the Nasdaq Capital Market under the symbol “FNBC,” we cannot predict whether an active and liquid trading market for our common stock will develop.  Persons purchasing shares may not be able to sell their shares when they desire if a liquid trading market does not develop or sell them at a price equal to or above the initial purchase price of $10.00 per share even if a liquid trading market develops.  A limited trading market for our common stock may reduce the market value of the common stock and make it difficult to buy or sell our shares on short notice.  A limited trading market could also result in a wider spread between the bid and ask price for the stock, meaning the highest price being offered for shares for sale at any particular time may be further from the lowest price being offered by buyers for the stock at that moment than if the stock were more actively traded (the difference between the bid and ask price being the “spread” for the stock).  This could make it more difficult to sell a large number of shares at one time and could mean the sale of a large number of shares at one time could depress the market price.  See “Market for the Common Stock.”
 
The cost of additional finance and accounting systems, procedures and controls in order to satisfy our new public company reporting requirements will increase our expenses.
 
As a result of the completion of this offering, we will become a public reporting company.  We expect that the obligations of being a public company, including the substantial public reporting obligations, will require significant expenditures and place additional demands on our management team.  We have made, and will continue to make, changes to our internal controls and procedures for financial reporting and accounting systems to meet our
 
 
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reporting obligations as a stand-alone public company. However, the measures we take may not be sufficient to satisfy our obligations. Section 404 of the Sarbanes-Oxley Act requires annual management assessments of the effectiveness of our internal control over financial reporting, starting with the second annual report that we would expect to file with the SEC, and will likely require in the same report, a report by our independent auditors on the effectiveness of our internal control over financial reporting. Any failure to achieve and maintain an effective internal control environment could have a material adverse effect on our business and stock price.  In addition, we may need to hire additional compliance, accounting and financial staff with appropriate public company experience and technical knowledge, and we may not be able to do so in a timely fashion.  As a result, we may need to rely on outside consultants to provide these services for us until qualified personnel are hired.  These obligations will increase our operating expenses and could divert our management’s attention from our operations.
 
Our equity incentive plans will increase our costs, which will reduce our income.
 
We anticipate that our employee stock ownership plan will purchase 8% of the total shares of common stock sold in the stock offering and contributed to the foundation, with funds borrowed from First Northwest Bancorp.  We will record annual employee stock ownership plan expense in an amount equal to the fair value of shares of common stock committed to be released to employees.  Assuming the employee stock ownership plan purchases 796,648 shares in the offering at the adjusted maximum of the offering range, we will recognize additional annual pre-tax compensation expense of approximately $398,000 over a 20-year period, assuming the shares of common stock have a fair market value of $10.00 per share for the full 20-year period. If shares of common stock appreciate in value over time, compensation expense relating to the employee stock ownership plan will increase.
 
We also intend to adopt an equity incentive plan after the stock offering that would award participants shares of our common stock (at no cost to them) and/or options to purchase shares of our common stock.  The number of shares of restricted stock or stock options reserved for issuance under any initial equity incentive plan may not exceed 4% and 10%, respectively, of our total outstanding shares, if these plans are adopted within 12 months after the completion of the conversion.  We may grant shares of common stock and stock options in excess of these amounts provided the equity incentive plan is adopted more than one year following the stock offering.  Assuming a $10.00 per option exercise price and an estimated grant-date fair value of the options utilizing a Black-Scholes option pricing analysis of $3.96 per option granted, with the value amortized over a five-year vesting period, the corresponding annual pre-tax expense associated with the stock options would be approximately $789,000 at the adjusted maximum of the offering range. In addition, assuming that all shares of restricted stock are awarded at a price of $10.00 per share, and that the awards vest over a five-year period, the corresponding annual pre-tax expense associated with restricted stock awarded under an equity incentive plan would be approximately $797,000   at the adjusted maximum of the offering range. However, if we grant shares of common stock or options in excess of these amounts, such grants would increase our costs further.
 
The shares of restricted stock granted under an equity incentive plan will be expensed by us over their vesting period at the fair market value of the shares on the date they are awarded.  If the shares of restricted stock to be granted are repurchased in the open market (rather than issued directly from authorized but unissued shares by First Northwest Bancorp) and cost the same as the purchase price in the stock offering, the reduction to shareholders’ equity due to the plan would be between $2.6 million at the minimum of the offering range and $4.0 million at the adjusted maximum of the offering range.   To the extent we repurchase shares of common stock in the open market to fund the grants of shares under the plan, and the price of such shares exceeds the offering price of $10.00 per share, the reduction to shareholders’ equity would exceed the range described above.  Conversely, to the extent the price of such shares is below the offering price of $10.00 per share, the reduction to shareholders’ equity would be less than the range described above. See “Pro Forma Data” and “Management - Benefits to Be Considered Following Completion of the Conversion.”
 
Management and the board of directors have significant discretion over the investment of the offering proceeds and may not be able to achieve acceptable returns on the proceeds from the offering.
 
Our board of directors and management will have discretion in the investment of the capital raised in this offering.  We will use a portion of the net proceeds retained to finance the purchase of common stock in the offering by the employee stock ownership plan and may use the remaining net proceeds to pay dividends to shareholders, repurchase shares of common stock, purchase securities, deposit funds in First Federal or other financial institutions, acquire other financial services companies or for other general corporate purposes.  First Federal may use the
 
 
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proceeds it receives to fund new loans, purchase securities, or for general corporate purposes.  We have not, however, identified specific amounts of proceeds for any of these purposes and we will have significant flexibility in determining the amount of net proceeds we apply to different uses and the timing of these applications.  Our failure to utilize these funds effectively could reduce our profitability.  We have not established a timetable for the effective deployment of the proceeds, and we cannot predict how long we will need to effectively deploy the proceeds.  Investing the offering proceeds in securities until we are able to deploy the proceeds will provide lower margins than we generally earn on loans, potentially adversely affecting shareholder returns, including earnings per share, return on assets and return on equity.
 
The amount of common stock we will control, our articles of incorporation and bylaws, and state and federal law could discourage hostile acquisitions of control of First Northwest Bancorp.
 
The employee stock ownership plan plans to purchase 8.0% of the aggregate shares sold in the offering, including shares issued to the First Federal Community Foundation. This ownership, as well as the potential acquisition of common stock through the proposed equity incentive plan could result in ownership by insiders of First Northwest Bancorp in excess of 25.0% of the total shares issued in the offering at the maximum of the offering range.  This insider ownership and provisions in our articles of incorporation and bylaws may discourage attempts to acquire First Northwest Bancorp, pursue a proxy contest for control of First Northwest Bancorp, assume control of First Northwest Bancorp by a holder of a large block of common stock, and remove First Northwest Bancorp’s management, all of which shareholders might think are in their best interests.  These provisions include a prohibition on any holder of common stock voting more than 10% of the outstanding common stock.  See “Restrictions on Acquisition of First Northwest Bancorp and First Federal - Anti-takeover Provisions That are Contained in Sections of First Northwest Bancorp’s Articles of Incorporation and Bylaws.”
 
In addition, the business corporation law of Washington, the state where First Northwest Bancorp is incorporated, provides for certain restrictions on acquisition of First Northwest Bancorp.  Furthermore, federal law restricts acquisitions of control of bank holding companies such as First Northwest Bancorp.
 
The implementation of an equity incentive plan may dilute your ownership interest.
 
We intend to adopt an equity incentive plan following the offering.  This stock-based incentive plan will be funded through either open market purchases, if permitted, or from the issuance of authorized but unissued shares of our common stock.  In the event authorized but unissued shares of our common stock are used to fund stock options or awards of shares of common stock under the plan in amounts equal to 10.0% and 4.0%, respectively, of the shares to be outstanding after the offering including the shares contributed to the First Federal Community Foundation, shareholders would experience dilution in their ownership interest of 9.09% and 3.85%, respectively, or 6.47% in the aggregate.  See “Pro Forma Data” and “Management - Benefits to Be Considered Following Completion of the Conversion.”
 
Our growth or future losses may require us to raise additional capital in the future, but that capital may not be available when it is needed or the cost of that capital may be very high.
 
We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations.  We believe the net proceeds of this offering will be sufficient to permit First Federal to maintain regulatory capital compliance for the foreseeable future.  Nonetheless, we may at some point need to raise additional capital to support continued growth or in the event we have significant losses.
 
Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside our control, and on our financial condition and performance.  Accordingly, we may not be able to raise additional capital if needed on terms that are acceptable to us, or at all.  If we cannot raise additional capital when needed, our operations could be materially impaired and our financial condition and liquidity could be materially and adversely affected.  In addition, if we are unable to raise additional capital when required by FDIC and the DFI, we may be subject to adverse regulatory action.  See “How We Are Regulated.”
 
 
31
 
 
Risks Related to the Contribution to the Foundation
 
The contribution to the First Federal Community Foundation will decrease our profits for 2013.
 
First Northwest Bancorp intends to fund the foundation with $400,000 in cash and the remainder in shares of common stock so that the amount contributed is equal to 8% of the gross offering proceeds received by First Northwest Bancorp in the offering.  Based on the purchase price of $10.00 per share, we would fund the foundation with 604,000 shares of our common stock at the maximum of the offering range. This contribution will be an additional operating expense and will reduce net income during the fiscal year in which the foundation is funded, which is expected to be the fiscal year ending June 30, 2013. Assuming the offering is completed at the maximum of the offering range, the contribution to the foundation would reduce net earnings by approximately $4.3 million, after tax, in 2013. See “Pro Forma Data.”
 
The contribution to the First Federal Community Foundation will decrease the ownership interest and voting interest in the shares sold to the public after the contribution.
 
Purchasers of shares will have their ownership and voting interests diluted at the close of the conversion when First Northwest Bancorp makes a contribution to the foundation. This dilution will range from 6.83% at the minimum to 7.04% at the maximum or the offering range, as adjusted. For a further discussion regarding the effect of the contribution to the foundation, see   “Pro Forma Data” and “Comparison of Independent Valuation and Pro Forma Financial Information With and Without the Foundation.”
 
Our contribution to the First Federal Community Foundation may not be tax deductible, which could decrease our profits.
 
We believe that our contribution to the foundation, valued at $6.4 million at the maximum of the offering range, pre-tax, will be deductible for federal income tax purposes. However, we may not have sufficient taxable income to be able to fully deduct the contribution. If it is more likely than not that we will be unable to fully deduct the contribution, we will be required to establish a valuation allowance related to that portion of the deferred tax asset that is not deemed to be realizable.
 
 
32
 

 
The financial condition data as of June 30, 2012 and 2011 and the operating data for the years ended June 30, 2012, 2011 and 2010 presented below are derived from the audited consolidated financial statements and related notes included elsewhere in the prospectus.  The financial condition data as of June 30, 2010, 2009 and 2008 and the operating data for the years ended June 30, 2009 and 2008 are derived from audited consolidated financial statements not included in this prospectus.  The financial condition data as of September 30, 2012 and the operating data for the three months ended September 30, 2012 and 2011 are derived from unaudited consolidated financial statements included elsewhere in this prospectus which, in the opinion of management, include all adjustments (consisting of normal recurring adjustments) necessary to present fairly the data from the unaudited periods.  Historical results are not necessarily indicative of results to be expected in any future periods and results from the three months ended September 30, 2012 are not necessarily indicative of the results to be expected for the year ending June 30, 2013.  The following information is only a summary and you should read it in conjunction with our consolidated financial statements and related notes beginning on page F-1 and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.
 
   
September 30,
   
June 30,
 
   
2012
   
2012
   
2011
   
2010
   
2009
   
2008
 
Selected Financial Condition Data:
       
(In thousands)
 
Total assets
  $ 781,778     $ 771,864     $ 748,851     $ 738,563     $ 736,490     $ 711,239  
Cash and cash equivalents
    36,525       42,475       35,751       26,966       32,748       21,117  
Loans receivable, net (1)  
    411,113       400,659       424,187       471,231       526,325       546,207  
Investment securities available-for-sale
    219,214       218,163       198,917       163,270       95,266       49,461  
Investment securities held to maturity
    60,702       57,385       37,081       24,534       33,369       40,520  
Deposits
    589,871       583,238       562,398       556,223       530,822       491,536  
Borrowings
    100,033       100,033       100,033       99,993       119,675       137,906  
Total equity
    78,454       77,300       77,220       72,648       71,075       72,091  
 
   
Three
Months Ended
       
   
September 30,
   
Year Ended June 30,
 
   
2012
   
2011
   
2012
   
2011
   
2010
   
2009
   
2008
 
               
(In thousands)
 
Selected Operations Data:
                                         
Total interest income
  $ 6,491     $ 6,862     $ 26,942     $ 29,416     $ 33,896     $ 39,106     $ 41,517  
Total interest expense
    1,631       1,940       7,140       8,258       11,681       16,823       23,218  
Net interest income
    4,860       4,922       19,802       21,158       22,215       22,283       18,299  
Provision for loan losses
    624       1,548       7,970       926       4,373       1,920       259  
Net interest income after provision for loan losses
    4,236       3,374       11,832       20,232       17,842       20,317       18,040  
Net gain on sale of loans
    110       179       1,503       1,472       2,525       886       381  
Net gain on sale of investment securities
    51       --       293       40       908       --       --  
Impairment on investment securities, net
    --       (170 )     (419 )     (829 )     (3,154 )     (494 )     --  
Other noninterest income
    999       1,018       4,022       3,940       3,893       2,217       2,513  
Total noninterest income
    1,160       1,027       5,399       4,623       4,172       2,609       2,894  
Total noninterest expense
    4,482       4,949       20,991       19,765       22,615       21,864       19,145  
Income (loss) before (benefit) provision for income taxes
    914       (548 )     (3,760 )     5,090       (601 )     1,108       1,789  
Provision (benefit) for income taxes
    279       (328 )     (1,800 )     1,195       (602 )     335       268  
  Net income (loss)
  $ 635     $ (220 )   $ (1,960 )   $ 3,895     $ 1     $ 773     $ 1,521  
 
 
(1)
Net of allowances for loan losses, loans in process, purchase discounts and deferred loan fees.
 
 
33
 
 
   
At or For the
                               
   
Three Months Ended
   
At or For the
 
   
September 30,
    Year Ended June 30,  
   
2012
   
2011
    2012    
2011
   
2010
   
2009
   
2008
 
                                           
Selected Financial Ratios and Other Data:
                                         
Performance ratios:
                                         
Return on assets (ratio of net income (loss) to average total assets) (5)  
    0.33 %     (0.12 )%     (0.26 )%     0.52 %     0.00 %     0.11 %     0.21 %
Return on equity (ratio of net income (loss) to average equity) (5)  
    3.25       (1.13 )     (2.52 )     5.17       0.00       1.09       2.11  
Yield on average interest-earning assets
    3.58       3.92       3.80       4.19       4.90       5.77       6.49  
Rate paid on average interest-bearing liabilities
    1.02       1.24       1.13       1.31       1.87       2.76       3.74  
Interest rate spread information:
                                                       
Average during period
    2.55       2.68       2.67       2.88       3.03       3.01       2.75  
End of period
    2.75       2.74       2.66       2.86       3.22       2.88       2.77  
Net interest margin (1)  
    2.68       2.81       2.79       3.02       3.21       3.29       2.87  
Operating expense to average total assets
    2.3       2.6       2.7       2.6       3.1       3.0       2.6  
Efficiency ratio (2)  
    74.5       83.2       83.3       76.7       85.7       87.8       90.3  
Average interest-earning assets to average interest-bearing liabilities
    113.9       112.2       112.2       111.5       110.8       111.1       102.7  
                                                         
Asset quality ratios:
                                                       
Nonperforming assets to total assets at end   of period (3)  
    1.8       2.6       1.7       2.2       2.6       1.3       0.1  
Nonperforming loans to total gross loans (4)
    2.6       3.2       2.5       2.8       3.5       1.7       0.1  
Allowance for loan losses to nonperforming   loans (4)  
    74.3       41.0       72.8       39.4       38.3       34.6       220.9  
Allowance for loan losses to gross loans receivable
    1.9       1.3       1.8       1.1       1.3       0.6       0.3  
Net charge-offs (recoveries) to average outstanding loans
    (0.1 )     0.2       1.3       0.6       0.2       0.1       --  
                                                         
Capital ratios:
                                                       
Equity to total assets at end of period
    10.0       10.2       10.0       10.3       9.8       9.7       10.1  
Average equity to average assets
    10.0       10.3       10.2       10.0       9.6       10.0       9.8  
                                                         
Other data:
                                                       
Number of full service offices
    9       8       9       8       9       9       9  
Full-time equivalent employees
    160       146       152       152       149       205       191  
                                                         
Average total assets (based on three and 12 month-ends)
  $ 779,675     $ 754,320     $ 763,397     $ 752,096     $ 739,230     $ 722,006     $ 730,841  
Average total equity (based on three and 12 month-ends)
    78,092       77,617       77,903       75,365       71,166       71,870       71,426  
Average outstanding loans, net
    408,126       419,053       412,262       447,677       513,152       552,563       566,889  
Average outstanding gross loans
    416,137       424,194       418,954       454,736       520,185       556,057       567,736  
 
 
(1)
Net interest income divided by average interest-earning assets.
(2)
Total noninterest expense as a percentage of net interest income and total other noninterest income.
(3)
Nonperforming assets consists of nonperforming loans (which include nonaccruing loans and accruing loans more than 90 days past due), foreclosed real estate and other repossessed assets.
(4)
Nonperforming loans consists of nonaccruing loans and accruing loans more than 90 days past due.
(5)
Ratios for the three months ended September 30, 2012 and September 30, 2011 are annualized.
 
 
34
 
 
 
This prospectus contains forward-looking statements, which can be identified by the use of words such as “believes,” “expects,” “anticipates,” “estimates” or similar expressions.  Forward-looking statements include:
 
 
●
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;
 
 
●
decreases 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;
 
 
●
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;
 
 
●
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;
 
 
●
results of examinations of us by the DFI, FDIC, Federal Reserve, 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;
 
 
35
 
 
 
●
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 this prospectus.
 
Any of the forward-looking statements that we make in this prospectus 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.  Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements and you should not rely on such statements.
 
 
Although the actual net proceeds from the sale of the shares of common stock cannot be determined until the conversion is completed, we presently anticipate that the net proceeds will be between $57.5 million at the minimum of the offering range and $78.3 million at the maximum of the offering range and may be up to $90.3 million assuming an increase in the estimated offering range by 15%.  See “Pro Forma Data” and “The Conversion and Stock Offering - How We Determined Our Price and the Number of Shares to Be Issued in the Stock Offering” as to the assumptions used to arrive at these amounts.
 
We intend to use the net proceeds received from the stock offering as follows:
 
     
Minimum
     
Maximum
   
Maximum,
as adjusted
 
   
(In thousands)
 
                         
Retained by First Northwest Bancorp
  $ 23,634     $ 32,223     $ 37,163  
Loan to employee stock ownership plan
    5,109       6,923       7,966  
Contributed to First Federal
    28,743       39,147       45,129  
Net proceeds from stock offering
  $ 57,485     $ 78,293     $ 90,258  
 
First Northwest Bancorp will purchase all of the capital stock of First Federal to be issued in the offering in exchange for a portion of the net proceeds.  In no event will less than 50% of the net proceeds be transferred to First Federal in exchange for its shares.  The portion of the net proceeds used by First Northwest Bancorp to purchase the capital stock of First Federal will be added to First Federal’s general funds for general corporate purposes.  The net proceeds First Federal receives from First Northwest Bancorp are initially intended to be invested into short-term liquid investments.  In addition, a majority of the net proceeds retained by First Northwest Bancorp, excluding the amount needed to fund the loan to the employee stock ownership plan, is expected to be invested in short-term liquid assets, providing additional funds for reinvestment in earning assets.
 
Except as described above, neither First Northwest Bancorp nor First Federal has any specific plans for the investment of the proceeds of this offering, nor have they allocated a specific portion of the proceeds to any particular use.  For a discussion of our business reasons for undertaking the conversion, see “The Conversion and Stock Offering -.”
 
First Northwest Bancorp intends to use a portion of the net proceeds to make a loan directly to the employee stock ownership plan to enable it to purchase up to 8% of the aggregate shares of common stock sold in the offering, including shares issued to the First Federal Community Foundation or, alternatively, in the open market after the conversion.  Based upon the sale of 5,950,000 and 8,050,000 shares of common stock in the offering at the minimum and maximum of the estimated offering range, respectively, the loan to the First Northwest Bancorp employee stock ownership plan would be $5.1 million and $6.9 million, respectively.  See “Management - Benefits to Be Adopted - Employee Stock Ownership Plan.”
 
 
36
 
 
First Northwest Bancorp   will fund the First Federal Community Foundation with $400,000 in cash and the remainder in shares of common stock so that the total amount contributed is equal to 8% of the gross offering proceeds received by First Northwest Bancorp in the offering.  In addition, within one year after completion of the offering, First Northwest Bancorp intends to adopt an equity incentive plan, subject to shareholder approval, and use a portion of its proceeds to fund the purchase of shares in the open market for the plan.  The equity incentive plan intends to purchase in the open market 4% of the aggregate shares sold in the offering and contributed to the foundation, or $2.6 million and $3.5 million at the minimum and maximum of the estimated offering range, respectively.
 
The net proceeds may vary because total expenses of the conversion may be more or less than those estimated.  The net proceeds will also vary if the number of shares to be issued in the conversion is adjusted to reflect a change in the estimated pro forma market value of First Federal. Payments for shares made through withdrawals from existing deposit accounts at First Federal will not result in the receipt of new funds for investment by First Federal but will result in a reduction of First Federal’s interest expense and liabilities as funds are transferred from interest-bearing certificates or other deposit accounts.
 
 
Following completion of the stock offering, our board of directors will have the authority to declare dividends on our shares of common stock, subject to statutory and regulatory requirements. However, no decision has been made with respect to the payment of dividends.  The payment of dividends will depend upon a number of factors, including capital requirements, First Northwest Bancorp’s and First Federal’s financial condition and results of operations, tax considerations, statutory and regulatory limitations and general economic conditions.  No assurances can be given that any dividends will be paid or that, if paid, dividends will not be reduced or eliminated in future periods.  First Northwest Bancorp may file consolidated tax returns with First Federal.  Accordingly, it is anticipated that any cash distributions made by First Northwest Bancorp to its shareholders would be treated as cash dividends and not as a return of capital for federal and state tax purposes.
 
Dividends from First Northwest Bancorp will depend, in large part, upon receipt of dividends from First Federal, because First Northwest Bancorp initially will have limited sources of funds other than the portion of the proceeds retained from this offering, dividends from First Federal, earnings from the investment of proceeds retained by First Northwest Bancorp from the sale of shares of common stock and interest payments with respect to First Northwest Bancorp’s loan to the First Northwest Bancorp employee stock ownership plan.  Under Washington law, First Northwest Bancorp is prohibited from paying a dividend if, as a result of its payment, it would be unable to pay its debts as they become due in the normal course of business, or if its total liabilities would exceed its total assets.  In addition, as a bank holding company, the policy of the Federal Reserve permits First Northwest Bancorp   to pay a cash dividend only to the extent that its net income for the past year is sufficient to cover both the cash dividend and a rate of earnings retention that is consistent with its capital needs, asset quality and overall financial condition.  See “How We Are Regulated – Regulation and Supervision of First Northwest Bancorp –Restrictions on Dividends.”
 
 
First Northwest Bancorp has never issued capital stock, and, consequently, there is no established market for the common stock at this time.  First Northwest Bancorp has applied to have its common stock listed on the Nasdaq Capital Market under the symbol “FNBC.”  The development of a liquid public market depends on the existence of willing buyers and sellers, the presence of which is not within the control of First Northwest Bancorp, First Federal or any market maker.  Accordingly, the number of active buyers and sellers of the common stock at any particular time may be limited.  There can be no assurance that purchasers will be able to sell their shares at or above the initial purchase price of $10.00 per share. The development of a public market having the desirable characteristics of depth, liquidity and orderliness depends on the existence of willing buyers and sellers, the presence of which is not within our control or that of any market maker. The number of active buyers and sellers of our common stock at any particular time may be limited, which may have an adverse effect on the price at which our common stock can be sold. There can be no assurance that persons purchasing the common stock will be able to sell their shares at or above the $10.00 price per share in the offering. Purchasers of our common stock should recognize that there may be a limited trading market in the common stock and, therefore, should have the financial ability to withstand a longer-term investment horizon.
 
 
37
 
 
 
The following table presents the capitalization of First Federal at September 30, 2012, and the pro forma consolidated capitalization of First Northwest Bancorp after giving effect to the conversion, excluding assumed earnings on the net proceeds, based upon the sale of the number of shares shown below and the other assumptions set forth under “Pro Forma Data.”
 
         
First Northwest Bancorp – Pro Forma
Based Upon Sale at $10.00 Per Share
 
   
At
September 30,
2012
   
5,950,000
Shares (Minimum of Range)
   
7,000,000
Shares
(Midpoint
of Range)
   
8,050,000
Shares
(Maximum
of Range)
   
9,257,500
Shares (1)
(Maximum of
Range, as
Adjusted)
 
   
(Dollars in thousands)
 
Deposits (2)  
  $ 589,871     $ 589,871     $ 589,871     $ 589,871     $ 589,871  
Borrowings (2)  
    100,033       100,033       100,033       100,033       100,033  
Total deposits and borrowings
  $ 689,904     $ 689,904     $ 689,904     $ 689,904     $ 689,904  
                                         
Shareholders’ equity
                                       
Preferred stock, $0.01 par value,  5,000,000 shares authorized,  none issued
  $ --     $ --     $ --     $ --     $ --  
Common stock, $0.01 par value,  75,000,000 shares authorized;  shares to be issued as   reflected (3)  
    --       64       75       87       100  
Additional paid-in capital
    --       61,781       73,014       84,246       97,164  
Retained earnings (4)  
    75,312       75,312       75,312       75,312       75,312  
    Less:
                                       
Expense of stock contribution to   the First Federal Community  Foundation (5)  
    --       (4,360 )     (5,200 )     (6,040 )     (7,006 )
Expense of cash contribution to  the First Federal Community  Foundation (5)  
    --       (400 )     (400 )     (400 )     (400 )
    Plus:
                                       
Tax benefit of contribution to  the First Federal Community  Foundation
    --       1,618       1,904       2,190       2,518  
Accumulated other  comprehensive income
    3,142       3,142       3,142       3,142       3,142  
                                         
Less:
                                       
Common stock to be acquired by the employee stock
                                       
ownership plan (6)
    --       (5,109 )     (6,016 )     (6,923 )     (7,966 )
Common stock to be acquired for restricted stock awards (7)
    --       (2,554 )     (3,008 )     (3,462 )     (3,983 )
                                         
Total shareholders’ equity
  $ 78,454     $ 129,494     $ 138,823     $ 148,152     $ 158,881  
                                         
Total shareholders’ equity as a percentage of total assets
    10.04 %     15.55 %     16.48 %     17.40 %     18.43 %
                                         
Pro forma shares outstanding
                                       
Shares issued to foundation
    --       436,000       520,000       604,000       700,600  
Shares offered for sale in offering
    --       5,950,000       7,000,000       8,050,000       9,257,500  
Total shares outstanding
    --       6,386,000       7,520,000       8,654,000       9,958,100  
 
(footnotes on following page)
 
 
38
 
 
 
 
   
(1)
As adjusted to give effect to an increase in the number of shares of common stock which would be offered as a result of a 15% increase in the estimated offering range to reflect demand for shares, changes in market and general financial conditions following the commencement of the subscription and community offerings or regulatory considerations.
(2)
Does not reflect withdrawals from deposit accounts for the purchase of shares of common stock in the conversion.  These withdrawals would reduce pro forma deposits by the amount of the withdrawals.
(3)
No effect has been given to the issuance of additional shares of common stock pursuant to the proposed equity incentive plan.  If this plan is implemented, an amount up to 10% of the shares of First Northwest Bancorp common stock sold in the offering and contributed to the First Federal Community Foundation will be reserved for issuance upon the exercise of options under the stock option plan. See “Management – Benefits.”
(4)
The retained earnings of First Federal will be substantially restricted after the conversion.  Additionally, First Federal will be prohibited from paying any dividend that would reduce its regulatory capital below the amount required for the liquidation account that will be set up in connection with the conversion.  See “The Conversion and Stock Offering - Effects of the Conversion - Depositors’ Rights if We Liquidate.”
(5)
Assumes a cash contribution of $400,000 and the remainder in shares of common stock so that the amount contributed is equal to 8% of the gross offering proceeds received by First Northwest Bancorp in the offering.
(6)
Assumes that 8% of the shares sold in the offering , including shares issued to the First Federal Community Foundation, will be purchased by the employee stock ownership plan financed by a loan from First Northwest Bancorp.  The loan will be repaid principally from First Federal’s contributions to the employee stock ownership plan. Since First Northwest Bancorp will finance the employee stock ownership plan debt, this debt will be eliminated through consolidation and no liability will be reflected on First Northwest Bancorp’s consolidated financial statements. Accordingly, the amount of shares of common stock acquired by the employee stock ownership plan is shown in this table as a reduction of total shareholders’ equity.
(7)
Assumes a number of shares of common stock equal to 4% of the shares of common stock to be sold in the offering will be purchased for grant by the proposed equity incentive plan.  The funds to be used by the plan to purchase the shares will be provided by First Northwest Bancorp.    The dollar amount of common stock to be purchased is based on the $10.00 per share subscription price in the offering and represents unearned compensation. This amount does not reflect possible increases or decreases in the value of common stock relative to the subscription price in the offering. As First Northwest Bancorp accrues compensation expense to reflect the vesting of shares pursuant to the restricted stock plan, the credit to equity will be offset by a charge to noninterest expense. Implementation of the restricted stock plan will require shareholder approval. The funds to be used by the restricted stock plan to purchase the shares will be provided by First Northwest Bancorp.   See “Management – Benefits.
 
 
    At September 30, 2012, First Federal and First Northwest Bancorp exceeded all of their applicable regulatory capital requirements.  The tables on the following pages set forth the regulatory capital of First Federal and First Northwest Bancorp at September 30, 2012 and the pro forma regulatory capital of First Federal and First Northwest Bancorp after giving effect to the conversion and offering, based upon the sale of the number of shares shown in the table.  The pro forma regulatory capital amounts reflect the receipt by First Federal of 50% of the net stock proceeds.  The pro forma risk-based capital amounts assume the investment of the net proceeds received by First Federal in assets that have a risk-weight of 20% or higher under applicable regulations, as if the net proceeds had been received and so applied at September 30, 2012.
 
 
39
 
First Federal Capital Requirements
 
         
Pro Forma at September 30, 2012
 
   
September 30, 2012
   
5,950,000 Shares
Sold at $10.00 per Share
(Minimum of Range)
   
7,000,000 Shares
Sold at $10.00 per Share
(Midpoint of Range)
   
8,050,000 Shares
Sold at $10.00 per Share
(Maximum of Range)
   
9,257,500 Shares
Sold at $10.00 per Share
(Maximum of Range,
as Adjusted)
 
   
Amount
   
Percent of
Assets (1)
   
Amount
   
Percent of
Assets (1)
   
Amount
   
Percent of
Assets (1)
   
Amount
   
Percent of
Assets (1)
   
Amount
   
Percent of
Assets (1)
 
   
(Dollars in thousands)
 
Equity capital under generally  accepted accounting  principles (“GAAP”)                         
  $ 78,454       10.04 %   $ 101,688       12.55 %   $ 105,983       13.00 %   $ 110,277       13.44 %   $ 115,217       13.94 %
                                                                                     
Tier I leverage                                
  $ 75,280       9.67 %   $ 98,514       12.21 %   $ 102,809       12.66 %   $ 107,103       13.10 %   $ 112,043       13.61 %
Requirement                                         
    31,144       4.00       32,278       4.00       32,486       4.00       32,694       4.00       32,933       4.00  
Excess                                         
  $ 44,136       5.67 %   $ 66,236       8.21 %   $ 70,323       8.66 %   $ 74,409       9.10 %   $ 79,110       9.61 %
                                                                                   
Tier I risk-based                              
  $ 75,280       20.31 %   $ 98,514       26.18 %   $ 102,809       27.25 %   $ 107,103       28.31 %   $ 112,043       29.52 %
Requirement                                         
    14,823       4.00       15,050       4.00       15,092       4.00       15,133       4.00       15,181       4.00  
Excess                                         
  $ 60,457       16.31 %   $ 83,464       22.18 %   $ 87,717       23.25 %   $ 91,970       24.31 %   $ 96,862       25.52 %
                                                                                 
Total risk-based                                
  $ 79,959       21.58 %   $ 103,193       27.43 %   $ 107,488       28.49 %   $ 111,782       29.55 %   $ 116,722       30.75 %
Risk-based requirement                      
    29,646       8.00       30,100       8.00       30,183       8.00       30,266       8.00       30,362       8.00  
Excess                                         
  $ 50,313       13.58 %   $ 73,093       19.43 %   $ 77,305       20.49 %   $ 81,516       21.55 %   $ 86,360       22.75 %
                                                                                 
Reconciliation of capital infused into  First Federal:
                                                                               
Net proceeds infused 
                  $ 28,743             $ 33,945             $ 39,147             $ 45,129          
Less:
                                                                               
   Common stock acquired by
      employee stock ownership plan
                    (5,109 )             (6,016 )             (6,923 )             (7,966 )        
   Cash contribution to First Federal
      Community Foundation
                    (400 )             (400 )             (400 )             (400 )        
Pro forma increase in GAAP and  regulatory capital                              
                  $ 23,234             $ 27,529             $ 31,824             $ 36,763          
                                           
(1) Adjusted total or adjusted risk-weighted assets, as appropriate.
 
 
40
 

First Northwest Bancorp Capital Requirements
 
 
         
Pro Forma at September 30, 2012
 
   
September 30, 2012
   
5,950,000 shares
Sold at $10.00 per Share
(Minimum of Range)
   
7,000,000 Shares
Sold at $10.00 per Share
(Midpoint of Range)
   
8,050,000 Shares
Sold at $10.00 per Share
(Maximum of Range)
   
9,257,500 Shares
Sold at $10.00 per Share
(Maximum of Range,
as Adjusted)
 
   
Amount
   
Percent of
Assets (1)
   
Amount
   
Percent of
Assets
   
Amount
   
Percent of
Assets
   
Amount
   
Percent of
Assets
   
Amount
   
Percent of
Assets
 
   
(Dollars in thousands)
 
Equity capital under generally
   accepted accounting
   principles (“GAAP”)                                         
  $ 78,454       10.04 %   $ 129,494       15.55 %   $ 138,823       16.48 %   $ 148,152       17.40 %   $ 158,881       18.43 %
                                                                                 
Tier I leverage                        
  $ 75,280       9.67 %   $ 126,320       15.23 %   $ 135,649       16.17 %   $ 144,978       17.09 %   $ 155,707       18.13 %
Requirement                                         
    31,144       4.00       33,186       4.00       33,559       4.00       33,932       4.00       34,361       4.00  
Excess                                         
  $ 44,136       5.67 %   $ 93,134       11.23 %   $ 102,090       12.17 %   $ 111,046       13.09 %   $ 121,346       14.13 %
                                                                                 
Tier I risk-based                           
  $ 75,280       20.31 %   $ 126,320       33.17 %   $ 135,649       35.45 %   $ 144,978       37.70 %   $ 155,707       40.27 %
Requirement                                         
    14,823       4.00       15,231       4.00       15,306       4.00       15,381       4.00       15,467       4.00  
Excess                                         
  $ 60,457       16.31 %   $ 111,089       29.17 %   $ 120,343       31.45 %   $ 129,597       33.70 %   $ 140,240       36.27 %
                                                                                 
Total risk-based                            
  $ 79,959       21.58 %   $ 130,999       34.40 %   $ 140,328       36.67 %   $ 149,657       38.92 %   $ 160,386       41.48 %
Risk-based requirement           
    29,646       8.00       30,463       8.00       30,612       8.00       30,761       8.00       30,933       8.00  
Excess                                         
  $ 50,313       13.58 %   $ 100,536       26.40 %   $ 109,716       28.67 %   $ 118,896       30.92 %   $ 129,453       33.48 %
 
(1) Adjusted total or adjusted risk-weighted assets, as appropriate.
 
 
41
    
 
We cannot determine the actual net proceeds from the sale of our common stock until the conversion is completed.  However, we estimate that net proceeds will be between $57.5 million and $78.3 million, or $90.3 million if the estimated offering range is increased by 15%, based upon the following assumptions:
 
 
●
all shares of common stock will be sold in the subscription offering and community offering;
 
 
●
Sandler O’Neill + Partners, L.P.   will receive a fee equal to 1.00% of the gross proceeds from the subscription and community offerings, excluding shares of common stock sold to directors, executive officers and employees (and members of their immediate families), the employee stock ownership plan and the contribution to the First Federal Community Foundation;
 
 
●
total expenses, excluding the fee paid to Sandler O’Neill + Partners, L.P., are estimated to be approximately $1.5 million.  Actual expenses may vary from those estimated; and
 
 
●
First Northwest Bancorp will grant options under the equity incentive plan to acquire common stock equal to 10.0% of the shares of common stock outstanding after the offering, and will grant restricted stock awards in an amount equal to 4.0% of such shares.  First Northwest Bancorp will acquire common stock underlying these awards through open market purchases.  The estimated fair value of the options, estimated using the Black-Scholes option pricing model, is recognized as an expense over the requisite vesting period of the options.  The expense recorded in the pro forma financial information assumes the retrospective method under U.S. generally accepted accounting principles.
 
Pro forma net income of First Northwest Bancorp have been calculated for the year ended June 30, 2012 and the three months ended September 30, 2012, as if the common stock to be issued in the conversion had been sold at the beginning of the period and the net proceeds had been invested at 0.72% and 0.62%, respectively, which represents the yield on five-year U.S. Government securities at June 30, 2012 and at September 30, 2012.  We believe that this rate more accurately reflects a pro forma reinvestment rate than the arithmetic average method, which assumes reinvestment of the net proceeds at a rate equal to the average of the yield on interest-earning assets and the cost of deposits for the respective periods.  The effect of withdrawals from deposit accounts for the purchase of common stock has not been reflected.  A tax rate of   34% has been assumed for the periods, resulting in after-tax yields of 0.48%   and 0.41 % for the year ended June 30, 2012 and the three months ended September 30, 2012, respectively.  Historical and pro forma earnings per share amounts have been calculated by dividing historical and pro forma amounts by the indicated number of shares of common stock, as adjusted to give effect to the shares purchased by the employee stock ownership plan.  See Note 2 to the following tables.  As discussed under “How We Intend to Use the Proceeds From this Offering,” First Northwest Bancorp intends to make a loan to fund the purchase of 8% of the common stock sold in the offering by the employee stock ownership plan, including shares issued to the First Federal Community Foundation, and intends to retain 50% of the net proceeds from the conversion.
 
No effect has been given in the tables to the issuance of additional shares of common stock pursuant to any stock options available for grant under the equity incentive plan.  The table below gives effect to the restricted stock awards that would be available for grant under the equity incentive plan and which is expected to be adopted by First Northwest Bancorp following the conversion and presented to shareholders for approval at an annual or special meeting of shareholders to be held at least six months following the completion of the conversion.  If the equity incentive plan is approved by shareholders, First Northwest Bancorp intends to acquire an amount of common stock equal to 4% of the shares of common stock issued in the conversion (including shares contributed to the First Federal Community Foundation), either through open market purchases or from authorized but unissued shares of common stock, if permissible.  See “Management - Benefits – Equity Incentive Plan.”  The following tables assume that shareholder approval has been obtained, as to which there can be no assurance, and that the shares acquired by First Northwest Bancorp are purchased in the open market at $10.00 per share.  No effect has been given to First Northwest Bancorp’s results of operations after the conversion, the market price of the common stock after the conversion, or a less than 4% purchase of common stock by First Northwest Bancorp.
 
The following pro forma information may not be representative of the financial effects of the foregoing transactions at the dates on which the transactions actually occur and should not be taken as indicative of future results of operations.  Pro forma shareholders’ equity represents the difference between the stated amount of assets and liabilities of First Northwest Bancorp computed in accordance with GAAP.  Historical per share amounts have been computed as if the shares of common stock expected to be issued in the offering had been outstanding at the
 
 
42
 
 
beginning of the period covered by the table. However, neither historical nor pro forma stockholders’ equity has been adjusted to reflect the investment of the estimated net proceeds from the sale of the shares in the offering, the additional employee stock ownership plan expense or expenses related to the proposed equity incentive plan.  Shareholders’ equity does not give effect to intangible assets in the event of a liquidation to First Federal’s bad debt reserve or to the liquidation account to be maintained by First Federal.  The pro forma shareholders’ equity is not intended to represent the fair market value of the common stock and may be different than amounts that would be available for distribution to shareholders in the event of liquidation.
 
The tables on the following pages summarize historical data of First Northwest Bancorp’s pro forma data at or for the year ended June 30, 2012 and at or for the three months ended September 30, 2012, based on the assumptions set forth above and in the tables and should not be used as a basis for projection of the market value of our common stock following the conversion and the offering.
 
 
43
 
 
   
At or For the Three Months Ended September 30, 2012
 
   
5,950,000
Shares Sold at
$10.00 Per
Share
(Minimum
of Range)
   
7,000,000
Shares Sold at
$10.00 Per
Share
(Midpoint
of Range)
   
8,050,000
Shares Sold at
$10.00 Per
Share
(Maximum
of Range)
   
9,257,500
Shares Sold at
$10.00 Per Share
(Maximum of
Range, as
Adjusted) (1)
 
   
(Dollars in thousands)
 
Gross proceeds of offering
  $ 59,500     $ 70,000     $ 80,500     $ 92,575  
Plus: Value of shares issued to the First Federal Community Foundation
    4,360       5,200       6,040       7,006  
      Pro forma market capitalization
  $ 63,860     $ 75,200     $ 86,540     $ 99,581  
Pro forma market capitalization:
                               
Gross proceeds of offering
  $ 59,500     $ 70,000     $ 80,500     $ 92,575  
 Less expenses
    (2,015 )     (2,111 )     (2,207 )     (2,317 )
Estimated net proceeds
    57,485       67,889       78,293       90,258  
Less: cash contribution to Foundation
    (400 )     (400 )     (400 )     (400 )
 Less: common stock acquired by  employee stock ownership plan (2)
    (5,109 )     (6,016 )     (6,923 )     (7,966 )
 Less: common stock acquired for  restricted stock awards (3)
    (2,554 )     (3,008 )     (3,462 )     (3,983 )
Estimated investable net proceeds
  $ 49,422     $ 58,465     $ 67,508     $ 77,909  
Pro forma net income for the three months  ended September 30, 2012:
                               
Consolidated net income (loss):
                               
 Historical
  $ 635     $ 635     $ 635     $ 635  
Pro forma income on net proceeds
    51       60       69       80  
 Less: pro forma employee stock  ownership plan adjustment (2)
    (42 )     (50 )     (57 )     (66 )
 Less: pro forma restricted stock  award adjustment (3)
    (84 )     (99 )     (114 )     (132 )
 Less: pro forma stock option  adjustment (4)
    (116 )     (136 )     (157 )     (181 )
Pro forma net income
  $ 444     $ 410     $ 376     $ 336  
                                 
Per share net income (loss) for the three  months ended September 30, 2012:
                               
Historical
  $ 0.11     $ 0.09     $ 0.08     $ 0.07  
Pro forma income on net proceeds
    0.01       0.01       0.01       0.01  
 Less: pro forma employee stock  ownership plan adjustment (2)
    (0.01 )     (0.01 )     (0.01 )     (0.01 )
 Less: pro forma restricted stock  award adjustment (3)
    (0.01 )     (0.01 )     (0.01 )     (0.01 )
 Less: pro forma stock option  adjustment (4)
    (0.02 )     (0.02 )     (0.02 )     (0.02 )
Pro forma net income per share (5)
  $ 0.08     $ 0.06     $ 0.05     $ 0.04  
                                 
Offering price as a multiple of pro forma  net income per share
    31.25       41.67       50.00       62.50  
                                 
Number of shares outstanding for pro forma  income per share calculations
    5,881,506       6,925,920       7,970,334       9,171,410  
 
 
(table continued on following page)
(Footnotes on page 48)
 
 
44
 

   
At or For the Three Months Ended September 30, 2012
 
   
5,950,000
Shares Sold at
$10.00 Per
Share
(Minimum
of Range)
   
7,000,000
Shares Sold at
$10.00 Per
Share
(Midpoint
of Range)
   
8,050,000
Shares Sold at
$10.00 Per
Share
(Maximum
of Range)
   
9,257,500
Shares Sold at
$10.00 Per Share
(Maximum of
Range, as
Adjusted) (1)
 
   
(Dollars in thousands)
 
Pro forma shareholders’ equity at September 30, 2012:
                       
Historical
  $ 78,454     $ 78,454     $ 78,454     $ 78,454  
Estimated net proceeds
    57,485       67,889       78,293       90,258  
 Plus: Shares issued to the First Federal Community Foundation
    4,360       5,200       6,040       7,006  
 Less: Shares contributed to the First Federal Community Foundation
    (4,360 )     (5,200 )     (6,040 )     (7,006 )
 Less: Cash Contribution to Foundation
    (400 )     (400 )     (400 )     (400 )
Plus: Tax benefit of contribution to the First Federal Community Foundation
    1,618       1,904       2,190       2,518  
 Less: common stock acquired by the employee stock ownership plan (2)
    (5,109 )     (6,016 )     (6,923 )     (7,966 )
 Less: common stock acquired by the  equity incentive plan
    (2,554 )     (3,008 )     (3,462 )     (3,983 )
Pro forma shareholders’ equity
  $ 129,494     $ 138,823     $ 148,152     $ 158,881  
 Less: Intangibles
    (14 )     (14 )     (14 )     (14 )
Pro forma tangible stockholders’equity
  $ 129,480     $ 138,809     $ 148,138     $ 158,867  
                                 
Pro forma shareholders’ equity per share at September 30, 2012:
                               
Historical
  $ 12.29     $ 10.43     $ 9.07     $ 7.88  
Estimated net proceeds
    9.00       9.03       9.05       9.06  
 Plus: Shares issued to the First Federal Community Foundation
    0.68       0.69       0.70       0.70  
 Less: Shares contributed to the First Federal Community Foundation
    (0.68 )     (0.69 )     (0.70 )     (0.70 )
 Less: Cash Contribution to Foundation
    (0.06 )     (0.05 )     (0.05 )     (0.04 )
Plus: Tax benefit of contribution to the First Federal Community Foundation
    0.25       0.25       0.25       0.25  
 Less: common stock acquired by the employee stock ownership plan (2)
    (0.80 )     (0.80 )     (0.80 )     (0.80 )
 Less: common stock acquired by the  equity incentive plan (3)
    (0.40 )     (0.40 )     (0.40 )     (0.40 )
Pro forma shareholders’ equity per share (5)
  $ 20.28     $ 18.46     $ 17.12     $ 15.95  
 Less: Intangibles per share
    --       --       --       --  
Pro forma tangible stockholders’ equity per share
  $ 20.28     $ 18.46     $ 17.12     $ 15.95  
                                 
Offering price as a percentage of pro forma shareholders’ equity
    49.31 %     54.17 %     58.41 %     62.70 %
Offering price as a percentage of pro forma tangible shareholders’ equity per share
    49.31 %     54.17 %     58.41 %     62.70 %
Number of shares outstanding for pro forma book value per share calculations
    6,386,000       7,520,000       8,654,000       9,958,100  
 
   
(Footnotes on page 48)
 
 
45
 
 
   
At or For the Year Ended June 30, 2012
 
   
5,950,000
Shares Sold at
$10.00 Per
Share
(Minimum
of Range)
   
7,000,000
Shares Sold at
$10.00 Per
Share
(Midpoint
of Range)
   
8,050,000
Shares Sold at
$10.00 Per
Share
(Maximum
of Range)
   
9,257,500
Shares Sold at
$10.00 Per Share
(Maximum of
Range, as
Adjusted) (1)
 
   
(Dollars in thousands)
 
Gross proceeds of offering
  $ 59,500     $ 70,000     $ 80,500     $ 92,575  
Plus: Value of shares issued to the First Federal Community Foundation
    4,360       5,200       6,040       7,006  
  Pro forma market capitalization
  $ 63,860     $ 75,200     $ 86,540     $ 99,581  
Pro forma market capitalization:
                               
Gross proceeds of offering
  $ 59,500     $ 70,000     $ 80,500     $ 92,575  
Less expenses
    (2,015 )     (2,111 )     (2,207 )     (2,317 )
Estimated net proceeds
    57,485       67,889       78,293       90,258  
Less: cash contribution to Foundation
    (400 )     (400 )     (400 )     (400 )
Less: common stock acquired by employee stock ownership plan (2)
    (5,109 )     (6,016 )     (6,923 )     (7,966 )
Less: common stock acquired for restricted stock awards (3)
    (2,554 )     (3,008 )     (3,462 )     (3,983 )
Estimated investable net proceeds
  $ 49,422     $ 58,465     $ 67,508     $ 77,909  
Pro forma net income for the year ended June 30, 2012:
                               
Consolidated net income (loss):
                               
Historical
  $ (1,960 )   $ (1,960 )   $ (1,960 )   $ (1,960 )
Pro forma income on net proceeds
    235       278       321       370  
Less: pro forma employee stock ownership plan adjustment (2)
    (169 )     (199 )     (228 )     (263 )
Less: pro forma restricted stock award adjustment (3)
    (337 )     (397 )     (457 )     (526 )
Less: pro forma stock option adjustment (4)
    (463 )     (545 )     (627 )     (722 )
Pro forma net income
  $ (2,694 )   $ (2,823 )   $ (2,951 )   $ (3,101 )
                                 
Per share net income (loss) for the year ended June 30, 2012:
                               
Historical
  $ (0.33 )   $ (0.28 )   $ (0.25 )   $ (0.21 )
Pro forma income on net proceeds
    0.04       0.04       0.04       0.04  
Less: pro forma employee stock ownership plan adjustment (2)
    (0.03 )     (0.03 )     (0.03 )     (0.03 )
Less: pro forma restricted stock award adjustment (3)
    (0.06 )     (0.06 )     (0.06 )     (0.06 )
Less: pro forma stock option adjustment (4)
    (0.08 )     (0.08 )     (0.08 )     (0.08 )
Pro forma net income (loss) per share (5)
  $ (0.46 )   $ (0.41 )   $ (0.38 )   $ (0.34 )
                                 
Offering price as a multiple of pro forma net income per share
 
NM
   
NM
   
NM
   
NM
 
                                 
Number of shares outstanding for pro forma income per share calculations
    5,900,664       6,948,480       7,996,296       9,201,284  
 
 
(table continued on following page)
(Footnotes on page 48)
 
 
46
 
 
   
At or For the Year Ended June 30, 2012
 
   
5,950,000
Shares Sold at
$10.00 Per
Share
(Minimum
of Range)
   
7,000,000
Shares Sold at
$10.00 Per
Share
(Midpoint
of Range)
   
8,050,000
Shares Sold at
$10.00 Per
Share
(Maximum
of Range)
   
9,257,500
Shares Sold at
$10.00 Per Share
(Maximum of
Range, as
Adjusted) (1)
 
   
(Dollars in thousands)
 
                         
Pro forma shareholders’ equity at June 30, 2012:
                       
Historical
  $ 77,300     $ 77,300     $ 77,300     $ 77,300  
Estimated net proceeds
    57,485       67,889       78,293       90,258  
 Plus: Shares issued to the First Federal Community Foundation
    4,360       5,200       6,040       7,006  
 Less: Shares contributed to the First Federal Community Foundation
    (4,360 )     (5,200 )     (6,040 )     (7,006 )
Less: Cash Contribution to Foundation
    (400 )     (400 )     (400 )     (400 )
Plus: Tax benefit of contribution to the First Federal Community Foundation
    1,618       1,904       2,190       2,518  
 Less: common stock acquired by the employee stock ownership plan (2)
    (5,109 )     (6,016 )     (6,923 )     (7,966 )
 Less: common stock acquired by the equity incentive plan
    (2,554 )     (3,008 )     (3,462 )     (3,983 )
Pro forma shareholders’ equity
  $ 128,340     $ 137,669     $ 146,998     $ 157,727  
 Less: Intangibles
    (15 )     (15 )     (15 )     (15 )
Pro forma tangible stockholders’ equity
  $ 128,325     $ 137,654     $ 146,983     $ 157,712  
                                 
Pro forma shareholders’ equity per share at June 30, 2012:
                               
Historical
  $ 12.10     $ 10.28     $ 8.93     $ 7.76  
Estimated net proceeds
    9.00       9.03       9.05       9.06  
 Plus: Shares issued to the First Federal Community Foundation
    0.68       0.69       0.70       0.70  
 Less: Shares contributed to the First Federal Community Foundation
    (0.68 )     (0.69 )     (0.70 )     (0.70 )
 Less: Cash Contribution to Foundation
    (0.06 )     (0.05 )     (0.05 )     (0.04 )
Plus: Tax benefit of contribution to the First Federal Community Foundation
    0.25       0.25       0.25       0.25  
 Less: common stock acquired by the employee stock ownership plan (2)
    (0.80 )     (0.80 )     (0.80 )     (0.80 )
 Less: common stock acquired by the equity incentive plan (3)
    (0.40 )     (0.40 )     (0.40 )     (0.40 )
Pro forma shareholders’ equity per share (5)
  $ 20.09     $ 18.31     $ 16.98     $ 15.83  
 Less: Intangibles per share
    --       --       --       --  
Pro forma tangible stockholders’ equity per share
  $ 20.09     $ 18.31     $ 16.98     $ 15.83  
                                 
Offering price as a percentage of pro forma shareholders’ equity
    49.78 %     54.61 %     58.89 %     63.17 %
Offering price as a percentage of pro forma tangible shareholders’ equity per share
    49.78 %     54.61 %     58.89 %     63.17 %
Number of shares outstanding for pro forma book value per share calculations
    6,386,000       7,520,000       8,654,000       9,958,100  
 
   
(Footnotes on following page)
 
 
47
 
 
(1)
As adjusted to give effect to an increase in the number of shares which could occur as a result of a 15% increase in the offering range to reflect demand for the shares, changes in market and financial conditions following the commencement of the offering or regulatory considerations.
   
(2)
Assumes that 8% of shares of common stock sold in the offering, including shares issued to the First Federal Community Foundation, will be purchased by the employee stock ownership plan. For purposes of these tables, the funds used to acquire these shares are assumed to have been borrowed by the employee stock ownership plan from First Northwest Bancorp.  First Federal intends to make annual contributions to the employee stock ownership plan in an amount at least equal to the required principal and interest payments on the debt. First Federal’s total annual payments on the employee stock ownership plan debt are based upon a 20 year loan.  The pro forma adjustments assume that the employee stock ownership plan shares are allocated in equal annual installments based on the number of loan repayment installments assumed to be paid by First Federal, the fair value of the common stock remains equal to the subscription price and the employee stock ownership plan expense reflects an effective combined federal and state tax rate of 34%. The unallocated employee stock ownership plan shares are reflected as a reduction of shareholders’ equity. No reinvestment is assumed on proceeds contributed to fund the employee stock ownership plan. The pro forma net income further assumes that 6,386, 7,520, 8,654 and 9,958 shares were committed to be released during the three months ended September 30, 2012; and 25,544, 30,080, 34,616 and 39,832 shares were committed to be released during the year ended June 30, 2012, at the minimum, midpoint, maximum, and adjusted maximum of the offering range, respectively, and only the employee stock ownership plan shares committed to be released during the period were considered outstanding for purposes of income per share calculations.  See “Management - Benefits - Employee Stock Ownership Plan.”
   
(3)
If the stock-based incentive plan is approved by First Northwest Bancorp’s shareholders, First Northwest Bancorp may purchase an aggregate number of shares of common stock equal to 4.0% of the shares to be sold in the offering and contributed to the First Federal Community Foundation (or possibly a greater number of shares if the plan is implemented more than one year after completion of the conversion), to be awarded as restricted stock to officers and directors under the stock-based incentive plan.  Shareholder approval of the stock-based incentive plan and purchases of stock for grant under the plan may not occur earlier than six months after the completion of the offering.  The shares may be issued directly by First Northwest Bancorp or acquired through open market purchases.  The funds to be used to purchase the shares to be awarded by the stock-based incentive plan will be provided by First Northwest Bancorp.  The table assumes that (i) the shares to be awarded under the stock-based incentive plan are acquired through open market purchases at $10.00 per share, (ii) 5% of the amount contributed for restricted stock awards is expensed during the three months ended September 30, 2012 and 20% is expensed for the year ended June 30, 2012 (based on a five-year vesting period), and (iii) the stock-based incentive plan expense reflects an estimated marginal federal and state effective tax rate of 34%.  Assuming shareholder approval of the stock-based incentive plan and that shares of common stock (equal to 4.0% of the shares sold in the offering and contributed to the First Federal Community Foundation) are awarded through the use of authorized but unissued shares of common stock, shareholders would have their ownership and voting interests diluted by approximately 3.9%.
   
(4)
Gives effect to the options we expect to grant under the stock-based incentive plan, which is expected to be adopted by First Northwest Bancorp following the offering and presented for shareholder approval not earlier than six months after the completion of the offering.  We have assumed that options will be granted to acquire a number of shares equal to 10% of the shares sold in the offering and contributed to the First Federal Community Foundation.  In calculating the pro forma effect of the stock options, it is assumed that the exercise price of the stock options and the trading price of the stock at the date of grant were $10.00 per share, the estimated grant-date fair value pursuant to the application of the Black-Scholes option pricing model (see “Summary – Benefits to Management from the Offering” for applicable assumptions) was $3.96 for each option and the aggregate grant-date fair value of the stock options was amortized to expense on a straight line basis over a five-year vesting period of options with a 10 year expected life.  Finally, we assumed that 25% of the stock options were non-qualified options granted to directors, resulting in a tax benefit (at an assumed rate of 34%) for a deduction equal to the grant date fair value of the option.  Under the above assumptions, the granting of options under the stock-based incentive plan will result in no additional shares under the treasury stock method for purposes of calculating earnings per share.  There can be no assurance that the actual exercise price of the stock options will be equal to the $10.00 price per share.  If a portion of the shares to satisfy the exercise options under the stock-based incentive plan are obtained from the issuance of authorized but unissued shares, our net income per share and shareholders’ equity per share will decrease.  This will also have a dilutive effect of up to 9.1% on the ownership interest of persons who purchase common stock in the offering.
   
(5)
Adjusted shares used for the pro-forma net income per share computations are determined by taking the number of shares assumed to be sold in the offering, including shares issued to the First Federal Community Foundation, and subtracting the employee stock ownership plan shares that have not been committed for release during the period. See note 2, above.
 
 
48
 
 
WITH AND WITHOUT THE FOUNDATION
 
If First Federal does not establish or fund the foundation as part of the conversion, RP Financial has estimated that the pro forma aggregate market value of First Northwest Bancorp would be approximately $77.0 million at the midpoint of the estimated valuation range.  This is approximately $1.8 million greater than the pro forma aggregate market capitalization of First Northwest Bancorp, including the foundation, and would result in a 180,000 share increase in the amount of common stock offered for sale in the conversion.  The pro forma book value ratio would be similar, assuming the midpoint, under both the current appraisal and the estimate of the value of First Northwest Bancorp without the foundation.  The pro forma shareholders’ equity per share would also be similar with or without the foundation.  First Northwest Bancorp cannot assure you that, in the event the foundation is not formed, the appraisal prepared at that time would have concluded that the pro forma market value of First Northwest Bancorp would be the same as was estimated.
 
   
At the Minimum of
Estimated Price Range
   
At the Midpoint of
Estimated Price Range
   
At the Maximum of
Estimated Price Range
   
At the Maximum, As
Adjusted, of
Estimated Price Range
 
   
With
Foundation
   
No
Foundation
   
With
Foundation
   
No
Foundation
   
With
Foundation
   
No
Foundation
   
With
Foundation
   
No
Foundation
 
                                                 
Estimated offering amount
  $ 59,500     $ 65,450     $ 70,000     $ 77,000     $ 80,500     $ 88,550     $ 92,575     $ 101,833  
Pro forma market capitalization
    63,860       65,450       75,200       77,000       86,540       88,550       99,581       101,833  
Total assets
    832,818       837,301       842,147       847,359       851,476       857,416       862,204       868,983  
Total liabilities
    703,324       703,324       703,324       703,324       703,324       703,324       703,324       703,324  
Pro forma shareholders’ equity
    129,494       133,977       138,823       144,035       148,152       154,092       158,881       165,659  
Pro forma consolidated net income
    444       444       410       410       376       377       336       337  
Pro forma shareholders’ equity per shares
    20.28       20.47       18.46       18.70       17.12       17.40       15.95       16.27  
Pro forma consolidated net income per shares
    0.08       0.08       0.06       0.06       0.05       0.05       0.04       0.04  
                                                                 
Pro forma pricing ratios:
                                                               
Offering price as a percentage pro forma shareholders’ equity per share
    49.31 %     48.85       54.17       53.45       58.41       57.47       62.70       61.50  
Offering price to pro forma net income per share
    31.25       31.25       41.67       41.67       50.00       50.00       62.50       62.50  
                                                                 
Pro forma financial ratios:
                                                               
   Return on assets (annualized)
    0.21 %     0.21 %     0.19 %     0.19 %     0.18 %     0.18 %     0.16 %     0.16 %
Return on shareholders’  equity (annualized)
    1.37 %     1.32 %     1.18 %     1.14 %     1.02 %     0.98 %     0.85 %     0.81 %
Shareholders’ equity to assets
    15.55 %     16.00 %     16.48 %     17.00 %     17.40 %     17.97 %     18.43 %     19.06 %
Total shares issued
    6,386,000       6,545,000       7,520,000       7,700,000 %     8,654,000       8,855,000       9,958,100       10,183,250  
    
 
49
 
 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
This discussion and analysis reviews our consolidated financial statements and other relevant statistical data and is intended to enhance your understanding of our financial condition and results of operations. The information in this section has been derived from the consolidated financial statements and footnotes thereto, which appear beginning on page F-1 of this prospectus.  You should read the information in this section in conjunction with the business and financial information regarding First Federal as provided in this prospectus.  Unless otherwise indicated, the financial information presented in this section reflects the consolidated financial condition and results of operations of First Federal and its subsidiaries.
 
Overview
 
First Federal is a community-oriented financial institution primarily serving the North Olympic Peninsula region of Washington through our nine full-service banking offices.  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.  We also offer a variety of deposit accounts 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.
 
Income.   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.

Provision for Loan Losses.   The allowance for loan losses is a valuation allowance for probable losses inherent in the loan portfolio. We evaluate the need to establish allowances against losses on loans on a quarterly basis. When additional allowances are necessary, a provision for loan losses is charged to earnings.

Expenses.   The noninterest expenses we incur in operating our business consist of salaries and employee benefits 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. Following the offering, our noninterest expenses are likely to increase as a result of operating as a public company. These additional expenses will consist primarily of increased costs for legal and accounting services, insurance, expenses of stockholder communications and meetings and stock exchange listing fees.

Salaries and employee benefits consist primarily of salaries and wages paid to our employees, payroll taxes, expenses for health insurance, retirement plans and other employee benefits. Following the offering, we will recognize additional annual employee compensation expenses stemming from the adoption of new equity benefit plans. We cannot determine the actual amount of these new stock-related compensation and benefit expenses at this time because applicable accounting practices require that they be based on the fair market value of the shares of common stock at specific points in the future. For an estimate of’ these expenses, see “Pro Forma Data.”

Our contribution to the foundation will be an additional operating expense that will reduce net income during the quarter in which the contribution to the foundation is funded. The contribution to the foundation will
 
 
50
 
 
result in a $3.1 million and $4.3 million after-tax expense at the minimum and maximum of the offering range, respectively. Any expense resulting from the contribution to the foundation will not be a recurring expense.

Weak economic conditions and ongoing strains in the financial and housing markets, which accelerated beginning in 2008 and have continued through 2012, have presented an unusually challenging environment for banks and their holding companies, including First Federal. This has been particularly evident in our need to provide for credit losses during these periods at significantly higher levels than our historical experience and has also adversely affected our net interest income and other operating revenues and expenses. Our provisions for loan losses have been higher than historical levels during this period and reflects material levels of delinquencies, nonperforming loans and net charge-offs. As a result of these factors, for the three months ended September 30, 2012 and for the year ended June 30, 2012, we had net income of $635,000 and a net loss of $2.0 million, respectively, compared to net income of $3.9 million for the year ended June 30, 2011 and $1,000 for the year ended June 30, 2010.
 
Our Business and Operating Strategy
 
Background. Throughout most of our 89-year history, we have operated as a traditional savings and loan association, attracting deposits and investing those funds primarily in residential mortgage loans and investment securities. During the past decade, recognizing our need to adapt to changing market conditions, we revised our operating strategy to diversify our loan portfolio, expand our deposit product offerings and enhance our infrastructure. Certain highlights of our operations in recent years are as follows:

 
●
Repositioning the loan portfolio. We have gradually increased the origination of commercial real estate and multifamily real estate loans, and decreased reliance on originating and retaining longer-term, fixed-rate, owner occupied residential mortgage loans. This has been done to reduce our exposure to interest rate risk, increase the yield on our loan portfolio and shorten the maturity of the loan portfolio. In addition, given current market conditions, we are not presently emphasizing land and land development loans or construction loans.

 
●
Reorganized senior management team.   During the past five years, we have strengthened our existing management team with the addition of new executive officers.  In 2008, we added Laurence Hueth, who is now our Executive Vice President, Chief Financial Officer, and Chief Operating Officer.  In 2009, Levon Mathews became First Federal’s President and Chief Executive Officer.  Finally, in February 2012, we added Cliff Frydenberg as Executive Vice President and Chief Credit Officer.  These individuals each have over 25 years of banking experience and have been instrumental in the design and implementation of our business plan.

 
●
Selling residential mortgage loans into the secondary market. Since 2009, we have generally sold most newly originated and refinanced, conforming single-family owner-occupied mortgage loans into the secondary market on a servicing retained basis.  Starting in 2011, we began selling mortgages on both a servicing released and servicing retained basis in an effort to become more price competitive and enhance the gain on loans sold.  This strategy has helped to reduce our exposure to interest rate risk and increase our noninterest income.  In 2012, we began selectively adding 30-year fixed-rate mortgages to the portfolio in an effort to enhance our net interest income.

 
●
Adding new deposit capabilities. Historically, we have offered traditional consumer and business deposit products.  Over the past several years, we have added remote deposit capture, consumer and business on-line banking and consumer mobile banking capabilities.  The board and management remain committed to maintaining competitive deposit products and services.

 
●
Enhancing our infrastructure. Over the past several years, we have focused on upgrading our infrastructure, both in terms of equipment and personnel, in order to position ourselves for growth.

Our objective is to develop First Federal into an independent high performing bank focused on meeting the needs of individuals, small businesses and community organizations in our primary market area of Northwest Washington through exceptional service and competitive products. In addition, we expect to opportunistically
 
 
51
 
 
 expand into additional surrounding market areas.  After the conversion and offering, we intend to achieve our objective by implementing these strategies:

 
●
Improving our earnings by increasing our portfolio of higher yielding loans and our noninterest income . Through increased originations or purchases, we intend to prudently increase the percentage of our loan portfolio consisting of higher-yielding commercial real estate and commercial business loans. These loan categories offer higher risk-adjusted returns, shorter maturities and more sensitivity to interest rate fluctuations than one- to four-family residential loans. We will pursue this strategy with the benefit of the addition of lending personnel experienced in those types of credits. Since June 30, 2008, our commercial and multi-family real estate loans have increased from $64.5 million, or 11.6% of total loans to $110.1 million, or 26.1% of total loans, at September 30, 2012. The increase resulted in part from improved opportunities due to less competition for such loans from other financial institutions as a result of the weakened economic environment. We also intend to selectively add additional products to further diversify revenue sources and to capture more of each customer’s banking relationship by cross-selling our loan and deposit products and additional services to our customers. We will also continue to review opportunities to increase noninterest income through the origination and sale of loans and possible expansion into new areas such as wealth management services.
 
 
●
Focusing on asset quality. We believe that strong asset quality is a key to our long-term financial success.  We are focused on monitoring existing performing loans, resolving nonperforming loans and selling foreclosed assets. We have aggressively sought to reduce our level of nonperforming assets through write-downs, collections, modifications and sales of nonperforming loans and real estate owned. We have taken proactive steps to resolve our nonperforming loans, including negotiating repayment plans, forbearances, loan modifications and loan extensions with our borrowers when appropriate, and accepting short payoffs on delinquent loans, particularly when such payoffs result in a smaller loss to us than foreclosure. We also retain the services of independent firms to periodically review segments of our loan portfolio and comment regarding our loan policies and procedures. Beginning with the addition of our new president and chief executive officer in 2009 and continuing with the recent addition of our new chief credit officer in 2012, we have applied more conservative and stringent underwriting practices to our new loans, while also curtailing our originations of construction, land and land development loans (including lot loans).  Our exposure to higher risk construction, land and land development loans has declined to $18.0 million at September 30, 2012 compared to $49.8 million at June 30, 2008. Nonperforming assets have decreased from their recent peak of $18.9 million at June 30, 2010, to $14.3 million at September 30, 2012.
 
 
●
Attracting core deposits and other deposit products. Our strategy is to emphasize total relationship banking with our customers to internally fund our loan growth, rather than utilizing wholesale funding sources. We believe that a continued focus on customer relationships will help to increase our level of core deposits and locally-based retail certificates of deposit. In addition to our retail branches, we maintain state-of-the-art technology-based products, such as on-line personal financial management, business cash management, and business remote deposit products, that enable us to compete effectively with banks of all sizes. We recently enhanced our integrated mobile banking platform by introducing applications for both smartphones and iPads.
 
 
●
Expanding our presence in contiguous and nearby market areas and capturing business opportunities resulting from changes in the competitive environment.   We believe that opportunities currently exist in contiguous and nearby market areas to grow our franchise and complement our strong market share in our primary market areas.  In addition, by delivering high quality, customer-focused products and services, we expect to attract additional borrowers and depositors and thus increase our market share and revenue generation.  We anticipate our marketing efforts will enable organic growth as the local economy and loan demand strengthens.  We believe that community bank consolidation will continue to take place and further believe that, with our capital and liquidity positions after this offering, we will be positioned to take advantage of acquisitions or other business opportunities, including FDIC-assisted transactions and the
 
 
52
 
 
acquisition of individual branches and/or de novo branch openings that meet our investment and market objectives, although we do not currently have any understandings or agreements regarding any specific acquisition transaction. We intend to continue to be disciplined as it pertains to future expansion, acquisitions and de novo branching. Our primary focus will be on the Northwest Washington markets we know and understand, although we will consider additional select opportunities that may arise in other parts of the Northwest.
 
 
●
Hiring experienced employees with a customer service focus. Our ability to continue to attract and retain banking professionals with strong business banking and service skills, community relationships and significant knowledge of our markets and the markets we want to expand into will be key to our success. We believe that by focusing on experienced bankers who are established in their communities, we can enhance our market position and add profitable growth opportunities. We emphasize to our employees the importance of delivering exemplary customer service and seeking opportunities to build further relationships with our customers. Our goal is to compete by relying on the strength of our customer service and relationship banking approach.
 
For a more detailed description of our products and services, as well as our business operating strategy and goals, see “Business of First Federal” beginning on page __.
 
Critical Accounting Policies
 
We have certain accounting policies that are important to the assessment of our financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain.  Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances.  Facts and circumstances which could affect these judgments include, but are not limited to, changes in interest rates, changes in the performance of the economy and changes in the financial condition of borrowers.  Our accounting policies are discussed in detail in Note 1 of the Notes to Consolidated Financial Statements included in this prospectus.
 
The following represent our critical accounting policies:
 
Allowance for Loan Losses .   The allowance for loan losses is the amount estimated by management as necessary to cover losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses, which is charged to income. Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment. Among the material estimates required to establish the allowance are: the likelihood of default; the loss exposure at default; the amount and timing of future cash flows on impaired loans; the value of collateral; and the determination of loss factors to be applied to the various elements of the portfolio. All of these estimates are susceptible to significant change. Management reviews, and the board of directors approves, at least quarterly, the level of the allowance and the provision for loan losses based on past loss experience, current economic conditions and other factors related to the collectability of the loan portfolio. Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic or other conditions differ substantially from the assumptions used in making the evaluation. In addition, the FDIC and the DFI, as an integral part of their examination process, periodically review our allowance for loan losses and may require us to recognize adjustments to the allowance based on their judgment about information available at the time of their examination. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would adversely affect earnings. See Note 3 of the Notes to Consolidated Financial Statements included in this prospectus.
 
Other-Than-Temporary Impairment . Investment securities are reviewed at the end of each quarter to determine whether the fair value is below the current amortized cost. When the fair value of any of our investment securities has declined below its amortized cost, management is required to assess whether the decline is other than temporary.  In making this assessment, we consider such factors as the type of investment, the length of time and extent to which the fair value has been below the carrying value, the financial condition and near-term prospects of the issuer, and our intent and ability to hold the investment long enough to allow for any anticipated recovery. The decision to record a write-down, its amount and the period in which it is recorded could change if management’s assessment of the above factors were different.  We do not record impairment write-downs on debt securities when impairment is due to changes in interest rates, since we have the intent and ability to realize the full value of the
 
 
53
 
 
investments by holding them to maturity. Quoted market value is considered to be fair value for actively traded securities. For privately issued securities, and for thinly traded securities where market quotes are not available, we use estimation techniques to determine fair value. Estimation techniques used include discounted cash flows for debt securities. Additional information regarding our accounting for investment securities is included in Notes 2 and 14 to the Notes to Consolidated Financial Statements.
 
Mortgage Servicing Rights.   We record mortgage servicing rights on loans originated and subsequently sold into the secondary market.  We stratify our capitalized mortgage servicing rights based on the type, term and interest rates of the underlying loans.  Mortgage servicing rights are carried at fair value.  The value is determined through a discounted cash flow analysis, which uses interest rates, prepayment speeds and delinquency rate assumptions as inputs.  All of these assumptions require a significant degree of management judgment.  If our assumptions prove to be incorrect, the value of our mortgage servicing rights could be negatively affected.  See Notes 1 and 6 to the Notes to Consolidated Financial Statements.

Income Taxes .   Management makes estimates and judgments to calculate certain tax liabilities and to determine the recoverability of certain deferred tax assets, which arise from temporary differences between the tax and financial statement recognition of revenues and expenses.  We   also estimate a valuation allowance for deferred tax assets if, based on the available evidence, it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. These estimates and judgments are inherently subjective.  In evaluating the recoverability of deferred tax assets, management considers all available positive and negative evidence, including past operating results, recent cumulative losses - both capital and operating - and the forecast of future taxable income, both capital gains and operating. In determining future taxable income, management makes assumptions for the amount of taxable income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require judgments about future taxable income and are consistent with the plans and estimates to manage our business. Any reduction in estimated future taxable income may require us to record a valuation allowance against deferred tax assets. An increase in the valuation allowance would result in additional income tax expense in the period and could have a significant impact on future earnings.

Emerging Growth Company Status. We are an “emerging growth company” as defined under the Jumpstart Our Business Startups Act (the “JOBS Act”).  The JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period for complying with new or revised accounting standards. Under this provision, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we are choosing to “opt out” of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

Comparison of Financial Condition at September 30, 2012 and June 30, 2012
 
Assets .   Total assets increased $9.9 million, or 1.3%, to $781.8 million at September 30, 2012, from $771.9 million at June 30, 2012. Loans, excluding loans held for sale, increased $10.4 million, or 2.6%, to $411.1 million at September 30, 2012, from $400.7 million at June 30, 2012.  Securities increased $4.4 million, or 1.6%, to $279.9 million at September 30, 2012, from $275.5 million at June 30, 2012, and cash and cash equivalents decreased by $6.0 million, or 14.1%, to $36.5 million at September 30, 2012 from $42.5 million at September 30, 2011.

Loans receivable, net, increased $10.4 million, or 2.6%, to $411.1 million at September 30, 2012, from $400.7 million at June 30, 2012.  The portfolio growth was primarily a result of an increase in real estate secured loans, which increased $17.6 million, or 5.2%, to $353.1 million at September 30, 2012, from $335.5 million at June 30, 2012.   One- to four-family residential loans increased $9.3 million, or 4.3%, during the quarter ended September 30, 2012, as we retained a limited amount of 30-year fixed rate mortgages. The portfolio of commercial real estate loans also increased during the quarter by $11.6 million, or 14.5%, to $91.6 million at September 30, 2012 from $80.0 million at June 30, 2012.  These increases were partially offset by a decrease in construction and land loans of $4.7 million, or 20.7%, to $18.0 million at September 30, 2012, from $22.7 million at June 30, 2012, and a decrease in home equity loans of $2.6 million, or 5.1%, to $48.6 million at September 30, 2012, from $51.2 million at June 30, 2012.
 
 
54
 
 
Our allowance for loan losses was $8.2 million, or 1.95% of gross loans receivable at September 30, 2012, compared to $7.4 million, or 1.80% of gross loans receivable at June 30, 2012.  The increase in the allowance was the result of an increase in delinquent, nonperforming, criticized and classified loans during the quarter.   Special mention, substandard and doubtful loans increased by $2.3 million, or 8.4%, to $29.6 million at September 30, 2012, from $27.3 million at June 30, 2012.
 
Nonperforming loans increased $900,000, or 8.8%, to $11.1 million at September 30, 2012, from $10.2 million at June 30, 2012, primarily as a result of an increase in nonperforming commercial real estate loans of $1.7 million, partially offset by a decrease in nonperforming one- to four-residential loans of $800,000.  Nonperforming loans to total loans increased to 2.6% at September 30, 2012, from 2.5% at June 30, 2012.  Real estate owned and repossessed assets increased $300,000 to $3.2 million at September 30, 2012, from $2.9 million at June 30, 2012 as a result of increased foreclosure of one- to four-family residential properties.  At September 30, 2012, we had $11.0 million in restructured loans, of which $5.0 million were performing in accordance with their revised terms and returned to accrual status.  See “Business of First Federal – Asset Quality” for additional information regarding our delinquent, nonperforming, criticized and classified loans.
 
At September 30, 2012, the securities portfolio represented 35.8% of total assets, compared to 35.7% at June 30, 2012, an increase of $4.4 million, or 1.6%, to $279.9 million at September 30, 2012, from $275.5 million at June 30, 2012.  Mortgage-backed securities represented the largest portion of our investment portfolio and were $218.9 million at September 30, 2012, an increase of $5.3 million, or 2.5%, from $213.6 million at June 30, 2012.  Other investment securities, including municipal bonds, were $61.0 million at September 30, 2012, a decrease of $1.0 million from $62.0 million at June 30, 2012.  Deposit growth, along with cash flow from loan amortization and payoff activity, continued to be deployed into various investment securities as a short-term alternative until loan demand improves.

Liabilities. Total liabilities increased $8.7 million, or 1.3%, to $703.3 million at September 30, 2012, from $694.6 million at June 30, 2012, primarily due to retail deposit account balances increasing $6.7 million, or 1.2%, to $589.9 million at September 30, 2012, from $583.2 million at June 30, 2012.  We believe our growth in deposits was attributable to our customers seeking the safety afforded by insured deposits along with our success in attracting deposits from community organizations.  Transaction and savings account deposits increased $10.5 million, or 2.5%, to $424.0 million at September 30, 2012 from $413.5 million at June 30, 2012, while certificates of deposit declined $3.9 million, or 2.3%, during this period.  The change in the mix of deposits reflects the continued impact of a concern for safety and liquidity as well as the historically low-rate environment.

Borrowings of $100.0 million were unchanged between September 30, 2012 and June 30, 2012 and were comprised primarily of advances from the FHLB.  FHLB borrowings were unchanged from June 30, 2012 to September 30, 2012 at $99.9 million with a weighted average interest rate of 4.22%.

Equity .   Total equity increased $1.2 million or 1.6%, to $78.5 million at September 30, 2012, from $77.3 million at June 30, 2012. The increase primarily was a result of $635,000 in net income with the remaining increase due to other comprehensive income associated with the mark to market adjustments on the investment portfolio.

Comparison of Results of Operations for the Three Months Ended September 30, 2012 and 2011

General. Net income for the three months ended September 30, 2012 was $635,000 compared to a net loss of $220,000 for the three months ended September 30, 2011. The increase in net income was primarily due to a $924,000 decrease in the provision for loan losses and a $467,000 decrease in noninterest expenses as a result of $547,000 in recoveries in real estate owned expenses.

Net Interest Income. Total interest income decreased $371,000, or 5.4%, to $6.5 million for the three months ended September 30, 2012 from $6.9 million for the comparable period in 2011. Interest income on loans decreased $317,000, or 5.5%, during the three months ended September 30, 2012, reflecting a decrease of $11.0 million in the average balance of loans outstanding for the three months ended September 30, 2012, compared to the comparable period in 2011.  During the three months ended September 30, 2012, loan yields decreased 16 basis points as higher yielding loans continued to pay off and were replaced with loans at lower interest rates.

Interest income on total investment securities (which includes investment securities and mortgage-backed securities) decreased $61,000 to $981,000 for the three months ended September 30, 2012 compared to $1.0 million
 
 
55
 
 
for the three months ended September 30, 2011.  The average balance of our total investment securities increased $38.2 million to $288.4 million for the three months ended September 30, 2012 compared to $250.2 million for the three months ended September 30, 2011.  Yields on investment securities for the three months ended September 30, 2012 declined 31 basis points due to increased prepayment activity which accelerated premium amortization and resulted in reinvestment of payments received at lower interest rates.

 The following table compares average earning asset balances, associated yields, and resulting changes in interest income for the three months ended September 30, 2012 and 2011:
 
   
Three Months Ended September 30,
 
   
2012
 
2011
   
Increase/ 
 (Decrease) in
Interest Income
 
   
Average
Balance
Outstanding
   
Yield
   
Average
Balance
Outstanding
   
Yield
     
   
(Dollars in thousands)
 
Loans receivable, net
 
$
408,126
   
5.39
%
 
$
419,053
     
5.55
%
 
$
(317
)
Investment securities
   
61,268
   
1.51
     
50,549
     
1.34
     
62
 
Mortgage-backed securities
   
227,124
   
1.32
     
199,610
     
1.75
     
(123
)
FHLB stock
   
10,787
   
--
     
10,819
     
--
     
--
 
Cash and due from banks
   
18,536
   
0.19
     
20,350
     
0.04
     
7
 
   Total interest-earning assets
 
$
725,841
   
3.58
   
$
700,381
     
3.92
   
$
(371
)

Interest Expense.   Total interest expense decreased $309,000, or 15.9%, to $1.6 million for the three months ended September 30, 2012, compared to $1.9 million for the three months ended September 30, 2011.  Deposit costs decreased $312,000, or 36.2%, primarily due to a decrease in interest rates paid. The average balance of interest-bearing deposits increased $12.3 million, or 2.3%, to $536.7 million for the three months ended September 30, 2012 from $524.4 million for the three months ended September 30, 2011.  The increase during the first quarter of 2012 was attributable to increases in average balances for transaction accounts of $8.3 million, savings accounts of $3.3 million, and money market accounts of $19.6 million, partially offset by a decrease in the average balance of certificates of deposit of $18.9 million.  With rates at historically low levels there has been little incentive for depositors to extend maturities and reduce the liquidity associated with savings and money market products by renewing maturing certificates of deposit.  The average cost of all deposit products decreased for the three months ended September 30, 2012, with certificates of deposit declining by 35 basis points to 1.05% from 1.40% for the three months ended September 30, 2011, while the cost of money market deposits decreased by 19 basis points to 0.18% for the three months ended September 30, 2012 from 0.37% for the three months ended September 30, 2011.  Borrowing costs remained virtually unchanged at $1.1 million for the three months ended September 30, 2012 and 2011.

The following table details average balances, cost of funds and the change in interest expense for the three months ended September 30, 2012 and 2011:
 
   
Three Months Ended September 30,
 
   
2012
 
2011
 
Increase/ 
 (Decrease)
in Interest
Expense
 
   
Average
Balance
Outstanding
   
Rate
   
Average
Balance
Outstanding
   
Rate
     
   
(Dollars in thousands)
 
Savings accounts
 
$
78,964
   
0.11
%
 
$
75,664
     
0.22
%
  $
(21
)
Transaction accounts
   
97,584
   
0.01
     
89,312
     
0.06
     
(12
)
Money market accounts
   
193,204
   
0.18
     
173,642
     
0.37
     
(71
)
Certificates of deposit
   
166,903
   
1.05
     
185,755
     
1.40
     
(208
)
Borrowings
   
100,533
   
4.30
     
100,033
     
4.31
     
3
 
   Total interest-bearing liabilities
 
$
637,188
   
1.02
   
$
624,406
     
1.24
    $
(309
)

Provision for Loan Losses.  The provision for loan losses decreased $924,000, or 59.7%, to $624,000 for the three months ended September 30, 2012, compared to $1.5 million for the three months ended September 30,
 
 
56
 
 
2011 primarily due to net loan recoveries of $210,000 for the three months ended September 30, 2012, compared to net loan charge-offs of $630,000 for the three months ended September 30, 2011.  Management considers the allowance for loan losses at September 30, 2012 to be adequate to cover probable losses inherent in the loan portfolio based on the assessment of the above-mentioned factors affecting 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 of 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 three months ended September 30, 2012 and 2011:

   
    At or For the Three Months
   Ended September 30,
        2012       2011  
        (Dollars in thousands)  
       
Provision for loan losses
 
$
624
   
$
1,548
 
Net (recoveries) charge-offs
   
(210
)
   
630
 
Allowance for loan losses
   
8,224
     
5,646
 
Allowance for losses as a percentage of total gross loans receivable at the end of this period
   
1.9
%
   
1.3
%
Total nonaccruing loans
   
11,073
     
13,773
 
Allowance for loan losses as a percentage of nonperforming loans at end of period
   
74.3
%
   
41.0
%
Nonaccrual and 90 days or more past due loans as a percentage of total loans
   
2.6
%
   
3.2
%
Total loans
 
$
422,065
   
$
426,543
 

Noninterest Income.   Noninterest income increased $133,000, or 13.0%, to $1.2 million for the three months ended September 30, 2012 from $1.0 million for the three months ended September 30, 2011.  The increase in noninterest income between the comparable periods was due to $170,000 of other-than-temporary impairment charges related to our collateralized debt obligations secured by pooled trust preferred securities recorded during the three months ended September 30, 2011.  These securities were sold during the year ended June 30, 2012. The following table provides a detailed analysis of the changes in the components of noninterest income:

   
Three Months
 Ended September 30,
 
Increase (Decrease)
 
   
2012
   
2011
   
Amount
   
Percent
 
   
(Dollars in thousands)
 
                         
Loan and deposit service fees
 
$
855
   
$
799
   
$
56
     
7.0
%
Mortgage servicing fees, net of  amortization
   
(56
)
   
54
     
(110
)
   
(203.7
)
Net gain on sales of loans
   
110
     
179
     
(69
)
   
(38.5
)
Net gain on sale of investment securities
   
51
     
--
     
51
     
100.0
 
Net impairment losses
   
--
     
(170
)
   
170
     
(100.0
)
Increase in cash surrender value of bank-owned life insurance
   
148
     
156
     
(8
)
   
(5.1
)
Other income
   
52
     
9
     
43
     
477.8
 
          Total noninterest income
 
$
1,160
   
$
1,027
   
$
133
     
13.0
%
 
 
57
 
 
Loan and deposit service fees increased $56,000, or 7.0%, to $855,000 for the three months ended September 30, 2012 due to increases in transactional deposit accounts between these periods.  Gains on sales of investment securities were $51,000 for the three months ended September 30, 2012 as selected securities with accelerating prepayments were sold compared to no sales in the comparable period in 2011.  Decreases in the gain on sale of loans and mortgage servicing fees net of amortization during the three months ended September, compared to the period in 2011 were attributable to the addition of 30-year single family residential loans to the portfolio, which reduced the opportunity to generate loan sale revenue, and contributed to the decrease in our mortgage servicing rights asset as the portfolio of loans serviced for others decreased.

Noninterest Expense. Noninterest expense decreased $467,000, or 9.4%, to $4.5 million for the three months ended September 30, 2012, compared to $4.9 million for the three months ended September 30, 2011.  Expenses associated with real estate owned for the three months ended September 30, 2012 reflect a non-recurring $547,000 recovery of expenses from a third party servicing loans for First Federal.  Excluding the recovery, operating expenses would have been $5.0 million at September 30, 2012, an increase of $83,000 from the comparable three months ended September 30, 2011.  The following table provides an analysis of the changes in the components of noninterest expense:

   
At or For the Three
Months
Ended September 30,
 
Increase
(Decrease)
 
   
2012
   
2011
   
Amount
   
Percent
 
   
(Dollars in thousands)
 
                         
Compensation and benefits
 
$
2,464
   
$
2,363
   
$
101
     
4.3
%
Real estate owned and repossessed assets expenses, net
   
(306
)
   
432
     
(738
)
   
(170.8
)
Data processing
   
528
     
373
     
155
     
41.6
 
Occupancy, equipment, depreciation and amortization
      702         732         (30 )       (4.1 )
Supplies, postage, and telephone
   
221
     
170
     
51
     
30.0
 
Regulatory assessments and state taxes
   
75
     
112
     
(37
)
   
(33.0
)
Advertising
   
87
     
62
     
25
     
40.3
 
Professional fees
   
236
     
101
     
135
     
133.7
 
FDIC insurance premium
   
170
     
148
     
22
     
14.9
 
Other
   
305
     
456
     
(151
)
   
(33.1
)
   Total
 
$
4,482
   
$
4,949
   
$
(467
)
   
(9.4
)%

Compensation and benefits expenses increased $101,000, or 4.3%, to $2.5 million for the three months ended September 30, 2012, compared to $2.4 million for the comparable period in 2011. Additional staffing associated with branch expansion into Kitsap and Whatcom counties and operational support staff has increased full-time equivalent employees to 160 at September 30, 2012 from 146 at September 30, 2011.  During the three months ended September 30, 2012, data processing charges were $528,000, an increase of $155,000, or 41.6%, from $373,000 for the three months ended September 30, 2011.  The increase in data processing charges were due to costs associated with our branch expansion and the associated cost increases attributed to increased transaction activity associated with deposit accounts, including mobile and internet banking.

Provision (Benefit) for Income Tax.   An income tax expense of $279,000 was recorded for net income for the three months ended September 30, 2012 compared to a tax benefit of $328,000 associated with the net loss for the three months ended September 30, 2011.

Comparison of Financial Condition at June 30, 2012 and June 30, 2011
 
Assets .   Total assets increased $23.0 million, or 3.1%, to $771.9 million at June 30, 2012, from $748.9 million at June 30, 2011. Loans, excluding loans held for sale, decreased $23.5 million, or 5.5%, to $400.7 million at
 
 
58
 
 
June 30, 2012, from $424.2 million at June 30, 2011.  Securities increased $39.6 million, or 16.8%, to $275.5 million at June 30, 2012, from $236.0 million at June 30, 2011, and cash and cash equivalents increased by $6.7 million, or 18.7% to $42.5 million at June 30, 2012.

Loans receivable, net, decreased $23.5 million, or 5.5%, to $400.7 million at June 30, 2012, from $424.2 million at June 30, 2011, primarily as a result of lower loan demand in our market area, coupled with residential loan refinancing that was sold into the secondary market, loan repayments, foreclosures and repossession of assets.  Lower loan demand is attributable to continuing weakness in the local economy.
 
Real estate secured loans decreased $19.3 million, or 5.4%, to $335.5 million at June 30, 2012, from $354.8 million at June 30, 2011.   One- to four-family residential loans decreased $23.6 million, or 9.9%, in 2012, as we sold nearly all one- to four-family residential loans originated in the secondary market. Construction and land loans decreased $900,000, or 3.8% to $22.7 million at June 30, 2012, from $23.6 million at June 30, 2011.  Commercial and multi-family real estate loans totaled $97.1 million and represented 23.7% of total loans at June 30, 2012, compared to $91.9 million or 21.3% of total loans at June 30, 2011.
 
Our allowance for loan losses at June 30, 2012, was $7.4 million, or 1.80% of gross loans receivable, compared to $4.7 million, or 1.10%, of gross loans receivable at June 30, 2011.  The increase in the allowance was the result of a decline in asset quality evidenced by an increase in loans classified as substandard and doubtful to $23.9 million at June 30, 2012, from $20.5 million at June 30, 2011.  In addition, the increased qualitative factors used to anticipate higher losses on junior liens associated with their subordinate collateral position added to the allowance during the year ended June 30, 2012, and loan charge-offs increased to $5.5 million for the year ended June 30, 2012, from $2.9 million for the year ended June 30, 2011.
 
Nonperforming loans decreased $1.8 million, or 15.0%, to $10.2 million at June 30, 2012, from $12.0 million at June 30, 2011, primarily as a result of charge-offs and foreclosures.  At June 30, 2012, our nonperforming loans consisted of $5.4 million of one- to four-family loans, $3.6 million of commercial real estate loans, $882,000 of home equity loans, $132,000 of construction and land loans, and $102,000 of consumer loans.  Nonperforming loans to total loans decreased to 2.5% at June 30, 2012, from 2.8% at June 30, 2011.  Real estate owned and repossessed assets totaled $2.9 million at June 30, 2012, compared to $4.5 million at June 30, 2011.  The decrease reflects the write down and disposition of properties.  At June 30, 2012, we also had $8.9 million in restructured loans, of which $4.8 million were performing in accordance with their revised terms and returned to accrual status.  See “Business of First Federal - Asset Quality” for additional information regarding our delinquent, nonperforming, criticized and classified loans.
 
At June 30, 2012, the securities portfolio represented 35.7% of total assets, compared to 31.5% at June 30, 2011, increasing by $39.6 million or 16.8%, to $275.5 million at June 30, 2012, from $236.0 million at June 30, 2011.  Mortgage-backed securities represent the largest portion of our investment portfolio.  Mortgage-backed securities were $213.6 million at June 30, 2012, an increase of $33.8 million, or 18.8% from the prior year. Other investment securities, including municipal bonds, totaled $62.0 million at June 30, 2012, an increase of $5.7 million or 10.1% from the prior year. Deposit growth, along with cash flow from loan amortization and payoff activity, continued to be deployed into various investment securities as a short-term alternative until loan demand improves.

Liabilities. Total liabilities increased $22.9 million, or 3.4%, to $694.6 million at June 30, 2012, from $671.6 million at June 30, 2011, primarily due to retail deposit account balances increasing $20.8 million, or 3.7%, to $583.2 million at June 30, 2012, from $562.4 million at June 30, 2011.  We believe our growth in deposits was attributable to our customers seeking the safe investment afforded by insured deposits.  Transaction and savings account deposits increased $42.7 million, or 11.5%, to $413.5 million at June 30, 2012 from June 30, 2011, while certificates of deposit declined $21.8 million, or 11.4%, during this period.  The change in the mix of deposits reflects the continued impact of a concern for safety and liquidity as well as the historically low-rate environment.

Borrowings of $100.0 million were unchanged between June 30, 2011 and June 30, 2012 and were comprised primarily of advances from the FHLB.  FHLB borrowings were unchanged from June 30, 2011 to June 30, 2012 at $99.9 million with a weighted average interest rate of 4.22%.

Equity .   Total equity increased $80,000 or 0.1%, to $77.3 million at June 30, 2012, from $77.2 million at June 30, 2011. The increase primarily was a result of a $2.0 million increase due to other comprehensive income
 
 
59
 
 
associated with mark to market adjustments on the investment portfolio that offset the fiscal 2012 operating loss of $2.0 million.

Comparison of Results of Operations for the Years Ended June 30, 2012 and 2011
 
General. Our net loss for the year ended June 30, 2012, was $2.0 million as compared to net income of $3.9 million for the year ended June 30, 2011. The change was primarily due to increased provisioning for loan losses of $7.0 million, a decline in net interest income of $l.4 million, and an increase in noninterest expense primarily attributable to increased expense for the disposition of real estate and personal property owned, partially offset by a $776,000 increase in noninterest income and a decrease in the provision for income taxes of $3.0 million.

Net Interest Income. Net interest income decreased $1.4 million, or 6.6%, to $19.8 million for the year ended June 30, 2012, from $21.2 million for the year ended June 30, 2011. The decrease in net interest income for the year ended June 30, 2012, was primarily attributable to the continued weak economic conditions that resulted in reduced loan demand from creditworthy borrowers and a continued decline in interest rates.

Our net interest margin decreased 23 basis points to 2.79% for the year ended June 30, 2012, from 3.02% for the prior year, primarily due to the lower yield earned on interest-earning assets resulting from the shift in composition of outstanding interest-earning assets from loans into investment securities, primarily mortgage backed securities, and the lower interest rate environment, which reduced the yield on interest earning assets by 39 basis points to 3.80% for the year ended June 30, 2012.  Generally, our loans have higher yields than our investment securities.  The cost of average interest-bearing liabilities decreased 18 basis points to 1.13% for the year ended June 30, 2012, compared to 1.31% for the prior year due to a reduction in deposit rates.  Our funding costs have limited opportunity for further downward rate adjustments until our FHLB advances begin maturing in 2014.

Interest Income.   Total interest income decreased $2.5 million, or 8.5%, to $26.9 million for the year ended June 30, 2012. Interest income on loans decreased $2.5 million, or 9.9%, in 2012, as average balances of loans decreased by $35.4 million and earnings were further reduced by a 13 basis point decrease in the yield on loans. The yields on all loan types decreased due to lower interest rates on newly originated loans.

Interest income on total investment securities (which includes investment securities and mortgage-backed securities) increased by $39,000 to $4.2 million for the year ended June 30, 2012.  The average balance of our total investment securities increased by $36.6 million or 16.0% while the yield declined 24 basis points, primarily reflecting lower yields on mortgage-backed securities.

 The following table compares average earning asset balances, associated yields, and resulting changes in interest income for the years ended June 30, 2012 and 2011:
 
   
Year Ended June 30,
 
   
2012
 
2011
   
Increase/ 
 (Decrease) in
Interest Income
 
   
Average
Balance
Outstanding
   
Yield
   
Average
Balance
Outstanding
   
Yield
     
   
(Dollars in thousands)
 
                               
Loans receivable, net
  $
412,262
   
5.51
  %   $
447,677
     
5.64
%
  $
(2,526
)
Investment securities
   
52,929
   
1.29
     
70,434
     
1.34
     
(261
)
Mortgage-backed securities
   
213,162
   
1.65
     
159,011
     
2.03
     
300
 
FHLB stock
   
10,819
   
--
     
10,819
     
--
     
--
 
Cash and due from banks
   
20,384
   
0.14
     
13,434
     
0.12
     
13
 
   Total interest-earning assets
  $
709,556
   
3.80
    $
701,375
     
4.19
    $
(2,474
)

Interest Expense.   Total interest expense decreased $1.2 million, or 14.5%, to $7.1 million during the year ended June 30, 2012, as deposit costs declined $1.1 million, or 30.0%, and borrowing costs remained virtually
 
 
60
 
 
unchanged at $4.3 million. The average balance of interest-bearing deposits increased $3.1 million, or 0.6%, during the year ended June 30, 2012.  Increases in the average balances of transaction accounts of $6.6 million, savings accounts of $1.4 million, and money market accounts of $12.3 million were largely off-set by decreases in the average balance of certificates of deposit of $17.1 million.  With rates at historically low levels there has been little incentive for depositors to extend maturities and reduce the liquidity associated with savings and money market products by renewing maturing certificates of deposit.  The average cost of all deposit products decreased, with certificates of deposit declining by 27 basis points to 1.24% for the year ended June 30, 2012 from 1.51% the previous year while the cost of money market deposits decreased by 17 basis points to 0.26% for the year ended June 30, 2012 from 0.43% for the previous year.
 
The following table details average balances, cost of funds and the change in interest expense for the years ended June 30, 2012 and 2011:

   
Year Ended June 30,
 
   
2012
 
2011
 
Increase/ 
 (Decrease)
in Interest
Expense
 
   
Average
Balance
Outstanding
   
Rate
   
Average
Balance
Outstanding
   
Rate
     
   
(Dollars in thousands)
 
Savings accounts
  $
76,530
   
0.15
%
  $
75,171
     
0.27
%
  $
(84
)
Transaction accounts
   
92,663
   
0.04
     
86,110
     
0.09
     
(42
)
Money market accounts
   
183,300
   
0.26
     
170,972
     
0.43
     
(249
)
Certificates of deposit
   
179,665
   
1.24
     
196,802
     
1.51
     
(752
)
Borrowings
   
100,033
   
4.28
     
99,996
     
4.27
     
9
 
   Total interest-bearing liabilities
  $
632,191
   
1.13
    $
629,051
     
1.31
    $
(1,118
)

Provision for Loan Losses.  The provision for loan losses increased $7.0 million to $8.0 million during the year ended June 30, 2012, from $926,000 during the year ended June 30, 2011. We have increased the provision as a result of a decline in asset quality evidenced by an increase in loans classified as substandard and doubtful to $23.9 million at June 30, 2012, from $20.5 million at June 30, 2011.  Net loan charge-offs were $5.3 million for the year ended June 30, 2012, compared to $2.6 million for the year ended June 30, 2011.   In addition, we adjusted the actual loss history reviewed for purposes of our allowance calculations from a three quarter period to a four quarter period to ensure appropriate considerations of recent loss trends in each loan category.

The following table details activity and information related to the allowance for loan losses for the years ended June 30, 2012 and 2011:

   
At or For the Year
 Ended June 30,
 
   
2012
   
2011
 
   
(Dollars in thousands)
 
Provision for loan losses
  $
7,970
    $
926
 
Net charge-offs
   
           (5,308
)
   
(2,618
)
Allowance for loan losses
   
7,390
     
4,728
 
Allowance for losses as a percentage of total gross loans receivable at the end of this period
   
1.8
%
   
1.1
%
Total nonaccruing loans
  $
10,152
    $
11,991
 
Allowance for loan losses as a percentage of nonperforming loans at end of period
   
72.8
%
   
39.4
%
Nonaccrual and 90 days or more past due loans as a percentage of total loans
   
2.5
%
   
2.8
%
Total loans
  $
409,987
    $
430,809
 
 
 
61
 
 
Noninterest Income.   Noninterest income increased $776,000, or 16.8%, to $5.4 million for the year ended June 30, 2012, from $4.6 million for the year ended June 30, 2011.  The following table provides a detailed analysis of the changes in the components of noninterest income:

   
Year Ended June 30,
 
Increase (Decrease)
 
   
2012
   
2011
   
Amount
   
Percent
 
   
(Dollars in thousands)
 
                         
Loan and deposit service fees
  $
3,186
    $
3,021
    $
165
     
5.5%
 
Mortgage servicing fees, net of
   amortization
   
(19
)
   
117
     
(136
)
   
(116.2
)
Net gain on sales of loans
   
1,503
     
1,472
     
31
     
2.1
 
Net gain on sale of investment securities
   
293
     
40
     
253
     
632.5
 
Net impairment losses
   
(419
)
   
(829
)
   
410
     
49.5
 
Increase in cash surrender value of bank-owned life insurance
   
706
     
551
     
155
     
28.1
 
Other income
   
149
     
251
     
(102
)
   
(40.6
)
          Total noninterest income
  $
5,399
    $
4,623
    $
776
     
16.8
%

Noninterest income increased during the year ended June 30, 2012, primarily as a result of increased gains on sales of investment securities and a decrease in other than temporary impairment charges on investment securities.  Increased service fees from loan and deposit account activity of $165,000 and increases in the value of bank-owned life insurance of $155,000 were partially offset by decreases in mortgage servicing fees of $136,000 and other noninterest income of $102,000. The decrease in other noninterest income was primarily as a result of a lower income generated on nondeposit investment product sales.  Gains on sales of investment securities increased by $253,000 to $293,000 for the year ended June 30, 2012 as we periodically sold securities during the year.  During the year ended June 30, 2012, we had gains on sale of loans of $1.5 million, unchanged from the year ended June 30, 2011.

We have recognized significant levels of other-than-temporary-impairment charges beginning in 2009, related to $6.0 million in collateralized debt obligations secured by pooled trust preferred securities that were purchased prior to 2007.  During the year ended June 30, 2012, we had other-than-temporary impairment charges of $419,000, compared to $829,000 for the year ended June 30, 2011.  These securities were sold during the year ended June 30, 2012.
 
 
62
 

 

Noninterest Expense. Noninterest expense increased $ 1.2 million to $ 21.0 million for the year ended June 30, 2012, compared to $19.8 million for the year ended June 30, 2011, which was primarily attributable to increased expenses related to real estate and other personal property owned of $1.2 million. Increased expenses were realized from asset value write-downs during the period as a result of disposition strategies, including short sales, to reduce real estate owned. Our efficiency ratio was 83.3 % for the year ended June 30, 2012, compared to 76.7 % for the year ended June 30, 2011. The following table provides an analysis of the changes in the components of noninterest expense:
 
   
At or For the Year
Ended June 30,
   
Increase
(Decrease)
 
   
2012
   
2011
   
Amount
   
Percent
 
   
(Dollars in thousands)
 
                         
Compensation and benefits
  $
9,490
    $
9,632
    $
(142
)
   
(1.5
)%
Real estate owned and repossessed assets expenses, net
   
2,519
     
1,303
     
1,216
     
93.3
 
Data processing
   
1,637
     
1,503
     
134
     
8.9
 
Occupancy, equipment, depreciation and amortization
   
2,948
     
2,699
     
249
     
9.2
 
Supplies, postage, and telephone
   
756
     
809
     
(53
)
   
(6.6
)
Regulatory assessments and state taxes
   
385
     
485
     
(100
)
   
(20.6
)
Advertising
   
457
     
370
     
87
     
23.5
 
Professional fees
   
850
     
1,046
     
(196
)
   
(18.7
)
FDIC insurance premium
   
656
     
844
     
(188
)
   
(22.3
)
Other
   
1,293
     
1,074
     
219
     
20.4
 
   Total
  $
20,991
    $
19,765
    $
1,226
     
6.2
%
 
Compensation and benefits expenses decreased $ 142,000 , or 1.5 %, to $ 9.5 million for the year ended June 30, 2012, from $ 9.6 million for the prior year. At June 30, 2012, we employed 152 full-time equivalent employees compared to 149 at June 30, 2011.  Occupancy and equipment expenses increased by $249,000, or 9.2%, to $2.9 million from $2.7 million for the prior year primarily due to software and hardware costs associated with technology upgrades completed as part of the upgrades and enhancements associated with our process efficiency reviews completed in 2010.  Data processing charges increased by $134,000, or 8.9%, to $1.6 million for the year ended June 30, 2012, from $1.5 million for the prior year.  Increases were primarily attributable to increased transaction activity associated with deposit accounts, including mobile and internet banking.
 
Provision (Benefit) for Income Tax.   The income tax benefit of $1.8 million for the year ended June 30, 2012 was related to our net loss as compared to an income tax expense of $1.2 million for the year ended June 30, 2011 on our net income.
 
Comparison of Results of Operations for the Years Ended June 30, 2011 and 2010
 
General.   Our net income during the year ended June 30, 2011 increased to $3.9 million from $1,000 during the year ended June 30, 2010. The change was primarily due to reductions in the provision for loan losses of $3.4 million, a $2.9 million reduction in noninterest expense, and a $451,000 increase in noninterest income, partially offset by a $1.1 million decrease in net interest income and an increase in our provision for income taxes of $1.8 million.
 
Net Interest Income.   Net interest income decreased $1.1 million, or 5.0%, to $21.2 million for the year ended June 30, 2011, from $22.2 million in the prior year. The decrease in net interest income for 2011 was attributable to the ongoing challenges with the weak economy that have persisted since 2007 and in particular the low interest rate environment and reduced loan demand from creditworthy borrowers.
 
 
63
 
 
Our net interest margin decreased 19 basis points to 3.02% for the year ended June 30, 2011, from 3.21% for the prior year, primarily due to a $65.5 million decrease in average balances of loans and a $73.0 million increase in average balances of total investment securities (which includes investment securities and mortgage-backed securities).  Generally, our loans have higher yields than our investment securities and as a result of the decline in loans and increase in investment securities, the yield on our average interest-earning assets declined 71 basis points, to 4.19% for the year ended June 30, 2011 from 4.90% in fiscal 2010.  The cost of average interest-bearing liabilities decreased 56 basis points to 1.31% for the year ended June 30, 2011, compared to 1.87% for the prior year, primarily due to a decline in the rates paid on all types of interest bearing deposits as well as borrowings during the year ended June 30, 2011 as compared to the prior year.
 
Interest Income.   Total interest income decreased $4.5 million, or 13.3%, to $29.4 million for the year ended June 30, 2011. Interest income on loans decreased $5.0 million, or 16.5%, during the year ended June 30, 2011, as average balances of loans declined by $65.5 million and a decline in yield of 25 basis points. The decrease in the average balance of loans was attributable to a decline in the real estate market and related loan demand that did not generate sufficient volumes to replace normal amortization and prepayment activity resulting from declining interest rates.
 
Interest income on total investment securities (which includes investment securities and mortgage-backed securities) increased $499,000, or 13.6%, for the year ended June 30, 2011 compared to the prior fiscal year.  Average investment securities balances were $73.0 million higher in the year ended June 30, 2011, than in the year ended June 30, 2010, a 46.7% increase, while the yield declined 53 basis points.
 
The following table compares average earning asset balances, associated yields, and resulting changes in interest income for the years ended June 30, 2011 and 2010:
 
    Year Ended June 30,  
   
2011
   
2010
    Increase/    
    Average            Average           (Decrease)   
    Balance           Balance          
in Interest
 
   
Outstanding
   
Yield
   
Outstanding
   
Yield
    Income  
    (Dollars in thousands)  
                                         
Loans receivable, net
  $ 447,677       5.64 %   $ 513,152       5.89 %   $ (4,984 )
Investment securities
    70,434       1.34       63,634       1.79       (194 )
Mortgage-backed securities
    159,011       2.03       92,774       2.73       693  
FHLB stock
    10,819       --       10,819       --       --  
Cash and due from banks
    13,434       0.12       11,771       0.09       5  
   Total interest-earning assets
  $ 701,375       4.19     $ 692,150       4.90     $ (4,480 )
 
Interest Expense. Total interest expense decreased $3.4 million, or 29.1%, to $8.3 million for the year ended June 30, 2011 from $11.7 million for the year ended June 30, 2010. Interest expense reductions reflected general changes in the interest rate environment as well as a restructuring of approximately $52.0 million in borrowings from the FHLB with a weighted average rate of 4.74% reducing the rate to 3.97% and the removal of interest rate floors on savings accounts.  The cost of average interest-bearing deposits decreased 58 basis points, from 1.33% to 0.75%, in fiscal 2011 as compared to fiscal 2010. The average balance of interest-bearing deposits increased $8.2 million, or 1.6%, while the average balance of borrowings declined $3.6 million.
 
 
64
 
 
The following table details average balances, cost of funds and the change in interest expense for the years ended June 30, 2011 and 2010:
 
    Year Ended June 30,  
   
2011
   
2010
    Increase/   
    Average            Average          
(Decrease) 
 
    Balance           Balance            in Interest  
   
Outstanding
   
Rate
   
Outstanding
   
Rate
    Expense  
   
  (Dollars in thousands)
 
                                         
Savings accounts
  $ 75,171       0.27 %   $ 87,394       1.26 %   $ (899 )
Transaction accounts
    86,110       0.09       74,879       0.22       (92 )
Money market accounts
    170,972       0.43       151,555       0.84       (545 )
Certificates of deposit
    196,802       1.51       207,062       2.12       (1,406 )
Borrowings
    99,996       4.27       103,623       4.59       (481 )
   Total interest-bearing liabilities
  $ 629,051       1.31     $ 624,513       1.87     $ (3,423 )
 
Provision for Loan Losses. In connection with its analysis of the loan portfolio, management determined that a provision for loan losses of $926,000 was required for the year ended June 30, 2011, compared to a provision for loan losses of $ 4.4 million established for the year ended June 30, 2010.  The decrease in the provision primarily reflects the decrease in nonperforming loans.  Nonperforming loans were $ 12.0 million or 2.8 % of total loans at June 30, 2011, compared to $ 16.8 million, or 3.5 % of total loans at June 30, 2010.
 
The following table details activity and information related to the allowance for loan losses for the years ended June 30, 2011 and 2010:
 
   
At or For the Year
Ended June 30,
 
   
2011
   
2010
 
   
(Dollars in thousands)
 
             
Provision for loan losses
  $
926
    $
4,373
 
Net charge-offs
   
(2,618
)
   
(1,021
)
Allowance for loan losses
   
4,728
     
6,420
 
Allowance for losses as a percentage of total gross loans receivable at the end of this period
   
1.1
%
   
1.3
%
Total nonaccruing loans
  $
11,991
    $
16,784
 
Allowance for loan losses as a percentage of nonperforming loans at end of period
   
39.4
%
   
38.3
%
Nonaccrual and 90 days or more past due loans as a percentage of total loans
   
  2.8
%
   
 3.5
%
Total loans
  $
430,809
    $
480,277
 
 
 
65
 
 
Noninterest Income.   Total noninterest income increased $451,000, or 10.8% during the year ended June 30, 2011, compared to the year ended June 30, 2010. The following table provides a detailed analysis of the changes in the components of noninterest income:
 
   
Year Ended June 30,
 
Increase (Decrease)
 
   
2011
   
2010
   
Amount
   
Percent
 
   
(Dollars in thousands)
 
                         
Loan and deposit service fees
  $
3,021
    $
2,322
    $
699
     
30.1
%
Mortgage servicing fees, net of  amortization
   
117
     
100
     
17
     
17.0
 
Net gain on sales of loans
   
1,472
     
2,525
     
(1,053
)
   
(41.7
)
Net gain on sale of investment securities
   
40
     
908
     
(868
)
   
(95.6
)
Net impairment losses
   
(829
)
   
(3,154
)
   
2,325
     
73.7
 
Increase in cash surrender value of bank-owned life insurance
   
551
     
979
     
(428
)
   
(43.7
)
Other income
   
251
     
492
     
(241
)
   
(49.0
)
          Total noninterest income
  $
4,623
    $
4,172
    $
451
     
10.8
%
 
Noninterest income increased during the year ended June 30, 2011 primarily as a result of $2.3 million of reduced impairment charges on investment securities, partially offset by decreases in gains on sales of loans and investment securities of $1.1 million and $868,000, respectively. Noninterest income in the year ended June 30, 2011, also included a gain on the sale of a former branch site of $395,000.  Significant asset sales were recorded during the year ended June 30, 2010, as management addressed balance sheet and operational challenges.  Gains on loan sales of $2.5 million included a gain of $1.1 million for a $33.6 million bulk sale of fixed-rate residential mortgages.  We also sold investment securities during the year ended June 30, 2010, resulting in a gain on sale of securities of $908,000, which offset prepayment penalties of $729,000 associated with prepaying FHLB advances.
 
Service fees, primarily on deposit related activity increased by $699,000, or 30.1%, to $3.0 million during the year ended June 30, 2011, from $2.3 million during the year ended June 30, 2010.  The increases were primarily in non-sufficient fees and overdraft fees related to the increasing transaction account base.  This increase was largely offset by a $428,000 decrease in income recognized for the increase in cash surrender value of BOLI during the year ended June 30, 2011 to $551,000 from $979,000 during the year ended June 30, 2010 and a $241,000 decrease in other income, from $492,000 to $251,000 during the respective periods.  During the year ended June 30, 2010, First Federal pursued a tax exchange of its BOLI product that resulted in a one-time gain of $468,000.
 
Noninterest Expense.   Total noninterest expenses decreased $2.9 million, or 12.6%, to $19.8 million in 2011, compared to $22.6 million during the year ended June 30, 2010. Compensation and benefits expenses were reduced $1.5 million, or 13.1%, as a result of the “First Federal Forward” efficiency review of staffing and processes.  Other operating costs, exclusive of costs of real estate and other personal property owned, charitable contributions and FHLB prepayment penalties, declined $703,000, from $9.5 million in fiscal 2010 to $8.8 million in fiscal 2011. These increases were offset by an increase in real estate and other personal property owned costs of $774,000.  Charitable contributions declined $735,000 between fiscal 2011 and 2010.  Finally, there was a $729,000 one-time prepayment penalty on FHLB advances incurred in fiscal 2010.   Our efficiency ratio was 76.7% for the year ended June 30, 2011, compared to 85.7% for the year ended June 30, 2010.
 
 
66
 
 
The following table provides a detailed analysis of the changes in the components of noninterest expense:
 
   
At or For the Year
Ended June 30
   
Increase
(Decrease)
 
   
2011
   
2010
   
Amount
   
Percent
 
   
(Dollars in thousands)
 
                                 
Compensation and benefits
  $
9,632
    $
11,089
    $
(1,457
)
   
(13.1
)%
Real estate owned and repossessed assets expenses, net
   
1,303
     
529
     
774
     
146.3
 
Data processing
   
1,503
     
1,479
     
24
     
1.6
 
Occupancy and equipment
   
2,699
     
2,715
     
(16
)
   
(0.6
)
Supplies, postage, and telephone
   
809
     
783
     
26
     
3.3
 
Regulatory assessments and state taxes
   
485
     
366
     
119
     
32.5
 
Advertising
   
370
     
514
     
(144
)
   
(28.0
)
Professional fees
   
1,046
     
1,401
     
(355
)
   
(25.3
)
FDIC insurance premium
   
844
     
915
     
(71
)
   
(7.8
)
FHLB prepayment penalty
   
--
     
729
     
(729
)
   
(100.0
)
Other
   
1,074
     
2,095
     
(1,021
)
   
48.7
 
   Total
  $
19,765
    $
22,615
    $
(2,850
)
   
(12.6
)%
 
During fiscal 2010, First Federal had $755,000 in charitable contributions expense related to the fulfillment of its $1.0 million commitment to fund community projects made in 2008 and 2009 as part of First Federal’s Community Dividend Program. The program was designed to make significant donations to non-profit organizations providing housing, economic development and other community development projects in the communities we serve. Our directors are actively involved in our local communities and some of the contributions go to non-profit organizations in which they are actively involved, such as the Olympic Medical Center Foundation and the Northwest Maritime Center.
 
Provision (Benefit) for Income Tax.   During the year ended June 30, 2011, we had an income tax expense of $1.2 million compared to income tax benefit of $602,000 for the year ended June 30, 2010. The increase in tax expense was due primarily to our increased net income.
 
 
67
 
 
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 is the weighted average yield on interest-earning assets, rates paid on interest-bearing liabilities and the resultant spread at September 30, 2012.  Income and all average balances are monthly average balances, which management deems to be representative of the operations of First Federal.  Nonaccruing loans have been included in the table as loans carrying a zero yield.
 
         
Three Months Ended
       
   
At
   
September 30 ,
   
Year Ended June 30,
 
   
September 30,
                               
   
2012
   
2012
   
2011
   
2012
   
2011
   
2010
 
                                                                                                 
         
Average
               
Average
               
Average
               
Average
               
Average
             
         
Balance
   
Interest
         
Balance
   
Interest
         
Balance
   
Interest
         
Balance
   
Interest
         
Balance
   
Interest
       
   
Yield/
   
Out-
   
Earned/
   
Yield/
   
Out-
   
Earned/
   
Yield/
   
Out-
   
Earned/
   
Yield/
   
Out-
   
Earned/
   
Yield/
   
Out-
   
Earned/
   
Yield/
 
   
Rate
   
standing
   
Paid
   
Rate
   
standing
   
Paid
   
Rate
   
standing
   
Paid
   
Rate
   
standing
   
Paid
   
Rate
   
standing
   
Paid
   
Rate
 
   
(Dollars in thousands)
 
Loans receivable, net (1)
    5.34 %   $ 408,126     $ 5,501       5.39 %   $ 419,053     $ 5,818       5.55 %   $ 412,262     $ 22,705       5.51 %   $ 447,677     $ 25,231       5.64 %   $ 513,152     $ 30,215       5.89 %
Investment securities
    1.65       61,268       231       1.51       50,549       169       1.34       52,929       682       1.29       70,434       943       1.34       63,634       1,137       1.79  
Mortgage-backed securities
    1.94       227,124       750       1.32       199,610       873       1.75       213,162       3,526       1.65       159,011       3,226       2.03       92,774       2,533       2.73  
FHLB stock
    --       10,787       --       --       10,819       --       --       10,819       --       --       10,819       --       --       10,819       --       --  
Cash and cash equivalents
    0.14       18,536       9       0.19       20,350       2       0.04       20,384       29       0.14       13,434       16       0.12       11,771       11       0.09  
Total interest-earning  assets (2)
    3.76       725,841       6,491       3.58       700,381       6,862       3.92       709,556       26,942       3.80       701,375       29,416       4.19       692,150       33,896       4.90  
                                                                                                                                 
Interest-bearing liabilities:
                                                                                                                               
                                                                                                                                 
Savings accounts
    0.10       78,964       21       0.11       75,664       42       0.22       76,530       118       0.15       75,171       202       0.27       87,394       1,101       1.26  
Transaction accounts
    0.01       97,584       2       0.01       89,312       14       0.06       92,663       33       0.04       86,110       75       0.09       74,879       167       0.22  
Money market accounts
    0.22       193,204       88       0.18       173,642       159       0.37       183,300       480       0.26       170,972       729       0.43       151,555       1,274       0.84  
Certificates of deposit
    1.02       166,903       440       1.05       185,755       648       1.40       179,665       2,226       1.24       196,802       2,978       1.51       207,062       4,384       2.12  
Total deposits
            536,655       551       0.41       524,373       863       0.66       532,158       2,857       0.54       529,055       3,984       0.75       520,890       6,926       1.33  
Borrowings
    4.22       100,533       1,080       4.30       100,033       1,077       4.31       100,033       4,283       4.28       99,996       4,274       4.27       103,623       4,755       4.59  
Total interest-bearing  liabilities
    1.01       637,188       1,631       1.02       624,406       1,940       1.24       632,191       7,140       1.13       629,051       8,258       1.31       624,513       11,681       1.87  
                                                                                                                                 
Net interest income
                    4,860                       4,922                       19,802                     $ 21,158                     $ 22,215          
Net interest rate spread
    2.75                       2.56                       2.68                       2.67                       2.88                       3.03  
Net earning assets
            88,653                     $ 75,975                     $ 77,365                     $ 72,324                     $ 67,637                  
Net interest margin (3)
                            2.68                       2.81                       2.79                       3.02                       3.21  
Average interest-earning  assets to average  interest-bearing liabilities
            113.91 %                     112.2 %                     112.2 %                     111.5 %                     110.8 %                
 
(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 .
 
 
68
 

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 due to the 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,
2012 vs. 2011
         
Year Ended
June 30,
2012 vs. 2011
         
Year Ended
June 30,
2011 vs. 2010
       
   
Increase
(Decrease)
Due to
   
Total
Increase
   
Increase
(Decrease)
Due to
   
Total
Increase
   
Increase
(Decrease)
Due to
   
Total
Increase
 
   
Volume
   
Rate
   
(Decrease)
   
Volume
   
Rate
   
(Decrease)
   
Volume
   
Rate
   
(Decrease)
 
   
(In thousands)
 
Interest earning assets:
                                                     
Loans receivable
  $ (152 )   $ (165 )   $ (317 )   $ (1,996 )   $ (530 )   $ (2,526 )   $ (3,855 )   $ (1,129 )   $ (4,984 )
Investment and mortgage-backed securities
    156       (217 )     (61 )     865       (826 )     39       1,930       (1,431 )     499  
FHLB stock
    --       --       --       --       --       --       --       --       --  
Other (1)
    --       7       7       8       5       13       2       3       5  
Total interest-earning assets
  $ 4     $ (375 )   $ (371 )   $ (1,123 )   $ (1,351 )   $ (2,474 )   $ (1,923 )   $ (2,557 )   $ (4,480 )
                                                                         
Interest-bearing liabilities:
                                                                       
Savings accounts
  $ 2     $ (23 )   $ (21 )   $ 4     $ (88 )   $ (84 )   $ (154 )   $ (745 )   $ (899 )
Interest-bearing transaction accounts
    1       (13 )     (12 )     6       (48 )     (42 )     25       (117 )     (92 )
Money market accounts
    18       (89 )     (71 )     53       (302 )     (249 )     163       (708 )     (545 )
Certificates of deposit
    (66 )     (142 )     (208 )     (259 )     (493 )     (752 )     (217 )     (1,189 )     (1,406 )
Borrowings
    5       (2 )     3       2       7       9       (166 )     (315 )     (481 )
Total interest-bearing liabilities
  $ (40 )   $ (269 )   $ (309 )   $ (194 )   $ (924 )   $ (1,118 )   $ (349 )   $ (3,074 )   $ (3,423 )
                                                                         
Net change in interest income
  $ 44     $ (106 )   $ (62 )   $ (929 )   $ (427 )   $ (1,356 )   $ (1,574 )   $ 517     $ (1,057 )
 
(1)      Includes interest-bearing deposits (cash) at other financial institutions.
 
 
69
 
 
Asset and Liability Management and Market Risk
 
Risk Management Overview.   Managing risk is an essential part of successfully managing a financial institution. Our Enterprise Risk Management (ERM) committee reports key risk indicators to the Board of Directors through the Audit Committee.  The most prominent risk exposures management monitors are: strategic, credit, interest rate, liquidity, operational, compliance, reputational and legal risk.  We utilize the services of outside firms to assist us in our asset and liability management and our analysis of market risk.
 
Interest Rate Risk Management.   We manage the interest rate sensitivity of interest-bearing liabilities and interest-earning assets in an effort to minimize the adverse effects of changes in the interest rate environment. Except for certain adjustable-rate home equity lines of credit and commercial real estate loans that are tied to the prime rate, the twelve month constant maturity treasury, or the London Interbank Offered Rate (“LIBOR”), deposit accounts typically reprice more quickly in response to changes in market interest rates than mortgage loans because of their shorter maturities. As a result, sharp increases in interest rates may adversely affect earnings. Typically, decreases in interest rates beneficially affect our earnings in the short term, but with the Federal Reserve maintaining the federal funds rate near zero for a prolonged period, decreases in interest rates adversely affect earnings due to prepayments and refinancing associated with loans and investment securities invested in lower yielding assets, reducing interest income. In contrast, First Federal has little or no long-term ability to reduce funding costs associated with deposits and borrowings. To increase earnings in the short-term, management has recently begun adding a limited amount of fixed-rate conforming residential mortgage loans to the loan portfolio.
 
We currently do not participate in hedging programs, interest rate swaps or other activities involving the use of derivative financial instruments to manage interest rate risk.
 
Interest Rate Sensitivity Analysis.   Management uses an interest rate sensitivity analysis to review our level of interest rate risk. This analysis measures interest rate risk by computing changes in the present value of our cash flows from assets, liabilities and off-balance sheet items in the event of a range of assumed changes in market interest rates. The present value of equity is equal to the market value of assets minus the market value of liabilities, with adjustments made for off-balance sheet items. This analysis assesses the risk of loss in market risk sensitive instruments in the event of a sudden and sustained 100 to 400 basis point increase or a 100 basis point decrease in market interest rates with no effect given to any future steps that management might take to counter the impact of that interest rate movement. The following table presents the change in the present value of First Federal’s equity at September 30, 2012, that would occur in the event of an immediate change in interest rates based on management’s assumptions.
 
September 30, 2012
   
Net Portfolio Value
       
Basis Point
Change in
Interest
Rates
 
$ Amount
   
$ Change
   
% Change
   
NPV
Ratio
%
 
   
(Dollars in thousands)
       
                         
400
  $ 71,504     $ (19,435 )     (21.4 )%     9.8 %
300
    80,127       (10,812 )     (11.9 )     10.7  
200
    87,086       (3,853 )     (4.2 )     11.3  
100
    91,088       149       (0.2 )     11.6  
0
    90,939       --       --       11.3  
(100)
    79,356       (11,583 )     (12.7 )     9.8  
 
 
70
 

Using the same assumptions as above, the sensitivity of our projected net interest income for the year ended September 30, 2012, is as follows:
 
September 30, 2012
   
Projected Net Interest Income
Basis Point
Change in
Interest
Rates
 
$ Amount
   
$ Change
   
% Change
                   
                   
400
  $ 17,457     $ (1,757 )     (9.1 )%
300
    18,419       (795 )     (4.1 )
200
    19,261       47       0.2  
100
    19,593       379       2.0  
0
    19,214       --       --  
(100)
    18.063       (1,151 )     (6.0 )
 
Assumptions made by management relate to interest rates, loan prepayment rates, deposit decay rates, and the market values of certain assets under differing interest rate scenarios, among others. As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets have features, such as rate caps or floors, which restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, expected rates of prepayments on loans and early withdrawals from certificates could deviate significantly from those assumed in calculating the table.
 
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 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.
 
Management regularly adjusts our investments in liquid assets based upon an assessment of the expected loan demand, expected deposit flows, the 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 and securities available for sale. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. At September 30, 2012, cash and cash equivalents totaled $36.5 million. Securities classified as available-for-sale, whose aggregate market value exceeds cost, provide additional sources of liquidity and had a market value of $219.2 million at September 30, 2012.  In addition, at September 30, 2012, we had excess FHLB stock of $6.8 million and have pledged collateral to support borrowings of $165.3 million.  We have also established a borrowing arrangement with the Federal Reserve Bank of San Francisco, however, no collateral has been pledged as of September 30, 2012.
 
At September 30, 2012, we had $13.7 million in loan commitments outstanding, and an additional $38.0 million in undisbursed loans and standby letters of credit.
 
Certificates of deposit due within one year of September 30, 2012 totaled $105.2 million, or 63.4% of certificates of deposit. The large percentage of certificates of deposit that mature within one year reflects customers’ hesitancy to invest their funds for long periods.  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
 
 
71
 
 
comprised of nine full-service retail banking offices located throughout our primary market area, and the general cash flows from our existing lending and investment activities, will afford us sufficient long-term liquidity.
 
Off-Balance Sheet Activities
 
In the normal course of operations, First Federal engages in a variety of financial transactions that are not recorded in our 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, 2012 and the year ended June 30, 2012, we engaged in no off-balance sheet transactions likely to have a material effect on our financial condition, results of operations or cash flows.
 
Contractual Obligations
 
At September 30, 2012, 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
  $ 105,197     $ 47,237     $ 13,354     $ 66     $ 165,854  
FHLB advances
    --       54,924       45,000       --       99,924  
Operating leases
    21       7       --       --       28  
Borrower tax and  insurance
    1,053       --       --       --       1,053  
     Total contractual obligations
  $ 106,271     $ 102,168     $ 58,354     $ 66     $ 266,859  
 
Commitments and Off-Balance Sheet Arrangements
 
The following table summarizes our commitments and contingent liabilities with off-balance sheet risks as of September 30, 2012:
 
   
Amount of Commitment
Expiration - Per Period
 
   
Total
Amounts
Committed
   
Due in
One
Year
 
   
(In thousands)
 
             
Commitments to originate loans:
           
Fixed-rate
  $ 2,857     $ 2,857  
Adjustable-rate
    10,831       10,831  
Undisbursed balance of loans closed
  $ 13,688     $ 13,688  
 
Capital Resources
 
First Federal is subject to minimum capital requirements imposed by the FDIC.  Based on its capital levels at September 30, 2012, First Federal exceeded these requirements as of that date and continues to exceed them as of the date of this prospectus.  Consistent with our goals to operate a sound and profitable organization, our policy is for First Federal to maintain a “well-capitalized” status under the capital categories of the FDIC.  Based on capital levels at September 30, 2012, First Federal was considered to be well-capitalized.  See “How We Are Regulated - Regulatory Capital Requirements” and “Risk Factors - The short-term and long-term impact of the changing regulatory capital requirements and anticipated new capital rules is uncertain.”
 
 
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The following table shows the capital ratios of First Federal at September 30, 2012.
 
   
Actual
   
Minimum Capital
Requirements
   
Minimum Required
to Be Well-Capitalized
Under Prompt
Corrective
Action Provisions
 
   
Amount
   
Ratio
   
Amount
   
Ratio
   
Amount
   
Ratio
 
             
(Dollars in thousands)
           
Tier 1 Capital to total adjusted assets (1)
  $ 75,280       9.7 %   $ 31,144       4.0 %   $ 38,930       5.0 %
Tier 1 Capital to risk-weighted assets (2)
    75,280       20.3       14,823       4.0       22,235       6.0  
Total Capital to risk-weighted assets (2)
    79,959       21.6       29,646       8.0       37,058       10.0  
 
 (1)
Based on total adjusted assets of $778.6 million.
 (2) 
Based on risk-weighted assets of $370.6 million.
 
The capital raised in this offering, with net proceeds estimated to be between $57.5 million and $78.3 million, will significantly increase our regulatory capital levels and ratios.  Based upon our existing capital, and the capital to be raised in this offering, we believe that we will have sufficient capital to carry out our proposed business plan for at least the next year and to meet any applicable regulatory capital requirements during that period.  See “Pro Forma Data.”

Recent Accounting Pronouncements
 
In April 2011, the FASB issued ASU No. 2011-03, Reconsideration of Effective Control for Repurchase Agreements . The Update amends existing guidance to remove from the assessment of effective control, the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee and, as well, the collateral maintenance implementation guidance related to that criterion. ASU No. 2011-03 is effective for reporting periods beginning on or after December 15, 2011. The guidance applies prospectively to transactions or modification of existing transactions that occur on or after the effective date and early adoption is not permitted. The adoption of this ASU did not have a material impact on the our consolidated financial statements. 
 
In April 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs . The Update amends existing guidance regarding the highest and best use and valuation premise by clarifying these concepts are only applicable to measuring the fair value of nonfinancial assets.  The Update also clarifies that the fair value measurement of financial assets and financial liabilities which have offsetting market risks or counterparty credit risks that are managed on a portfolio basis, when several criteria are met, can be measured at the net risk position. Additional disclosures about Level 3 fair value measurements are required include ing a quantitative disclosure of the unobservable inputs and assumptions used in the measurement, a description of the valuation process in place, and discussion of the sensitivity of fair value changes in unobservable inputs and interrelationships about those inputs as well disclosure of the level of the fair value of items that are not measured at fair value in the financial statements but disclosure of fair value is required. The provisions of ASU No. 2011-04 are effective for reporting periods beginning after December 15, 2011 and are applied prospectively. The adoption of this ASU did not have a material impact on our consolidated financial statements. 
 
In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income. The Update amends current guidance to allow a company the option of presenting the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The provisions do not change the items that must be reported in other comprehensive income or when an item of other comprehensive must to reclassified to net income. The amendments do not change the option for a company to present components of other comprehensive income either net of related tax effects or before related tax effects, with one amount shown for the aggregate income tax expense (benefit) related to the total of other comprehensive income items. The amendments do not affect how earnings per share is calculated or presented.  The provisions of ASU No. 2011-05 are effective for reporting periods beginning after December 15, 2011 and are applied retrospectively. Early adoption was permitted and there are no required transition disclosures.  
 
 
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In December 2011, the FASB issued ASU No. 2011-12,   Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 . The ASU defers indefinitely the requirement to present reclassification adjustments and the effect of those reclassification adjustments on the face of the financial statements where net income is presented, by component of net income, and on the face of the financial statements where other comprehensive income is presented, by component of other comprehensive income.   The adoption of the ASU did not have a material impact on our consolidated financial statements. 
 
In September 2011, the FASB issued ASU No. 2011-08, Testing Goodwill for Impairment. With the Update, a company testing goodwill for impairment now has the option of performing a qualitative assessment before calculating the fair value of the reporting unit (the first step of goodwill impairment test). If, on the basis of qualitative factors, the fair value of the reporting unit is more likely than not greater than the carrying amount, a quantitative calculation would not be needed.  Additionally, new examples of events and circumstances that an entity should consider in performing its qualitative assessment about whether to proceed to the first step of the goodwill impairment have been made to the guidance and replace the previous guidance for triggering events for interim impairment assessment. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011.  The adoption of this ASU did not have a material impact on our consolidated financial statements. 
 
In December 2011, the FASB issued ASU No. 2012-11, Disclosures about Offsetting Assets and Liabilities . The Update requires an entity to offset, and present as a single net amount, a recognized eligible asset and a recognized eligible liability when it has an unconditional and legally enforceable right of setoff and intends either to settle the asset and liability on a net basis or to realize the asset and settle the liability simultaneously. The ASU requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The amendments are effective for annual and interim reporting periods beginning on or after January 1, 2013. We are currently in the process of evaluating the ASU but do not expect it will have a material impact on our consolidated financial statements. 
 
In July 2012, the FASB issued ASU No. 2011-02, Testing Indefinite-Lived Intangible Assets for Impairment. With the Update, a company testing indefinite-lived intangibles for impairment now   has the option to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount in accordance with current guidance. An entity also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. An entity will be able to resume performing the qualitative assessment in any subsequent period.   The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after September 15, 2012.   The adoption of this ASU will not have a material impact on our consolidated financial statements. 
 
In October 2012, the FASB issued ASU. 2012-06, Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution .  The Update clarifies that when an entity recognizes an indemnification asset as a result of a government-assisted acquisition of a financial institution and subsequently, a change in the cash flows expected to be collected on the indemnification asset occurs, as a result of a change in cash flows expected to be collected on the assets subject to indemnification, the reporting entity should subsequently account for the change in the measurement of the indemnification asset on the same basis as the change in the assets subject to indemnification. Any amortization of changes in value should be limited to the contractual term of the indemnification agreement. The ASU is effective for annual and interim reporting periods beginning on or after December 15, 2012. The adoption of this ASU will not have a material impact on our consolidated financial statements.
 
Effect of Inflation and Changing Prices.   The consolidated financial statements and related financial data presented in this prospectus 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
 
 
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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.

 
First Northwest Bancorp was formed at the direction of First Federal in August 2012, for the purpose of owning all of the outstanding stock of First Federal to be issued in the conversion.  First Northwest Bancorp is incorporated under the laws of the State of Washington, and generally is authorized to engage in any activity that is permitted by the Washington Business Corporation Act and is permissible to a bank holding company pursuant to the Bank Holding Company Act and regulations of the Federal Reserve Board.  The business of First Northwest Bancorp initially will consist only of the business of First Federal.  The holding company structure will, however, provide First Northwest Bancorp with greater flexibility than First Federal has to diversify its business activities, through existing or newly formed subsidiaries, or through acquisitions or mergers of other financial institutions as well as other companies.  Although there are no current arrangements, understandings or agreements regarding any such activity or acquisition, First Northwest Bancorp will be in a position after the conversion, subject to regulatory restrictions, to take advantage of any favorable acquisition opportunities that may arise.
 
The assets of First Northwest Bancorp will consist initially of the stock of First Federal, the loan to the Employee Stock Ownership Plan (“ESOP”) and up to 50% of the net proceeds from the conversion and stock offering (less the amount loaned to the ESOP).  Initially, any activities of First Northwest Bancorp are anticipated to be funded by the retained proceeds and the income thereon and dividends from First Federal, if any.  See “Our Policy Regarding Dividends” and “How We Are Regulated – Limitations on Dividends and Stock Repurchases.”  Thereafter, activities of First Northwest Bancorp may also be funded through sales of additional securities, through borrowings and through income generated by other activities of First Northwest Bancorp.  We will utilize the support staff and offices of First Federal and pay First Federal for these services.  If we expand or change our business in the future, we may hire our own employees.  At this time, there are no plans regarding such other activities other than the intended loan to the ESOP to facilitate its purchase of common stock in the conversion.  See “Management – Benefit Plans – Employee Stock Ownership Plan.”
 
The executive offices of First Northwest Bancorp are located at 105 West 8th Street, Port Angeles, Washington  98362.  Its telephone number at that address is (360) 457-0461.
 
 
General
 
We are a well-established financial institution with an 89-year history of meeting the financial needs of our customers, who are primarily located in our local market.  First Federal was organized on March 23, 1923, as a Washington State chartered mutual savings and loan association known as Lincoln Savings and Loan Association.  On October 1, 1934, Lincoln Savings and Loan Association converted to a federal charter and became known as First Federal Savings and Loan Association of Port Angeles.   Effective November 30, 2011, First Federal completed its charter conversion from a federal mutual savings and loan association to a Washington State chartered mutual savings bank.  At September 30, 2012, we had total assets of $781.8 million, total deposits of $589.9 million and total equity of $78.5 million.
 
First Federal is a community-based savings bank primarily serving the North Olympic Peninsula region of Washington through our nine full-service banking offices.  Eight of our branches are located within Clallam and Jefferson counties, Washington, and in December 2011, we opened a new lending center in Kitsap County, which became a full-service branch in October 2012.  In addition, in July 2012, we opened a loan production office in Bellingham, Washington. We are contemplating near-term expansion into the contiguous counties of Whatcom, Skagit, Island, Snohomish and San Juan, Washington and may also consider acquisitions of other financial institutions in the Northwest.   Throughout most of our 89-year history, we have operated as a traditional savings and loan association, attracting deposits and investing those funds primarily in residential mortgage loans and investment securities.  During the past decade, recognizing our need to adapt to changing market conditions, we have strengthened our senior management team and revised our operating strategy to diversify our loan portfolio, expand our deposit product offerings and enhance our infrastructure.   We have gradually increased the origination of commercial real estate and multifamily real estate loans, and decreased reliance on originating and retaining longer-term, fixed-rate, owner occupied residential mortgage loans.  Since 2009, we have generally sold most newly originated and refinanced, conforming single-family owner-occupied mortgage loans into the secondary market,
 
 
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although in 2012, we began selectively adding 30-year fixed-rate mortgages to 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.  Over the past several years, we have added remote deposit capture, consumer and business on-line banking and consumer mobile banking capabilities.   At September 30, 2012, transaction and savings deposits comprised 71.9% of total deposits.

Market Area  

We conduct our operations out of our main administrative office and eight full-service branch offices in the North Olympia Peninsula region of Washington.  The administrative office is located in Port Angeles, in Clallam County, Washington, along with six of our branch offices.  One branch office is located in Jefferson County and one is located in Kitsap County.
 
Clallam County has a population of 71,404 according to the latest information available from the U.S. Census Bureau.  The estimated median family income is $58,100 for 2012 according to data provided by the FDIC, compared to $72,900 for the State of Washington.  The economic base in Clallam County has been historically dependent on the marine services, forest products, agriculture, technology, tourism and education industries.  The primary employers in Clallam County include the Olympic Medical Center, Peninsula College, the Port Angeles School District, Clallam County government, Seven Cedars (casino golf course and other retail businesses), Clallam Bay Corrections Center, Nippon Paper Group and the Westport Shipyard.  Based on information from the Washington Center for Real Estate Research, for the quarter ended March 31, 2012, the median home price in Clallam County was $169,300, a decrease of 4% from $176,400 for the same period in 2011.  The median home price for the year ended December 31, 2007, reflecting home prices prior to the recent recession, was $242,000. Existing home resales in Clallam County for the quarter ended March 31, 2012 remained unchanged from the prior year; however, the number of building permits declined by 27.8% to 13 for the quarter ended March 31, 2012 from 18 for the same period in the prior year.  Based on data from the FDIC, the unemployment rate in Clallam County decreased to 11.0% at March 31, 2012 from 11.8% at March 31, 2011, and compared to 9.0% for the State of Washington and 8.6% for the United States at March 31, 2012.

Jefferson County has a population of 29,872 according to the latest information available from the U.S. Census Bureau.  The estimated median family income is $63,300 for 2012 according to data provided by the FDIC, compared to $72,900 for the State of Washington.  The economic base in Jefferson County has been historically dependent on several industry segments, including arts and culture, maritime and boat building, small-scale manufacturing, and tourism.  Another industry that supports the economic base is agriculture, which has recently increased, with several successful local farmers, and a local food co-op with sales over $10.0 million.  The primary employers in Jefferson County include the Port Townsend Paper, Jefferson Healthcare, Port Townsend School District, the Port Authority of Port Townsend and related marine trade, and the Jefferson County government.  Based on information from the Washington Center for Real Estate Research, for the quarter ended March 31, 2012, the median home price in Jefferson County was $227,900, a decrease of 12.3% from $260,000 for the same period in 2011.  The median home price for the year ended December 31, 2007, reflecting home prices prior to the recent recession, was $329,000.  Existing home resales in Jefferson County for the quarter ended March 31, 2012 increased 25.6% from the prior year and the number of building permits increased by 50.0% to 15 for the quarter ended March 31, 2012 from 10 for the same period in the prior year.  Based on data from the FDIC, the unemployment rate in Jefferson County decreased to 10.5% at March 31, 2012 from 11.1% at March 31, 2011 and compared to 9.0% for the State of Washington and 8.6% for the United States at March 31, 2012.

Kitsap County has a population of 251,133 according to the latest information available from the U.S. Census Bureau.  The estimated median family income is $75,600 for 2012 according to data provided by the FDIC, compared to $72,900 for the State of Washington.   The economic base of Kitsap County is largely supported by the Kitsap Naval Base and other military related employment through the United States Navy. Other private industries that support the economic base are healthcare, retail and tourism.  The primary employers in Kitsap County include the Harrison Medical Center, Walmart, and Port Madison Enterprises, which owns and operates the Clearwater Casino and Resort, gas stations and other retail operations.  Based on information from the Washington Center for Real Estate Research, for the quarter ended March 31, 2012, the median home price in Kitsap County was $212,500, a decrease of 9.6% from $235,000 for the same period in 2011.  The median home price for the year ended December 31, 2007, reflecting home prices prior to the recent recession, was $290,000.  Existing home resales in Kitsap County for the quarter ended March 31, 2012 increased 2.7% from the prior year and the number of building permits increased by 20.6% to 76 for the quarter ended March 31, 2012 from 63 for the same period in the prior year.  Based on data from the FDIC, the unemployment rate in Kitsap County decreased to 8.0% at March 31, 2012 from 8.6% at March 31, 2011 and compared to 9.0% for the State of Washington and 8.6% for the United States at March 31, 2012.
 
 
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For a discussion regarding the competition in our primary market area, see “Business of First Federal - Competition.”    
 
Lending Activities
 
General.   First Federal’s principal lending activities are concentrated in 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.  A substantial portion of our loan portfolio is secured by real estate, either as primary or secondary collateral, located within our primary market area.
 
 
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Lending Activities
 
The following table represents information concerning the composition of our loan portfolio, including loans held for sale, by the type of loan at the dates indicated:
 
   
September 30,
   
June 30,
 
   
2012
   
2012
   
2011
   
2010
   
2009
   
2008
 
   
Amount
   
Percent
   
Amount
   
Percent
   
Amount
   
Percent
   
Amount
   
Percent
   
Amount
   
Percent
   
Amount
   
Percent
 
               
(Dollars in thousands)
 
                                                                         
Real estate:
                                                                       
   One- to four-family
  $ 224,978     53.2 %   $ 215,661     52.6 %   $ 239,318     55.5 %   $ 261,626     54.5 %   $ 322,282     60.6 %   $ 368,239     66.3 %
   Multi-family
    18,472     4.4       17,175     4.2       17,088     4.0       18,322     3.8       23,314     4.4       19,307     3.5  
   Commercial real estate
    91,589     21.7       79,965     19.5       74,810     17.4       71,898     15.0       58,584     11.0       45,215     8.1  
   Construction and land
    18,025     4.3       22,689     5.5       23,595     5.5       40,063     8.3       40,254     7.6       49,784     9.0  
     Total real estate loans
    353,064     83.6       335,490     81.8       354,811     82.4       391,909     81.6       444,434     83.6       482,545     86.9  
                                                                                     
Consumer:
                                                                                   
   Home equity
    48,633     11.5       51,155     12.5       54,960     12.8       61,965     12.9       56,423     10.6       45,807     8.2  
   Other consumer
    11,198     2.7       11,083     2.7       13,092     3.0       16,807     3.5       19,768     3.7       18,994     3.4  
      Total consumer loans
    59,831     14.2       62,238     15.2       68,052     15.8       78,772     16.4       76,191     14.3       64,801     11.6  
                                                                                     
Commercial business loans
    9,170     2.2       12,259     3.0       7,946     1.8       9,596     2.0       11,305     2.1       8,080     1.5  
                                                                                     
     Total loans
    422,065     100.0 %     409,987     100.0 %     430,809     100.0 %     480,277     100.0 %     531,930     100.0 %     555,426     100.0 %
                                                                                     
Less:
                                                                                   
   Deferred fees and discounts
    545             563             597             610             1,175             1,431        
    Premium on purchased loans, net
    943             957             1,022             1,069             57             92        
   Loans held for sale
    1,240             418             275             947             1,305             6,085        
   Allowance for loan losses
    8,224             7,390             4,728             6,420             3,068             1,611        
       Total loans, net
    411,113           $ 400,659           $ 424,187           $ 471,231           $ 526,325           $ 546,207        
 
 
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Fixed-Rate and Adjustable-Rate Loans

The following table shows the composition of our loan portfolio in dollar amounts and in percentages by fixed rates and adjustable rates at the dates indicated.

   
September 30,
   
June 30,
 
   
2012
   
2012
   
2011
   
2010
   
2009
   
2008
 
   
Amount
   
Percent
   
Amount
   
Percent
   
Amount
   
Percent
   
Amount
   
Percent
   
Amount
   
Percent
   
Amount
   
Percent
 
               
(Dollars in thousands)
 
Fixed-rate loans:
                                                                       
Real estate:
                                                                       
   One- to four-family
  $ 173,245       41.0 %   $ 160,985       39.3 %   $ 178,692       41.5 %   $ 192,256       40.0 %   $ 252,931       47.5 %   $ 285,033       51.3 %
   Multi-family
    3,469       0.8       3,630       0.9       7,448       1.7       8,051       1.7       6,245       1.2       3,930       0.7  
   Commercial real estate
    48,668       11.5       46,823       11.4       49,726       11.5       70,616       14.7       45,536       8.6       24,119       4.3  
   Construction and land
    16,544       3.9       17,444       4.3       19,780       4.6       32,119       6.7       38,633       7.3       47,360       8.6  
     Total real estate loans
    241,926       57.2       228,882       55.9       255,646       59.3       303,042       63.1       343,345       64.6       360,442       64.9  
Consumer:
                                                                                               
   Home equity
    11,846       2.8       12,412       3.0       12,322       2.9       15,826       3.3       18,832       3.5       22,219       4.0  
   Other consumer
    9,369       2.2       9,198       2.2       11,129       2.6       14,537       3.0       17,414       3.3       16,927       3.0  
      Total consumer loans
    21,215       5.0       21,610       5.2       23,451       5.5       30,363       6.3       36,246       6.8       39,146       7.0  
Commercial business loans
    5,565       1.3       5,873       1.4       3,130       0.7       5,118       1.1       5,372       1.0       3,204       0.6  
      Total fixed-rate loans
    268,706       63.5       256,365       62.5       282,227       65.5       338,523       70.5       384,963       72.4       402,792       72.5  
                                                                                                 
Adjustable-rate loans:
                                                                                               
Real estate:
                                                                                               
   One- to four-family
    51,733       12.3       54,676       13.3       60,626       14.1       69,370       14.4       69,351       13.0       83,206       15.0  
   Multi-family
    15,003       3.6       13,545       3.3       9,640       2.2       10,271       2.1       17,069       3.2       15,377       2.8  
   Commercial real estate
    42,921       10.2       33,142       8.1       25,084       5.8       1,282       0.3       13,049       2.5       21,096       3.8  
   Construction and land
    1,481       0.4       5,245       1.3       3,815       0.9       7,944       1.7       1,620       0.3       2,424       0.4  
     Total real estate loans
    111,138       26.5       106,608       26.0       99,165       23.0       88,867       18.5       101,089       19.0       122,103       22.0  
                                                                                                 
Consumer:
                                                                                               
   Home equity
    36,787       8.7       38,743       9.4       42,638       9.9       46,139       9.6       37,591       7.1       23,588       4.2  
   Other consumer
    1,829       0.4       1,885       0.5       1,963       0.5       2,270       0.5       2,354       0.4       2,067       0.4  
      Total consumer loans
    38,616       9.1       40,628       9.9       44,601       10.4       48,409       10.1       39,945       7.5       25,655       4.6  
Commercial business loans
    3,605       0.9       6,386       1.6       4,816       1.1       4,478       0.9       5,933       1.1       4,876       0.9  
     Total adjustable-rate loans
    153,359       36.5       153,622       37.5       148,582       34.5       141,754       29.5       146,967       27.6       152,634       27.5  
                                                                                                 
Total loans
    422,065       100.0 %     409,987       100.0 %     430,809       100.0 %     480,277       100.0 %     531,930       100.0 %     555,426       100.0 %
Less:
                                                                                               
   Deferred fees and discounts
    545               563               597               610               1,175               1,431          
   Premium on purchased loans, net
    943               957               1,022               1,069               57               92          
   Loans held for sale
    1,240               418               275               947               1,305               6,085          
   Allowance for loan losses
    8,224               7,390               4,728               6,420               3,068               1,611          
      Total loans, net
  $ 411,113             $ 400,659             $ 424,187             $ 471,231             $ 526,325             $ 546,207          
 
 
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Loan Maturity
 
The following table illustrates the contractual maturity of our loan portfolio at June 30, 2012.  Mortgages that have adjustable or renegotiable interest rates are shown as maturing in the period during which the contract is due.  The total amount of loans due after June 30, 2013 that have fixed interest rates is $246.7 million, while the total amount of loans due after such date that have adjustable interest rates is $142.9 million.  The table does not reflect the effects of unpredictable principal prepayments.
 
    Real Estate                                            
   
One- to Four-
               
Commercial Real
   
Construction
                           
Commercial
             
   
Family
   
Multi-family
   
Estate
   
and Land
   
Home Equity
   
Other Consumer
   
Business
   
Total (1)
 
         
Weighted
         
Weighted
         
Weighted
         
Weightedd
         
Weighted
         
Weighted
         
Weighted
         
Weighted
 
         
Average
         
Average
         
Average
         
Average
         
Average
         
Average
         
Average
         
Average
 
   
Amount
   
Rate
   
Amount
   
Rate
   
Amount
   
Rate
   
Amount
   
Rate
   
Amount
   
Rate
   
Amount
   
Rate
   
Amount
   
Rate
   
Amount
   
Rate
 
                                                                                                 
   
(Dollars in thousands)
 
2013 (2)  
  $ 77     5.81 %   $ 1,207     5.89 %   $ 11,365       5.55 %   $ 439       5.96 %   $ 9       5.63 %   $ 2,046       9.67 %   $ 5,170       7.02 %   $ 20,313       6.37 %
2014
    27     5.98       3,727     6.26       5,451       5.61       231       7.42       32       6.42       867       7.14       1,709       3.66       12,044       5.68  
2015
    67     6.07       70     4.51       16,747       5.94       37       7.08       163       5.57       989       6.70       405       7.75       18,478       6.01  
2016
    282     5.56       4     7.06       16,186       6.50       30       7.50       673       6.10       878       5.92       1,628       5.86       19,681       6.39  
2017 to 2019
    2,814     5.33       2,323     3.20       6,787       6.13       425       5.75       3,148       5.88       2,809       6.28       1,102       5.55       19,408       5.60  
2020 to 2023
    8,041     5.52       6,647     4.70       14,858       5.25       4,086       6.59       18,357       5.19       1,499       7.41       2,156       4.36       55,644       5.33  
2024 to 2027
    25,365     4.25       570     6.79       1,495       4.84       8,781       6.80       3,235       6.62       669       7.87       89       9.00       40,204       5.13  
2028 and beyond
    178,988     5.16       2,627     6.07       7,076       6.47       8,660       6.21       25,538       4.52       1,326       5.76       --       --       224,215       5.20  
Total
  $ 215,661     5.07 %   $ 17,175     5.20 %   $ 79,965       5.89 %   $ 22,689       6.51 %   $ 51,155       5.00 %   $ 11,083       7.17 %   $ 12,259       5.84 %   $ 409,987       5.40 %

 (1)   Excludes deferred fees and discounts of $1.5 million.
 (2)   Includes demand loans, loans having no stated maturity, overdraft loans and loans held for sale.
 
 
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One- to Four-Family Real Estate Lending.   At September 30, 2012, one- to four-family residential mortgage loans totaled $225.0 million, or 53.2%, of our gross loan portfolio.  We originate both fixed and adjustable-rate loans which can be sold in the secondary market or retained in our residential portfolio based on our asset objectives.  Residential loans are underwritten to secondary market standards or to other acceptable underwriting standards, which may not meet all of Freddie Mac and Fannie Mae eligibility requirements.
 
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 amortizations 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 for one to five 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.  Another factor that influences our origination of adjustable-rate loan products is whether the loan contains a discounted initial rate, which is a rate that is lower than rates offered for comparable fixed-rate loans.

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.  At September 30, 2012, the average interest rate on our adjustable rate mortgage loans was approximately 64% over the fully indexed rate.  As of September 30, 2012, we had $153.4 million, or 36.5%, of adjustable-rate mortgage loans in our portfolio.

All of our residential loans are evaluated at the time they are originated using underwriting criteria that meet the Freddie Mac Loan Prospector guidelines.  This underwriting considers a variety of factors including, but not limited to, credit history, debt to income ratios, property type, loan to value ratio and occupancy.  For loans with over 80% loan-to-value ratios, we typically require private mortgage insurance, which reduces our loan to value risk exposure in the event of a default on the loan and liquidation of the collateral for repayment. Other tools we use to reduce credit risk include, but are not limited to, title insurance, hazard insurance and, if necessary, flood insurance as required under current regulations.  All residential mortgage loans which require appraisals are appraised by independent fee appraisers approved by First Federal.  Fee appraisers submit documentation to First Federal to complete a formal review in conjunction with loan approval.
 
First Federal does not actively engage in subprime lending, either through advertising, marketing, underwriting and/or risk selection, and has no established program to originate or purchase subprime loans to be held in its portfolio.
 
Construction and Land Lending.   At September 30, 2012, our construction and land loans were $18.0 million, or 4.3% of the total loan portfolio.  Prior to 2010, First Federal offered an “all-in-one” residential fixed-rate custom construction loan product, which enabled the borrower to lock in the interest rate for the construction phase as well as for the permanent financing.  This product has been replaced with an adjustable-rate custom construction loan which, at the completion of construction, is placed in our portfolio as an adjustable rate mortgage loan.
 
We also originate construction loans for acceptable commercial real estate projects.  These projects include, but are not limited to, multi-family, retail, office/warehouse and office buildings.  Underwriting criteria on these loans include, but are not limited to, minimum debt service coverage requirements of 1.20x or better, loan-to-value
 
 
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limitations, pre-leasing requirements, construction cost over-run contingency reserves, interest and absorption period reserves, occupancy, capitalization rates and interest rate stress testing, as well as other underwriting criteria.
 
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 insure 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.
 
Land acquisition, development and construction loans are available to local contractors and developers for the purpose of holding and/or developing residential building sites and homes when market conditions warrant such activity.  Land acquisition, development and construction loans, however, have been restricted since the economic downturn began in 2008. Land acquisition loans are secured by a first lien on the property, and are generally limited to 65% of the acquisition price or the appraised value, whichever is less. Development land loans are generally limited to 75% of the discounted appraised value based on the projected lot sale absorption rate and associated carry and liquidation costs of the developed lots and homes.  Underwriting criteria for acquisition and development loans include, but are not limited to, evidence of preliminary plat approval, compliance with state and Federal environmental protection and disclosure laws, engineering plans, detailed costs breakdowns and marketing plans.  These loans have been limited to projects within our primary market area.  Other risk management tools include, but are not limited to, title insurance, feasibility and market absorption reports, environmental questionnaires, and other supplementary information as may be required to determine if the project and proposed lots represent acceptable collateral for timely repayment of the loan.  The success of land acquisition, development and construction lending is largely dependent upon future sales for repayment of the loan. Economic and market conditions can be unpredictable and can have a significant adverse impact on the value and marketability of the collateral for land acquisition, development and construction loans.

We also originate individual lot loans, which are secured by a first lien on the property, for borrowers who are planning to build on the lot within the next five years, or who are holding the lot for investment purposes.  Generally, these loans have a maximum loan-to-value ratio of 75% for improved lands (legal access, water and power) and 65% for unimproved land.   The interest rate on these loans is fixed with a 20-year amortization and a five-year term.
 
At the dates indicated, the composition of our construction and land portfolio was as follows:

   
September 30,
   
June 30,
 
   
2012
   
2012
   
2011
   
2010
 
         
(In thousands)
 
                         
One- to four-family residential
  $ 1,626     $ 2,457     $ 974     $ 6,398  
  Multi-family residential
    --       --       951       --  
  Commercial real estate
    --       3,300       1,635       8,377  
  Land
    16,399       16,932       20,035       25,288  
Total construction
  $ 18,025     $ 22,689     $ 23,595     $ 40,063  

Substantially all of our construction and land loans are secured by properties located on the Olympic Peninsula.

Construction lending for custom construction as well as speculative construction requires additional underwriting measures to effectively manage the construction process and future collateral value. Valuations on construction loans are based on the assumption that the finished improvements will be built in strict accordance with plans and specifications submitted to us at the time of the loan application. The appraiser must take into consideration the proposed design and market appeal of the improvements, based on current market conditions and
 
 
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demand for homes, although the improvements may not be completed for six to 12 months or longer, depending on the complexity of the plans and specifications and market conditions.

Numerous variables can adversely affect the value and marketability of the collateral, as well as the borrower’s ability to complete the project and repay the debt.  For example, unknown site issues can be discovered at the time of excavation, design problems, voluntary and involuntary cost over-runs, economic and market conditions, contractor expertise, professional capacity, unexpected injuries, lawsuits and other unpredictable health and financial changes can occur, which could compromise timely completion of the project and repayment of the debt.

Under certain circumstances we may have to declare a default, foreclose and sell the project “as is” to another party, typically at a discount, for assuming the responsibility and unknown risk of taking on a failed project or we may choose to complete the project and assume the market risk of selling the project at a future market price, which may or may not enable us to fully recover unpaid loan funds and associated construction and liquidation costs.

Commercial and Multi-Family Real Estate Lending.   At September 30, 2012, $91.6 million, or 21.7%, and $18.5 million, or 4.4%, of our total loan portfolio was secured by commercial and multi-family real estate property, respectively.  Our commercial real estate loans include, but are not limited to, loans secured by hotels and motels, office/warehouse, retail strip centers, self-storage facilities, medical and professional office buildings, combination gas stations and convenience stores, and assisted living facilities located within our market areas.  Our multi-family loans are primarily secured by apartment complexes located in Western Washington.  We offer both fixed-and adjustable-rate loans on commercial and multi-family real estate loans. These loans generally have maturity dates between three and 10 years with monthly payment amortization terms up to 25 years.  As of September 30, 2012, we had $15.0 million in adjustable rate multi-family loans and $42.9 million in adjustable rate commercial real estate loans.
 
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 are 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. 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 includes underwriting of their personal financial statements, tax returns and individual credit reports, which provides us with additional support and a secondary source for repayment of the debt.
 
Commercial and multi-family real estate loans with adjustable rates generally adjust after an initial period of three to five years.  Adjustable-rate multi-family residential and commercial real estate loans are generally priced to market indices with appropriate margins, which may include the U.S. Constant Maturity Treasury Rate, LIBOR, or other acceptable index.  Beginning in 2011, we began including pre-payment penalties on loans originated within our market.  The maximum loan-to-value ratio for commercial and multi-family real estate loans is typically limited to 80% of the appraiser opinion of market value or determined by an income to debt service ratio of 1.20x.  We require independent appraisals or evaluations on all loans secured by commercial real estate from an approved appraisers list.   We require most of our commercial and multi-family real estate loan borrowers to submit annual financial statements and/or rent rolls on the subject property.  These properties may also be subject to annual inspections with pictures to support that appropriate maintenance is being performed by the owner/borrower.
 
 
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The following table provides information on multi-family and commercial real estate loans by type at the dates indicated:
 
   
September 30,
   
June 30,
 
   
2012
   
2012
   
2011
 
   
Amount
   
Percent
   
Amount
   
Percent
   
Amount
   
Percent
 
   
(Dollars in thousands)
Multi-family
  $ 18,472       16.8 %   $ 17,175       17.7 %   $ 17,088       18.6 %
Real estate retail
    30,538       27.8       24,338       25.1       19,544       21.3  
Real estate health care
    15,555       14.1       17,253       17.8       17,970       19.6  
Other non-owner occupied commercial real estate
    14,321       13.0       11,527       11.9       9,238       10.1  
Other owner-occupied commercial real estate
    31,175       28.3       26,847       27.5       28,058       30.4  
    Total
  $ 110,061       100.0 %   $ 97,140       100.0 %   $ 91,898       100.0 %

If we foreclose on a multi-family or commercial real estate loan, the marketing and liquidation period to convert the real estate asset to cash can be a lengthy process with substantial holding costs. In addition, vacancies, deferred maintenance, repairs and market stigma can result in prospective buyers expecting sale price concessions to offset their real or perceived economic losses for the time it takes them to return the property to profitability.  Depending on the individual circumstances, initial charge-offs and subsequent losses on commercial real estate loans can be unpredictable and substantial.

Our largest single commercial and multi-family borrowing relationship at September 30, 2012, totaled $8.2 million, and is collateralized by commercial real estate and consists of four loans.  At September 30, 2012, these loans were all performing in accordance with their repayment terms. As of September 30, 2012, eight commercial real estate loans were delinquent in excess of 90 days or were in nonaccrual status.  At September 30, 2012 and June 30, 2012, total delinquent commercial real estate loans were $4.3 million and $2.4 million, respectively, including loans that are delinquent more than 90 days and in nonaccrual status. Of these commercial real estate loans, four and one were troubled debt restructurings, with balances of $3.3 million and $1.3 million at September 30, 2012 and June 30, 2012, respectively. During the three months ended September 30, 2012, no commercial real estate loans were charged-off while three commercial real estate loans were charged off in the amount of $577,000 during the year ended June 30, 2012.

Consumer Lending.   We offer a variety of consumer loans, including home equity loans and lines of credit, new and used automobile loans, loans on other miscellaneous vehicles including recreational vehicles, travel trailers and motorcycles, and personal lines of credit.  At September 30, 2012, home equity loans and lines of credit totaled $59.8 million, or 14.2% of the loan portfolio.  Our interest rates on home equity loans are risk priced adjusted based on credit score, loan to value and overall credit quality of the applicant.  Home equity loans are made for, among other purposes, the improvement of residential properties, weatherization, and other consumer needs.  Some of these loans are secured by first liens; however, the majority of these loans are secured by a second deed of trust on the residential property.  Fixed-rate terms are available up to a maximum loan amount of $250,000 with a seven year repayment term.   Home equity lines of credit are prime rate, interest only loans with a maximum loan amount up to $50,000 and a term of 15 years.  A balloon payment for the balance is due at the end of the term.  The maximum combined loan to value (first and second liens) for this product is limited to 70% of the appraised value at origination.  Home equity lines of credit have greater risk than one- to four-family residential mortgage loans because they are secured by mortgages subordinated to the existing first mortgage on the property, which we may or may not hold, and do not have private mortgage insurance coverage.
 
We also offer a weatherization loan program guaranteed by either the City of Port Angeles or the Clallam County Public Utility District.  The purpose of these loans is to promote energy conservation by weatherizing homes and providing a low interest rate program for consumers to achieve lower energy costs and tax rebates.  These are one-year adjustable-rate loans indexed to LIBOR.
 
We offer several options for vehicle purchase or refinance with a maximum term of up to 84 months depending on the age and condition of the vehicle.  Loan rates for auto lending, as well as all other consumer loans,
 
 
84
 
 
are priced based on the specific loan type and the risk involved.  Direct and indirect lending sources are used to originate auto loans, which includes online as well as in person applications at our branch locations.
 
We also make indirect auto loans through an auto dealer loan program with two local franchised car dealerships.  We have provided our underwriting criteria and pricing to the dealers but require further underwriting review and final approval prior to funding.  In an attempt to increase our volume of auto loans, we have also engaged a third-party vendor with a well-known, web-based program that allows consumers living in Washington, Idaho and Oregon to apply online for auto refinances.  The vendor facilitates the approval process (based on our underwriting criteria and pricing) and submits the loan to us for our approval.  Our consumer underwriting department re-underwrites the loan, and either approves or denies the loan request. If approved, the vendor provides the documentation to the borrower and, after the loan is funded, the borrower remits monthly payments directly to us.  If denied, the vendor handles all the adverse action and notification requirements.
 
Consumer loans represent additional and unique underwriting risks, because of the mobility and rapidly depreciating nature of consumer assets such as automobiles, RVs, boats and trailers in contrast to real estate based collateral.  If a borrower defaults, repossession and liquidation of the collateral may not provide sufficient sale proceeds to satisfy the outstanding loan balance.  Many factors account for potential loan losses on consumer loans, a number of which are largely outside the control of the lenders and include deferred maintenance, damages, depreciation and borrowers who relocate to other states.  While subsequent legal actions and judgments against defaulted borrowers may be appropriate, such collection efforts and costs may not always be warranted, and are evaluated after determining the cost of such collection efforts and the probability of any future loan recovery. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and are more likely to be adversely affected by job loss, illness or personal bankruptcy.  Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on these loans.
 
As of September 30, 2012, 33 consumer loans totaling $920,000 were delinquent in excess of 90 days or on nonaccrual status.  Net consumer loan charge offs were $80,000 and $1.8 million during the three months ended September 30, 2012 and the year ended June 30, 2012, respectively.
 
Commercial Business Lending.   As of September 30, 2012, commercial business loans totaled $9.2 million, or 2.2% of our loan portfolio.  These loans are primarily originated as loans to business borrowers, which include lines of credit, term loans and letters of credit.  These loans are typically secured by business assets and are used for general business purposes, including seasonal and permanent working capital, equipment financing, capital, and general investments.  Loan terms vary from one to seven years.  The interest rates on such loans are generally floating rates indexed to LIBOR or other acceptable indices depending on prevailing economic and market conditions.  A typical requirement for us to extend business credit is for the borrower to have a business deposit relationship with us which, in most cases, includes multiple accounts and related services from which we realize low cost deposits plus service and ancillary fee income.
 
Commercial business loans typically have shorter maturity terms and higher interest spreads than real estate loans, but generally involve more credit risk because of the type and nature of the collateral.  We are focusing our efforts on small-to-medium sized, privately-held companies with local or regional businesses that operate in our market area.  Our commercial business lending policy includes credit file documentation and analysis of the borrower’s background, capacity to repay the loans, the adequacy of the borrower’s capital, as well as an evaluation of other conditions affecting the borrower.  Analysis of the borrower’s past, present and future cash flows, as well as the collateral pledged as security is also an important aspect of our credit analysis.  We generally obtain personal guarantees on our commercial business loans.
 
Primary repayment of our commercial loans is often dependent on cash flows of the borrower, which may be unpredictable due to normal business cycles, industry changes, and economic and political conditions. Furthermore, collateral securing these loans may fluctuate in value based on market conditions or other factors.  Our commercial business loans are originated primarily based on the identified cash flow of the borrowing entity and secondarily on the underlying collateral and revenue provided by the borrower and guarantors.  Most often, this collateral consists of real estate, accounts receivable, inventory or equipment.  Secondary sources of repayment and/or recovery for most of these loans are based on the liquidation of the pledged collateral, and may include
 
 
85
 
 
enforcement of personal guaranties.  Secondary underwriting and collection efforts may include accounts receivable, or other third party payments, whereby availability of funds for repayment of these loans may be substantially dependent on the ability of the borrower or a third party to collect amounts due from its customers.  In addition, collateral secured by business assets may become functionally or economically obsolete, which can become problematic from a valuation, collection and liquidation perspective.
 
There were no commercial business loans charged-off during the three months ended September 30, 2012, compared to $364,000 charged-off during the year ended June 30, 2012, and $115,000 charged-off during the year ended June 30, 2011.
 
Loan Solicitation and Processing.   Our loan originations are obtained from a variety of sources, including existing or walk-in customers, business development by our relationship managers (“RMs”), and referrals from business owners, investors, entrepreneurs, builders, realtors, existing customers and other professional third parties.  Loan originations are further supported by lending services offered through our internet website, direct mail, advertising, cross-selling, employees’ community service and in the case of auto loans, through dealers or web-based established third-party internet solicitors. All of our consumer loan products, including residential mortgage loans, secured and unsecured consumer loans are processed through our centralized processing and underwriting center.  Commercial business loans, including commercial and multi-family real estate loans, are processed by the RMs, assistants and credit analysts with formalized credit presentations submitted to our Senior Loan Committee for approval.  Any exception to loan policy must be approved by the Senior Loan Committee.
 
Lending Authority.   Our employees do not have individual signing authority to approve loans.  Consumer and mortgage loans less than $50,000 require the signature of the loan underwriter as well as the department manager/supervisor.  All loans of $50,000 to $500,000 require two signatures of members of the Senior Loan Committee; all loans above $500,000 require approval by a majority of the Senior Loan Committee.  All commercial loans require signature by the Senior Loan Committee.  Commercial loans up to $500,000 require two signatures, and a majority of the Senior Loan Committee is required for loans over $500,000.  All Regulation O loans to insiders, regardless of the amount, require review and approval by our board of directors.

The Senior Loan Committee consists of the President/Chief Executive Officer, Chief Financial Officer, Chief Credit Officer, and Chief Banking Officer.  In November 2011, the board of directors eliminated the requirement for approval of loans by the board of directors (with the exception of Regulation O loans).  The board loan/asset quality committee and full board continue to provide direction through policy approval and oversight for key credit risk management, such as lending to percentage of capital, loans to one borrower limits, and underwriting criteria. The board loan/asset quality committee and board of directors review approved loans and loans that were not approved on a quarterly basis.  The board loan/asset quality committee meets at least quarterly to discuss asset quality, loan production, and policy compliance, as well as to review industry trends.

As a savings bank chartered under Washington law, we are not subject to any statutory lending limits.  At September 30, 2012, however, our internal policy limits loans to one borrower and the borrower’s related entities to 15% of our unimpaired capital and surplus, or approximately $11.8 million at September 30, 2012, without the express prior consent of our board of directors.   At September 30, 2012 there were 114 loans, or $94.7 million, with relationships over $1.0 million.  This amount included two past due loans totaling $3.1 million, one of which was a troubled debt restructure for $1.6 million that was also on non-accrual. This amount also included a troubled debt restructured loan in the amount of $1.3 million which was on non-accrual but not past due.  The remaining 111 loans, or $90.3 million, were current and performing as of September 30, 2012. The following is a summary of the five largest relationships at September 30, 2012.
 
 
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Total Commitment
   
Number of Loans in
Relationship
 
Primary Collateral Type
 
(In thousands)
         
$
 8,239
   
4
 
Commercial Real Estate
 
 8,220
   
3
 
Multi-family Real Estate
 
 6,125
   
6
 
Commercial Real Estate
 
 5,398
   
2
 
Commercial Real Estate
 
 5,000
   
3
 
Commercial Real Estate

Loan Originations, Servicing, Purchases and Sales.   We originate mortgage, consumer, commercial real estate, and commercial business loans for our portfolio utilizing fixed- and adjustable-rate loan products.  Residential mortgage loans on one- to four-family properties are sometimes sold in the secondary market, and we make a decision, at the time of sale, whether to also sell the servicing.  Occasionally we will purchase whole and participation loans on a servicing retained or released basis, including loans that may be located outside our primary market areas.  Our ability to originate sufficient loan volume to meet our asset and liability management objectives is limited within our historical market as a result of consumer demand, population demographics and economic conditions.  During the past few years, we, like many other financial institutions, have experienced significant prepayments on loans due to prevailing economic conditions, and low interest rates.  In periods of economic uncertainty, like we are currently experiencing, the ability of financial institutions, including us, to originate real estate loans is substantially reduced, which results in a decrease in interest income. During the three months ended September 30, 2012 and 2011, and the years ended June 30, 2012 and 2011, our total originations were $45.1 million, $23.4 million, $115.6 million and $92.6 million, respectively. We underwrite loan purchases and participations to the same standards as the loans we originate.
 
We actively sell residential first mortgage loans in the secondary market.  The majority of all residential mortgages we originate are fixed-rate mortgages, which primarily are sold to the secondary market at the time of origination to improve our interest rate risk.  In 2012, we began selectively adding 30 year fixed-rate mortgages to our loan portfolio in an effort to enhance our net interest income.  During the three months ended September 30, 2012 and 2011 and the years ended June 30, 2012 and 2011, we sold $3.9 million, $9.8 million, $63.8 million and $53.9 million of residential mortgage loans, respectively.  Our secondary market relationship is primarily with Freddie Mac.  These sales allow for a servicing fee on loans when the servicing is retained by us.  Most one- to four-family loans sold by us are sold with servicing retained. Loans in general are sold on a non-recourse basis, whenever possible,   subject to a provision for repurchase upon breach of representation, warranty or covenant.  Sales of real estate loans through secondary market conduits can be beneficial to us since these sales generate income at the time of sale, produce future servicing income, provide funds for additional lending, and assist us in managing our interest rate risk.
 
During fiscal 2008, we sold loans with “life of the loan” recourse provisions to Freddie Mac, requiring us to repurchase the loan if it defaults.  There has been one loan repurchased since 2008 that had a life of the loan recourse provision. The remaining balance of loans serviced for others with life of the loan recourse provisions was $6.9 million at September 30, 2012. We did not repurchase any loans during the three months ended September 30, 2012 and 2011, however, we repurchased seven loans during the year ended June 30, 2012, and five loans during the year ended June 30, 2011. We earned mortgage servicing income of $180,000, $221,000, $826,000, and $920,000 for the three months ended September 30, 2012 and 2011 and the years ended June 30, 2012 and 2011, respectively. At September 30, 2012, we were servicing $277.8 million of residential mortgage loans for Freddie Mac and other secondary market purchasers. These mortgage servicing rights had a fair value at September 30, 2012, of $1.7 million. See Note 6 of the Notes to Consolidated Financial Statements included in this prospectus.
 
Gains, losses and transfer fees on sales of one- to four-family loans and participations are recognized at the time of the sale.  Our net gain on sales of residential loans for the three months ended September 30, 2012 and 2011 was $110,000 and $179,000, respectively, and was $1.5 million for each of the years ended June 30, 2012 and 2011.
 
 
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The following table shows our loan origination, sale and repayment activities for the periods indicated (includes loans held for sale):
 
   
Three Months Ended
September 30,
   
Year Ended June 30,
 
   
2012
   
2011
   
2012
   
2011
   
2010
 
   
(In thousands)
 
Originations by type :
                             
                               
Fixed-rate:
                             
One- to four-family
  $ 25,982     $ 14,959     $ 76,163     $ 66,992     $ 70,690  
Multi-family
    20       20       102       29       101  
Commercial real estate
    2,895       140       7,798       1,235       2,123  
Construction and land
    79       60       207       1,048       5,940  
Home equity
    37       59       364       10       853  
Other consumer
    947       644       2,520       1,742       3,627  
Commercial business
    175       4,206       4,669       1,021       1,626  
Total fixed-rate
    30,135       20,088       91,823       72,077       84,960  
Adjustable-rate :
                                       
One- to four-family
    1,073       520       2,987       6,044       12,201  
Multi-family
    1,540       --       5,449       276       --  
Commercial real estate
    11,588       62       8,377       5,400       7,877  
Construction and land
    117       664       2,747       5,393       8,030  
Home equity
    134       444       740       412       9,019  
Other consumer
    --       --       --       100       115  
Commercial business
    532       1,646       3,499       2,921       682  
       Total adjustable-rate
    14,984       3,336       23,799       20,546       37,924  
Total loans originated
    45,119       23,424       115,622       92,622       122,884  
                                         
Purchases by type :
                                       
Home equity
    --       --       2,761       --       --  
Commercial real estate
    --       --       --       --       6,762  
      --       --       2,761       --       6,762  
Sales and Repayments :
                                       
One- to four-family loans sold
    3,885       9,834       63,799       53,850       102,569  
Total principal repayments, charge-offs and transfers to
   other real estate owned and personal property owned
    29,156       19,401       75,406       88,240       78,730  
Total reductions
    33,041       29,235       139,205       142,090       181,299  
Net loan activity
  $ 12,078     $ (5,811 )   $ (20,822 )   $ (49,468 )   $ (51,653 )

Loan Origination and Other Fees.   Loan origination fees generally represent a percentage of the principal amount of the loan that is paid by the borrower.  Accounting standards require that certain fees received, net of certain origination costs, be deferred and amortized over the contractual life of the loan.  Net deferred fees or costs associated with loans that are prepaid or sold are recognized as income at the time of prepayment.  We had $545,000 of net deferred loan fees and costs as of September 30, 2012, compared to $563,000, $597,000 and $610,000 at June 30, 2012, 2011 and 2010. In addition, we receive fees for loan commitments, late payments and miscellaneous services.

Asset Quality
 
Management of asset quality is accomplished by internal controls, monitoring and reporting of key risk indicators, and internal and external individual loan reviews. The primary objective of our loan review process is to measure performance and assess risk for the purpose of identifying and establishing acceptable risk levels, in order to minimize loan loss exposure.  From the time of loan origination through final repayment, all loans are assigned a risk rating based on pre-determined criteria and levels of risk.  The risk rating is monitored and may change during the life of the loan.
 
Internal and external loan reviews vary by loan type, as well as the nature and complexity of the loan.  In addition, depending on the size of the loan, some loans may represent a substantial investment and warrant
 
 
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individual reviews, while other loans may have less risk because the loan size is small.  In some cases the risk is spread over a large number of obligors or the obligations are well collateralized and further analysis of the individual’s assets would expand the review process without measurable improvement to our risk assessment.  Asset types with these characteristics may be reviewed on the basis of risk indicators such as delinquency (consumer and residential real estate loans) or credit rating.  We conduct numerous levels of analysis and formal reviews on individual loans that represent greater potential risk.  In some cases, a total re-evaluation of the loan and associated risks are documented by completing a loan risk assessment and action plan.  Some loans may be re-evaluated in terms of their fair market value or net realizable value in order to determine the likelihood of potential loss exposure and, consequently, the adequacy of specific and general loan loss reserves.
 
We generally assess late fees or penalty charges on delinquent loans of five percent of the monthly payment amount due.  Substantially all first lien residential fixed-rate and adjustable-rate mortgage loan payments are due on the first day of the month, however, a borrower is given a 15-day grace period to make the loan payment.  When a mortgage loan borrower fails to make a required payment when it is due, we institute collection procedures.  The first notice is mailed to the borrower on the 16th day requesting payment and assessing a late charge.  Attempts to contact the borrower by telephone generally also begin upon the 16th day of delinquency.  If a satisfactory response is not obtained, continual follow-up contacts are attempted until the loan has been brought current.  Before the 90th day of delinquency, attempts to interview the borrower are made to establish the cause of the delinquency, whether the cause is temporary, the attitude of the borrower toward the debt and a mutually satisfactory arrangement for curing the default. If the borrower is chronically delinquent and all reasonable means of obtaining payments have been exercised, we will pursue all permissible loan remedies according to the terms of the security instruments and applicable law.  In the event of an unsecured loan, we will either seek legal action against the borrower or refer the loan to an outside collection agency.
 
The board of directors is informed monthly as to the percent of total loans and dollar amount of mortgage and consumer loans that are delinquent by more than 30 days, and is given information regarding classified assets.
 
The following table shows our delinquent loans by type of loan and number of days delinquent as of September 30, 2012.

   
Loans Delinquent For:
   
60-89 Days
   
90 Days and Over
   
Total Loans Delinquent
60 Days or More
 
               
Percent of
               
Percent of
               
Percent of
 
               
Loan
               
Loan
               
Loan
 
   
Number
   
Amount
   
Category
   
Number
   
Amount
   
Category
   
Number
   
Amount
   
Category
 
   
(Dollars in thousands)
Real estate loans:
                                                     
  One- to four-family
    --     $ --       --  
%
    24     $ 3,347       1.5
%
    24     $ 3,347       1.5
%
  Multi-family
    --       --       --       --       --       --       --       --       --  
  Commercial real estate
    1       162       0.2       5       3,570       3.9       6       3,732       4.1  
 
                                                                       
  Construction and land
     development
    --       --       --       5       258       1.4       5       258       1.4  
      Total real estate loans
    1       162       --       34       7,175       2.0       35       7,337       2.1  
                                                                         
Consumer loans:
                                                                       
  Home equity
    3       70       0.1       18       529       1.1       21       599       1.2  
  Other
    3       43       0.4       6       75       0.7       9       118       1.1  
      Total consumer loans
    6       113       0.5       24       604       1.0       30       717       1.2  
Commercial business loans
    --       --       --       --       --       --       --       --       --  
      Total loans
    7     $ 275       0.1
%
    58     $ 7,779       1.8
%
    65     $ 8,054       1.9
%
 
 
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During the economic cycle we have experienced changes in our portfolio with respect to delinquent, nonperforming and impaired loans.  At September 30, 2012, our total loan delinquencies, including loans 30 days or more past due, were $10.6 million compared to $11.1 million and $14.1 million at June 30, 2012 and 2011, respectively.  Delinquent loans other than nonperforming and impaired loans were $2.5 million, $2.9 million and $4.6 million at September 30, 2012 and at June 30, 2012 and 2011, respectively.
 
Nonperforming Assets.   The following table sets forth information with respect to our nonperforming assets.  At each of the dates indicated, there were no loans delinquent more than 90 days that were accruing interest.
 
   
September 30,
   
June 30,
 
   
2012
   
2012
   
2011
   
2010
   
2009
   
2008
 
         
(Dollars in thousands)
 
Nonaccruing loans:
                                   
Real estate loans :
                                   
One- to four-family
  $ 4,616     $ 5,410     $ 5,041     $ 9,079     $ 4,671     $ 708  
Multi-family
    --       --       --       --       --       --  
Commercial real estate
    5,279       3,626       5,008       4,255       3,062       --  
  Construction and land
    258       132       769       2,264       860       --  
    Total real estate loans
    10,153       9,168       10,818       15,598       8,593       708  
                                                 
Consumer loans:
                                               
Home equity
    819       882       883       570       160       --  
Other
    101       102       290       78       80       21  
    Total consumer loans
    920       984       1,173       648       240       21  
Commercial  business loans
    --       --       --       538       25       --  
    Total nonaccruing loans
    11,073       10,152       11,991       16,784       8,858       729  
                                                 
Real estate owned:
                                               
One- to four-family
    2,854       2,546       3,630       1,233       263       --  
Commercial real estate
    41       41       632       211       --       --  
  Construction and land
    320       233       134       323       186       --  
Total real estate loans
    3,215       2,820       4,396       1,767       449       --  
  Home equity
    --       --       --       69       --       --  
    Total real estate owned
    3,215       2,820       4,396       1,836       449       --  
                                                 
Repossessed  automobiles and
  recreational vehicles
    15       45       79       237       30       6  
                                                 
Total nonperforming assets
  $ 14,303     $ 13,017     $ 16,466     $ 18,857     $ 9,337     $ 735  
                                                 
Restructured loans:
                                               
One- to four-family
  $ 4,949     $ 4,946     $ 4,798     $ 3,401     $ --     $ --  
Multi-family
    286       287       --       --       --       --  
Commercial real estate
    4,386       2,894       3,140       3,923       1,986       --  
Construction and land
    212       --       --       1,361       --       --  
   Total real estate loans
    9,833       8,127       7,938       8,685       1,986       --  
Home equity
    769       742       594       417       --       --  
Other consumer
    30       30       61       --       --       --  
Commercial business
    392       --       --       460       --       --  
    Total restructured loans
  $ 11,024     $ 8,899     $ 8,593     $ 9,562     $ 1,986     $ --  
                                                 
Nonaccrual and 90 days or more past due
  loans as a percentage of total loans
    2.6 %     2.5 %     2.8 %     3.5 %     1.7 %     0.1 %
 
For the three months ended September 30, 2012 and 2011 and the year ended June 30, 2012, gross interest income which would have been recorded had the nonaccruing loans been current in accordance with their original terms amounted to $1.0 million, $1.5 million, and $1.0 million, respectively.  The amount that was included in interest income on impaired loans was $43,000, $225,000, $529,000 and $226,000, respectively, for the three months ended September 30, 2012 and 2011 and the years ended June 30, 2012 and 2011.
 
Real Estate Owned and Repossessed Property.   Real estate we acquire as a result of foreclosure, deed in lieu, or non-merger deed in lieu of foreclosure is classified as real estate owned until it is sold.  When the property is acquired, it is recorded at the lower of its cost, which is the unpaid principal balance of the related loan, or the fair market value of the property less selling costs.  Other repossessed collateral, including automobiles, are also recorded at the lower of cost or fair market value.  As of September 30, 2012, First Federal had 19 properties in real
 
 
90
 
 
estate owned with an aggregate book value of $3.2 million.  Of the 19 properties, $320,000 are land and/or lot properties, $2.9 million are single family residential properties and $41,000 is commercial real estate.  Our real estate owned properties are all located in the States of Washington and Oregon.  Most of the properties included in real estate owned are listed with a real estate broker for sale, included in the multiple listing service, and are actively being marketed.  The largest of these properties had an aggregate book value of $869,000 and consisted of a single family residence located in the Portland, Oregon metropolitan area.  This loan was part of a pool of loans purchased in 2006.  The second largest real estate owned property had an aggregate book value of $310,000 and was comprised of a single family residence located in Port Townsend, Washington.
 
Restructured Loans.   According to generally accepted accounting principles, we are required to account for certain loan modifications or restructurings as “troubled debt restructurings.”  In general, the modification or restructuring of a debt is considered a troubled debt restructuring, if we, for economic or legal reasons related to a borrower’s financial difficulties, grant a concession to the borrower under more favorable terms and conditions than we would grant to an ordinary bank customer under a normal course of business standard.
 
General loan restructures and modifications not considered as troubled debt restructures may include lowering interest rates, extending the maturity date, deferring or re-amortizing monthly payments or other concessions.  These general loan restructures and modifications are made on a case-by-case basis provided that such concessions are not below market rates nor considered material and outside of the terms and conditions granted to other borrowers under normal course of business standards.
 
Adversely classified loans which are subsequently modified and placed in nonaccrual status must remain in nonaccrual status for a period of not less than six months with consecutive satisfactory payment performance and be further supported by current financial information and analysis which demonstrates the borrowers have the financial capacity to meet future debt service before being returned to accrual status.
 
As of September 30, 2012, we had 67 loans with an aggregate principal balance of $11.0 million which we have identified as “troubled debt restructures,”   of which $5.0 million were performing in accordance with their revised terms and on accrual status.  Within the allowance for loan and lease losses for these loans, at September 30, 2012, we have established a special reserve in the amount of $159,000 in conformance with GAAP and all of these loans were performing according to their terms.
 
Classified Assets.   Federal regulations provide for the classification of lower quality loans and other assets, such as debt and equity securities, as substandard, doubtful or loss.  An asset is considered substandard when material conditions are identified which raise issues about the financial capacity, collateral or other conditions which may compromise the borrower’s promise and ability to satisfactorily perform under the terms of the loan.  Substandard assets considered impaired include those characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected.  Assets classified as doubtful have all the weaknesses inherent in those classified as impaired with the added characteristic that the weaknesses present make near term collection or liquidation highly questionable and improbable.  Assets classified as loss are those considered uncollectible and of such little value that their continuance as assets with the establishment of a specific loss reserve is not warranted.

When we classify problem assets as substandard, doubtful, and impaired, we conduct individual loan and collateral analysis to establish a specific loan loss allowance in an amount we deem prudent, based on the unique circumstances of each loan. Our Credit Administration, Special Assets Group and senior management review the analysis and approve the specific loan loss allowance for these loans.
 
General  reserve loan loss allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances on impaired loans, have not been specifically allocated to particular problem assets.  When an insured institution identifies a problem asset as an unavoidable and imminent loss, it is required to partially or fully charge-off such assets in the period in which they are deemed uncollectible.  Assets that do not currently expose us to sufficient risk to warrant classification as substandard or doubtful but possess identified weaknesses are classified by us as either watch or special mention assets.  Our determination as to the classification of our assets and the amount of our valuation allowances is subject to review by the DFI and the FDIC, which can order specific charge-offs or the establishment of additional loan loss allowances.
 
In connection with the filing of regulatory periodic reports with the FDIC which include disclosure of adversely classified assets, we regularly review the problem assets in our portfolio to determine whether any assets require re-classification in accordance with applicable regulations.  On the basis of our review of our assets, as of
 
 
91
 
 
September 30, 2012, we had criticized and classified assets of $29.6 million.  The amount classified represented 37.7% of equity capital and 3.8% of assets at that date.
 
The following table shows the aggregate amounts of our criticized and classified assets at the dates indicated.

     
September 30,
   
June 30,
 
     
2012
   
2012
   
2011
   
2010
 
           
(Dollars in thousands)
 
 
Loans:
                       
 
Special mention loans
  $ 2,794     $ 3,389     $ 5,772     $ 14,917  
 
Substandard loans
    26,822       23,735       17,121       26,961  
 
Doubtful loans
    --       197       3,422       381  
 
Loss loans
    --       --       --       --  
 
Total criticized and classified loans
    29,616       27,321       26,315       42,259  
                                   
 
Securities:
                               
 
Substandard
    --       --       603       903  
                                   
 
Total classified securities
    --       --       603       903  
                                   
 
Total criticized and classified assets
  $ 29,616     $ 27,321     $ 26,918     $ 43,162  

Included in our classified loans at September 30, 2012 are $3.6 million of loans made to not for profit organizations, including organizations we have contributed to such as the Olympic Community Action Programs and the Northwest Maritime Center.
 
Allowance for Loan Losses.   Management recognizes that loan losses may occur over the life of a loan and the allowance for loan losses must be maintained at a level necessary to absorb specific losses on impaired loans and probable losses inherent for the total loan portfolio.  Our executive officers prepare and the board of directors’ Loan/Asset Quality Committee and the full board review and approve, the allowance for loan losses on a quarterly basis and establishes the provision for credit losses based on the risk composition of our loan portfolio, delinquency levels, loss experience, economic conditions, bank regulatory examination results, seasoning of the loan portfolios and other factors related to the collectability of the loan portfolio.  The allowance is increased by the provision for loan losses, which is charged against current period operating results and decreased by the amount of actual loan charge-offs, net of recoveries.
 
We believe the quantitative and qualitative analysis necessary to calculate reasonably accurate accounting estimates for loan losses reserves is a critical process. However, economic, market, industry and political changes can adversely affect loan types, and unpredictable personal events or other undisclosed information by individual borrowers can occur at any time, which can result in immediate significant changes in, as well as management’s assumptions about, probable losses inherent in the loan portfolio. The impact of such events can quickly deplete the allowance and potentially require increased provisions to replenish the allowance, which could negatively affect current and future earnings.
 
Our methodology for analyzing the allowance for loan losses consists of two components: general and specific allowances.  The formula for the general loan loss reserve allowance is determined by applying an estimated quantified loss percentage, as well as qualitative factors, to various groups of loans.  The loss percentages are generally based on various historical measures such as the amount and type of classified loans, past due ratios, loss experience, and economic conditions, which could affect the collectability of the respective loan types.  Qualitative factors and adjustments to the loan loss reserve calculations are largely subjective, but include objective variables such as unemployment rates, falling or rising real estate values, real estate and retail sales, demographics and other known material economic indicators.  A specific allowance is established when management believes the borrower’s financial and/or collateral condition has materially deteriorated to a point of impairment and loss is highly probable.
 
The allowance for loan losses was $8.2 million at September 30, 2012, compared to $7.4 million and $4.7 million at June 30, 2012 and 2011, respectively. The increase was a result of the decline in asset quality reflected in the increase in our delinquent, nonperforming, criticized and classified loans, together with our recognition of qualitative factors which have materially affected conditions in the residential real estate markets in which we operate.  In addition, we adjusted the actual loss history reviewed for purposes of our allowance calculations from a three quarter period to an eight quarter period to ensure appropriate considerations of recent loss trends in each loan
 
 
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category.  We continually monitor local, regional and national economic trends, including those from the FDIC, the Board of Realtors and other reports.  The continuation of the delinquent loan trend, coupled with national and regional economic trends have resulted in proactive identification, assessment and appropriate increases in the provision for loan losses.  Qualitative factors developed from internal and external sources of information combined with historical loss experience have also resulted in further increases to the allowance for loan losses.
 
We define a loan as being impaired when, based on current information and events, it is probable we will be unable to collect amounts due under the contractual terms of the loan agreement.  Large groups of smaller balance homogenous loans such as residential mortgage loans and consumer loans are collectively evaluated for impairment.  All other loans are evaluated for impairment on an individual basis.  In the process of identifying loans as impaired, management takes into consideration factors which include payment history, 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 borrowers, including payment history and amounts of any payment shortfall, length and reason for delay, and likelihood of return to stable performance.
 
In determining the allowance for loan losses, management utilizes the valuation shown in the most recent appraisal obtained, unless additional information is known, which can result in additional adjustments to the valuation of collaterals pledged.
 
Appraisals or evaluations may be updated subsequent to the time of origination, whenever management identifies a loan as impaired or potentially being impaired. Events which may trigger an updated appraisal or evaluation include, but are not limited to, borrower delinquency, material technical defaults, annual review of borrower’s financial condition, property tax and/or assessment delinquency, deferred maintenance or other information known or discovered by us.
 
Impaired collateral dependent loans require a current appraisal and analysis to determine the net value of the collateral for loan loss reserve purposes.  Once an updated appraisal is obtained, our policy is to update these appraisals every 12 months as long as the loan and collateral remains impaired. Certain types of collateral, depending on market conditions, may require more frequent appraisal, updates or evaluations.  When the results of the impairment analysis indicate a potential loss, the loan is classified as substandard and a specific reserve amount is established or adjusted to reflect any further deterioration in the value of the collateral that may occur prior to liquidation or reinstatement.  The impairment analysis takes into consideration the primary, secondary, and tertiary sources of repayment, whether impairment is likely to be temporary in nature or liquidation is anticipated.
 
The allowance for loan losses was $8.2 million or 1.9% of total loans outstanding as of September 30, 2012, compared to $7.4 million and $4.7 million, or 1.8% and 1.1%, respectively, of total loans outstanding as of June 30, 2012 and June 30, 2011, respectively.  The level of the loan loss reserve allowance as of September 30, 2012, is based on our current qualitative and quantitative methodology, which includes best efforts identification of loans which may have loss potential in the foreseeable future. However, as previously discussed and explained, actual losses may vary from the estimates.  Management will continue to review the adequacy of the allowance for loan losses and make adjustments to the allowance for loan losses based on loan growth, economic conditions, charge-offs and portfolio composition.  For the three months ended September 30, 2012 and 2011 and for the years ended June 30, 2012 and 2011, the provision for loan losses was $624,000, $1.5 million, $8.0 million and $926,000, respectively.
 
As of September 30, 2012, we had impaired loans in the amount of $17.8 million compared to $15.8 million at both June 30, 2012 and 2011.
 
Management believes that our allowance for loan losses as of September 30, 2012, was adequate to absorb the known and inherent risks of loss in the loan portfolio at that date.  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 provision 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 of information available to them at the time of their examination.
 
 
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The following table summarizes the distribution of our allowance for loan losses at the dates indicated.
 
   
September 30,
   
June 30,
 
   
2012
   
2012
   
2011
   
2010
   
2009
   
2008
 
   
Amount
   
Percent
of loans
in each
category
to total
   
Amount
   
Percent
of loans
in each
category
to total
   
Amount
   
Percent
of loans
in each
category
to total
   
Amount
   
Percent
of loans
in each
category
to total
   
Amount
   
Percent
of loans
in each
category
to total
   
Amount
   
Percent
of loans
in each
category
to total
 
               
(Dollars in thousands)
 
Allocated at end of period to:
                                                                       
One- to four- family
  $ 4,217       53.2 %   $ 3,464       52.6 %   $ 2,025       55.5 %   $ 2,032       54.5 %   $ 788       60.6 %   $ 552       66.3 %
Multi-family
    104       4.4       78       4.2       73       4.0       12       3.8       23       4.4       91       3.5  
Commercial real estate
    732       21.7       876       19.5       962       17.4       896       15.0       729       11.0       429       8.1  
Construction and land
    278       4.3       230       5.5       502       5.5       2,022       8.3       431       7.6       220       9.0  
Home equity
    2,074       11.5       1,773       12.5       666       12.8       591       12.9       294       10.6       10       8.2  
Other consumer
    396       2.7       395       2.7       166       3.0       396       3.5       425       3.7       236       3.4  
Commercial business
    417       2.2       574       3.0       294       1.8       471       2.0       378       2.1       73       1.5  
Unallocated
    6       --       --       --       40       --       --       --       --       --       --       --  
Total
  $ 8,224       100.0 %   $ 7,390       100.0 %   $ 4,728       100.0 %   $ 6,420       100.0 %   $ 3,068       100.0 %   $ 1,611       100.0 %
 
 
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The following table sets forth an analysis of our allowance for loan losses:

   
September 30,
   
June 30
 
   
2012
   
2012
   
2011
   
2010
   
2009
   
2008
 
   
(Dollars in thousands)
 
Allowance at beginning of period
  $ 7,390     $ 4,728     $ 6,420     $ 3,068     $ 1,611     $ 1,618  
Charge-offs:
                                               
One- to four-family
    --       2,482       890       209       --       --  
Multi-family
    --       --       2       --       --       --  
Commercial real estate
    --       577       194       --       16       --  
Construction and land
    --       314       1,274       125       20       --  
Home equity
    91       1,465       283       144       23       --  
Other consumer
    46       301       152       415       266       187  
Commercial business
    --       364       115       204       210       123  
Total charge-offs
    137       5,503       2,910       1,097       535       310  
                                                 
Recoveries:
                                               
One- to four-family
    130       95       188       --       --       --  
Multi-family
    --       --       1       --       --       --  
Commercial real estate
    151       --       13       --       1       --  
Construction and land
    --       --       49       --       --       --  
Home equity
    --       7       3       7       5       --  
Other consumer
    57       47       19       36       34       41  
Commercial business
    9       46       19       33       32       3  
Total recoveries
    347       195       292       76       72       44  
                                                 
Net charge-offs (recoveries)
    210       (5,308 )     (2,618 )     (1,021 )     (463 )     (266 )
Provision for loan losses
    624       7,970       926       4,373       1,920       259  
Balance at end of period
  $ 8,224     $ 7,390     $ 4,728     $ 6,420     $ 3,068     $ 1,611  
                                                 
Net charge-offs as a percentage of average loans outstanding
    (0.1 )%     1.3 %     0.6 %     0.2 %     0.1 %     -- %
                                                 
Net charge-offs as a percentage of average nonperforming assets
    (1.5 )%     36.0 %     14.0 %     6.8 %     10.6 %     43.7 %
                                                 
Allowance as a percentage of nonperforming loans
    74.3 %     72.8 %     39.4 %     38.3 %     34.6 %     220.9 %
                                                 
Allowance as a percentage of total loans
    1.9 %     1.8 %     1.1 %     1.3 %     0.6 %     0.3 %
                                                 
Average consolidated loans, net
  $ 408,126     $ 412,262     $ 447,677     $ 513,152     $ 552,563     $ 566,889  
Average total loans
  $ 416,137     $ 418,954     $ 454,736     $ 520,185     $ 556,057     $ 567,736  

Investment Activities
 
General. Under Washington law, savings banks are permitted to invest in various types of liquid assets, including U.S. Treasury obligations, securities of various federal agencies, certain certificates of deposit of insured banks and savings institutions, banker’s acceptances, repurchase agreements, federal funds, commercial paper, investment grade corporate debt securities, and obligations of states and their political sub-divisions.
 
Our Chief Financial Officer has the basic responsibility for the management of our investment portfolio, in consultation with our Chief Executive Officer, and the direction and guidance of the board of directors.  Various factors are considered when making investment decisions, including the marketability, maturity and tax consequences of the proposed investment.  The maturity structure of investments will be affected by various market conditions, including the current and anticipated slope of the yield curve, the level of interest rates and our anticipated liquidity needs.
 
 
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The general objective of our investment portfolio is to provide sufficient liquidity to fund lending, deposit withdrawal, operations of First Federal and support earnings while satisfactorily managing risk, including credit risk, reinvestment risk, liquidity risk and interest rate risk.  See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Asset and Liability Management and Market Risk.”  We expect that a portion of the net proceeds of this offering initially will be used to invest in U.S. Government and federal agency securities of various maturities, mortgage-backed or other marketable securities, and other permissible investments, until they can be deployed in an orderly fashion.
 
As a member of the FHLB, we had $10.7 million in stock of the FHLB at September 30, 2012.  We have not received any dividends from the FHLB since it suspended dividends in 2008.
 
 
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Securities.   The table below sets forth information regarding the composition of our securities portfolio and other investments at the dates indicated.  At September 30, 2012, our securities portfolio did not contain securities of any issuer with an aggregate book value in excess of 10% of our equity capital, excluding those issued by the United States Government or its agencies.
 
   
September 30,
   
June 30,
 
   
2012
   
2012
   
2011
   
2010
 
   
Book
Value
   
Fair
Value
   
Book
Value
   
Fair
Value
   
Book
Value
   
Fair
Value
   
Book
Value
   
Fair
Value
 
                           
(In thousands)
             
Securities available-for-sale:
                                               
   Municipal bonds
  $ 2,347     $ 2,479     $ 2,353     $ 2,460     $ 100     $ 107     $ 351     $ 360  
   Small Business Administration
    39,261       40,100       40,121       40,728       21,187       21,447       23,564       23,631  
   Government agency
    --       --       --       --       29,976       30,154       38,287       38,430  
   U.S. Treasury
    --       --       --       --       --       --       6,020       6,024  
   Trust preferred securities
    --       --       --       --       522       63       1,125       266  
   Mortgage-backed:
                                                               
      Agency
    168,602       172,297       167,154       170,383       140,189       141,669       88,176       89,188  
      Corporate
    4,244       4,338       4,561       4,592       5,609       5,477       5,298       5,371  
         Total available-for-sale
    214,454       219,214       214,189       218,163       197,583       198,917       162,821       163,270  
                                                                 
   FHLB stock
    6,849       6,849       6,921       6,921       6,744       6,744       6,536       6,536  
                                                                 
Securities held to maturity:
                                                               
   Municipal bonds and other
    17,069       17,577       17,390       17,426       2,147       2,232       2,177       2,280  
   Small Business Administration
    1,345       1,352       1,382       1,388       1,794       1,796       2,023       2,008  
   Trust preferred securities
    --       --       --       --       540       540       695       695  
   Mortgage-backed:
                                                               
      Agency
    42,288       43,138       38,613       39,236       32,600       33,131       19,639       19,899  
         Total held to maturity
    60,702       62,067       57,385       58,050       37,081       37,699       24,534       24,882  
                                                                 
   FHLB stock
    3,873       3,873       3,898       3,898       4,075       4,075       4,283       4,283  
                                                                 
Total securities
  $ 285,878     $ 292,003     $ 282,393     $ 287,032     $ 245,483     $ 247,435     $ 198,174     $ 198,971  
 
 
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Maturity of Securities.   The composition and contractual maturities of our investment portfolio at June 30, 2012 and September 30, 2012, excluding FHLB stock, are indicated in the following table.  The yields on municipal bonds have not been computed on a tax equivalent basis.

   
June 30, 2012
 
   
1 year or less
   
Over 1 year to 5 years
 
Over 5 to 10 years
   
Over 10 years
   
Total Securities
 
   
Amortized
Cost
   
Weighted
Average
Yield
   
Amortized
Cost
   
Weighted
Average
Yield
   
Amortized
Cost
   
Weighted
Average
Yield
   
Amortized
Cost
   
Weighted
Average
Yield
   
Amortized
Cost
   
Weighted
Average
Yield
   
Fair
Value
 
   
(Dollars in thousands)
 
Securities available-for-sale:
                                                                 
                                                                               
Municipal bonds
  $ --     -- %   $ 100     3.45 %   $ --     -- %   $ 2,253     2.96 %   $ 2,353     2.98 %   $ 2,460  
Small Business Administration
    --     --       --     --       --     --       40,121     1.17       40,121     1.65       40,728  
U.S. Treasury
    --     --       --     --       --     --       --     --       --     --       --  
Mortgage-backed:
                                                                             
Agency
    --     --       --     --       821     3.27       166,333     1.70       167,154     1.71       170,383  
Corporate
    --     --       --     --       --     --       4,561     2.64       4,561     2.64       4,592  
Total available-for-sale
  $ --     -- %   $ 100     3.45 %   $ 821     3.27 %   $ 213,268     1.63 %   $ 214,189     1.73 %   $ 218,163  
Securities held to maturity:
                                                                             
Municipal bonds
  $ 275     3.82 %   $ 1,538     3.39 %   $ --     -- %   $ 15,577     2.42 %   $ 17,390     2.53 %   $ 17,426  
Small Business Administration
    --     --       --     --       --     --       1,382     0.75       1,382     0.75       1,388  
Mortgage-backed:
                                                                             
Agency
    38     5.18       1,151     4.84       17,381     1.87       20,043     1.85       38,613     1.96       39,236  
Total held to maturity
    313     3.99       2,689     4.00 %     17,381     1.87       37,002     2.05       57,385     2.10       58,050  
Total securities
  $ 313     3.99 %   $ 2,789     3.98 %   $ 18,202     1.93 %   $ 250,270     1.70 %   $ 271,574     1.81 %   $ 276,213  
 
   
September 30, 2012
 
   
1 year or less
   
Over 1 year to 5 years
 
Over 5 to 10 years
   
Over 10 years
   
Total Securities
 
   
Amortized
Cost
   
Weighted
Average
Yield
   
Amortized
Cost
   
Weighted
Average
Yield
   
Amortized
Cost
   
Weighted
Average
Yield
   
Amortized
Cost
   
Weighted
Average
Yield
   
Amortized
Cost
   
Weighted
Average
Yield
   
Fair
Value
 
   
(Dollars in thousands)
 
Securities available-for-sale:
                                                                 
Municipal bonds
  $ --     -- %   $ 100     3.45 %   $ --     -- %   $ 2,247     2.96 %   $ 2,347     2.98 %   $ 2,479  
Small Business Administration
    --     --       --     --       --     --       39,261     1.21       39,261     1.21       40,100  
U.S. Treasury
    --     --       --     --       --     --       --     --       --     --       --  
Mortgage-backed:
                                                                             
Agency
    --     --       --     --       641     3.28       167,961     1.92       168,602     1.93       172,297  
Corporate
    --     --       --     --       --     --       4,244     2.52       4,244     2.52       4,338  
Total available-for-sale
  $ --     -- %   $ 100     3.45 %   $ 641     3.28 %   $ 213,713     1.82     $ 214,454     1.82     $ 219,214  
Securities held to maturity:
                                                                             
Municipal bonds
  $ 420     3.77 %   $ 1,142     3.66 %   $ --     -- %   $ 15,507     2.42 %   $ 17,069     2.53 %   $ 17,577  
Small Business Administration
    --     --       --     --       --     --       1,345     0.75       1,345     0.75       1,352  
Mortgage-backed:
                                                                             
Agency
    93     4.19       867     4.92       15,841     1.95       25,487     1.79       42,288     1.92       43,138  
Total held to maturity
    513     3.85       2,009     4.20       15,841     1.95       42,339     1.99       60,702     2.07       62,067  
       Total securities
  $ 513     3.85     $ 2,109     4.17     $ 16,482     2.00     $ 256,052     1.84     $ 275,156     1.88     $ 281,281  
 
 
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Deposit Activities and Other Sources of Funds
 
General.   Deposits, borrowings and loan repayments are the major sources of our funds for lending and other investment purposes.  Scheduled loan repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are influenced significantly by general interest rates and market conditions.  Borrowings from the FHLB are used to supplement the availability of funds from other sources and also as a source of term funds to assist in the management of interest rate risk.
 
Our deposit composition reflects a mixture with certificates of deposit accounting for 28.1% of the total deposits at September 30, 2012, and interest and noninterest-bearing checking, savings and money market accounts comprising the balance of total deposits.  We rely on marketing activities, convenience, customer service and the availability of a broad range of deposit products and services to attract and retain customer deposits.  We did not have any brokered deposits at September 30, 2012.
 
Deposits .  Deposits are attracted from within our market area through the offering of a broad selection of deposit instruments, including checking accounts, money market deposit accounts, savings accounts and certificates of deposit with a variety of rates.  Deposit account terms vary according to the minimum balance required, the time periods the funds must remain on deposit and the interest rate, among other factors.  In determining the terms of our deposit accounts, we consider the development of long-term profitable customer relationships, current market interest rates, current maturity structure and deposit mix, our customer preferences and the profitability of acquiring customer deposits compared to alternative sources.
 
Deposit Activity.   The following table sets forth our total deposit activities for the periods indicated.

   
Three Months Ended
September 30,
   
Year Ended June 30,
 
   
2012
   
2011
   
2012
   
2011
   
2010
 
   
(Dollars in thousands)
 
Beginning balance
  $ 583,238     $ 562,398     $ 562,398     $ 556,223     $ 530,822  
Net deposits (withdrawals)
    6,082       6,546       17,983       2,191       18,475  
Interest credited
    551       863       2,857       3,984       6,926  
Ending balance
  $ 589,871     $ 569,807     $ 583,238     $ 562,398     $ 556,223  
                                         
Net increase
  $ 6,633     $ 7,409     $ 20,840     $ 6,175     $ 25,401  
                                         
Percent increase 
    1.1 %     1.3 %     3.7 %     1.1 %     4.8 %
 
 
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Types of Deposits.   The following table sets forth the dollar amount of deposits in the various types of deposits programs we offered at the dates indicated.

   
September 30
   
June 30,
 
   
2012
   
2012
   
2011
   
2010
 
         
Percent
         
Percent
         
Percent
         
Percent
 
   
Amount
   
of Total
   
Amount
   
of Total
   
Amount
   
of Total
   
Amount
   
of Total
 
                                                 
Transactions and Savings Deposits:
                                               
                                                 
Interest-bearing transaction
  $ 96,982       16.5 %   $ 95,955       16.5 %   $ 89,271       15.9 %   $ 80,079       14.4 %
Noninterest-bearing transaction
    53,732       9.1       46,662       8.0       37,830       6.7       32,868       5.9  
Savings accounts             
    79,638       13.5       78,007       13.4       73,932       13.1       75,814       13.6  
Money market accounts
    193,665       32.8       192,847       33.1       169,765       30.2       163,624       29.5  
                                                                 
Total transaction and savings
   deposits
    424,017       71.9       413,471       71.0       370,798       65.9       352,385       63.4  
                                                                 
Certificates:
                                                               
                                                                 
0.00 – 0.99%
    111,005       18.8       108,020       18.5       100,369       17.9       81,723       14.7  
1.00 – 1.99%
    33,554       5.7       37,575       6.4       45,050       8.0       61,357       11.0  
2.00 – 2.99%
    11,844       2.0       13,802       2.4       25,638       4.6       24,434       4.4  
3.00 – 3.99%
    3,944       0.7       4,093       0.7       8,572       1.5       16,162       2.9  
4.00 – 4.99%
    5,331       0.9       6,103       1.0       11,184       2.0       18,482       3.3  
5.00 and over
    176       --       174       --       787       0.1       1,680       0.3  
                                                                 
Total certificates
    165,854       28.1       169,767       29.0       191,600       34.1       203,838       36.6  
                                                                 
Total deposits
  $ 589,871       100.0 %   $ 583,238       100.0 %   $ 562,398       100.0 %   $ 556,223       100.0 %

 
100
 
 
Deposit Flow .  The following table sets forth the balances of savings deposits in the various types of savings accounts offered by First Federal at the dates indicated.
                                                                                           
   
September 30
   
June 30
 
   
2012
   
2012
   
2011
   
2010
   
2009
 
   
Amount
   
Percent
of
Total
   
Increase/
(Decrease)
   
Amount
   
Percent
of
Total
   
Increase/
(Decrease)
   
Amount
   
Percent
of
Total
   
Increase/
(Decrease)
   
Amount
   
Percent
of
Total
   
Increase/
(Decrease)
   
Amount
   
Percent
of
Total
   
Increase/
(Decrease)
 
                                                                                           
Savings accounts
  $ 79,638     13.5 %   $ 1,631     $ 78,007     13.4 %   $ 4,075     $ 73,932     13.1 %   $ (1,882 )   $ 75,814     13.6 %   $ (22,791 )   $ 98,605     18.6 %   $ 6,247  
Transaction accounts
    150,714     25.6       8,097       142,617     24.5       15,516       127,101     22.6       14,154       112,947     20.3       18,247       94,700     17.8       14,282  
Money-market accounts
    193,665     32.8       818       192,847     33.1       23,082       169,765     30.2       6,141       163,624     29.4       48,950       114,674     21.6       40,697  
Fixed-rate certificates which mature in the year ending:
                                                                                                             
Within 1 year
    105,197     17.8       (4,678 )     109,875     18.8       (22,603 )     132,478     23.6       857       131,621     23.7       (47,196 )     178,817     33.7       (28,607 )
After 1 year but within 2 years
    32,829     5.6       (623 )     33,452     5.7       (1,059 )     34,511     6.1       (5,719 )     40,230     7.2       20,540       19,690     3.7       1,619  
After 2 years but within 5 years
    27,762     4.7       1,526       26,236     4.5       2,102       24,134     4.3       (7,354 )     31,488     5.7       7,697       23,791     4.5       5,444  
Certificates maturing thereafter
    66     --       (138 )     204     --       (273 )     477     0.1       (22 )     499     0.1       (46 )     545     0.1       (396 )
Total
  $ 589,871     100.0 %   $ 6,633     $ 583,238     100.0 %   $ 20,840     $ 562,398     100.0 %   $ 6,175     $ 556,223     100.0 %   $ 25,401     $ 530,822     100.0 %   $ 39,286  
 
 
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Deposit Maturities.   The following table sets forth the rate and maturity information of our time deposit certificates at September 30, 2012.
 
        0.00-
0.99% 		      1.00-
1.99% 		      2.00-
2.99% 		      3.00-
3.99% 		      4.00-
4.99% 		   
5.00%
or higher
   
Total
   
Percent
of
Total
 
                                                             
 
Certificate accounts maturing in quarter ending:
                                                         
                                                             
 
December 31, 2012
  $ 28,156     $ 1,388     $ 1,528     $ 83     $ 1,300     $ --     $ 32,455       19.6 %
 
March 31, 2013
    23,460       9,070       183       183       580       --       33,476       20.2  
 
June 30, 2013
    14,562       3,553       137       601       153       --       19,006       11.5  
 
September 30, 2013
    16,718       1,825       299       195       1,223       --       20,260       12.2  
 
December 31, 2013
    4,880       2,478       104       75       1,654       --       9,191       5.5  
 
March 31, 2014
    7,313       1,477       138       101       209       --       9,238       5.6  
 
June 30, 2014
    3,456       1,466       200       1,893       22       --       7,037       4.2  
 
September 30, 2014
    4,865       1,506       2       813       1       176       7,363       4.4  
 
December 31, 2014
    1,211       1,870       322       --       76       --       3,479       2.1  
 
March 31, 2015
    1,054       1       985       --       30       --       2,070       1.2  
 
June 30, 2015
    2,566       56       2,082       --       77       --       4,781       2.9  
 
September 30, 2015
    2,301       370       1,402       --       5       --       4,078       2.5  
 
Thereafter
    463       8,494       4,462       --       1       --       13,420       8.1  
                                                                   
 
Total
  $ 111,005     $ 33,554     $ 11,844     $ 3,944     $ 5,331     $ 176     $ 165,854       100.0 %
                                                                   
 
Percent of total
    67.0 %     20.2 %     7.1 %     2.4 %     3.2 %     0.1 %     100.0 %        

Jumbo Certificates.   The following table indicates the amount of our jumbo certificates of deposit by time remaining until maturity as of September 30, 2012.  Jumbo certificates of deposit are certificates in amounts of $100,000 or more.
 
   
Maturity
 
   
3 Months
or Less
   
Over
3 to 6
Months
   
Over
6 to 12
Months
   
Over 12
Months
   
Total
 
   
(In thousands)
 
Certificates of deposit less than $100,000
  $ 20,684     $ 19,208     $ 23,739     $ 29,222     $ 92,853  
                                         
Certificates of deposit of $100,000 or more
    11,771       14,268       15,527       31,435       73,001  
                                         
Total certificates
  $ 32,455     $ 33,476     $ 39,266     $ 60,657     $ 165,854  

The Federal Reserve requires First Federal to maintain reserves on transaction accounts or non-personal time deposits.  These reserves may be in the form of cash or noninterest-bearing deposits with the Federal Reserve Bank of San Francisco.  Negotiable order of withdrawal (NOW) accounts and other types of accounts that permit payments or transfers to third parties fall within the definition of transaction accounts and are subject to the reserve requirements, as are any non-personal time deposits at a savings bank.  As of September 30, 2012, our deposit with the Federal Reserve Bank of San Francisco and vault cash exceeded our reserve requirements.
 
 
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Borrowings.   Although customer deposits are the primary source of funds for our lending and investment activities, we have used advances from the FHLB to supplement our supply of lendable funds, to meet short-term deposit withdrawal requirements and also to provide longer-term funding to better match the duration of selected loan and investment maturities.
 
Depending upon the retail banking activity and the availability of excess post-conversion capital that may be provided to us, we will consider and may undertake additional leverage strategies within applicable regulatory requirements or restrictions.  These borrowings would be expected to primarily consist of FHLB advances.
 
As a member of the FHLB, we are required to own capital stock in the FHLB and are authorized to apply for advances on the security of that stock and certain of our mortgage loans and other assets (principally securities which are obligations of, or guaranteed by, the U.S. Government) provided certain creditworthiness standards have been met.  Advances are individually made under various terms pursuant to several different credit programs, each with its own interest rate and range of maturities.  Depending on the program, limitations on the amount of advances are based on the financial condition of the member institution and the adequacy of collateral pledged to secure the credit.  We maintain a committed credit facility with the FHLB and had collateral pledged that would support additional borrowing capacity of $60.1 million at September 30, 2012. Our outstanding advances from the FHLB totaled $99.9 million at September 30, 2012.
 
The following tables set forth information regarding our borrowing at the end of and during the periods indicated.  The tables include both long- and short-term borrowings.
 
   
Three Months Ended
September 30,
   
Year Ended
June 30,
 
   
2012
   
2011
   
2012
   
2011
   
2010
 
   
(Dollars in thousands)
 
Maximum balance:
                             
FHLB advances
  $ 99,924     $ 99,924     $ 99,924     $ 99,924     $ 119,081  
Craft3 Promissory Note
    109       109       109       109       69  
                                         
Average balances:
                                       
FHLB advances
  $ 99,924     $ 99,924     $ 99,924     $ 99,924     $ 103,554  
Craft3 Promissory Note
    109       109       109       72       69  
                                         
Weighted average interest rate:
                                       
FHLB advances
    4.22 %     4.22 %     4.22 %     4.22 %     4.50 %
Craft3 Promissory Note
    4.50 %     4.50 %     4.50 %     4.50 %     4.50 %

   
September 30,
   
June 30,
 
   
2012
   
2012
   
2011
   
2010
 
   
(Dollars in thousands)
 
Balance outstanding at end of period:
                       
FHLB advances
  $ 99,924     $ 99,924     $ 99,924     $ 99,924  
Craft3 Promissory Note
    109       109       109       69  
                             Total borrowings
  $ 100,033     $ 100,033     $ 100,033     $ 99,993  
                                 
Weighted average interest rate of:
                               
FHLB advances
    4.22 %     4.22 %     4.22 %     4.22 %
Craft3 Promissory Note
    4.50 %     4.50 %     4.50 %     4.50 %
 
Subsidiary and Other Activities
 
We have one subsidiary, North Olympic Peninsula Services, Inc. (“NOPS”), which is wholly-owned and has been inactive for approximately nine years. Our initial capital investment in NOPS was $500,000 and as of September 30, 2012 we had not made any subsequent investment. In 2008, First Federal partnered with Craft3, Inc., a Washington nonprofit corporation, to form two limited liability companies for the purpose of participating in the new markets tax credit program (“NMTC”). First Federal made an initial capital investment of 99.99% in Craft3 Development, IV, LLC for $4.9 million in the form of $2.4 million of debt and $2.5 million of equity.  Craft3 Development IV, LLC then made a 100% equity investment of $4.9 million into another company, Craft3
 
 
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Investment IV, LLC. Craft3 Investment IV distributed those funds in the form of a loan to Downtown Ambulatory Health Center, LLC for construction of a medical facility in Port Angeles, Washington. First Federal will participate in the NMTC program over a seven year period and realize $1.9 million in tax credits. At the completion of the seven years, both subsidiaries will be dissolved, and the loan to the downtown Ambulatory Health Center, LLC refinanced. First Federal will receive a $4.6 million reimbursement for its debt and equity contributions, and the $300,000 deficiency between the amount of the investment and the amount of the reimbursement is being amortized over the new markets tax period.

The First Federal Community Foundation

General.   In furtherance of our commitment to the communities we serve, we have voluntarily established a foundation in connection with our conversion from the mutual to stock form of organization.  The plan of conversion provides that the foundation will be established as a non-stock corporation and will be funded with $400,000 in cash and the remainder in shares of common stock so that the total amount contributed is equal to 8% of the gross offering proceeds received by First Northwest Bancorp in the offering.  The contribution of common stock to the foundation will be dilutive to the interests of shareholders.  First Northwest Bancorp has no plans to provide additional funding beyond this initial contribution over the next three years.  First Federal may make future contributions as deemed appropriate by First Federal’s Board of Directors, subject to any capital needs and requirements or other regulatory limitations that may be applicable.  The contribution of common stock to the foundation will not be included in determining whether the minimum number of shares of common stock (5,950,000) has been sold in order to complete the offering.

Purpose of the Foundation.   The purpose of the First Federal Community Foundation is to provide funding to support charitable causes and community development activities in the communities we serve.  The First Federal Community Foundation is being formed as a complement to our existing community activities.  We currently contribute funds to support local community activities and actively encourage our employees to volunteer their time, raise funds and contribute their personal funds to a wide range of charitable organizations.  The foundation is completely dedicated to community activities and the promotion of charitable causes, and may be able to support these activities in ways that are not currently available to us.

We believe the establishment of a foundation is consistent with our long-term commitment to community service.  The board of directors further believes that the funding of the foundation with common stock of First Northwest Bancorp is a means of enabling the communities served by us to share in the growth and success of First Northwest Bancorp long after completion of the conversion.  The foundation will accomplish that goal by providing for continued ties between the foundation and First Federal, thereby forming a partnership with our community.  The establishment of the foundation will also enable First Northwest Bancorp and First Federal to develop a unified charitable donation strategy and will centralize the responsibility for administration and allocation of corporate charitable funds.

Structure of the First Federal Community Foundation. The foundation has been incorporated under Washington law as a non-stock corporation. Its initial board of directors will consist of persons who are directors or employees of First Federal, as well as at least one independent director.  Directors of the foundation who are affiliated with First Federal are not expected to be paid additional compensation for their service on the foundation’s board.  The articles of incorporation of the foundation will provide that the corporation is organized exclusively for charitable purposes, including development in the local community, as set forth in Section 501(c)(3) of the Internal Revenue Code.  The foundation’s articles of incorporation or bylaws also provide that no part of its earnings will inure to the benefit of, or be distributable to, its directors, officers or members.

The authority for the affairs of the foundation will be vested in its board of directors.  The directors of the foundation are responsible for establishing the foundation’s policies with respect to grants or donations by the foundation, consistent with the purpose for which the foundation was established.  Although no formal policy governing the foundation grants exists at this time, the foundation’s board of directors will adopt such a policy prior to receiving the contribution.  As directors of a not-for-profit corporation, directors of the foundation are at all times bound by their fiduciary duty to advance the foundation’s charitable goals, to protect the assets of the foundation and to act in a manner consistent with the charitable purpose for which the foundation was established.  The directors of the foundation are also responsible for directing the foundation’s activities, including the management of the
 
 
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common stock of First Northwest Bancorp.  The board of directors of the foundation will appoint such officers as may be necessary to manage its operation.  The foundation may use employees of First Federal as its volunteer support staff.

The foundation will commit to the Federal Reserve that all shares of common stock held by the foundation will be voted in the same ratio as all other shares of First Northwest Bancorp’s common stock on all proposals considered by shareholders of First Northwest Bancorp.

As a private foundation under Section 501(c)(3) of the Internal Revenue Code, the foundation is required to distribute annually in grants or donations, a minimum of 5% of the average fair market value of its net investment assets.

Upon completion of the conversion and the contribution of shares to the foundation, First Northwest Bancorp would have 6,386,000, 7,520,000 and 8,654,000 shares issued and outstanding at the minimum, midpoint and maximum of the estimated valuation range.  Because First Northwest Bancorp will have an increased number of shares outstanding, the voting and ownership interests of purchasers of common stock in the offering will be diluted by 6.83% and 6.98% at the minimum and maximum of the offering, respectively, as compared to their interests in First Northwest Bancorp if the foundation was not established.  For additional discussion of the dilutive effect, see “Pro Forma Data.”  If the foundation was not established and funded as part of the conversion, RP Financial estimates that the pro forma valuation of First Northwest Bancorp would be greater; and as a result, a greater number of shares of common stock would be issued in the offering.  At the minimum, midpoint and maximum of the valuation range, the pro forma valuation of First Northwest Bancorp is $63.9 million, $75.2 million, and $86.5 million with the foundation, as compared with $65.5 million, $77.0 million, and $88.6 million, respectively, without the foundation.  See “Comparison of Valuation and Pro Forma Information With and Without the Foundation.”

Regulatory Conditions Imposed on the First Federal Community Foundation.   The Federal Reserve imposes numerous requirements on the establishment and operation of a charitable foundation.  As a result, the foundation is subject to these requirements, including but not limited to the following:

 
(a)
examination by the Federal Reserve, at the foundation’s expense, and  compliance with supervisory directives imposed by the Federal Reserve;
 
 
(b)
the foundation must provide the Federal Reserve with a copy of the annual report it submits to the Internal Revenue Service;
 
 
(c)
as long as the foundation controls shares of First Northwest Bancorp, those shares must be voted in the same ratio as all other shares are voted on each proposal considered by the shareholders, subject to certain exceptions;
 
 
(d)
the foundation must operate according to written policies adopted by its board of directors, including a conflict of interest policy; and
 
 
(e)
the foundation must not engage in self-dealing, and must comply with all laws necessary to maintain the foundation’s tax-exempt status.
 
Competition
 
We face competition in attracting deposits.  Competition in originating real estate loans comes primarily from other savings institutions, commercial banks, credit unions, life insurance companies and mortgage bankers.  Other savings institutions, commercial banks, credit unions and finance companies provide vigorous competition in consumer lending, including our indirect lending.  Commercial business competition is primarily from commercial banks, some of which have a nationwide presence.  We compete by delivering high-quality, personal service to our customers that result in a high level of customer satisfaction.
 
Our market area has a high concentration of financial institutions, many of which are branches of large money center banks and regional banks.  These include such large national lenders as Wells Fargo, Bank of America, Chase and others in our market area that have greater resources than we do and offer services that we do
 
 
105
 
 
not provide.  For example, we do not offer trust services.  Customers who seek “one-stop shopping” may be drawn to institutions that offer services that we do not.
 
We attract our deposits through our branch office system.  Competition for those deposits is principally from other savings institutions, commercial banks and credit unions located in the same community, as well as mutual funds and other alternative investments.  We compete for these deposits by offering superior service and a variety of deposit accounts at competitive rates.  Based on  the most recent branch data provided by the FDIC, as of June 30, 2011, First Federal’s share of bank, savings bank and savings and loan association deposits in Clallam and Jefferson counties was 34.4% and 14.7%, respectively.
 
Employees
 
At September 30, 2012, we had 160 full-time equivalent employees.  Our employees are not represented by any collective bargaining group.  We consider our employee relations to be good.
 
Properties
 
At September 30, 2012, we had our administrative office, eight full-service banking offices and one lending center with an aggregate net book value of $9.0 million. In October 2012, the lending center in Poulsbo, Washington became a full service branch and in July 2012 a lending center was established in Bellingham, Washington. The following table sets forth certain information concerning our offices at September 30, 2012.  See also Note 5 of the Notes to Consolidated Financial Statements.  In the opinion of management, the facilities are adequate and suitable for our needs.
 
Location
 
Leased or owned
   
Lease
expiration
date
 
Square
footage
 
Net book value at
September 30,
2012(1)
                     
(In thousands)
ADMINISTRATION CENTER
                       
                         
105 W. Eighth Street
Port Angeles, Washington 98362
 
Owned
    --       18,913       1,922  
                             
BRANCH OFFICES
                           
                             
Downtown Port Angeles
141 W. First Street
Port Angeles, Washington 98362
 
Owned
    --       6,912       404  
                             
Eastside
1603 E. First Street
Port Angeles, Washington 98362
 
Owned
    --       3,322       280  
                             
Sixth Street
227 E. Sixth Street
Port Angeles, Washington 98362
 
Owned
    --       2,382       522  
                             
Sequim Avenue
333 N. Sequim Avenue
Sequim, Washington 98382
 
Owned
    --       9,376       1,629  
                             
Sequim Village Marketplace
1201 W. Washington Street
Sequim, Washington 98382
 
Owned
    --       5,380       3,024  
 
(table continued on following page)
 
 
106
 
 
Location
 
Leased or owned
   
Lease
expiration
date
 
Square
footage
 
Net book value at
September 30,
2012(1)
                     
(In thousands)
Forks
215 Calawah Way
Forks, Washington 98331
 
Owned
    --       2,159       182  
                             
Port Townsend
1321 Sims Way
Port Townsend, Washington 98368
 
Owned
    --       4,637       1,057  
                             
Poulsbo Loan Production Office (2)
19980 10 th Avenue NE, Suite 202
Poulsbo, Washington 98370
 
Leased
   
1/31/2014
    883       --  
                             
Bellingham Loan Production
Office (3)
1313 E. Maple Street, Suite 228
Bellingham, Washington 98225
 
Leased
   
1/31/2013
    340       --  
 
(1)
Includes value of the land.
(2)
Became a full service branch in October 2012 and is scheduled to receive deposits by October 31, 2012.  Lease renewal for two successive three year terms.
(3)
Established in July 2012.  Lease is for a six month period from July 12, 2012 until January 31, 2013 and has no specific renewal terms.

We maintain depositor and borrower customer files on an on-line basis, utilizing a telecommunications network, portions of which are leased. The book value of all data processing and computer equipment utilized by First Federal at September 30, 2012, was $957,000.  Management has a business continuity plan in place with respect to the data processing system, as well as First Federal’s operations.
 
Legal Proceedings
 
First Federal from time to time is involved in various claims and legal actions arising in the ordinary course of business.  There are currently no matters that, in the opinion of management, would have material adverse effect on our financial position, results of operation or liquidity.
 
 
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Management Structure
 
The board of directors of First Northwest Bancorp consists of the same nine individuals who currently serve as directors of First Federal.  The composition of our board of directors and the board of First Federal will remain unchanged following the conversion.  In addition, following the conversion, each of the executive officers of First Northwest Bancorp will continue to serve as an executive officer of First Federal.
 
Currently, First Federal compensates all of the executive officers and directors.  First Northwest Bancorp reimburses First Federal on a quarterly basis for the time that executive officers spend on holding company matters.  Following the conversion, we intend to continue these practices unless First Northwest Bancorp begins engaging in significant business apart from being the holding company of First Federal, in which case, First Northwest Bancorp may begin compensating its executive officers and directors separately.
 
Our Directors
 
The directors of First Northwest Bancorp are the same persons who currently serve as directors of First Federal.  Each director will serve until the first annual meeting of shareholders of First Northwest Bancorp, at which time each director will stand for re-election.  Currently, the directors of First Federal are elected by its members.  Following the conversion, the directors of First Northwest Bancorp will be divided into three classes so that, after the first annual meeting of shareholders, approximately one-third of the directors will be elected at each annual meeting of shareholders.  First Northwest Bancorp will elect the directors of First Federal, as its sole shareholder.
 
The table below sets forth certain information regarding the members of the board of directors of First Federal, including the term of office for each board member.
 
Name
 
Age as of
June 30, 2012
 
Positions Held With First Federal
 
Director
Since
 
Term of
Office
Expires
                 
Richard G. Kott
 
77
 
Chairman of the Board
 
1998
 
2012
Stephen E. Oliver
 
64
 
Vice Chairman of the Board
 
2001
 
2014
David A. Blake
 
64
 
Director
 
2005
 
2012
Lloyd J. Eisenman
 
72
 
Director
 
1985
 
2012
Cindy H. Finnie
 
62
 
Director
 
2012
 
2012
David T. Flodstrom
 
65
 
Director
 
2002
 
2013
Laurence J. Hueth
 
49
 
Executive Vice President, Chief Operating,  Financial and Risk Officer
 
2010
 
2014
Levon L. Mathews
 
53
 
President and Chief Executive Officer
 
2009
 
2012
Jennifer Zaccardo
 
60
 
Director
 
2011
 
2014

The Business Background of Our Directors
 
The business experience of each director for at least the past five years is set forth below.  The biographies also contain information regarding the person’s experience, qualifications, attributes or skills that caused the board of directors to determine that the person should serve as a director.  Unless otherwise indicated, directors have held their positions for at least the past five years.
 
Richard G. Kott retired as president and owner of Atlas Trucking Inc. located in Port Angeles, Washington, in 2003, selling the company which he operated for 22 years.  He began a phased retirement in 2001 when he and a partner sold Atlas Columbia Warehouse Inc., located in Tacoma, Washington, a company which they started in 1986.  The two companies provided transportation, warehousing and nationwide distribution and export services for the pulp, paper and lumber industries.  They employed about 50 people, operating profitably for the years he was an owner.  Prior to this, Mr. Kott spent 24 years in the pulp and paper industry working in technical, engineering and operating positions.  He served as resident manager for major integrated paper mills in Washington, Oregon and Louisiana owned by Fortune 500 companies.  For a number of years he also successfully ran his own consulting
 
 
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business in the pulp and paper industry.  Mr. Kott is a chemical engineer and former Fulbright Scholar.  In retirement he continues serving as a director of Lumber Traders Inc. and its affiliated corporations.   He also assists with local charities serving youth activities and education on the Olympic Peninsula.
 
Stephen E. Oliver is an attorney with over 30 years of experience in the areas of banking, real estate development, environmental and municipal law.  Currently, he owns the legal consulting firm, S.E. Oliver, Inc., which he started in 2010.  Prior to starting his consulting firm, Mr. Oliver was a stockholder in the Platt Irwin Law Firm beginning his affiliation in 1978, and serving as President from 1991 through 2009.  Mr. Oliver is President of the Board of Directors of the Northwest Maritime Center, Port Townsend, Washington, and is a member of the Board of Directors of the Olympic Medical Center Foundation, Port Angeles, Washington.
 
David A. Blake is the Operations Manager and a partner at Blake Sand & Gravel, an aggregates and crushed rock producer located in Sequim, Washington.  He also served as the Chief Executive Officer of Blake Tile and Stone, a retail masonry, tile and stone business from 1980 to 2009, and has been affiliated with both companies since 1969.  Mr. Blake is a member of the Board of Directors of the Albert Haller Foundation and served on the Sequim School District Board of Directors for 31 years.
 
Lloyd J. Eisenman is retired after a 39-year career in accounting and finance.  Prior to his retirement, he served as the Chief Financial Officer of First Federal from 1998 until 2005, and had been employed by First Federal since 1973.  Mr. Eisenman began his career as a Certified Public Accountant, working in public accounting for seven years.  His career has given him a wealth of expertise, particularly in the areas of risk management and financial reporting.  Mr. Eisenman is a past President of the Kiwanis Club of Port Angeles and also served as a Lt. Governor of the Pacific Northwest District of Kiwanis International.  He is currently a board member of the Olympic Peninsula Chapter of The American Red Cross.  He is a past director of the Feiro Marine Life Center and is a member of the Chamber of Commerce of Port Angeles.
 
Cindy H. Finnie recently retired from Allstate Insurance Company after 38 years of leadership experience.  Her range of responsibilities included property and casualty underwriting, sales management, business development, agency management, financial management and developing insurance agencies.  Ms. Finnie was also responsible for introducing and developing the financial services market in her area.  Ms. Finnie is the co-owner and President of Rainshadow Properties, Inc., a boutique hotel and property management company that she co-founded in 1995.  Ms. Finnie is also a director and past president of the Centrum Foundation, Chair of the Washington State Arts Commission, Chair of the Fort Worden Public Development Authority, a director of the Jefferson County Community Foundation and a member of the City of Port Townsend Lodging Tax Advisory Committee.
 
David T. Flodstrom, P.E. is retired after a 36-year career in municipal management and industrial relations.  During his career, he served as the City Engineer for Port Angeles for five years, the Port Angeles City Manager for ten years and worked in industrial relations and human resources for private industries for fifteen years.  Mr. Flodstrom’s career has provided him with expertise in management, human resources and governance.  Mr. Flodstrom is the past president of Nor’ Western Rotary Club, a member of the Olympic Medical Foundation board, Commissioner of the Peninsula Housing Authority, past board member of the Washington Business Association, and has spent over 30 years as a coach and umpire for youth baseball clubs.
 
Laurence J. Hueth joined First Federal as Asset/Liability Manager in December 2008, and was elected Executive Vice President, Chief Financial Officer in February 2009.  Mr. Hueth assumed the additional responsibilities of Chief Risk Officer and Chief Operating Officer in 2011 and 2012, respectively.  Mr. Hueth has over 25 years of progressively responsible experience in the finance and risk management areas within the banking industry.  Prior to joining First Federal, Mr. Hueth was employed by PFF Bank & Trust located in Pomona, California for 15 years holding positions in finance, treasury and operational risk management, including serving as Vice President, Operational Risk Manager and Bank Treasurer from 2005 until November 2008.
 
Levon L. Mathews is our President and Chief Executive Officer, a position he has held since September 2009.  He has 30 years’ experience in banking, including having served as President of First Federal Bancshares from January 2009 until September 2009, Executive Vice President, Regions Morgan Keegan Private Banking from April 2006 to April 2008, President of Regions Bank of Memphis from 2001 until April 2006 and President of Union Planters of North Indiana from 1999 until 2001.  Mr. Mathews’ career has provided him with a wealth of experience in all areas of banking.  He has served as a member of the Board of Directors of the St. Louis Federal Reserve, Memphis Region.
 
 
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Jennifer Zaccardo is President and Managing Partner of Baker, Overby & Moore Inc., P.S., a public accounting firm with which she has been affiliated since 1983.  She is a Certified Public Accountant with particular expertise in the timber industry and small business financial reporting and taxation, and is a member of the Washington Society of Certified Public Accountants and the American Institute of Certified Public Accountants.  Ms. Zaccardo is a past president and treasurer of the Peninsula College Foundation Board of Governors.
 
Director Qualifications and Experience.   The following table highlights the experience, qualifications, attributes and skills that the board of directors considered in making its decision to nominate directors to our board; however, the fact that a particular attribute was not considered should not be construed to be a determination that the director lacks such an attribute.
 
Experience, Qualification, Skill or Attribute
Blake
Eisenman
Finnie
Flodstrom
Hueth
Kott
Mathews
Oliver
Zaccardo
                   
Professional standing in chosen field
x
x
x
x
x
x
x
x
x
Expertise in financial services or related industry
 
x
x
 
x
x
x
 
x
Audit Committee Financial Expert
 
x
     
x
   
x
Civic and community involvement
x
x
x
x
x
x
x
x
x
Other public company experience
       
x
x
x
   
Leadership and team-building skills
x
x
x
x
x
x
x
x
x
Diversity by race, gender or culture
   
x
         
x
Specific skills/knowledge:
                 
Finance
 
x
x
 
x
x
x
 
x
Technology
       
x
     
x
Marketing
x
 
x
           
Public affairs
x
x
 
x
         
Human resources
x
   
x
 
x
   
x
Governance
x
x
x
x
 
x
x
x
x
 
Directors’ Compensation
 
The following table provides compensation information for each member of the board of directors of First Federal during the year ended June 30, 2012, except for Mr. Mathews, our Chief Executive Officer, and Mr. Hueth, our Chief Financial Officer, whose compensation is presented in the Summary Compensation Table in the section entitled “Executive Compensation” below.
 
Name
 
Fees Earned or
Paid in Cash ($)
   
Total ($)
 
             
Richard G. Kott
    30,775       30,775  
Stephen E. Oliver
    27,100       27,100  
David A. Blake
    27,888       27,888  
Lloyd J. Eisenman
    28,063       28,063  
Cindy H. Finnie (1)
    825       825  
David T. Flodstrom
    27,384       27,384  
Jennifer Zaccardo
    22,162       22,162  
     
 
(1)
Ms. Finnie was appointed to the Board effective June 26, 2012.
 
 
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The non-employee (outside) directors of First Federal receive compensation for their service on the board.  In setting their compensation, the board of directors considers the significant amount of time and level of skill required for director service.  Outside directors currently receive an annual retainer, as follows: Chairman, $15,000; Vice Chairman and Committee Chairs, $12,000; and all other directors, $9,000.  In addition, outside directors receive a fee of $825 for each board meeting attended, with the exception of the Chairman of the Board, who receives $975 per meeting.  Committee members also receive fees for committee meeting attendance of $325 per meeting for regular members and $425 per meeting for committee chairs.  Fees for interim committee meetings called for a particular purpose and not to discuss regular agenda items are paid at half the committee meeting fee.
 
Deferred Compensation Plan.   In order to encourage the retention of qualified directors, we offer a deferred compensation plan whereby directors may defer all or a portion of their regular fees until a permitted distribution event occurs under the plan.  Each director may direct the investment of the deferred fees among investment options made available by First Federal.  We have established a grantor trust to hold the plan investments.  Grantor trust assets are considered part of our general assets, and the directors have the status of unsecured creditors of First Federal with respect to the trust assets.  The plan permits the payment of benefits upon a separation from service (on account of termination of service, pre-retirement death or disability), a change in control, an unforeseeable emergency or upon a date specified by the director, in an amount equal to the value of the director’s account balance (or the amount necessary to satisfy the unforeseeable emergency, in that case).  A director may elect, at the time he or she makes a deferral election, to receive the deferred amount and related earnings in a lump sum or in annual installments over a period not exceeding 15 years.  A director may subsequently elect to change when or how he or she receives his or her plan benefit, if certain required conditions are met.  At June 30, 2012, our estimated deferred compensation liability accrual with respect to non-employee directors under the deferred compensation plan was $21,550.
 
Meetings and Committees of the Board of Directors
 
In connection with the completion of the conversion, First Northwest Bancorp will establish a nominating and corporate governance committee, a compensation committee and an audit committee.  All of the members of these committees will be independent directors as defined in the listing standards of The Nasdaq Stock Market.  We plan to have written charters for each committee available on our website at www.ourfirstfed.com.
 
The board of directors of First Federal generally meets monthly.  During the year ended June 30, 2012, the board of directors held 13 meetings.  First Federal has standing Audit and Compliance, Compensation and Loan/Asset Quality committees.  No current director attended fewer than 75% of the total meetings of the board of directors and committees on which such board member served during this period.
 
The Audit and Compliance Committee consists of Directors Eisenman (Chairman), Oliver, Kott and Zaccardo.  This committee’s primary responsibilities are to engage the independent accounting firm to audit First Federal’s financial statements; review the findings and recommendations from regulatory examinations, audits and compliance self-assessments together with management responses to ensure that appropriate action is taken to oversee the integrity of the financial statements and internal controls; oversee the Enterprise Risk Management Program and management’s assessment of exposure to risks in every facet of the business (i.e., strategic, credit, interest rate, liquidity, operational, compliance, reputational, and legal); and, monitor the regulatory environment that may change First Federal’s risk profile.  The Audit and Compliance Committee meets quarterly and on an as needed basis.  The committee met five times during the year ended June 30, 2012.
 
The Compensation Committee consists of Directors Flodstrom (Chairman), Blake, Eisenman, Finnie, Kott, Oliver and Zaccardo.  This committee meets annually and on an as needed basis, and provides general oversight regarding the personnel, compensation and benefits matters of First Federal.  The Compensation Committee met four times during the year ended June 30, 2012.
 
The Loan/Asset Quality Committee consists of Directors Blake (Chairman), Eisenman, Finnie, Flodstrom, Hueth and Mathews.  This committee exercises oversight of the lending function, including the review and recommendation for board approval of the lending policies; reviews reports related to asset quality and lending; and reviews and discusses marketing strategies as related to assessing the impact of such trends on First Federal’s ability to execute its lending strategy.  The Loan Committee meets quarterly and on an as needed basis, and met eight times during the year ended June 30, 2012.
 
 
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Corporate Governance
 
We are committed to establishing and maintaining high standards of corporate governance.  In connection with the completion of the conversion, we will establish a nominating and corporate governance committee to ensure compliance with the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act, and the rules and regulations of the SEC and The Nasdaq Stock Market.
 
Corporate Governance Policy and Code of Ethics. First Federal has adopted a Code of Ethics that is applicable to all directors, officers and employees.  Following the conversion, First Northwest Bancorp will adopt a corporate governance policy and a code of business conduct and ethics.  The corporate governance policy is expected to cover such matters as the following:
 
 
●
the duties and responsibilities of each director;
 
●
the composition, responsibilities and operation of the board of directors;
 
●
the establishment and operation of board committees, including audit, nominating and corporate governance, and compensation committees;
 
●
succession planning;
 
●
convening executive sessions of independent directors;
 
●
the board of directors’ interaction with management and third parties; and
 
●
the evaluation of the performance of the board of directors and the Chief Executive Officer.
 
The code of business conduct and ethics, which is expected to apply to all employees and directors, will address conflicts of interest, the treatment of confidential information, general employee conduct and compliance with applicable laws, rules and regulations.  In addition, the code of business conduct and ethics will be designed to deter wrongdoing and to promote honest and ethical conduct in every respect.
 
Board Leadership Structure. First Federal has separated the positions of Chairman and Chief Executive Officer. The Chairman, who is an independent director, leads the board and presides at all board meetings, while the President and Chief Executive Officer runs the day-to-day business of First Federal.  The board supports having an independent director in a board leadership position and has had an independent chairman for many years.  Having an independent chairman enables non-management directors to raise issues and concerns for board consideration without immediately involving management.  The Chairman also serves as a liaison between the board and senior management.
 
Board Role in Risk Oversight.   As part of its overall responsibility to oversee the management, business and strategy of our company, one of the primary responsibilities of our board of directors is to oversee the amounts and types of risk taken by management in executing the corporate strategy, and to monitor our risk experience against the policies and procedures set to control those risks.  The board’s risk oversight function is carried out through its approval of various policies and procedures, such as our lending and investment policies; ratification or approval of investments; and regular review of risk elements such as interest rate risk exposure, liquidity and problem assets.  Some oversight functions are delegated to committees of the board, with such committees regularly reporting to the full board the results of their oversight activities.  For example, the Audit Committee is responsible for oversight of the independent auditors and meets directly with the auditors at various times during the course of the year.
 
Business Relationships and Transactions with Executive Officers, Directors and Related Persons
 
First Federal may engage in a transaction or series of transactions with our directors, executive officers and certain persons related to them.  These transactions are subject to the review and approval of the board of directors of First Federal.  During the year ended June 30, 2012, there were no transactions of this nature.
 
First Federal has followed a policy of granting loans to executive officers and directors, which fully complies with all applicable federal regulations.  Loans to directors and executive officers are made in the ordinary course of business and on the same terms and conditions, including interest rates and collateral, as those of comparable transactions with persons not related to First Federal prevailing at the time (unless made pursuant to the employee loan program described below), in accordance with our underwriting guidelines, and do not involve more than the normal risk of collectability or present other unfavorable features.  All loans to directors and executive officers and their related persons at June 30, 2012 were performing in accordance with their terms.
 
 
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Employee Loan Program.   First Federal offers an employee loan program to all employees to assist employees with loans for a variety of personal, family or household credit needs, or for the purchase, construction or refinancing of a home which is the employee’s primary residence.  All loans offered to employees are closed on the same terms as those available to members of the general public except following closing, the terms of employee loans are modified to reflect a preferential interest rate.  Existing loans may be modified to conform to the terms of the employee loan program.  Currently all fixed-rate loans are offered to employees at the market rate offered to the general public.  A discount from market rate is offered on adjustable rate loans as follows: 25 basis points for mortgage loans on the employee’s primary residence only; and 50 basis points for one consumer loan.   If an employee terminates employment at the Bank, the interest rate on the loan reverts to the original rate for the general public.  The table below provides information regarding our directors and executive officers who had indebtedness and principal payable thereon pursuant to the employee loan program that exceeded $120,000 during the year ended June 30, 2012.
 
Name
 
Type of Loan
 
Amount
Involved
in the
Transaction
 ($)(1)
   
Amount
Outstanding
as of
June 30,
2012
   
Principal
Paid
During
the Year
Ended
June 30,
2012 ($)
   
Interest
Paid
During
the Year
Ended
June 30,
2012 ($)
   
Interest
Rate
(Current
Note
Rate)
(%)
 
                                   
Elaine T. Gentilo
 
First Mortgage
    385,656       375,145       10,510       15,658       4.125  
   
Second Fixed Home Equity
    45,940       44,091       1,850       2,503       5.550  
   
Home Equity Line of Credit
    16,431       15,967       464       856       5.250  
                                             
Gina E. Lowman
 
First Mortgage
    229,840       221,671       8,170       13,149       3.750  
                                             
Stephen E. Oliver
 
First Mortgage
    353,488       347,239       6,250       8,449       3.750  
                                             
David A. Blake
 
First Mortgage
    161,749       158,647       3,101       6,013       3.750  
                                             
Lloyd J. Eisenman(2)
 
First Mortgage
    92,752       --       92,752       3,095       4.875  
   
Home Equity Line of Credit
    25,060       --       25,060       730       4.125  
   
Home Equity Line of Credit
    14,982       --       14,982       547       5.250  
 
(1)
Consists of the largest aggregate amount of principal outstanding during the year ended June 30, 2012.
(2)
On February 10, 2012, these loans were consolidated into one loan totaling $135,900 (which included closing fees for the refiling), at an interest rate of 3.875%.  This loan was sold on February 15, 2012.
 
Executive Officers of First Federal Who Are Not Directors
 
Each of the executive officers of First Federal will retain his or her office following the conversion.  Executive officers are appointed annually by the board of directors of First Federal.  The business experience for at least the past five years for each of the executive officers of First Federal, who do not serve as directors, is set forth below.
 
Clifford A. Frydenberg, 61, is our Executive Vice President and Chief Credit Officer, a position he has held since February 2012.  He was a loan consultant for James Grabicki and Associates, LLC, located in Bellingham, Washington, from 2008 until February 2012.  Prior to that, he was retired for three years, following a 30-year career in banking, including 20 years in executive level positions.
 
Elaine T. Gentilo, 61, is our Executive Vice President and Chief People Officer, a position she has held since June 2010.  Prior to that, she served as First Federal’s Human Resource Director from 2005 until June 2010.
 
Gina E. Lowman, 47, is our Executive Vice President and Chief Banking Officer, a position she has held since 2010.  Ms. Lowman has been employed by First Federal since 1998, serving in a variety of capacities, including as Director of Sales and Marketing from 2007 until 2010.
 
Joyce L. Ruiz, 52, is our Executive Vice President, Chief Administrative Officer and Corporate Secretary, positions she has held since December 2005.  Prior to that, she served as the Supervisor of First Federal’s Items Processing Department from March 2005 until December 2005.
 
 
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Executive Compensation
 
Compensation Discussion and Analysis.   This section provides an overview and analysis of First Federal’s compensation programs, the material compensation policy decisions it has made under those programs and the material factors considered in making those decisions.  Following this discussion is a series of tables that contain specific information about compensation paid or payable to the following individuals, who are First Federal’s “named executive officers”:
 
 
●
Levon L. Mathews, President and Chief Executive Officer;
 
●
Laurence J. Hueth, Executive Vice President, Chief Operating, Financial and Risk Officer;
 
●
Clifford A. Frydenberg, Executive Vice President and Chief Credit Officer;
 
●
Elaine T. Gentilo, Executive Vice President and Chief People Officer;
 
●
Gina E. Lowman, Executive Vice President and Chief Banking Officer; and
 
●
Joyce L. Ruiz, Executive Vice President, Chief Administrative Officer and Secretary.
 
Compensation Philosophy and Objectives.   First Federal’s executive compensation policies are designed to establish an appropriate relationship between executive pay and First Federal’s performance.  The principles underlying the executive compensation policies include the following:
 
 
●
attract and retain key executives who are vital to First Federal’s long-term success;
 
●
provide levels of compensation competitive with First Federal’s peers and commensurate with its performance;
 
●
compensate executives in ways that inspire and motivate them; and
 
●
properly align risk-taking and compensation.
 
Role of the Compensation Committee.   The Compensation Committee is responsible for setting the policies and compensation levels for First Federal’s directors, officers and employees.  The Committee is responsible for evaluating the performance of the Chief Executive Officer and setting his compensation, while the Chief Executive Officer evaluates the performance of other senior officers and makes recommendations to the Committee regarding compensation levels.  The Chief Executive Officer is not involved in decisions regarding his own compensation.
 
The Compensation Committee continually reviews executive compensation.  The recent economic downturn has impacted and will continue to impact compensation for the foreseeable future.  In particular, we did not pay incentive compensation to our named executive officers for the year ended June 30, 2012 and have not adopted incentive compensation goals for 2013.
 
Compensation Consultant/Peer Group Analysis.   In November 2010, the Compensation Committee engaged the services of Swanson Advisory Services, LLC to conduct a total compensation benchmarking analysis for executive management.  Together, Swanson Advisory Services and First Federal selected a peer group.  The peer group consisted of 24 financial holding companies ranging in total assets from $500 million to $1.1 billion headquartered in the Western United States, including seven headquartered in Washington.  The following companies comprised the peer group:
 
 American River Bankshares
 
Kaiser Federal Financial Group
 Anchor Bancorp
 
Northrim BanCorp
 Bank of Commerce Holdings
 
North Valley Bancorp
 Bridge Capital Holdings
 
Oak Valley Bancorp
 Broadway Financial Corp.
 
Pacific Financial Corp.
 Central Valley Community Bancorp
 
Pacific Premier Bancorp
 Community West Bancshares
 
Plumas Bancorp
 First Northern Community Bancorp
 
Riverview Bancorp
 First Pactrust Bancorp
 
Skagit State Bancorp
 FNB Bancorp
 
Timberland Bancorp 
 Heritage Financial Corp.
 
United Security Bancshares 
 Heritage Oaks Bancorp
 
Washington Banking Co.
 
 
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Swanson Advisory Services presented its final report to the Compensation Committee in March 2011.  For the period covered by the report, First Federal’s total assets were at the median of the peer group and its earnings were at the 90% percentile, compared to its peers.  The analysis demonstrated that executive officer total compensation for First Federal’s executive officers ranged from 0 to 45% of the peer group.  As a result of the analysis, the Compensation Committee increased the named executive officers’ salary by the following amounts: Mr. Mathews, 4.4%, Mr. Hueth, 21.4%, Ms. Gentilo, 1.5% and Ms. Lowman, 4.2%.  Ms. Ruiz was not included in the benchmarking analysis and Mr. Frydenberg had not yet been hired by First Federal.
 
Compensation Program Elements .  The Compensation Committee focuses primarily on the following components in forming the total compensation package for First Federal’s named executive officers:
 
 
●
base salary;
 
●
incentive compensation;
 
●
retirement benefits; and
 
●
health and welfare benefits.
 
In connection with the conversion and stock offering, we intend to establish an employee stock ownership plan.  This plan will give eligible employees an equity interest in First Northwest Bancorp and an additional retirement benefit in the form of First Northwest Bancorp common stock.  Following the offering, we plan to submit to First Northwest Bancorp shareholders for their approval an equity incentive plan that will allow for the grant of stock options and restricted stock awards to eligible participants.  Although we have not identified the amount or the individuals that will receive awards, we expect that this stock-based plan will help us to attract and retain employees consistent with our growth plans.  We expect that the proposed equity incentive plan will play a significant role in our future compensation considerations, particularly for our named executive officers.  For additional information regarding these plans, see “Benefits to Be Adopted—Employee Stock Ownership Plan” and “—Equity Incentive Plan.”
 
Base Salary.   We provide the opportunity for our named executive officers and other executives to earn a competitive base salary.  We do so in order to attract and retain key executives who are vital to First Federal’s success.  The Compensation Committee takes a number of factors into account when setting the base salaries of the named executive officers.  These factors include the officer’s level of experience, the responsibilities assigned to the officer and the officer’s performance during the previous year.
 
Incentive Compensation.   In past years, the named executive officers have had to opportunity to earn incentive compensation by meeting a set of predefined goals.  These goals included profitability and risk management.  Due to the recent state of the economy and First Federal’s performance, the Compensation Committee has temporarily suspended incentive compensation for the named executive officers.  Incentive compensation may be reinstated when conditions improve.
 
Retirement Benefits.   We offer a tax-qualified 401(k) plan to all of its employees who meet minimum eligibility requirements.  This plan allows our employees to save money for retirement in a tax-advantaged manner.  The plan is described in further detail below, under “Summary Compensation Table—401(k) Plan.”  During the fiscal year ended June 30, 2012, we matched employee contributions, to the extent allowed under qualified plan limitations, in the amount of fifty percent of the first six percent of participants’ contributions.
 
 We offer a pension plan which provides a benefit upon retirement to eligible employees hired prior to February 1, 2006.  The benefit is generally two percent times years of service times final average compensation (disregarding service and compensation after January 31, 2010).  The plan is described in further detail below, under “Pension Benefits.”
 
We also offer a deferred compensation plan whereby certain officers may defer all or a port of their annual salary until a permitted distribution event occurs under the plan.  Officers who participate may direct the investment of the deferred salary among investment options made available by First Federal.  We have entered into an agreement with Mr. Mathews, whereby we make an annual contribution to Mr. Mathews’ deferred compensation plan account in an amount equal to ten percent of his base salary.  Payment will be made to Mr. Mathews of the then
 
 
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value of his account upon his separation from service from First Federal or at a later date selected by Mr. Mathews, subject to the terms of the deferred compensation plan.
 
Health and Welfare Benefits.   We offer a range of benefits, in which all employees generally may participate, including medical and dental insurance coverage, vision care coverage, group life insurance coverage and long-term disability insurance coverage.
 
Summary Compensation Table.   The following table presents information regarding the compensation for the fiscal year ended June 30, 2012, of our named executive officers: (1) Levon L. Mathews, our President and Chief Executive Officer; (2) Laurence J. Hueth, our Executive Vice President, Chief Operating, Financial and Risk Officer; and (3) our next most highly compensated executive officers, who are Clifford A. Frydenberg, Elaine T. Gentilo, Gina E. Lowman and Joyce L. Ruiz.
 
Name and Principal Position
 
Fiscal
Year
 
Salary ($)
   
Bonus
($)(1)
   
Change in Pension
Value and
Nonqualified
Deferred
Compensation
Earnings ($)(2)
   
All Other
Compensation ($)(3)
   
Total
($)
 
                                   
Levon L. Mathews
 
2012
    287,844       --       --       32,932       320,776  
President and Chief Executive Officer
                                           
                                             
Laurence J. Hueth
 
2012
    172,156       --       --       3,850       176,006  
Chief Operating, Financial   and Risk Officer
                                           
                                             
Clifford A. Frydenberg
 
2012
    44,058 (4)     6,000       --       60       50,118  
Chief Credit Officer
                                           
                                             
Elaine T. Gentilo
 
2012
    99,944       --       20,000       3,122       123,066  
Chief People Officer
                                           
                                             
Gina E. Lowman
 
2012
    119,808       --       41,000       3,744       164,552  
Chief Banking Officer
                                           
                                             
Joyce L. Ruiz
 
2012
    65,385       --       10,000       2,049       77,434  
Chief Administrative Officer   and Corporate Secretary
                                           
 
(1)
One-time signing bonus.
 
(2)
Consists of the aggregate change in the actuarial present value of the officer’s accumulated benefit under the pension plan (described below) from the pension plan measure date used for financial statement reporting purchases with respect to First Federal’s audited financial statements for the prior completed fiscal year to the pension plan measurement date used for financial statement reporting purposes with respect to First Federal’s audited financial statements for the covered fiscal year.
(3)
Consists of 401(k) matching contribution and payment of life insurance premiums, and for Mr. Mathews, First Federal’s contribution to his deferred compensation plan of $28,750.
(4)
Mr. Frydenberg was hired effective as of February 28, 2012. His annual salary is $145,000.
 
Employment Agreements for Executive Officers.  In connection with the conversion, First Northwest Bancorp and First Federal intend to enter into three-year employment agreements with each of the named executive officers.  Under the employment agreements, the initial base salary levels for Messrs. Mathews, Hueth and Frydenberg, Ms. Gentilo, Ms. Lowman and Ms. Ruiz will be $288,000, $173,000, $145,000, $100,000, $120,000 and $70,000, respectively, which amounts will be paid by First Northwest Bancorp and First Federal and may be
 
 
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increased at the discretion of the board of directors or an authorized committee of the board.  On each anniversary of the initial date of the employment agreements, the term of the agreements will be extended for an additional year unless notice is given by First Northwest Bancorp or First Federal to the executive, or by the executive to First Northwest Bancorp or First Federal, at least 90 days prior to the anniversary date.  The agreements also provide that the executives are eligible for incentive opportunities and fringe benefits, and may participate in such benefit plans, to the same extent as executive officers of First Northwest Bancorp and First Federal generally.  The employment agreements provide for payments upon an executive’s termination under a variety of scenarios, as discussed in further detail below, under “Potential Payments Upon Termination.”
 
401(k) Plan .   We currently offer a qualified, tax-exempt savings plan to our employees with a cash or deferred feature qualifying under Section 401(k) of the Internal Revenue Code (the “401(k) Plan”).  Generally, all employees, as of the first day of the month following the commencement of employment, who have attained age 21, are eligible to make 401(k) contributions.  Employees are eligible to be allocated matching contributions as of the first day of the month following attainment of age 21 and completion of one year of service.
 
Participants are permitted to make pre-tax contributions to the 401(k) Plan of up to 20% of their annual salary and commissions up to $50,000, up to a maximum of $17,000 in 2012.  In addition, participants who have attained age 50 may defer an additional $5,500 annually as a 401(k) “catch-up” contribution.  First Federal matches 50% of the first six percent of participants’ contributions into the 401(k) Plan, including catch-up contributions.  401(k) contributions (other than catch-up contributions) and matching contributions are subject to nondiscrimination requirements imposed by the Internal Revenue Code.  All participant 401(k) contributions and earnings are fully and immediately vested.  Matching contributions and related earnings vest at a rate of 25% after one year of employment, 50% after two years of employment, 75% after three years of employment and 100% after four years of employment.
 
Participants may invest amounts contributed by them, as well as employer contributions, to their 401(k) Plan accounts in one or more investment options available under the 401(k) Plan.  Changes in investment directions among the funds are permitted on a periodic basis pursuant to procedures established by the plan administrator.  Each participant receives a quarterly statement which provides information regarding, among other things, the market value of his investments and contributions made to the 401(k) Plan on his behalf.  Participant account balances are updated daily. Participants are permitted to borrow against their account balances in the 401(k) Plan subject to plan rules.
 
Distribution of a participant’s vested account may be made upon termination of employment.   In addition, hardship distributions are also permitted as are in-service distributions after attaining age 59½.  One in-service distribution is permitted per calendar year. Distributions may be made in a lump sum or in annual payments, as and when elected by the participant but subject to plan rules.
 
Pension Benefits.   The following table provides information regarding each plan that provides for payments or other benefits at, following or in connection with retirement, as of June 30, 2012.
 
Name
 
Plan Name
 
Number of Years
of Credited
Service (1)
 
Present Value of
Accumulated Benefit
($)(2)
 
Payments During
Last Fiscal Year
($)
         
Levon L. Mathews
 
--
 
--
 
--
 
--
Laurence J. Hueth
 
--
 
--
 
--
 
--
Clifford A. Frydenberg
 
--
 
--
 
--
 
--
Elaine T. Gentilo
 
Pension Plan
 
3.833
 
87,000
 
--
Gina E. Lowman
 
Pension Plan
 
10.083
 
113,000
 
--
Joyce L. Ruiz
 
Pension Plan
 
3.833
 
31,000
 
--
 
(1)
The time from when the employee first became a participant in the plan until February 1, 2010, the date on which benefit accruals were frozen.
(2)
Calculated using the accrued benefit multiplied by a present value factor based on an assumed age 65 retirement date, 50% of the benefit using the 2000 RP Mortality table (generational mortality table for annuities) and 50% of the benefit using the 2000 RP Mortality table (static mortality table for lump sums) and 5.67% and 4.13% interest respectively.
 
 
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First Federal participates in a multiple-employer defined benefit plan (the “Pension Plan”), which provides a benefit upon retirement to eligible employees of First Federal.  Employees hired on or after February 1, 2006, are not eligible to participate in the Pension Plan.  Ms. Lowman, Ms. Gentilo and Ms. Ruiz are the only named executive officers who participate in the Pension Plan.  The Pension Plan benefit is generally two percent times years of service times final average compensation (disregarding service and compensation after January 31, 2010).   The Pension Plan also provides for a post-retirement benefit increase.  Upon completion of three years of employment with First Federal or upon reaching age 65, the employee is 100 percent vested.  Benefits are available under the Pension Plan upon retirement, death or termination of employment, if vested.  Early retirement payments that commence prior to normal retirement date are subject to actuarial reduction.  Ms. Gentilo, Ms. Lowman and Ms. Ruiz are currently eligible for early retirement payments under the plan.  Participants may elect to have their Pension Plan benefit paid as an annuity, with various annuity forms being available, or as a lump sum or partial lump sums if certain requirements are met.
 
Nonqualified Defined Contribution and Other Nonqualified Deferred Compensation Plans.   The following table provides information regarding each defined contribution or other plan that provides for the deferral of compensation on a basis that is not tax-qualified, for the year ended June 30, 2012.
 
Name
 
Executive
Contributions
in Last FY
($)
   
Registrant
Contributions in
Last FY ($)
   
Aggregate
Earnings in
Last FY ($)
   
Aggregate
Withdrawals/
Distributions
($)
   
Aggregate
Balance at
FYE ($)
 
                               
Levon L. Mathews
    --       28,750 (1)       (2)     --       48,426  
Laurence J. Hueth
    --       --       --       --       --  
Clifford A. Frydenberg
    --       --       --       --       --  
Elaine T. Gentilo
    --       --       --       --       --  
Gina E. Lowman
    --       --       --       --       --  
Joyce T. Ruiz
    --       --       --       --       --  
 
(1)     Also reported as compensation for the year ended June 30, 2012 in the “All Other Compensation” column of the Summary Compensation Table.
(2)    The value of Mr. Mathews’ account decreased as a result of loss on investments.
 
In order to encourage the retention of qualified officers, we offer a deferred compensation plan whereby certain officers may defer all or a portion of their annual salary until a permitted distribution event occurs under the plan.  Each officer may direct the investment of the deferred salary among investment options made available by First Federal.  We have established a grantor trust to hold the plan investments.  Grantor trust assets are considered part of our general assets, and the officers have the status of unsecured creditors of First Federal with respect to the trust assets.  The plan permits the payment of benefits upon a separation from service (whether on account of termination of employment, pre-retirement death, disability), a change in control, an unforeseeable emergency or upon a date specified by the officer, in an amount equal to the value of the officer’s account balance (or the amount necessary to satisfy the unforeseeable emergency, in that case).  An officer may elect, at the time he or she makes a deferral election, to receive the deferred amount and related earnings in a lump sum or in annual installments over a period not exceeding 15 years.  An officer may subsequently elect to change when or how he or she receives his or her plan benefit, if certain required conditions are met.  At June 30, 2012, our estimated deferred compensation liability accrual with respect to officers under the deferred compensation plan was $49,375.
 
First Federal has entered into a letter agreement with Mr. Mathews.  Pursuant to the agreement, First Federal makes an annual contribution to Mr. Mathews’ deferred compensation plan account in an amount equal to ten percent of his base salary.  Payment will be made to Mr. Mathews of the then value of his account (adjusted for gains and losses) upon his separation from service from First Federal or at a later date selected by Mr. Mathews, as permitted by the deferred compensation plan.
 
Potential Payments Upon Termination.   The following table provides information regarding each contract, agreement, plan or arrangement, including the Pension Plan and deferred compensation plan and letter agreement with Mr. Mathews, that provides for payments to a named executive officer at, following or in connection with any termination, including without limitation resignation, severance, retirement or a constructive termination of
 
 
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a named executive officer, or a change in control of First Federal, or a change in the named executive officer’s responsibilities, assuming that such termination occurred on June 30, 2012.
 
Name
 
Without Cause by Employer or
for Good
Reason by
Employee ($)
   
Change in Control
($)
   
Early
Retirement
($)
   
Normal
Retirement
($)
   
Disability
($)
   
Death
($)
 
                                     
Levon L. Mathews
                                   
    Employment Agreement
    294,204       749,561       --       --       --       --  
Deferred Compensation Plan
    48,426       48,426       48,426       48,426       48,426       48,426  
                                                 
Laurence J. Hueth
                                               
    Employment Agreement
    187,527       264,071       --       --       --       --  
Deferred Compensation Plan (1)
    --       --       --       --       --       --  
                                                 
Clifford A. Frydenberg
                                               
    Employment Agreement
    160,027       305,027       --       --       --       --  
Deferred Compensation Plan (1)
    --       --       --       --       --       --  
                                                 
Elaine T. Gentilo
                                               
    Employment Agreement
    115,026       167,883       --       --       --       --  
Deferred Compensation Plan (1)
    --       --       --       --       --       --  
Pension Plan
    --       --       5,175 (2)       (3)     --       37,260  
                                                 
Gina E. Lowman
                                               
    Employment Agreement
    139,711       178,960       --       --       --       --  
Deferred Compensation Plan (1)
    --       --       --       --       --       --  
Pension Plan
    --       --       4,268 (2)       (3)     --       30,730  
                                                 
Joyce L. Ruiz
                                               
    Employment Agreement
    85,838       97,107       --       --       --       --  
Deferred Compensation Plan (1)
    --       --       --       --       --       --  
Pension Plan
    --       --       1,423 (2)       (3)     --       10,246  
 
(1)  
Although eligible, does not participate in this plan.
(2)  
Annual payment.
(3)  
Not yet eligible.
 
Employment Agreements.   In connection with the conversion, First Northwest Bancorp and First Federal intend to enter into three-year employment agreements with each of the named executive officers.  These agreements will provide for potential payments upon an executive’s involuntary termination, death or disability.  The agreements may be terminated by First Federal for cause, by an executive if he or she is assigned duties inconsistent with the initial position, duties or responsibilities, or upon the occurrence of certain events that are treated as an involuntary termination under the employment agreement.  If an executive’s employment is terminated without cause or upon the executive’s voluntary termination following the occurrence of an event described in the preceding sentence, then for one year after the date of termination First Northwest Bancorp and First Federal would be required to pay the executive’s salary at the rate in effect immediately prior to the date of termination and continue the executive’s coverage under First Northwest Bancorp’s and First Federal’s health, life and disability programs.
 
The employment agreements will also provide for severance payment and other benefits if an executive is involuntarily terminated within 12 months following a change in control of First Northwest Bancorp or First
 
 
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Federal.  The agreements authorize severance payments on a similar basis if an executive voluntarily terminates his or her employment during the 12 months following a change in control because the executive is assigned duties inconsistent with the position, duties and responsibilities immediately prior to such change in control, or upon the occurrence of certain events that are treated as an involuntary termination under the employment agreement.  The agreements will define the term “change in control” as having occurred when, among other things: (1) certain events occur as specified by federal regulations in connection with a change in control of First Northwest Bancorp or First Federal; (2) a person other than First Northwest Bancorp purchases shares of First Northwest Bancorp’s or First Federal’s common stock under a tender or exchange offer for the shares; (3) any person, as that term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, is or becomes the beneficial owner of securities of First Northwest Bancorp representing 25% or more of the combined voting power of First Northwest Bancorp’s then outstanding securities; (4) a majority of the membership of the board of directors changes as the result of a contested election; or (5) upon the consummation of a plan of reorganization, merger, acquisition, consolidation, sale of all or substantially all of the assets of First Northwest Bancorp or a similar transaction in which First Northwest Bancorp is not the resulting entity.
 
In the event of a change in control, the employment agreements provide that the value of the maximum benefit be distributed in the form of a lump sum cash payment equal to a multiple of an executive’s “base amount” (2.75 for Mr. Mathews, 2.0 for Messrs. Hueth and Frydenberg and 1.5 for Ms. Gentilo, Ms. Lowman and Ms. Ruiz), and continued coverage under First Northwest Bancorp’s and First Federal’s health, life and disability programs for a one-year period following the change in control, the total value of which does not exceed 2.99 times the executive’s base amount.  An executive’s “base amount” is generally the average of the executive’s taxable compensation for the past five years.  Section 280G of the Internal Revenue Code provides that if payments made in connection with a change in control equal or exceed three times the individual’s base amount, then a portion of those payments are deemed to be “excess parachute payments.”  Individuals are subject to a 20% excise tax on the amount of such excess parachute payments, and First Northwest Bancorp and First Federal would not be entitled to deduct the amount of such excess parachute payments.  The employment agreements will provide that severance and other payments that are subject to a change in control will be reduced to the extent necessary to ensure that no amounts payable to the executives will be considered excess parachute payments.
 
If an executive becomes entitled to benefits under the terms of First Northwest Bancorp’s or First Federal’s then-current disability plan, if any, or becomes otherwise unable to fulfill his or her duties under the employment agreement, the executive shall be entitled to receive such group and other disability benefits as are then provided for executive employees.  In the event of the executive’s disability, the employment agreement will not be suspended, except that the obligation to pay the executive’s will be reduced in accordance with the amount of any disability income benefits received such that, on an after-tax basis, the executive realizes from the sum of disability income benefits and salary the same amount as the executive would realize on an after-tax basis from the executive’s if he or she had not become disabled.  Upon a resolution adopted by a majority of the disinterested members of the board of directors or an authorized committee, First Northwest Bancorp and First Federal may discontinue payment of an executive’s salary beginning six months after a determination that the executive become entitled to benefits under the disability plan or is otherwise unable to fulfill his or her duties under the employment agreement.
 
In the event of an executive’s death while employed under an employment agreement and prior to any termination of employment, we will pay to the executive’s estate, or such person as the executive may have previously designated, the salary which was not previously paid and which the executive would have earned if he or she had continued to be employed under the agreement through the last day of the month in which the executive died, together with the benefits provided under the employment agreement through that date.
 
Deferred Compensation Plan.   First Federal offers a deferred compensation plan whereby certain officers may defer all or a portion of their annual salary until a permitted distribution event occurs under the plan.  Currently, Mr. Mathews is the only named executive officer who participates in this plan.  First Federal makes an annual contribution to Mr. Mathews’ deferred compensation plan account in an amount equal to ten percent of his base salary.  Payment will be made to Mr. Mathews of the then value of his account (adjusted for gains and losses) upon his separation from service from First Federal or at a later date selected by Mr. Mathews, in a cash lump sum.  Payment is made from the general assets of First Federal, subject to claims of creditors in the event of First Federal’s bankruptcy or insolvency.
 
 
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Pension Plan.   First Federal participates in a pension plan which provides a benefit upon retirement to eligible employees of First Federal.  Ms. Lowman, Ms. Gentilo and Ms. Ruiz are the only named executive officers who participate in the Pension Plan.  The Pension Plan benefit is generally two percent times years of service times final average compensation (disregarding service and compensation after January 31, 2010).  Benefits are available under the Pension Plan upon normal retirement, late retirement, early retirement and death.  Early retirement payments that commence prior to normal retirement date are subject to actuarial reduction.  Participants may elect to have their Pension Plan benefit paid as an annuity, with various annuity forms being available, with the annuity being paid over the life of the participant or the participant and a designated beneficiary, depending on the annuity selected, or as a lump sum or partial lump sums if certain requirements are met.  Payment will be made from the trust established under the Pension Plan.
 
Compensation Committee Interlocks and Insider Participation
 
The members of the Compensation Committee are David T. Flodstrom, David A. Blake, Lloyd J. Eisenman, Cindy H. Finnie, Richard G. Kott, Stephen E. Oliver and Jennifer Zaccardo.  No members of the Compensation Committee were officers or employees of First Federal or any of its subsidiaries during the year ended June 30, 2012.  No member of the committee is a former officer of First Federal or any of its subsidiaries, other than Mr. Eisenman who retired in 2005.  No member of the committee had any relationships otherwise requiring disclosure, other than Mr. Oliver who has a mortgage loan outstanding under First Federal’s employee loan program as described in the section entitled, “Business Relationships and Transactions with Executive Officers, Directors and Related Persons.”
 
Benefits to Be Adopted
 
Employee Stock Ownership Plan .   We intend to adopt an employee stock ownership plan for employees of First Northwest Bancorp and First Federal to become effective upon the conversion.  Employees of First Northwest Bancorp and First Federal who have attained age 21 and have been credited with at least 1,000 hours of service during a twelve-month period will be eligible to participate in the employee stock ownership plan.
 
As part of the conversion, it is anticipated that the employee stock ownership plan will borrow funds from First Northwest Bancorp.  The employee stock ownership plan will use these funds to purchase a number of shares of common stock up to 8.0% of the shares of common stock to be outstanding after this offering.  It is anticipated that this loan will equal 100% of the aggregate purchase price of the common stock acquired by the employee stock ownership plan.  The loan to the employee stock ownership plan will be repaid primarily from First Federal’s contributions to the employee stock ownership plan over a period of 20 years, and from dividends on common stock held by the employee stock ownership plan.  Collateral for the loan will be the common stock purchased by the employee stock ownership plan.  The interest rate for the loan is expected to be set at the applicable long-term federal rate as published by the IRS in effect at the time the loan is funded.  In addition to making contributions to repay the employee stock ownership plan loan, First Federal or First Northwest Bancorp may, in any plan year, make additional discretionary contributions for the benefit of plan participants.  These contributions may be made either in cash or in shares of common stock, which may be acquired through the purchase of outstanding shares in the market or from individual shareholders, upon the original issuance of additional shares by First Northwest Bancorp or upon the sale of treasury shares by First Northwest Bancorp.  The timing, amount and manner of future contributions to the employee stock ownership plan will be affected by various factors, including the terms of the employee stock ownership loan, prevailing regulatory policies, the requirements of applicable laws and regulations and market conditions.
 
Shares purchased by the employee stock ownership plan with the proceeds of the loan will be held in a suspense account and released to participants’ accounts as debt service payments are made. Shares released from the employee stock ownership plan suspense account will be allocated to each eligible participant’s employee stock ownership plan account based on the ratio of each such participant’s eligible compensation to the total eligible compensation of all eligible employee stock ownership plan participants.  An employee is eligible for an employee stock ownership allocation if he or she is credited with 1,000 or more hours of service during the plan year, and is actually employed on the last day of the plan year.  The account balances of participants within the employee stock ownership plan will become 100% vested upon completion of three years of service.  Forfeitures of nonvested accounts will be reallocated among remaining participating employees in the same manner as an employer contribution.  In the case of a “change in control,” as defined in the employee stock ownership plan, which triggers a termination of the employee stock ownership plan, participants immediately will become fully vested in their account balances.  Benefits are payable upon retirement or other separation from service, or upon termination of the
 
 
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plan.  First Federal’s and First Northwest Bancorp’s contributions to the employee stock ownership plan are not fixed, and the value of the common stock cannot be determined in advance, so benefits payable under the employee stock ownership plan cannot be estimated.
 
Pentegra Service, Inc. of White Plains, New York, is expected to serve as trustee of the employee stock ownership plan.  Under the employee stock ownership plan, the trustee must vote all allocated shares held in the employee stock ownership plan in accordance with the instructions of the participating employees, and unallocated shares generally will be voted in the same ratio on any matter as those allocated shares for which instructions are given.
 
Generally accepted accounting principles require that any third-party borrowing by the employee stock ownership plan be reflected as a liability on First Northwest Bancorp’s statement of financial condition.  Since the employee stock ownership plan is borrowing from First Northwest Bancorp, such obligation is not treated as a liability, but will be excluded from stockholders’ equity.  If the employee stock ownership plan purchases newly issued shares from First Northwest Bancorp, total stockholders’ equity would neither increase nor decrease, but per share stockholders’ equity and per share net earnings would decrease as the newly issued shares are allocated to the employee stock ownership plan participants.
 
The employee stock ownership plan will be subject to the requirements of the Internal Revenue Code of 1986, Employment Retirement Income Security Act (“ERISA”), and the regulations of the IRS and the Department of Labor thereunder.
 
Equity Incentive Plan.   Currently, we intend to adopt, within one year after completion of the offering, an equity incentive plan providing for stock options and restricted stock for the benefit of selected directors, officers and employees.  We anticipate that the plan will have reserved a number of shares equal to 10.0% and 4.0% of the common stock to be outstanding after this offering for stock option and restricted stock awards, respectively.  Grants of restricted stock will be issued without cost to the recipient.  If a determination is made to implement a plan for stock options and restricted stock, the plan will be submitted to shareholders for their consideration, at which time the shareholders would be provided with detailed information regarding such plan.  If such plan is approved and effected, it will have a dilutive effect on First Northwest Bancorp’s shareholders as well as affect First Northwest Bancorp’s net income and shareholders’ equity, although the actual results cannot be determined until the plan is implemented.
 
Employee Severance Compensation Plan.   In connection with the conversion, First Federal’s board of directors intends to establish the First Federal Savings and Loan Association of Port Angeles Employee Severance Compensation Plan which will provide eligible employees with severance pay benefits in the event of a change in control of First Federal or First Northwest Bancorp following the conversion.  The severance plan will define the term “change in control” in the same manner as the executive officer employment agreements described above.
 
Management personnel with employment agreements or severance agreements will not be eligible to participate in the severance plan.  Generally, employees will be eligible to participate in the severance plan if they have completed at least one year of service with First Federal.  For this purpose, employees will be credited with service prior to adoption of the plan.  The severance plan will vest in each participant a contractual right to the benefits the participant is entitled to thereunder.  Under the plan, in the event of a change in control of First Federal or First Northwest Bancorp, eligible employees who are terminated will be entitled to receive a severance payment.  Eligible employees will be entitled to receive a severance payment in accordance with the following schedule:
 
 
●
Employees who have completed at least one year of service will receive a cash severance payment equal to three months of their base wage.
 
●
Employees with two to three years will receive a cash severance payment equal to six months of their base wage.
 
●
Employees with more than three years of service will receive a cash severance payment equal to six months plus one month for each year of continuous employment over three years up to a maximum payment equal to the employee’s then-annual salary.
 
●
An employee who is an assistant vice president of First Federal prior to the change in control and has less than three years of service will receive a minimum payment equal to one-half of the employee’s then-annual salary.
 
 
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●
Employees who are vice presidents and above of First Federal prior to the change in control will receive a minimum payment equal to the employee’s then-annual salary.
 
These payments may tend to discourage takeover attempts by increasing costs to be incurred by First Federal in the event of a takeover.  If the provisions of the severance plan are triggered, the total amount of payments that would be due thereunder, based solely upon current salary levels, would be approximately $4.8 million.  It is management’s belief, however, that substantially all of First Federal’s employees would be retained in their current positions in the event of a change in control, and that any amount payable under the severance plan would be considerably less than the total amount that could possibly be paid under the severance plan.
 
 
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The following table sets forth for each of the directors and executive officers of First Northwest Bancorp and First Federal and for all of the directors and executive officers as a group, the proposed purchases of common stock, assuming sufficient shares are available to satisfy their subscriptions.  Collectively, our directors and executive officers intend to subscribe for 91,300 shares regardless of the number of shares sold in the offering.  This number equals 1.2% of the 7,520,000 shares that would be sold at the midpoint of the offering range, including shares issued to the First Federal Community Foundation.  The amounts include shares that may be purchased through individual retirement accounts and by associates.  These purchases are intended for investment purposes only, and not for resale.  Directors, officers, their associates and employees will pay the same price as all other subscribers for the shares for which they subscribe.
 
             
Name
 
Amount
   
Number
of Shares
 
             
Directors :
           
             
Richard G. Kott
  $ 200,000       20,000  
Stephen E. Oliver
    50,000       5,000  
David A. Blake
    50,000       5,000  
Lloyd J. Eisenman
    95,000       9,500  
Cindy H. Finnie
    50,000       5,000  
David T. Flodstrom
    40,000       4,000  
Laurence J. Hueth (1)
    50,000       5,000  
Levon L. Mathews (1)
    175,000       17,500  
Jennifer Zaccardo
    170,000       17,000  
                 
Executive officers who
are not directors :
               
                 
Clifford A. Frydenberg
    25,000       2,500  
Elaine T. Gentilo
    1,000       100  
Gina E. Lowman
    2,000       200  
Joyce L. Ruiz
    5,000       500  
                 
All directors and executive
  officers as a group
  (13 persons)
  $ 913,000       91,300  
   
   (1)    Messrs. Hueth and Mathews are also executive officers of First Federal.
 
 
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The following is a brief description of certain laws and regulations applicable to First Northwest Bancorp and First Federal. Descriptions of laws and regulations here and elsewhere in this prospectus do not purport to be complete and are qualified in their entirety by reference to the actual laws and regulations. Legislation is introduced from time to time in the United States Congress or the Washington State Legislature that may affect the operations of First Northwest Bancorp and First Federal. In addition, the regulations governing us may be amended from time to time. Any such legislation or regulatory changes in the future could adversely affect our operations and financial condition. See “Restrictions on Acquisitions of First Northwest Bancorp and First Federal” for information on regulatory limits and requirements on persons or companies seeking to acquire control of those entities.
 
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) imposes new restrictions and an expanded framework of regulatory oversight for financial institutions, including depository institutions. The following discussion summarizes significant aspects of the Dodd-Frank Act that may affect First Federal and First Northwest Bancorp. For certain of these changes, implementing regulations have not been promulgated, so we cannot determine the full impact of the Dodd-Frank Act on our business and operations at this time.
 
The following aspects of the Dodd-Frank Act are related to the operations of First Federal:
 
 
●
The Consumer Financial Protection Bureau (“CFPB”), an independent consumer compliance regulatory agency within the Federal Reserve has been established. The CFPB is empowered to exercise broad regulatory, supervisory and enforcement authority over financial institutions with total assets of over $10 billion with respect to both new and existing consumer financial protection laws. Financial institutions with assets of less than $10 billion, like First Federal, will continue to be subject to supervision and enforcement by their primary federal banking regulator with respect to federal consumer financial protection laws.  The CFPB also has authority to promulgate new consumer financial protection regulations and amend existing consumer financial protection regulations;
 
 
●
 
The Federal Deposit Insurance Act was amended to direct federal regulators to require depository institution holding companies to serve as a source of strength for their depository institution subsidiaries;
 
 
●
The prohibition on payment of interest on demand deposits was repealed, effective July 21, 2011;
 
 
●
Deposit insurance is permanently increased to $250,000 and unlimited deposit insurance for noninterest-bearing transaction accounts is extended through December 31, 2012;
 
 
●
The deposit insurance assessment base for FDIC insurance is the depository institution’s average consolidated total assets less the average tangible equity during the assessment period; and
 
 
●
The minimum reserve ratio of the FDIC’s Deposit Insurance Fund (“DIF”) increased to 1.35 percent of estimated annual insured deposits or the comparable percentage of the assessment base; however, the FDIC is directed to “offset the effect” of the increased reserve ratio for insured depository institutions with total consolidated assets of less than $10 billion. Pursuant to the Dodd-Frank Act, the FDIC recently issued a rule setting a designated reserve ratio at 2.0% of insured deposits.
 
The following aspects of the Dodd-Frank Act are related to the operations of First Northwest Bancorp:
 
 
●
Tier 1 capital treatment for “hybrid” capital items like trust preferred securities is eliminated subject to various grandfathering and transition rules. The federal banking agencies must promulgate new rules on regulatory capital within 18 months from July 21, 2010, for both depository institutions and their holding companies, to include leverage capital and risk-based capital measures at least as stringent as those now applicable to First Federal under the prompt corrective action regulations;
 
 
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●
Public companies are required to provide their shareholders with a non-binding vote: (i) at least once every three years on the compensation paid to executive officers, and (ii) at least once every six years on whether they should have a “say on pay” vote every one, two or three years;
 
 
●
A separate, non-binding shareholder vote is required regarding golden parachutes for named executive officers when a shareholder vote takes place on mergers, acquisitions, dispositions or other transactions that would trigger the parachute payments;
 
 
●
Securities exchanges are required to prohibit brokers from using their own discretion to vote shares not beneficially owned by them for certain “significant” matters, which include votes on the election of directors, executive compensation matters, and any other matter determined to be significant;
 
 
●
Stock exchanges are prohibited from listing the securities of any issuer that does not have a policy providing for (i) disclosure of its policy on incentive compensation payable on the basis of financial information reportable under the securities laws, and (ii) the recovery from current or former executive officers, following an accounting restatement triggered by material noncompliance with securities law reporting requirements, of any incentive compensation paid erroneously during the three-year period preceding the date on which the restatement was required that exceeds the amount that would have been paid on the basis of the restated financial information;
 
 
●
Disclosure in annual proxy materials is required concerning the relationship between the executive compensation paid and the financial performance of the issuer;
 
 
●
Item 402 of Regulation S-K is amended to require companies to disclose the ratio of the Chief Executive Officer’s annual total compensation to the median annual total compensation of all other employees; and
 
 
●
Smaller reporting companies are exempt from complying with the internal control auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act.
 
Regulation of First Federal
 
General.   First Federal, as a state-chartered savings bank, is subject to applicable provisions of Washington law and to regulations and examinations of the DFI. As an insured institution, it also is subject to examination and regulation by the FDIC, which insures the deposits of First Federal to the maximum permitted by law. During these state or federal regulatory examinations, the examiners may require First Federal to provide for higher general or specific loan loss reserves, which can impact our capital and earnings. This regulation of First Federal is intended for the protection of depositors and the Deposit Insurance Fund of the FDIC and not for the purpose of protecting shareholders of First Federal or First Northwest Bancorp. First Federal is required to maintain minimum levels of regulatory capital and is subject to some limitations on the payment of dividends to First Northwest Bancorp. See “- Regulatory Capital Requirements” and “- Limitations on Dividends and Stock Repurchases.”
 
Federal and State Enforcement Authority and Actions . As part of its supervisory authority over Washington-chartered savings banks, the DFI may initiate enforcement proceedings to obtain a cease-and-desist order against an institution believed to have engaged in unsafe and unsound practices or to have violated a law, regulation, or other regulatory limit, including a written agreement. The FDIC also has the authority to initiate enforcement actions against insured institutions for similar reasons and may terminate the deposit insurance if it determines that an institution has engaged in unsafe or unsound practices or is in an unsafe or unsound condition. Both these agencies may utilize less formal supervisory tools to address their concerns about the condition, operations or compliance status of a savings bank.
 
Regulation by the Washington Department of Financial Institutions . State law and regulations govern First Federal’s ability to take deposits and pay interest, to make loans on or invest in residential and other real estate, to make consumer loans, to invest in securities, to offer various banking services to its customers, and to establish branch offices. As a state savings bank, First Federal must pay semi-annual assessments, examination costs and certain other charges to the DFI.
 
 
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Washington law generally provides the same powers for Washington savings banks as federally and other-state chartered savings institutions and banks with branches in Washington, subject to the approval of the DFI. Washington law allows Washington savings banks to charge the maximum interest rates on loans and other extensions of credit to Washington residents which are allowable for a national bank in another state if higher than Washington limits. In addition, the DFI may approve applications by Washington savings banks to engage in an otherwise unauthorized activity, if the DFI determines that the activity is closely related to banking, and First Federal is otherwise qualified under the statute. This additional authority, however, is subject to review and approval by the FDIC if the activity is not permissible for national banks.
 
Insurance of Accounts and Regulation by the FDIC .  The Deposit Insurance Fund (“DIF”) of the FDIC insures deposit accounts in First Federal up to $250,000 per separately insured depositor.  Noninterest bearing transaction accounts have unlimited coverage until December 31, 2012.  As insurer, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of and to require reporting by FDIC-insured institutions. Our deposit insurance premiums for the year ended June 30, 2012, were $656,000.  Those premiums have increased in recent years due to recent strains on the FDIC deposit insurance fund due to the cost of large bank failures and increase in the number of troubled banks.
 
As a result of a decline in the reserve ratio (the ratio of the net worth of the Deposit Insurance Fund to estimated insured deposits) and concerns about expected failure costs and available liquid assets in the Deposit Insurance Fund, the FDIC adopted a rule requiring each insured institution to prepay on December 30, 2009 the estimated amount of its quarterly assessments for the fourth quarter of 2009 and all quarters through the end of 2012 (in addition to the regular quarterly assessment for the third quarter due on December 30, 2009). The prepaid amount is recorded as an asset with a zero risk weight and the institution will continue to record quarterly expenses for deposit insurance. For purposes of calculating the prepaid amount, assessments were measured at the institution’s assessment rate as of September 30, 2009, with a uniform increase of three basis points effective January 1, 2011, and were based on the institution’s assessment base for the third quarter of 2009, with growth assumed quarterly at annual rate of 5%. If events cause actual assessments during the prepayment period to vary from the prepaid amount, institutions will pay excess assessments in cash, or receive a rebate of prepaid amounts not exhausted after collection of assessments due on June 13, 2013, as applicable. Collection of the prepayment does not preclude the FDIC from changing assessment rates or revising the risk-based assessment system in the future. The balance of First Federal’s prepaid assessment at September 30, 2012 was $1.1 million.
 
The Dodd-Frank Act requires the FDIC’s deposit insurance assessments to be based on assets instead of deposits.  The FDIC has issued rules, effective as of the second quarter of 2011, which specify that the assessment base for a bank is equal to its total average consolidated assets less average tangible capital.  The FDIC assessment rates range from approximately five basis points to 35 basis points, depending on applicable adjustments for unsecured debt issued by an institution and brokered deposits (and to further adjustment for institutions that hold unsecured debt of other FDIC-insured institutions), until such time as the FDIC’s reserve ratio equals 1.15%. Once the FDIC’s reserve ratio reaches 1.15% and the reserve ratio for the immediately prior assessment period is less than 2.0%, the applicable assessment rates may range from three basis points to 30 basis points (subject to adjustments as described above).  If the reserve ratio for the prior assessment period is equal to, or greater than 2.0% and less than 2.5%, the assessment rates may range from two basis points to 28 basis points and if the prior assessment period is greater than 2.5%, the assessment rates may range from one basis point to 25 basis points (in each case subject to adjustments as described above.  No institution may pay a dividend if it is in default on its federal deposit insurance assessment.
 
The FDIC conducts examinations of and requires reporting by state non-member banks, such as First Federal. The FDIC also may prohibit any insured institution from engaging in any activity determined by regulation or order to pose a serious risk to the deposit insurance fund.
 
The FDIC may terminate the deposit insurance of any insured depository institution, including First Federal, if it determines after a hearing that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, order or any condition imposed by an agreement with the FDIC. It also may suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance, if the institution has no tangible capital. If insurance of accounts is terminated, the accounts at the institution at the time of the termination, less subsequent withdrawals, shall continue to be insured for a period of six months to two years, as determined by the FDIC. Management is aware of no existing circumstances which would result in termination of First Federal’s deposit insurance.
 
 
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Prompt Corrective Action.   Federal statutes establish a supervisory framework based on five capital categories:  well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized.  An institution’s category depends upon where its capital levels are in relation to relevant capital measures, which include a risk-based capital measure, a leverage ratio capital measure and certain other factors.  The federal banking agencies have adopted regulations that implement this statutory framework.  Under these regulations, an institution is treated as well capitalized if its ratio of total capital to risk-weighted assets is 10% or more, its ratio of core capital to risk-weighted assets is 6% or more, its ratio of core capital to adjusted total assets (leverage ratio) is 5% or more, and it is not subject to any federal supervisory order or directive to meet a specific capital level.  In order to be adequately capitalized, an institution must have a total risk-based capital ratio of not less than 8%, a core capital to risk-weighted assets ratio of not less than 4%, and a leverage ratio of not less than 4%.  An institution that is not well capitalized is subject to certain restrictions on brokered deposits, including restrictions on the rates it can offer on its deposits generally.  Any institution which is neither well capitalized nor adequately capitalized is considered undercapitalized.

Undercapitalized institutions are subject to certain prompt corrective action requirements, regulatory controls and restrictions which become more extensive as an institution becomes more severely undercapitalized.  Failure by First Federal to comply with applicable capital requirements would, if unremedied, result in restrictions on its activities and lead to enforcement actions, including, but not limited to, the issuance of a capital directive to ensure the maintenance of required capital levels and, ultimately, the appointment of the FDIC as receiver or conservator.  Banking regulators will take prompt corrective action with respect to depository institutions that do not meet minimum capital requirements.  Additionally, approval of any regulatory application filed for their review may be dependent on compliance with capital requirements.

At September 30, 2012, First Federal was categorized as “well capitalized” under the prompt corrective action regulations of the FDIC.  For additional information, see Note 11 of the Notes to Consolidated Financial Statements.

Capital Requirements.   First Federal is required by FDIC regulations to maintain minimum levels of regulatory capital consisting of core (Tier 1) capital and supplementary (Tier 2) capital. Tier 1 capital generally includes common shareholders’ equity and noncumulative perpetual preferred stock, less most intangible assets. Tier 2 capital, which is limited to 100 percent of Tier 1 capital, includes such items as qualifying general loan loss reserves, cumulative perpetual preferred stock, mandatory convertible debt, term subordinated debt and limited life preferred stock; however, the amount of term subordinated debt and intermediate term preferred stock (original maturity of at least five years but less than 20 years) that may be included in Tier 2 capital is limited to 50 percent of Tier 1 capital.
 
The FDIC currently measures an institution’s capital using a leverage limit together with certain risk-based ratios. The FDIC’s minimum leverage capital requirement for a bank to be considered adequately capitalized specifies a minimum ratio of Tier 1 capital to average total assets of 4%. At September 30, 2012, First Federal had a Tier 1 leverage capital ratio to average assets of 9.7%.   The FDIC retains the right to require a particular institution to maintain a higher capital level based on its particular risk profile.
 
FDIC regulations also establish a measure of capital adequacy based on ratios of qualifying capital to risk-weighted assets. Assets are placed in one of four categories and given a percentage weight based on the relative risk of that category. In addition, certain off-balance sheet items are converted to balance-sheet credit equivalent amounts, and each amount is then assigned to one of the four categories. Under the guidelines, for a bank to be considered adequately capitalized the ratio of total capital (Tier 1 capital plus Tier 2 capital) to risk-weighted assets (the total risk-based capital ratio) must be at least 8%, and the ratio of Tier 1 capital to risk-weighted assets (the Tier 1 risk-based capital ratio) must be at least 4%. In evaluating the adequacy of a bank’s capital, the FDIC may also consider other factors that may affect the bank’s financial condition, such as interest rate risk exposure, liquidity, funding and market risks, the quality and level of earnings, concentration of credit risk, risks arising from nontraditional activities, loan and investment quality, the effectiveness of loan and investment policies, and management’s ability to monitor and control financial operating risks.
 
The FDIC may impose additional restrictions on institutions that are undercapitalized and generally is authorized to reclassify an institution into a lower capital category and impose the restrictions applicable to such category if the institution is engaged in unsafe or unsound practices or is in an unsafe or unsound condition. The imposition by the FDIC of any of these measures on First Federal may have a substantial adverse effect on its operations and profitability. Institutions with at least a 4.0% Tier 1 capital ratio, a 4.0% Tier 1 risk-based capital ratio and an 8.0% total risk-based capital ratio are considered “adequately capitalized.”  An institution is deemed “well capitalized” if it has at least a 5% Tier 1 capital ratio, a 6.0% Tier 1 risk-based capital ratio and 10.0% total
 
 
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risk-based capital ratio. Institutions that are not well capitalized are subject to certain restrictions on brokered deposits and interest rates on deposits. At September 30, 2012, First Federal was considered a “well capitalized” institution.  For a complete description of First Federal’s required and actual capital levels on September 30, 2012, see “First Federal Exceeds All Regulatory Capital Requirements.”
 
New Proposed Capital Rules. In June 2012, the Federal Reserve, FDIC and the OCC approved proposed rules that would substantially amend the regulatory risk-based capital rules applicable to First Northwest Bancorp and First Federal. The proposed rules implement the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act. “Basel III” refers to various documents released by the Basel Committee on Banking Supervision.  The proposed rules were subject to a public comment period that has expired and there is no date set for the adoption of final rules.
 
The proposed rules include new minimum risk-based capital and leverage ratios, which would be phased in during 2013 and 2014, and would refine the definitions of what constitutes “capital” for purposes of calculating those ratios. The proposed new minimum capital level requirements applicable to First Northwest Bancorp and First Federal under the proposals would be: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 4%. The proposed rules would also establish a “capital conservation buffer” of 2.5% above each of the new regulatory minimum capital ratios would result in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The new capital conservation buffer requirement would be phased in beginning in January 2016 at 0.625% of risk-weighted assets and would increase each year until fully implemented in January 2019. An institution would be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations would establish a maximum percentage of eligible retained income that could be utilized for such actions.
 
The proposed rules also implement other revisions to the current capital rules such as recognition of all unrealized gains and losses on available for sale debt and equity securities, and provide that instruments that will no longer qualify as capital would be phased out over time.
 
The federal bank regulatory agencies also proposed revisions to the prompt corrective action framework, which is designed to place restrictions on insured depository institutions, including First Federal, if their capital levels begin to show signs of weakness. These revisions would take effect January 1, 2015. Under the prompt corrective action requirements, insured depository institutions would be required to meet the following increased capital level requirements in order to qualify as “well capitalized:” (i) a new common equity Tier 1 risk-based capital ratio of 6.5%; (ii) a Tier 1 risk-based capital ratio of 8% (increased from 6%); (iii) a total risk-based capital ratio of 10% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 5% (unchanged from the current rules).
 
The proposed rules set forth certain changes for the calculation of risk-weighted assets and utilize an increased number of credit risk and other exposure categories and risk weights.  In addition, the proposed rules also address: (i) a proposed alternative standard of creditworthiness consistent with Section 939A of the Dodd-Frank Act; (ii) revisions to recognition of credit risk mitigation; (iii) rules for risk weighting of equity exposures and past due loans; and (iv) revised capital treatment for derivatives and repo-style transactions.
 
In particular, the proposed rules would expand the risk-weighting categories from the current four categories (0%, 20%, 50% and 100%) to a much larger and more risk-sensitive number of categories, generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity exposures. Higher risk weights would apply to a variety of exposure categories. Specifics include, among others:
 
 
●
Applying a 150% risk weight instead of a 100% risk weight for certain high volatility commercial real estate acquisition, development and construction loans.
 
 
●
For residential mortgage exposures, the current approach of a 50% risk weight for high-quality seasoned mortgages and a 100% risk-weight for all other mortgages is replaced with a risk weight of between 35% and 200% depending upon the mortgage’s loan-to-value ratio and whether the mortgage is a “category 1” or “category 2” residential mortgage exposure (based on eight criteria
 
 
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that include, among others, the term, seniority of the lien, use of negative amortization, balloon payments and certain rate increases).
 
 
●
Assigning a 150% risk weight to exposures (other than residential mortgage exposures) that are 90 days past due.
 
 
●
Providing for a 20% credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable (currently set at 0%).
 
         ●              Providing for a 100% risk weight for claims on securities firms.
 
         ●              Eliminating the current 50% cap on the risk weight for OTC derivatives.
 
Standards for Safety and Soundness.   The federal banking regulatory agencies have prescribed, by regulation, guidelines for all insured depository institutions relating to internal controls, information systems and internal audit systems; loan documentation; credit underwriting; interest rate risk exposure; asset growth; asset quality; earnings; and compensation, fees and benefits.  The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired.  Each insured depository institution must implement a comprehensive written information security program that includes administrative, technical, and physical safeguards appropriate to the institution’s size and complexity and the nature and scope of its activities.  The information security program must be designed to ensure the security and confidentiality of customer information, protect against any unanticipated threats or hazards to the security or integrity of such information, protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer, and ensure the proper disposal of customer and consumer information.  Each insured depository institution must also develop and implement a risk-based response program to address incidents of unauthorized access to customer information in customer information systems.  If the FDIC determines that an institution fails to meet any of these guidelines, it may require an institution to submit to the FDIC an acceptable plan to achieve compliance.
 
Federal Home Loan Bank System. First Federal is a member of the FHLB, which is one of 12 regional FHLBs that administer the home financing credit function of savings institutions. Each FHLB serves as a reserve or central bank for its members within its assigned region. It is funded primarily from proceeds derived from the sale of consolidated obligations of the Federal Home Loan Bank System. It makes loans or advances to members in accordance with policies and procedures, established by the Board of Directors of the FHLB, which are subject to the oversight of the Federal Housing Finance Board. All advances from the FHLB are required to be fully secured by sufficient collateral as determined by the FHLB. In addition, all long-term advances are required to provide funds for residential home financing.
 
As a member, First Federal is required to purchase and maintain stock in the FHLB. At September 30, 2012, First Federal had $10.7 million in FHLB stock, which was in compliance with this requirement.   First Federal did not receive any dividends from the FHLB for the years ended June 30, 2012, 2011 or 2010. Subsequent to December 31, 2008, the FHLB announced that it was below its regulatory risk-based capital requirement, and it is now precluded from paying dividends or repurchasing capital stock. The FHLB is not anticipated to resume dividend payments until its financial results improve. The FHLB has not indicated when dividend payments may resume.  See “Risk Factors - If our investment in the Federal Home Loan Bank of Seattle becomes impaired, our earnings and shareholders’ equity could decrease.”
 
The FHLBs have continued to contribute to low- and moderately-priced housing programs through direct loans or interest subsidies on advances targeted for community investment and low- and moderate-income housing projects. These contributions have affected adversely the level of FHLB dividends paid and could continue to do so in the future. These contributions could also have an adverse effect on the value of FHLB stock in the future. A reduction in value of First Federal’s FHLB stock may result in a corresponding reduction in its capital.
 
Activities and Investments of Insured State-Chartered Financial Institutions.   Federal law generally limits the activities and equity investments of FDIC insured, state-chartered banks to those that are permissible for national banks.  An insured state bank is not prohibited from, among other things, (1) acquiring or retaining a majority interest in a subsidiary, (2) investing as a limited partner in a partnership the sole purpose of which is direct or indirect investment in the acquisition, rehabilitation or new construction of a qualified housing project, provided that such limited partnership investments may not exceed 2% of the bank’s total assets, (3) acquiring up to 10% of
 
 
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the voting stock of a company that solely provides or reinsures directors’ and officers’ liability insurance coverage or bankers’ blanket bond group insurance coverage for insured depository institutions, and (4) acquiring or retaining the voting shares of a depository institution if certain requirements are met.

Washington State has enacted a law regarding financial institution parity.  Primarily, the law affords Washington-chartered commercial banks the same powers as Washington-chartered savings banks.  In order for a bank to exercise these powers, it must provide 30 days notice to the Director of the Washington Division of Financial Institutions and the Director must authorize the requested activity.  In addition, the law provides that Washington-chartered commercial banks may exercise any of the powers that the Federal Reserve has determined to be closely related to the business of banking and the powers of national banks, subject to the approval of the Director in certain situations.  Finally, the law provides additional flexibility for Washington-chartered commercial and savings banks with respect to interest rates on loans and other extensions of credit.  Specifically, they may charge the maximum interest rate allowable for loans and other extensions of credit by federally-chartered financial institutions to Washington residents.
 
Dividends. Dividends from First Federal constitute the major source of funds for dividends which may be paid by First Northwest Bancorp to shareholders after the conversion.  The amount of dividends payable by First Federal to First Northwest Bancorp will depend upon First Federal’s earnings and capital position, and is limited by federal and state laws, regulations and policies.  According to Washington law, First Federal may not declare or pay a cash dividend on its capital stock if it would cause its net worth to be reduced below (1) the amount required for liquidation accounts or (2) the net worth requirements, if any, imposed by the Director of the DFI.  Dividends on First Federal’s capital stock may not be paid in an aggregate amount greater than the aggregate retained earnings of First Federal, without the approval of the Director of the DFI.

The amount of dividends actually paid during any one period will be strongly affected by First Federal’s policy of maintaining a strong capital position.  Federal law further provides that no insured depository institution may pay a cash dividend if it would cause the institution to be “undercapitalized,” as defined in the prompt corrective action regulations.  Moreover, the federal bank regulatory agencies also have the general authority to limit the dividends paid by insured banks if such payments are deemed to constitute an unsafe and unsound practice.
 
Affiliate Transactions.   Federal laws strictly limit the ability of banks to engage in certain transactions with their affiliates, including their bank holding companies.  Transactions deemed to be a “covered transaction” under Section 23A of the Federal Reserve Act and between a subsidiary bank and its parent company or the nonbank subsidiaries of the bank holding company are limited to 10% of the bank subsidiary’s capital and surplus and, with respect to the parent company and all such nonbank subsidiaries, to an aggregate of 20% of the bank subsidiary’s capital and surplus.  Further, covered transactions that are loans and extensions of credit generally are required to be secured by eligible collateral in specified amounts.  Federal law also requires that covered transactions and certain other transactions listed in Section 23B of the Federal Reserve Act between a bank and its affiliates be on terms as favorable to the bank as transactions with non-affiliates.

Community Reinvestment Act.   First Federal is subject to the provisions of the Community Reinvestment Act of 1977 (CRA), which requires the appropriate federal bank regulatory agency to assess a bank’s performance under the CRA in meeting the credit needs of the community serviced by the bank, including low-and moderate income neighborhoods.  The regulatory agency’s assessment of a bank’s record is made available to the public.  Further, a bank’s CRA performance rating must be considered in connection with a bank’s application to, among other things, to establish a new branch office that will accept deposits, relocate an existing office or merge or consolidate with, or acquire the assets or assume the liabilities of, a federally regulated financial institution.  First Federal received an “outstanding” rating during its most recent CRA examination.

Privacy Standards.     The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (GLBA) modernized the financial services industry by establishing a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms and other financial service providers.  First Federal is subject to FDIC regulations implementing the privacy protection provisions of the GLBA.  These regulations require First Federal to disclose its privacy policy, including informing consumers of its information sharing practices and informing consumers of its rights to opt out of certain practices.
 
Environmental Issues Associated with Real Estate Lending. The Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) is a federal statute that generally imposes strict liability on, all prior and present “owners and operators” of sites containing hazardous waste. However, Congress asked to protect secured creditors by providing that the term “owner and operator” excludes a person whose ownership is
 
 
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limited to protecting its security interest in the site. Since the enactment of the CERCLA, this “secured creditor exemption” has been the subject of judicial interpretations which have left open the possibility that lenders could be liable for cleanup costs on contaminated property that they hold as collateral for a loan. To the extent that legal uncertainty exists in this area, all creditors, including First Federal, that have made loans secured by properties with potential hazardous waste contamination (such as petroleum contamination) could be subject to liability for cleanup costs, which costs often substantially exceed the value of the collateral property.
 
Other Consumer Protection Laws and Regulations. First Federal is subject to a broad array of federal and state consumer protection laws and regulations that govern almost every aspect of its business relationships with consumers. While the list set forth below is not exhaustive, these include the Truth-in-Lending Act, the Truth in Savings Act, the Electronic Fund Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Real Estate Settlement Procedures Act, the Home Mortgage Disclosure Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, the Right to Financial Privacy Act, the Home Ownership and Equity Protection Act, the Consumer Leasing Act, the Fair Credit Billing Act, the Homeowners Protection Act, the Check Clearing for the 21st Century Act, laws governing flood insurance, laws governing consumer protections in connection with the sale of insurance, federal and state laws prohibiting unfair and deceptive business practices, and various regulations that implement some or all of the foregoing. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits, making loans, collecting loans, and providing other services. Failure to comply with these laws and regulations can subject First Federal to various penalties, including but not limited to, enforcement actions, injunctions, fines, civil liability, criminal penalties, punitive damages, and the loss of certain contractual rights.
 
Regulation and Supervision of First Northwest Bancorp
 
General.   Upon the completion of the conversion, First Northwest Bancorp will be a bank holding company registered with the Federal Reserve and the sole shareholder of First Federal. Bank holding companies are subject to comprehensive regulation by the Federal Reserve under the Bank Holding Company Act of 1956, as amended (“BHCA”), and the regulations promulgated thereunder. This regulation and oversight is generally intended to ensure that First Northwest Bancorp limits its activities to those allowed by law and that it operates in a safe and sound manner without endangering the financial health of First Federal.
 
As a bank holding company, First Northwest Bancorp is required to file quarterly and annual reports with the Federal Reserve and any additional information required by the Federal Reserve and is subject to regular examinations by the Federal Reserve. The Federal Reserve also has extensive enforcement authority over bank holding companies, including the ability to assess civil money penalties, to issue cease and desist or removal orders and to require that a holding company divest subsidiaries (including its bank subsidiaries). In general, enforcement actions may be initiated for violations of law and regulations and unsafe or unsound practices.
 
The Bank Holding Company Act.   Under the BHCA, First Northwest Bancorp will be supervised by the Federal Reserve.  The Federal Reserve has a policy that a bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner.  In addition, the Federal Reserve provides that bank holding companies should serve as a source of strength to its subsidiary banks by being prepared to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity, and should maintain the financial flexibility and capital raising capacity to obtain additional resources for assisting its subsidiary banks.  A bank holding company’s failure to meet its obligation to serve as a source of strength to its subsidiary banks will generally be considered by the Federal Reserve to be an unsafe and unsound banking practice or a violation of the Federal Reserve’s regulations or both.
 
Under the BHCA, the Federal Reserve may approve the ownership of shares by a bank holding company in any company the activities of which the Federal Reserve has determined to be so closely related to the business of banking or managing or controlling banks as to be a proper incident thereto. These activities generally include, among others, operating a savings institution, mortgage company, finance company, credit card company or factoring company; performing certain data processing operations; providing certain investment and financial advice; underwriting and acting as an insurance agent for certain types of credit-related insurance; leasing property on a full-payout, non-operating basis; selling money orders, travelers’ checks and U.S. Savings Bonds; real estate and personal property appraising; providing tax planning and preparation services; and, subject to certain limitations, providing securities brokerage services for customers.
 
 
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Acquisitions. The BHCA prohibits a bank holding company, with certain exceptions, from acquiring ownership or control of more than 5% of the voting shares of any company that is not a bank or bank holding company and from engaging in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries. A bank holding company that meets certain supervisory and financial standards and elects to be designed as a financial holding company may also engage in certain securities, insurance and merchant banking activities and other activities determined to be financial in nature or incidental to financial activities.  The BHCA prohibits a bank holding company, with certain exceptions, from acquiring ownership or control of more than 5% of the voting shares of any company that is not a bank or bank holding company and from engaging in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries.
 
Regulatory Capital Requirements.   The Federal Reserve has adopted capital guidelines pursuant to which it assesses the adequacy of capital in examining and supervising a bank holding company and in analyzing applications under the BHCA. These guidelines apply on a consolidated basis to bank holding companies with $500 million or more in assets or with less assets but certain risky activities, and on a bank-only basis to other companies. These bank holding company capital adequacy guidelines are similar to those imposed on First Federal by the FDIC. For a bank holding company with less than $500 million in assets, the capital guidelines apply on a bank only basis and the Federal Reserve expects the holding company’s subsidiary banks to be well capitalized under the prompt corrective action regulations.
 
Interstate Banking .  The Federal Reserve must approve an application of a bank holding company to acquire control of, or acquire all or substantially all of the assets of, a bank located in a state other than the holding company’s home state, without regard to whether the transaction is prohibited by the laws of any state.  The Federal Reserve may not approve the acquisition of a bank that has not been in existence for the minimum time period, not exceeding five years, specified by the law of the host state.  Nor may the Federal Reserve approve an application if the applicant controls or would control more than 10% of the insured deposits in the United States or 30% or more of the deposits in the target bank’s home state or in any state in which the target bank maintains a branch.  Federal law does not affect the authority of states to limit the percentage of total insured deposits in the state that may be held or controlled by a bank holding company to the extent such limitation does not discriminate against out-of-state banks or bank holding companies.  Individual states may also waive the 30% state-wide concentration limit contained in the federal law.

The federal banking agencies are authorized to approve interstate merger transactions without regard to whether the transaction is prohibited by the law of any state, unless the home state of one of the banks adopted a law prior to June 1, 1997, which applies equally to all out-of-state banks and expressly prohibits merger transactions involving out-of-state banks.  Interstate acquisitions of branches will be permitted only if the law of the state in which the branch is located permits such acquisitions.  Interstate mergers and branch acquisitions will also be subject to the nationwide and statewide insured deposit concentration amounts described above.

Restrictions on Dividends.   First Northwest Bancorp’s ability to declare and pay dividends is subject to  the Federal Reserve limits and Washington law, and it may depend on its ability to receive dividends received from First Federal.
 
A policy of the Federal Reserve limits the payment of a cash dividend by a bank holding company if the holding company’s net income for the past year is not sufficient to cover both the cash dividend and a rate of earnings retention that is consistent with capital needs, asset quality and overall financial condition. A bank holding company that does not meet any applicable capital standard would not be able to pay any cash dividends under this policy. A bank holding company not subject to consolidated capital requirements is expected not to pay dividends unless its debt-to-equity ratio is less than 1:1, and it meets certain additional criteria. The Federal Reserve also has indicated that it would be inappropriate for a company experiencing serious financial problems to borrow funds to pay dividends.
 
Except for a company that meets the well-capitalized standard for bank holding companies, is well managed, and is not subject to any unresolved supervisory issues, a bank holding company is required to give  the Federal Reserve prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the company’s consolidated net worth. The Federal Reserve may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe or unsound practice or would violate any law, regulation or regulatory order, condition, or written agreement. A bank holding company is considered well-capitalized if on a consolidated basis it has a total
 
 
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risk-based capital ratio of at least 10.0% and a Tier 1 risk-based capital ratio of 6.0% or more, and is not subject to an agreement, order, or directive to maintain a specific level for any capital measure.
 
In addition, federal regulations and polices prohibit a return of capital during the three-year term of the business plan submitted by First Northwest Bancorp in connection with the stock offering.
 
Under Washington corporate law, First Northwest Bancorp generally may not pay dividends if after that payment it would not be able to pay its liabilities as they become due in the usual course of business, or its total assets would be less than the sum of its total liabilities .

Federal Securities Law.   The stock of First Northwest Bancorp will be registered with the SEC under the Securities Exchange Act of 1934, as amended. As a result, First Northwest Bancorp will become subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.
 
First Northwest Bancorp stock held by persons who are affiliates of First Northwest Bancorp may not be resold without registration unless sold in accordance with certain resale restrictions. Affiliates are generally considered to be officers, directors and principal shareholders. If First Northwest Bancorp meets specified current public information requirements, each affiliate of First Northwest Bancorp will be able to sell in the public market, without registration, a limited number of shares in any three-month period.
 
The SEC has adopted regulations and policies under the Sarbanes-Oxley Act of 2002 that apply to First Northwest Bancorp as a registered company under the Securities Exchange Act of 1934. The stated goals of these Sarbanes-Oxley requirements are to increase corporate responsibility, provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws. The SEC and Sarbanes-Oxley-related regulations and policies include very specific additional disclosure requirements and new corporate governance rules. The Sarbanes-Oxley Act represents significant federal involvement in matters traditionally left to state regulatory systems, such as the regulation of the accounting profession, and to state corporate law, such as the relationship between a board of directors and management and between a board of directors and its committees.
 
 
Federal Taxation
 
General.   First Northwest Bancorp and First Federal are subject to federal income taxation in the same general manner as other corporations, with some exceptions discussed below.  The following discussion of federal taxation is intended only to summarize certain pertinent federal income tax matters and is not a comprehensive description of the tax rules applicable to First Northwest Bancorp or First Federal.   First Federal is no longer subject to U.S. federal income tax examinations by tax authorities for years ended before June 30, 2009, and income tax returns have not been audited for the past three years.  See Note 9 of the Notes to Consolidated Financial Statements included in this prospectus.
 
First Northwest Bancorp anticipates that it will file a consolidated federal income tax return with First Federal commencing with the first taxable year after completion of the conversion.  Accordingly, it is anticipated that any cash distributions made by First Northwest Bancorp to its shareholders would be considered to be taxable dividends and not as a non-taxable return of capital to shareholders for federal and state tax purposes.
 
Method of Accounting.   For federal income tax purposes, First Federal currently reports its income and expenses on the accrual method of accounting and uses a fiscal year ending on June 30 for filing its federal income tax return.
 
Minimum Tax. The Internal Revenue Code imposes an alternative minimum tax at a rate of 20% on a base of regular taxable income plus certain tax preferences, called alternative minimum taxable income.  The alternative minimum tax is payable to the extent such alternative minimum taxable income is in excess of an exemption amount.  Net operating losses can offset no more than 90% of alternative minimum taxable income.  Certain payments of alternative minimum tax may be used as credits against regular tax liabilities in future years.  First Federal has not been subject to the alternative minimum tax, nor does it have any such amounts available as credits for carryover.
 
 
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Corporate Dividends-Received Deduction .   First Northwest Bancorp may eliminate from its income dividends received from First Federal as a wholly owned subsidiary of First Northwest Bancorp if it elects to file a consolidated return with First Federal.  The corporate dividends-received deduction is 100%, or 80%, in the case of dividends received from corporations with which a corporate recipient does not file a consolidated tax return, depending on the level of stock ownership of the payor of the dividend.  Corporations which own less than 20% of the stock of a corporation distributing a dividend may deduct 70% of dividends received or accrued on their behalf.
 
The First Federal Community Foundation
 
Tax Considerations.   First Federal has been advised by its outside tax advisors that an organization created and operated for charitable purposes would generally qualify as a Section 501(c)(3) exempt organization under the Internal Revenue Code, and that this type of an organization would likely be classified as a private foundation as determined in Section 509 of the Internal Revenue Code.  The foundation will submit a request to the Internal Revenue Service to be recognized as an exempt organization.  As long as the foundation files its application for recognition of tax-exempt status within 15 months from the date of its organization, and provided the Internal Revenue Service approves the application, the effective date of the foundation’s status as a Section 501(c)(3) organization will be retroactive to the date of its organization.  First Federal’s outside tax advisor, Silver, Freedman & Taff, L.L.P., however, has not rendered any advice on the regulatory condition to the contribution to require that all shares of common stock of First Northwest Bancorp held by the foundation must be voted in the same ratio as all other outstanding shares of common stock of First Northwest Bancorp on all proposals considered by shareholders of First Northwest Bancorp.  In the event that First Northwest Bancorp or the foundation receives an opinion of its legal counsel that compliance with this voting restriction would have the effect of causing the foundation to lose its tax-exempt status or otherwise have a material and adverse tax consequence on the foundation, or subject the foundation to an excise tax under Section 4941 of the Internal Revenue Code, it is expected that the Federal Reserve would waive such voting restriction upon submission of a legal opinion(s) by First Northwest Bancorp or the foundation satisfactory to them.  See “Business of First Federal – Charitable Foundation – Regulatory Conditions Imposed on the First Federal Community Foundation.”
 
Under Washington law, First Northwest Bancorp is authorized by statute to make charitable contributions and by law has recognized the benefits of such contributions to a Washington corporation.  In this regard, Washington law provides that a charitable gift must be within reasonable limits to be valid.
 
Under the Internal Revenue Code, First Northwest Bancorp is generally allowed a deduction for charitable contributions made to qualifying donees within the taxable year of up to 10% of its taxable income of the consolidated group of corporations (with certain modifications) for that year.  Charitable contributions made by First Northwest Bancorp in excess of the annual deductible amount will be deductible over each of the five succeeding taxable years, subject to certain limitations.  First Federal believes that the conversion presents a unique opportunity to establish and fund a foundation given the substantial amount of additional capital being raised in the conversion.  In making this determination, First Federal considered the dilutive impact of the contribution of common stock to the foundation on the amount of common stock available to be offered for sale in the stock offering.  Based on this consideration, First Federal believes that the contribution to the foundation in excess of the 10% annual deduction limitation is justified given First Federal’s capital position and its earnings, the substantial additional capital being raised in the stock offering, the potential benefits of the foundation to the communities served by First Federal and that some or all of the excess charitable contribution could be deductible in succeeding years.  In this regard, assuming the sale of shares at the maximum of the estimated offering range, First Northwest Bancorp would have pro forma shareholders’ equity of $148.2 million or 17.40% of pro forma consolidated assets.  See “Capitalization,” “First Federal Exceeds All Regulatory Capital Requirements,” “Pro Forma Data” and “Comparison of Valuation and Pro Forma Information With and Without the Foundation.”
 
First Northwest Bancorp anticipates receiving an opinion of its outside tax advisors, that the contribution of its own stock to the foundation should not constitute an act of self-dealing.  However, any opinion received from outside tax advisors is not binding on the Internal Revenue Service or the State of Washington Department of Revenue.  First Northwest Bancorp should also be entitled to a deduction in the amount of the fair market value of the stock at the time of the contribution less the nominal par value that the foundation may be required to pay to First Northwest Bancorp for such stock, subject to the annual deduction limitation described above.  First Northwest Bancorp, however, would be able to carry forward any unused portion of the deduction for five years following the contribution, subject to certain limitations.  First Northwest Bancorp’s outside tax advisors, however, have not rendered advice as to fair market value for purposes of determining the amount of the tax deduction.  Assuming the
 
 
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 close of the offering at the maximum of the estimated price range, First Northwest Bancorp estimates that all or a substantial portion of the contribution should be deductible over the six-year period.  First Federal may make further contributions to the foundation following the initial contribution, although this is not anticipated.  In addition, First Northwest Bancorp and First Federal may also continue to make charitable contributions to other qualifying organizations.  First Federal may make future contributions as deemed appropriate by First Federal’s Board of Directors, subject to any capital needs and requirements or other regulatory limitations that may be applicable.
 
Although First Northwest Bancorp expects to receive an opinion of its outside tax advisors that it will more likely than not be entitled to a deduction for the charitable contribution, there can be no assurances that the Internal Revenue Service will recognize the foundation as a Section 501(c)(3) exempt organization or that a deduction for the charitable contribution will be allowed.  In either case, First Northwest Bancorp’s contribution to the foundation would be expensed without tax benefit, resulting in a reduction in earnings in the year in which the Internal Revenue Service makes the determination.
 
As a private foundation, earnings and gains, if any, from the sale of common stock or other assets are generally exempt from federal and state corporate income taxation.  However, investment income, such as interest, dividends and capital gains, of a private foundation will generally be subject to a federal excise tax of 2.0%.  The foundation will be required to make an annual filing with the Internal Revenue Service.  The foundation also will be required to publish a notice that the annual information return will be available for public inspection for a period of 180 days after the date of the public notice.  The information return for a private foundation must include, among other things, an itemized list of all grants made or approved, showing the amount of each grant, the recipient, any relationship between a grant recipient and the foundation’s managers and a concise statement of the purpose of each grant.  Numerous other restrictions exist in the operation of the foundation including transactions with related entities, level of investment and distributions for charitable purposes.
 
Washington Taxation
 
First Federal is subject to a business and occupation tax imposed under Washington law at the rate of 1.8% of gross receipts.  Interest received on loans secured by mortgages or deeds of trust on residential properties and certain investment securities are exempt from this tax.
 
 
The board of directors of First Federal has adopted the plan of conversion, and an application for approval of the plan of conversion has been filed with the DFI and the FDIC.  The DFI must approve our application, which approval will be conditioned on the approval of the plan of conversion by our members and the satisfaction of certain other conditions.  The DFI’s conditional approval does not constitute a recommendation or endorsement of the plan of conversion.  We also must receive a letter of non-objection to the conversion from the FDIC to consummate the conversion.  A holding company application has also been filed with, and must be approved by, the Federal Reserve.
 
General
 
On May 22, 2012, we adopted a plan of conversion, which was subsequently amended on November 20, 2012, pursuant to which we will convert from a state chartered mutual savings bank to a state chartered stock savings bank and at the same time become a wholly owned subsidiary of First Northwest Bancorp,   a new Washington corporation.  The conversion will include adoption of the proposed articles of incorporation and bylaws, which will authorize us to issue capital stock.  Under the plan, First Federal common stock is being sold to First Northwest Bancorp   and First Northwest Bancorp’s common stock is being offered to our eligible depositors, the employee stock ownership plan, other depositors, and then to the public.  The conversion will be accounted for at historical cost.  First Northwest Bancorp has filed an application with the Federal Reserve to become a bank holding company and to acquire all of First Federal’s common stock to be issued in the conversion.
 
We intend to contribute 50% of the net proceeds of the offering to First Federal and lend our employee stock ownership plan cash to enable the plan to buy up to 8% of the shares sold in the offering, including shares issued to the First Federal Community Foundation.  We will retain the balance of the net proceeds.  We also intend to establish the foundation.  The conversion will be completed only upon the sale of at least 5,950,000 shares of our common stock offered pursuant to the plan of conversion.
 
 
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The shares of First Northwest Bancorp common stock are first being offered in a subscription offering to holders of subscription rights.  To the extent shares of common stock remain available after the subscription offering, shares may be offered in a community offering on a best efforts basis through Sandler O’Neill + Partners, L.P. in such a manner as to promote a wide distribution of the shares.  Shares not subscribed for in the subscription offering and community offering may be offered for sale on a best efforts basis in a syndicated offering, or in our discretion after consultation with our financial advisors, in a separate firm commitment underwritten public offering.  We have the right, in our sole discretion, to accept or reject, in whole or in part, any orders to purchase shares of common stock received in the community offering and any syndicated offering or underwritten offering.  See “– Community Offering” and “– Syndicated or Firm Commitment Underwritten Offering.”
 
Subscriptions for shares will be subject to the maximum and minimum purchase limitations set forth in the plan of conversion.  See “– Limitations on Stock Purchases.”
 
We determined the number of shares of common stock to be offered in the offering based upon an independent valuation of the estimated consolidated pro forma market value of First Northwest Bancorp.  All shares of common stock to be sold in the offering will be sold at $10.00 per share.  No commission will be charged to purchasers.  The independent valuation will be updated and the final number of shares of our common stock to be issued in the offering will be determined at the completion of the offering.  See “– How We Determined Our Price and the Number of Shares to Be Issued in the Stock Offering.”
 
The completion of the offering is subject to market conditions and other factors beyond our control.  No assurance can be given as to the length of time following approval of the plan of conversion by our members that will be required to complete the sale of shares.  If we experience delays, significant changes may occur in the estimated offering range with corresponding changes in the offering price and the net proceeds to be realized by us from the sale of the shares.  If the conversion is terminated, we will charge all related expenses against current income and any funds collected by us in the offering will be promptly returned, with interest, to each subscriber.
 
The following is a brief summary of the conversion and the applicable provisions of the plan of conversion.  A copy of the plan of conversion is available for inspection at First Federal, the DFI, and the FDIC.  The plan of conversion is also filed as an exhibit to the registration statement of which this prospectus is a part and the application to convert from mutual to stock form of which this prospectus is a part, copies of which may be obtained from the SEC and DFI, respectively.  See “Where You Can Find More Information.”
 
Our Reasons for the Conversion
 
The primary reasons for the conversion, and our decision to conduct the offering are to:
 
 
●
increase our capital to give us the financial strength to:
 
 
o
better enable us to serve our customers in our market area;
 
 
o
support our continued growth and expansion through additional branching activities or acquisitions, including FDIC-assisted transactions, although we have no current understandings or agreements with respect to any such acquisitions or expansion activities; and
 
 
o
increase our lending activities, particularly our emphasis on commercial business and commercial real estate lending, and explore the development of new products and services.
 
 
●
provide us with additional financial resources, including the ability to offer our stock as consideration for future acquisitions of other community banks;
 
 
●
help us maintain and further expand our philanthropic endeavors to the communities we serve through the formation and funding of the First Federal Community Foundation;
 
 
●
help us attract and retain qualified management through stock-based compensation plans;
 
 
●
provide our customers and other members of our communities with the opportunity to become owners of First Federal through the purchase of our common stock; and
 
 
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●
structure our business in a form that will enable us to have more flexible access to the capital markets.
 
In addition, in the stock holding company structure we will have greater flexibility in structuring mergers and acquisitions.  Potential sellers often want an acquirer’s stock for at least part of the acquisition consideration.  Our new stock holding company structure will enable us to offer stock or cash consideration, or a combination thereof, and will therefore enhance our ability to compete with other bidders when acquisition opportunities arise.  We do not have any specific plans or arrangements for expanding our branch network and/or any specific acquisition plans.
 
The offering will allow our directors, officers and employees to become shareholders, which we believe will be an effective performance incentive and an effective means of attracting and retaining qualified personnel.  The offering also will provide our customers and local community members with an opportunity to acquire our common stock.
 
Effects of the Conversion
 
General.   The conversion will have no effect on First Federal’s present business of accepting deposits and investing its funds in loans and other investments permitted by law.  Following completion of the conversion, First Federal will continue to be subject to regulation by the DFI, and its accounts will continue to be insured by the FDIC, up to applicable limits, without interruption.  After the conversion, First Federal will continue to provide services for depositors and borrowers under current policies and by its present management and staff.
 
Deposits and Loans .   Each holder of a deposit account in First Federal at the time of the conversion will continue as an account holder in First Federal after the conversion, and the conversion will not affect the deposit balance, interest rate or other terms of the depositor’s accounts.  Each account will be insured by the FDIC to the same extent as before the conversion.  Depositors in First Federal will continue to hold their existing certificates, statement savings and other evidence of their accounts.  The conversion will not affect the loan terms of any borrower from First Federal.  The amount, interest rate, maturity, security for and obligations under each loan will remain as they existed prior to the conversion.  See “- Voting Rights” and “- Depositors’ Rights if We Liquidate” below for a discussion of the effects of the conversion on the voting and liquidation rights of the depositors of First Federal.
 
Continuity.   The board of directors presently serving First Federal will serve as the board of directors of First Federal after the conversion.  The board of directors of First Northwest Bancorp consists of the same individuals who serve as directors of First Federal.  After the conversion, the voting shareholders of First Northwest Bancorp will elect approximately one-third of its directors annually.  All current officers of First Federal will retain their positions with First Federal after the conversion.
 
Voting Rights.   After completion of the conversion, members will have no voting rights in First Federal or First Northwest Bancorp and, therefore, will not be able to elect directors of either entity or to control their affairs.  After the conversion, voting rights in First Northwest Bancorp will be vested exclusively in the shareholders of First Northwest Bancorp.  Each holder of common stock will be entitled to vote on any matter to be considered by the shareholders of First Northwest Bancorp.  After completion of the conversion voting rights in First Federal will be vested exclusively in its sole shareholder, First Northwest Bancorp.
 
Depositors’ Rights if We Liquidate .   We have no plans to liquidate.  However, if there should ever be a complete liquidation of First Federal, either before or after the conversion, deposit account holders would receive the protection of insurance by the FDIC up to applicable limits.  In addition, liquidation rights before and after the conversion would be as follows:
 
Liquidation Rights in Present Mutual Institution.   In addition to the protection of FDIC insurance up to applicable limits, in the event of the complete liquidation of First Federal, each holder of a deposit account would receive his or her pro rata share of any assets of First Federal remaining after payment of claims of all creditors (including the claims of all depositors in the amount of the withdrawal value of their accounts).  Each holder’s pro rata share of the remaining assets, if any, would be in the same proportion of the assets as the balance in his or her deposit account was to the aggregate balance in all our deposit accounts at the time of liquidation.
 
 
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Liquidation Rights After the Conversion.   In the unlikely event that First Federal were to liquidate after the conversion, all claims of creditors, including those of depositors, would be paid first, followed by distribution of the liquidation account (described below) to depositors and borrowers as of March 31, 2011 and _________ __, 2012, who continue to maintain their deposit accounts as of the date of liquidation, with any assets remaining thereafter distributed to First Northwest Bancorp, as the holder of First Federal’s capital stock.
 
First Federal will, at the time of the conversion, establish a liquidation account in an amount equal to its total equity as of the date of the latest statement of financial condition contained in this prospectus.  The liquidation account will be a memorandum account on the records of First Federal and there will be no segregation of assets of First Federal related to it.
 
The liquidation account will be maintained subsequent to the conversion for the benefit of eligible account holders and supplemental eligible account holders who retain their deposit accounts in First Federal.  Each eligible account holder and supplemental eligible account holder will, with respect to each deposit account held, have a related inchoate interest in a portion of the liquidation account balance called a subaccount.
 
The initial subaccount balance for a deposit account held by an eligible account holder or a supplemental eligible account holder will be determined by multiplying the opening balance in the liquidation account by a fraction of which the numerator is the amount of the holder’s qualifying deposit in the deposit account and the denominator is the total amount of the qualifying deposits of all such holders.  The initial subaccount balance will not be increased, and it will be subject to downward adjustment as provided below.
 
If the balance in any deposit account of an eligible account holder or supplemental eligible account holder at the close of business on any annual closing date subsequent to the effective date of the conversion is less than the lesser of (1) the balance in the deposit account at the close of business on any other annual closing date subsequent to March 31, 2011 or _________ __, 2012, as applicable, or (2) the amount of the qualifying deposit in the deposit account on March 31, 2011 or _________ __, 2012, as applicable, then the subaccount balance for the deposit account will be adjusted by reducing the subaccount balance in an amount proportionate to the reduction in the deposit balance.  In the event of a downward adjustment, the subaccount balance will not be subsequently increased, notwithstanding any subsequent increase in the deposit balance of the related deposit account.  If any such deposit account is closed, the related subaccount balance will be reduced to zero.
 
In the event of a complete liquidation of First Federal (and only in that event), each eligible account holder and supplemental eligible account holder will be entitled to receive a liquidation distribution from the liquidation account in the amount of the then current adjusted subaccount balance(s) for the deposit account(s) then held by the holder before any liquidation distribution may be made to shareholders.  No merger, consolidation, bulk purchase of assets with assumptions of deposit accounts and other liabilities or similar transactions with another federally insured institution in which First Federal is not the surviving institution will be considered to be a complete liquidation.  In any such transaction, the liquidation account will be assumed by the surviving institution.
 
Tax Effects of the Conversion.   We have received an opinion from our special counsel, Silver, Freedman & Taff, L.L.P., Washington, D.C. that the conversion will constitute a tax free reorganization under the Internal Revenue Code and that no gain or loss will be recognized for federal income tax purposes by First Federal or First Northwest Bancorp as a result of the completion of the conversion.  However, this opinion is not binding on the IRS or the State of Washington Department of Revenue.
 
If the liquidation rights in First Federal or subscription rights to purchase First Northwest Bancorp common stock have a market value when received, or in the case of subscription rights, when exercised, then depositors receiving or exercising these rights may have a taxable gain.  Any gain will be limited to the fair market value of these rights.
 
Liquidation rights are the proportionate interest of certain depositors of First Federal in the special liquidation account to be established by First Northwest Bancorp under the plan of conversion.  See “- Depositors’ Rights if We Liquidate” above.  Special counsel believes that the liquidation rights will have no fair market or economic value.
 
 
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The subscription rights are the preferential rights of eligible subscribers to purchase shares of First Northwest Bancorp common stock in the conversion.  See “- Subscription Offering and Subscription Rights.”  Because the subscription rights are acquired without cost, are not transferable, last for only a short time period and give the recipients a right to purchase stock in the conversion only at fair market value, special counsel believes these rights do not have any taxable value when they are granted or exercised.  Special counsel’s opinion states that it is not aware of the IRS claiming in any similar conversion transaction that subscription rights have any market value.  Because there are no judicial opinions or official IRS positions on this issue, however, special counsel’s opinion relating to subscription rights comes to a reasoned conclusion instead of an absolute conclusion on this issue.  Special counsel’s conclusion is supported by a letter from RP Financial which states that the subscription rights do not have any value when they are distributed or exercised.
 
If the IRS disagrees and says the subscription rights have value, income may be recognized by recipients of these rights, in certain cases whether or not the rights are exercised.  This income may be capital gain or ordinary income, and First Northwest Bancorp and First Federal could recognize gain on the distribution of these rights.  Eligible subscribers are encouraged to consult with their own tax advisor regarding their own circumstances and any tax consequences if subscription rights are deemed to have value.
 
The opinion of special counsel relies on certain factual matters contained in a representation letter of First Federal.  These factual representations are the same as those that would be contained in a representation of First Federal to the IRS if it were seeking a private letter ruling relating to the federal income tax consequences of the conversion.  Special counsel’s opinion is based on the Internal Revenue Code, regulations now in effect or proposed, current administrative rulings and practice and judicial authority, all of which are subject to change.  Any change may be made with retroactive effect.  Unlike private letter rulings received from the IRS, special counsel’s opinion is not binding on the IRS and there can be no assurance that the IRS will not take a position contrary to the positions reflected in special counsel’s opinion, or that special counsel’s opinion will be upheld by the courts if challenged by the IRS.
 
First Federal is required to file an information statement with its federal income tax return for the year ending after the conversion setting forth, among other things, shifts in ownership and whether an ownership change has occurred.  If the independent accountants of First Federal concur at the time of the preparation of the information statement that the conversion did not result in an ownership change by reason of the cash issuance exception (after taking into account any applicable post-conversion shifts in ownership), then First Federal intends to reflect no ownership change on this information statement.
 
First Federal has also obtained an opinion from the Platt Irwin Law Firm, Port Angeles, Washington, that the income tax effects of the conversion under Washington tax laws will be substantially the same as the federal income tax consequences described above.
 
How We Determined Our Price and the Number of Shares to Be Issued in the Stock Offering
 
The plan of conversion requires that the purchase price of the common stock must be based on the appraised pro forma market value of First Northwest Bancorp and First Federal, as determined on the basis of an independent valuation.  We have retained RP Financial, a financial services industry consulting firm with over 20 years of experience in valuing financial institutions for mutual to stock conversions, to make this valuation.  We have no prior relationship with RP Financial, other than when we engaged them to prepare our business plan in March 2010.  For its services in making this appraisal, RP Financial’s fees and out-of-pocket expenses are estimated to be $96,000.  We have agreed to indemnify RP Financial and any employees of RP Financial who act for or on behalf of RP Financial in connection with the appraisal against any and all loss, cost, damage, claim, liability or expense of any kind, including claims under federal and state securities laws, arising out of any misstatement, untrue statement of a material fact or omission to state a material fact in the information we supply to RP Financial, unless RP Financial is determined to be negligent or otherwise at fault.
 
The amount of common stock we are offering is based on an independent appraisal by RP Financial of the estimated pro forma market value of First Northwest Bancorp, assuming the conversion and offering are completed.  The appraisal was based in part on our consolidated financial condition and results of operations, the pro forma effect of the additional capital raised by the sale of shares of our common stock in the offering, and an analysis of a peer group of publicly-traded companies utilized by RP Financial in its appraisal that RP Financial considers comparable to First Northwest Bancorp.
 
 
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RP Financial concluded that, as of November 9, 2012 the estimated pro forma market value of First Northwest Bancorp was $75.2 million.  This pro forma market value is the midpoint of a valuation range established by regulation with a minimum of $63.9 million and a maximum of $86.5 million, inclusive of shares to be issued to the foundation.  Based on this market value and a $10.00 per share purchase price, the number of shares of our common stock that will be offered for sale will range from 5,950,000 to 8,050,000 with a midpoint of 7,000,000.  The $10.00 per share price was selected primarily because it is the price most commonly used in mutual-to-stock conversions of financial institutions.  If a greater demand for shares of our common stock or a change in financial or market conditions warrant, the offering range may be increased by 15.0%.  At this adjusted maximum of the offering range, the estimated pro forma market value of $99.6 million and the number of shares of common stock offered for sale will be 9,257,500.
 
In preparing its appraisal, RP Financial considered the information in this prospectus, including our financial statements.  RP Financial also had various discussions with management and considered the following factors, among others.
 
 
●
certain historical, financial and other information relating to First Federal;
 
 
●
the projected results and financial condition of First Northwest Bancorp;
 
 
●
the economic and demographic conditions in our existing market area;
 
 
●
a comparative evaluation of the operating and financial characteristics of First Federal with the peer group companies discussed below;
 
 
●
the impact of the conversion and the offering on First Northwest Bancorp’s shareholders’ equity and earnings potential;
 
 
●
the proposed dividend policy of First Northwest Bancorp; and
 
 
●
the trading market for the securities of the peer group institutions and general conditions in the stock market for all publicly traded thrift institutions.
 
RP Financial did not perform a detailed analysis of the separate components of our assets and liabilities.  We did not impose any limitations on RP Financial in connection with its appraisal.
 
RP Financial also considered that we intend to issue shares of First Northwest Bancorp common stock to the First Federal Community Foundation, a charitable foundation that will be established in connection with the conversion. The intended contribution of shares of common stock to the foundation has the effect of reducing the number of shares that may be offered in the offering.  The foundation will be funded with $400,000 in cash and the remainder in shares of common stock so that the total amount contributed is equal to 8% of the gross offering proceeds received by First Northwest Bancorp in the offering.  We will not receive any conversion proceeds in connection with the issuance of these shares, and thus, our pro forma book value and earnings will be lower, resulting in a lower pro forma value for First Northwest Bancorp.  See “Business of First Federal – The First Federal Community Foundation” and “Comparison of Valuation and Pro Forma Information With and Without the Foundation.” RP Financial’s independent valuation will be updated before we complete our offering.
 
RP Financial relied primarily on a comparative market value methodology in determining the pro forma market value of our common stock.  In applying this methodology, RP Financial analyzed financial and operational comparisons of First Federal with a selected peer group of publicly traded savings institutions that RP Financial considered comparable to us.  The peer group used by RP Financial consists of ten companies listed in the table below.  The pro forma market value of First Northwest Bancorp’s common stock was determined by RP Financial based on the market pricing ratios of the peer group, subject to certain valuation adjustments based on differences between First Federal and the institutions comprising the peer group.  RP Financial took into account the significant volatility in the broader stock market and the after market pricing characteristics of recently converted savings institutions.  RP Financial utilized the results of this overall analysis to establish pricing ratios that resulted in the determination of the pro forma market value.
 
 
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The selection criteria for the peer group included consideration of geographic location, earnings and asset size.  The peer group companies are:
 
Peer Group (Ticker Symbol)
 
City and State
 
Assets(1)
 
       
(In millions)
 
HF Financial Corp. (HFFC)
 
Sioux Falls, SD
  $ 1,193  
HopFed Bancorp, Inc. (HFBC)
 
Hopkinsville, KY
    1,026  
First Financial Northwest, Inc. (FFNW)
 
Renton, WA
    999  
Timberland Bancorp, Inc. (TSBK)
 
Hoquiam, WA
    729  
First Savings Financial Group, Inc. (FSFG)
 
Clarksville, IN
    587  
First Clover Leaf Financial Corp. (FCLF)
 
Edwardsville, IL
    538  
First Capital, Inc. (FCAP)
 
Corydon, IN
    454  
Wayne Savings Bancshares, Inc. (WAYN)
 
Wooster, OH
    409  
River Valley Bancorp (RIVR)
 
Madison, IN
    408  
Eagle Bancorp Montana, Inc. (EBMT)
 
Helena, MT
    327  

(1) As of June 30, 2012

Two measures investors use to analyze whether a stock might be a good investment are the ratio of the offering price to the issuer’s “book value” and the ratio of the offering price to the issuer’s annual net income.  RP Financial considered these ratios, among other factors, in preparing its appraisal.  Book value is the same as total shareholders’ equity, and represents the difference between the issuer’s assets and liabilities.  Tangible book value is equal to total shareholders’ equity less intangible assets.  Reported earnings reflect the net income (loss) recorded for the twelve months ended September 30, 2012.  Core earnings represent earnings adjusted for non-operating items.
 
The following table presents a summary of selected pricing ratios for the peer group companies and First Northwest Bancorp (on a pro forma basis).  The pricing ratios are based on book value, earnings and other information as of and for the twelve months ended September 30, 2012 or the last twelve months for which data is available, stock price information as of November 9, 2012, as reflected in RP Financial’s appraisal report, dated November 9, 2012, and the number of shares assumed to be outstanding as described in “Pro Forma Data.”  Compared to the average pricing of the peer group, our pro forma pricing ratios at the maximum of the offering range indicated a discount of 23.5% on a price-to-book value basis, and a discount of 27.9% on a price-to-tangible book value basis.
 
 
Price-to-
earnings multiple
 
Price-to-core
earnings multiple
 
Price-to-book
value ratio
   
Price-to-tangible
book value ratio
 
                   
First Northwest Bancorp
                 
   Minimum of offering range
NM*
 
NM*
    49.31 %     49.31 %
   Midpoint of offering range
NM*
 
NM*
    54.17 %     54.17 %
   Maximum of offering range
NM*
 
NM*
    58.41 %     58.41 %
   Maximum of offering range, as adjusted
NM*
 
NM*
    62.70 %     62.70 %
                       
Valuation of peer group companies using stock market prices as of November 9, 2012
                     
   Average
19.94x
 
20.45x
    76.35 %     81.05 %
   Median
17.87x
 
18.67x
    72.86 %     76.43 %
*Not meaningful.
 
Our board of directors reviewed the appraisal report of RP Financial, including the methodology and the assumptions used, and determined that the valuation range was reasonable and adequate.
 
RP Financial’s valuation is not intended, and must not be construed, as a recommendation of any kind as to the advisability of purchasing these shares.  RP Financial did not independently verify the financial statements and other information we provided, nor did RP Financial value independently our assets or
 
 
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liabilities.  The valuation considers First Federal as a going concern and should not be considered as an indication of the liquidation value of First Federal.  Moreover, because this valuation is necessarily based upon estimates and projections of a number of matters, all of which are subject to change from time to time, no assurance can be given that persons purchasing common stock in the offering will thereafter be able to sell these shares at prices at or above the purchase price or in the range of the valuation described above.
 
RP Financial will update its appraisal before we complete the offering.  If, as a result of demand for the shares or changes in market conditions, RP Financial determines that our pro forma market value has increased, we may sell up to 9,257,500 shares in the offering without notice to you.  No sale of shares of common stock in the offering may be completed unless, prior to the completion, RP Financial confirms that nothing of a material nature has occurred which, taking into account all relevant factors, would cause it to conclude that the aggregate value of the common stock to be issued is materially incompatible with the estimate of the aggregate consolidated pro forma market value of First Northwest Bancorp.  If our pro forma market value at that time is either below $63.9 million or above $99.6 million, then, after consulting with the DFI and the FDIC, we may:
 
 
●
set a new offering range;
 
 
●
take such other actions as may be permitted by the DFI, the FDIC, the Federal Reserve, and the SEC; or
 
 
●
terminate the offering and promptly return all funds, with interest.
 
If we set a new offering range, we will be required to cancel your stock order and promptly return your subscription funds, with interest calculated at the statement savings rate, and cancel any authorization to withdraw funds from your deposit accounts for the purchase of shares of common stock. You will have the opportunity to place a new stock order.
 
An increase in the number of shares of common stock as a result of an increase in the estimated pro forma market value would decrease both a subscriber’s ownership interest and First Northwest Bancorp’s pro forma net income and shareholders’ equity on a per share basis while decreasing pro forma net income and increasing shareholders’ equity, respectively, on an aggregate basis.  A decrease in the number of shares of common stock would increase both a subscriber’s ownership interest and First Northwest Bancorp’s pro forma net income and shareholders’ equity on a per share basis while increasing pro forma net income and decreasing shareholders’ equity, respectively, on an aggregate basis.  See “Risk Factors - Risks Related to This Offering - The implementation of an equity incentive plan may dilute your ownership interest” and “Pro Forma Data.”
 
Copies of the appraisal report of RP Financial, LC. including any amendments, and the detailed report of the appraiser setting forth the method and assumptions for the appraisal are available for inspection at the office of First Federal and as specified under “Where You Can Find More Information.”  In addition, the appraisal report is an exhibit to the registration statement of which this prospectus is a part.  The registration statement is available on the SEC’s website (http://www.sec.gov).
 
Subscription Offering and Subscription Rights
 
Under the plan of conversion, rights to subscribe for the purchase of common stock have been granted to the following persons in the following order of descending priority:
 
 
●
depositors of First Federal with account balances of at least $50 as of the close of business on March 31, 2011 (“Eligible Account Holders”);
 
 
●
tax qualified plans, including our employee stock ownership plan and 401(k) plan (“Tax-Qualified Employee Stock Benefit Plans”);
 
 
●
depositors of First Federal, other than directors and executive officers and their associates employed, appointed or elected for the first time to such office after the March 31, 2011 eligibility record date (as defined below), with account balances of at least $50 as of the close of business on _________ __, 2012 (“Supplemental Eligible Account Holders”); and
 
 
●
depositors and borrowers of First Federal, as of the close of business on _______, 2012, other than Eligible Account Holders or Supplemental Eligible Account Holders (“Other Members”).
 
 
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All subscriptions received will be subject to the availability of common stock after satisfaction of all subscriptions of all persons having prior rights in the subscription offering and to the maximum and minimum purchase limitations set forth in the plan of conversion and as described below under “- Limitations on Stock Purchases.”
 
Preference Category No. 1: Eligible Account Holders .   Each Eligible Account Holder shall receive, without payment, first priority, nontransferable subscription rights to subscribe for shares of common stock in an amount equal to the greater of:
 
(1)           $200,000 or 20,000 shares of common stock;
 
(2)           one-tenth of one percent of the total offering of shares of common stock; or
 
 
(3)
15 times the product (rounded down to the next whole number) obtained by multiplying the total number of shares of common stock to be issued by a fraction, of which the numerator is the amount of the qualifying deposit of the Eligible Account Holder and the denominator is the total amount of qualifying deposits of all Eligible Account Holders in First Federal in each case on the close of business on March 31, 2011 (the “Eligibility Record Date”), subject to the overall purchase limitations.
 
See “- Limitations on Stock Purchases.”
 
If there are not sufficient shares available to satisfy all subscriptions, shares first will be allocated among subscribing Eligible Account Holders so as to permit each such Eligible Account Holder, to the extent possible, to purchase a number of shares sufficient to make his total allocation equal to the lesser of the number of shares subscribed for or 100 shares.  Thereafter, any shares remaining will be allocated among the subscribing Eligible Account Holders whose subscriptions remain unfilled pro rata in the proportion that the amounts of their respective qualifying deposits bear to the total amount of qualifying deposits of all subscribing Eligible Account Holders whose subscriptions remain unfilled.  For example, if an Eligible Account Holder with an unfilled subscription has qualifying deposits totaling $100, and the total amount of qualifying deposits for Eligible Account Holders with unfilled subscriptions was $1,000, then the number of shares that may be allocated to fill this Eligible Account Holder’s subscription would be 10% of the shares remaining available, up to the amount subscribed for.
 
To ensure proper allocation of stock, each Eligible Account Holder must list on his or her subscription order form all accounts in which he or she has an ownership interest.  Failure to list an account could result in fewer shares being allocated than if all accounts had been disclosed.  The subscription rights of Eligible Account Holders who are also directors or officers of First Federal or their associates will be subordinated to the subscription rights of other Eligible Account Holders to the extent attributable to increased deposits in the year preceding March 31, 2011.
 
Preference Category No. 2: Tax-Qualified Employee Stock Benefit Plans .   The plan of conversion provides that each Tax-Qualified Employee Stock Benefit Plan, excluding the 401(k) plan, shall receive nontransferable subscription rights to purchase up to 8% of the common stock sold in the offering, including shares issued to the First Federal Community Foundation, provided that individually or in the aggregate these plans (other than that portion of these plans which is self-directed) shall not purchase more than 8% of the shares of common stock, including shares issued to the First Federal Community Foundation, and any increase in the number of shares of common stock after the date hereof as a result of an increase of up to 15% in the maximum of the estimated valuation range.  The proposed employee stock ownership plan intends to purchase 8% of the shares of common stock sold in the offering, including shares issued to the First Federal Community Foundation, or 510,880 shares and 692,320 shares based on the minimum and maximum of the estimated offering range, respectively.  Subscriptions by the Tax-Qualified Employee Stock Benefit Plans will not be aggregated with shares of common stock purchased directly by or which are otherwise attributable to any other participants in the subscription and community offerings, including subscriptions of any of First Federal’s directors, officers, employees or associates thereof.  Subscription rights received pursuant to this category shall be subordinated to all rights received by Eligible Account Holders to purchase shares pursuant to Preference Category No. 1.  If the employee stock ownership plan’s subscription is not filled in its entirety, the plan may, with the approval of the DFI and the FDIC, purchase shares in the open market.  See “Management - Benefits - Employee Stock Ownership Plan.”
 
Preference Category No. 3: Supplemental Eligible Account Holders .   To the extent that there are sufficient shares remaining after satisfaction of subscriptions by Eligible Account Holders and the Tax-Qualified Employee Stock Benefit Plans, each Supplemental Eligible Account Holder shall be entitled to receive, without
 
 
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 payment therefore, third priority, nontransferable subscription rights to subscribe for shares of common stock in an amount equal to the greater of:
 
(1)           $200,000 or 20,000 shares of common stock;
 
(2)           one-tenth of one percent of the total offering of shares of common stock; or
 
 
(3)
15 times the product (rounded down to the next whole number) obtained by multiplying the total number of shares of common stock to be issued by a fraction, of which the numerator is the amount of the qualifying deposit of the Supplemental Eligible Account Holder and the denominator is the total amount of qualifying deposits of all Supplemental Eligible Account Holders in First Federal in each case on the close of business on _________ __, 2012 (the “Supplemental Eligibility Record Date”), subject to the overall purchase limitations.
 
See “- Limitations on Stock Purchases.”
 
If there are not sufficient shares available to satisfy all subscriptions of all Supplemental Eligible Account Holders, available shares first will be allocated among subscribing Supplemental Eligible Account Holders so as to permit each such Supplemental Eligible Account Holder, to the extent possible, to purchase a number of shares sufficient to make his or her total allocation equal to the lesser of the number of shares subscribed for or 100 shares.  Thereafter, any shares remaining available will be allocated among the Supplemental Eligible Account Holders whose subscriptions remain unfilled pro rata in the proportion that the amounts of their respective qualifying deposits bear to the total amount of qualifying deposits of all subscribing Supplemental Eligible Account Holders whose subscriptions remain unfilled.
 
Preference Category No. 4: Other Members .   To the extent that there are sufficient shares remaining after satisfaction of subscriptions by Eligible Account Holders, the Tax-Qualified Employee Stock Benefit Plans and Supplemental Eligible Account Holders, each Other Member shall receive, without payment therefore, fourth priority, nontransferable subscription rights to subscribe for shares of common stock, up to the greater of:
 
(1)            $200,000 or 20,000 shares of common stock; or
 
 
(2)
one-tenth of one percent of the total offering of shares of common stock in the offerings, subject to the overall purchase limitations.
 
See “- Limitations on Stock Purchases.”
 
In the event the Other Members subscribe for a number of shares which, when added to the shares subscribed for by Eligible Account Holders, the Tax-Qualified Employee Stock Benefit Plans and Supplemental Eligible Account Holders, is in excess of the total number of shares of common stock offered in the conversion, available shares will be allocated among the subscribing Other Members pro rata on the basis of the amounts of their respective subscriptions.
 
Expiration Date for the Subscription Offering.   The subscription offering will expire at 5:00 p.m., Pacific time, on _________ __, 2013, unless extended for the full 45 day period to __________ __, 2013, and may be extended an additional 45 days to _________ __, 2013 without the approval of the DFI.  Any further extensions of the subscription offering must be approved by the DFI.  The subscription offering may not be extended beyond _________ __, 2014.  Subscription rights which have not been exercised prior to _________ __, 2013 (unless extended) will become void.
 
First Northwest Bancorp and First Federal will not execute orders until at least the minimum number of shares of common stock, 5,950,000 shares, have been subscribed for or otherwise sold.  If all shares have not been subscribed for or sold by _________ __, 2013, unless this period is extended with the consent of the DFI, all funds delivered to First Federal pursuant to the subscription offering will be returned promptly to the subscribers with interest and all withdrawal authorizations will be canceled.  If an extension beyond _________ __, 2013 is granted, First Northwest Bancorp and First Federal will notify subscribers of the extension of time and of any rights of subscribers to confirm, modify or rescind their subscriptions.  This is commonly referred to as a “resolicitation offering.”
 
 
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In a resolicitation offering, First Northwest Bancorp would mail you a supplement to this prospectus if you subscribed for stock to let you confirm, modify or cancel your subscription.  If you fail to respond to the resolicitation offering, it would be as if you had canceled your order and all subscription funds, together with accrued interest, would be returned to you.  If you authorized payment by withdrawal of funds on deposit at First Federal, that authorization would terminate.  If you affirmatively confirm your subscription order during the resolicitation offering, First Northwest Bancorp and First Federal would continue to hold your subscription funds until the end of the resolicitation offering.  Your resolicitation order would be irrevocable without the consent of First Northwest Bancorp and First Federal until the conversion is completed or terminated.
 
Community Offering
 
To the extent that shares remain available for purchase after satisfaction of all subscription rights discussed above, we anticipate offering shares pursuant to the plan of conversion to members of the general public who receive a prospectus, with a preference given to natural persons residing in Clallam, Jefferson and Kitsap counties.  These natural persons are referred to as preferred subscribers.  We may limit total subscriptions in the community offering to ensure that the number of shares available for the syndicated or underwritten community offering may be up to a specified percentage of the number of shares of common stock.  The opportunity to subscribe for shares of common stock in any community offering will be subject to our right, in our sole discretion, to accept or reject any such orders either at the time of receipt of an order or as soon as practicable following _________ __, 2013.  The community offering, if any, will begin at the same time as, during or promptly after the subscription offering and will not be for more than 45 days after the end of the subscription offering.
 
The price at which common stock would be sold in the community offering will be the same price at which shares are offered and sold in the subscription offering.  No person, may purchase more than $200,000 of common stock in the community offering, and no person together with an associate or group of persons acting in concert, may purchase more than $400,000 of common stock in the community offering, subject to the maximum purchase limitations.  See “- Limitations on Stock Purchases.”  In the event of an oversubscription for shares in the community offering, shares may be allocated, to the extent shares remain available, on a pro rata basis to such person based on the amount of their respective subscriptions.
 
Syndicated or Firm Commitment Underwritten Offering
 
 If feasible, our board of directors may decide to offer for sale shares of common stock not subscribed for or purchased in the subscription and community offerings to selected members of the general public in a syndicated or firm commitment underwritten offering, subject to such terms, conditions and procedures as we may determine, in a manner that will achieve a wide distribution of our shares of common stock. The syndicated or firm commitment underwritten offering, if any, will begin as soon as practicable after termination of the subscription offering and the community offerings. Sandler O’Neill + Partners, L.P. may enter into agreements with broker-dealers to assist in the sale of the shares in the syndicated or firm commitment underwritten offering, although no such agreements currently exist.  Neither Sandler O’Neill + Partners, L.P. nor any registered broker-dealer shall have any obligation to take or purchase any shares of common stock in the syndicated offering; however, Sandler O’Neill + Partners, L.P. has agreed to use its best efforts in the sale of shares in any syndicated offering. We, in our sole discretion, have the right to reject orders in whole or in part received in the syndicated or firm commitment underwritten offering.
 
If a syndicated or firm commitment underwritten offering is held, Sandler O’Neill & Partners, L.P will serve as book-running manager.  In the event that shares of common stock are sold in a syndicated or firm commitment underwritten offering, we will pay fees of 5.25% of the aggregate amount of common stock sold in the syndicated or firm commitment underwritten offering to the book-running manager and any other broker-dealers included in the syndicated or firm commitment underwritten offering.  The shares of common stock will be sold at the same price per share ($10.00 per share) that the shares are sold in the subscription offering and the community offerings.   No person may purchase more than $200,000 of common stock in a syndicated or firm commitment underwritten offering, and no person together with an associate or group of persons acting in concert, may purchase more than $400,000 of common stock in the community offering, subject to the maximum purchase limitations.  See “- Limitations on Stock Purchases.”
 
In the event of a syndicated offering, it is currently expected that investors would follow the same general procedures applicable to purchasing shares in the subscription and community offerings (the use of order forms and the submission of funds directly to First Northwest Bancorp for the payment of the purchase price of the shares ordered ) except that payment must be in immediately available funds (bank checks, money orders, deposit account
 
 
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withdrawals from accounts at First Federal by wire transfers).  See “—Procedure for Purchasing Shares in the Subscription  Offering.”  “Sweep” arrangements and delivery versus payment settlement will only be used in a syndicated offering to the extent consistent with Rules 10b-9 and 15c2-4 and then-existing guidance and interpretations thereof of the Securities and Exchange Commission regarding the conduct of “min/max” offerings.
 
In the event of a firm commitment underwritten offering, the proposed underwriting agreement will not be entered into with Sandler O’Neill & Partners, L.P., First Northwest Bancorp and First Federal until immediately prior to the completion of the firm commitment underwritten offering. At that time, Sandler O’Neill & Partners, L.P. and any other broker-dealers included in the firm commitment underwritten offering will represent that they have received sufficient indications of interest to complete the offering.  Pursuant to the terms of the underwriting agreement, and subject to certain customary provisions and conditions to closing, upon execution of the underwriting agreement, Sandler O’Neill & Partners, L.P and any other underwriters will be obligated to purchase all the shares subject to the firm commitment underwritten offering.
 
If for any reason we cannot affect a syndicated or firm commitment underwritten offering of shares of common stock not purchased in the subscription and community offerings, or in the event that there are an insignificant number of shares remaining unsold after such offerings, we will try to make other arrangements for the sale of unsubscribed shares, if possible.  The DFI and the Financial Industry Regulatory Authority must approve any such arrangements.
 
Syndicated or Firm Commitment Underwritten Offering.   In the event that shares of common stock are sold in a syndicated or firm commitment underwritten offering, we will pay fees of 5.25% of the aggregate amount of common stock sold in the syndicated or firm commitment underwritten offering to the book-running manager and any other broker-dealers included in the syndicated or firm commitment underwritten offering.  If all shares of common stock were sold in the syndicated or firm commitment underwritten offering, the selling agent and underwriters’ commissions would be approximately $2.9 million, $3.4 million and $4.5 million at the minimum, midpoint, maximum and maximum as adjusted levels of the offering, respectively.
 
Persons Who Are Not Permitted to Participate in the Stock Offering
 
We will make reasonable efforts to comply with the securities laws of all states in the United States in which persons entitled to subscribe for stock pursuant to the plan of conversion reside.  However, we are not required to offer stock in the subscription offering to any person who resides in a foreign country or resides in a state of the United States with respect to which the granting of subscription rights or the offer or sale of shares of common stock to such persons would require any of us or our officers, directors or employees, under the laws of such state to register as a broker, dealer, salesperson or selling agent or to register or otherwise qualify the securities of First Northwest Bancorp for sale in such state.
 
Limitations on Stock Purchases
 
The plan of conversion includes the following limitations on the number of shares of First Northwest Bancorp common stock which may be purchased in the conversion:
 
 
(1)
No fewer than 25 shares of common stock may be purchased, to the extent shares are available;
 
 
(2)
Each Eligible Account Holder may subscribe for and purchase in the subscription offering up to the greater of:
 
 
a.
$200,000 or 20,000 shares of common stock;
 
 
b.
one-tenth of one percent of the total offering of shares of common stock; or
 
 
c.
15 times the product (rounded down to the next whole number) obtained by multiplying the total number of shares of common stock to be issued by a fraction, of which the numerator is the amount of the qualifying deposit of the Eligible Account Holder and the denominator is the total amount of qualifying deposits of all Eligible Account Holders in First Federal in each case as of the close of business on the Eligibility Record Date, subject to the overall limitation in clause (7) below;
 
 
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(3)
Tax qualified plans, including our employee stock ownership plan and 401(k) plan, will receive nontransferable subscription rights to purchase in the aggregate up to 10% of the shares of common stock in the offering, including shares issued to the foundation.  We expect the employee stock ownership plan to purchase 8% of the common stock sold in the offering.
 
 
(4)
Each Supplemental Eligible Account Holder may subscribe for and purchase in the subscription offering up to the greater of:
 
 
a.
$200,000 or 20,000 shares of common stock;
 
 
b.
one-tenth of one percent of the total offering of shares of common stock; or
 
 
c.
15 times the product (rounded down to the next whole number) obtained by multiplying the total number of shares of common stock to be issued by a fraction, of which the numerator is the amount of the qualifying deposit of the Supplemental Eligible Account Holder and the denominator is the total amount of qualifying deposits of all Supplemental Eligible Account Holders in First Federal in each case as of the close of business on the Supplemental Eligibility Record Date, subject to the overall limitation in clause (7) below;
 
 
(5)
Each Other Member may subscribe for and purchase in the subscription offering up to the greater of:
 
 
a.
$200,000 or 20,000 shares of common stock; or
 
 
b.
one-tenth of one percent of the total offering of shares of common stock, subject to the overall limitation in clause (7) below;
 
 
(6)
Persons purchasing shares of common stock in the community offering, syndicated offering, or underwritten offering may purchase up to $200,000 or 20,000 shares of common stock, subject to the overall limitation in clause (7) below; and
 
 
(7)
Except for the Tax-Qualified Employee Stock Benefit Plans, and the Eligible Account Holders and Supplemental Eligible Account Holders whose subscription rights are based upon the amount of their deposits, as a result of (2)(c) and (4)(c) above, the maximum number of shares of First Northwest Bancorp common stock subscribed for or purchased in all categories of the offerings by any person, together with associates of and groups of persons acting in concert with such persons, shall not exceed $400,000 or 40,000 shares of common stock.
 
Subject to any required DFI or other regulatory approval and the requirements of applicable laws and regulations, but without further approval of the members of First Federal, the boards of directors of First Northwest Bancorp and First Federal may, in their sole discretion, increase the maximum individual amount permitted to be subscribed to provide that any person, group of associated persons, or persons otherwise acting in concert subscribing for five percent, may purchase between five and ten percent as long as the aggregate amount that the subscribers purchase does not exceed ten percent of the total stock offering.   Requests to purchase additional shares of common stock will be allocated by the boards of directors on a pro rata basis giving priority in accordance with the preference categories set forth in this prospectus.
 
The term “associate” when used to indicate a relationship with any person means:
 
 
●
any corporation or organization (other than First Federal, First Northwest Bancorp or a majority-owned subsidiary of any of them) of which the person is an officer or partner or is directly or indirectly the beneficial owner of 10% or more of any class of equity securities;
 
 
●
any trust or other estate in which the person has a substantial beneficial interest or as to which the person serves as trustee or in a similar fiduciary capacity;
 
 
●
any relative or spouse of the person, or any relative of the spouse, who has the same home as the person or who is a director or officer of First Federal, First Northwest Bancorp or any subsidiary of First Federal or First Northwest Bancorp; and
 
 
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●
any person acting in concert with any of the persons or entities specified above;
 
provided, however, that Tax-Qualified Employee Plans shall not be deemed to be an associate of any director or officer of First Federal or First Northwest Bancorp.  When used to refer to a person other than an officer or director of First Federal, the board of directors of First Federal or officers delegated by the board of directors in their sole discretion may determine the persons that are associates of other persons.
 
The term “acting in concert” means knowing participation in a joint activity or parallel action towards a common goal whether or not pursuant to an express agreement, or a combination or pooling of voting or other interests in the securities of an issuer for a common purpose pursuant to any arrangement.  A person or company which acts in concert with another person or company shall also be deemed to be acting in concert with any person or company who is also acting in concert with that other party, except that the Tax-Qualified Employee Stock Benefit Plans will not be deemed to be acting in concert with their trustees or a person who serves in a similar capacity solely for the purpose of determining whether stock held by the trustee and stock held by each plan will be aggregated.  The determination of whether a group is acting in concert shall be made solely by the board of directors of First Federal or officers delegated by the board of directors and may be based on any evidence upon which the board or delegatees chooses to rely.
 
Marketing Arrangements
 
We have engaged Sandler O’Neill + Partners, L.P., a broker-dealer registered with the Financial Industry Regulatory Authority, as a financial advisor in connection with the offering of our common stock.  In its role as financial advisor, Sandler O’Neill + Partners, L.P., will:
 
 
●
provide advice on the financial and securities market implications of the plan of conversion and related corporate documents, including our business plan;
 
 
●
assist in structuring our stock offering, including developing and assisting in implementing a market strategy for the stock offering;
 
 
●
review all offering documents, including this prospectus, stock order forms and related offering materials (we are responsible for the preparation and filing of such documents);
 
 
●
assist us in preparing for and scheduling meetings with potential investors and broker-dealers, as necessary;
 
 
●
assist us in analyzing proposals from outside vendors retained in connection with the stock offering, including printers, transfer agents and appraisal firms;
 
 
●
assist us in the drafting and distribution of press releases as required or appropriate in connection with the stock offering;
 
 
●
meet with the board of directors and management to discuss any of these services; and
 
 
●
provide such other financial advisory and investment banking services in connection with the stock offering as may be agreed upon by Sandler O’Neill + Partners, L.P., and us.
 
For its services, Sandler O’Neill + Partners, L.P.   has received an advance payment of $25,000, which will be credited against future expenses and will receive a success fee of 1.00% of the aggregate purchase price of shares of common stock sold in the subscription offering and community offering, less any shares of common stock sold to our directors, officers and employees (or members of their immediate family) and the Tax-Qualified Employee Stock Benefit Plans, and our Foundation.    If selected dealers are used to assist in the sale of shares of First Northwest Bancorp common stock in the syndicated or underwritten offering, these dealers will be paid a fee of up to 5.25% of the total purchase price of the shares sold by the dealers.  We have agreed to indemnify Sandler O’Neill + Partners, L.P.   against certain claims or liabilities, including certain liabilities under the Securities Act of 1933, as amended, and will contribute to payments Sandler O’Neill + Partners, L.P.   may be required to make in connection with any such claims or liabilities.  In addition, Sandler O’Neill + Partners, L.P.   will be reimbursed for the fees and
 
 
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expenses of its legal counsel, and other actual out of pocket expenses, in an amount not to exceed $115,000 if no syndicated offering is held and maximum of $140,000 if a syndicated or underwritten offering is held.
 
We have also engaged Sandler O’Neill + Partners, L.P., to act as our conversion agent in connection with the offering. In its role as conversion agent, Sandler O’Neill + Partners, L.P., will, among other things:
 
 
●
consolidate accounts and develop a central file;
 
 
●
prepare proxy forms and proxy materials;
 
 
●
tabulate proxies and ballots;
 
 
●
act as inspector of election at the special meeting of members;
 
 
●
assist us in establishing and managing the Stock Information Center;
 
 
●
assist our financial printer with labeling of stock offering materials;
 
 
●
process stock order forms and certification forms and produce daily reports and analysis;
 
 
●
assist our transfer agent with the generation and mailing of stock certificates;
 
 
●
advise us on interest and refund calculations; and
 
 
●
create tax forms for interest reporting.
 
If the plan of conversion is terminated or if Sandler O’Neill + Partners, L.P.’s engagement is terminated in accordance with the provisions of the agreement, Sandler O’Neill + Partners, L.P. will be entitled to the advance payment and also receive reimbursement of its reasonable out-of-pocket expenses. We will indemnify Sandler O’Neill + Partners, L.P. against liabilities and expenses (including legal fees) related to or arising out of Sandler O’Neill + Partners, L.P.’s engagement as our conversion agent and performance of services as our conversion agent.
 
Sales of shares of First Northwest Bancorp common stock will be made by registered representatives affiliated with Sandler O’Neill + Partners, L.P.   or by the broker-dealers managed by Sandler O’Neill + Partners, L.P.  Sandler O’Neill + Partners, L.P.   has undertaken that the shares of First Northwest Bancorp common stock will be sold in a manner which will ensure that the distribution standards of The Nasdaq Stock Market will be met.  A stock information center will be established at First Federal’s executive office located at 105 West 8th Street, in Port Angeles, Washington.  First Northwest Bancorp will rely on Rule 3a4-1 of the Securities Exchange Act of 1934 and sales of First Northwest Bancorp common stock will be conducted within the requirements of this rule, so as to permit officers, directors and employees to participate in the sale of First Northwest Bancorp common stock in those states where the law permits.  No officer, director or employee of First Northwest Bancorp or First Federal will be compensated directly or indirectly by the payment of commissions or other remuneration in connection with his or her participation in the sale of common stock, as well as the establishment of the foundation.
 
Procedure for Purchasing Shares in the Subscription Offering
 
To ensure that each purchaser receives a prospectus at least 48 hours before _________ __, 2013 the subscription expiration date, unless extended, in accordance with Rule 15c2-8 of the Securities Exchange Act of 1934, no prospectus will be mailed any later than five days prior to that date or hand delivered any later than two days prior to that date.  Execution of the stock order form will confirm receipt or delivery in accordance with Rule 15c2-8.  Stock order forms will only be distributed with, or preceded by, a prospectus.
 
To purchase shares in the subscription offering, an executed stock order form with the required payment for each share subscribed for, or with appropriate authorization for withdrawal from a deposit account at First Federal must be received by First Federal by 5:00 p.m., Pacific time, on _________ __, 2013 unless extended.  In addition, First Northwest Bancorp and First Federal will require a prospective purchaser to execute a certification in the form required by the DFI.  Stock order forms which are not received by this time, are executed defectively, are received without full payment or appropriate withdrawal instructions, or are submitted on photocopied or facsimile stock
 
 
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order forms are not required to be accepted.  In addition, First Federal will not accept orders without an executed certification.  First Federal has the right to waive or permit the correction of incomplete or improperly executed forms, but does not represent that it will do so.  Once received, an executed order form may not be modified, amended or rescinded without the consent of First Federal, unless the conversion has not been completed within 45 days after the end of the subscription offering, or this period has been extended.
 
In order to ensure that Eligible Account Holders, Tax-Qualified Employee Stock Benefit Plans, Supplemental Eligible Account Holders and Other Members are properly identified as to their stock purchase priority, depositors as of the close of business on the Eligibility Record Date, March 31, 2011, the Supplemental Eligibility Record Date, ________ __, 2012, or the Other Members Record Date, _______ __, 2012, must list all accounts on the stock order form giving all names in each account and the account numbers.
 
Payment for subscriptions may be made:
 
 
●
By personal check, bank check or money order made payable to First Northwest Bancorp .
 
 
●
By authorizing a withdrawal from a savings or certificate of deposit account at First Federal, designated on the stock order form.   To use funds in an individual retirement account (“IRA”) at First Federal, you must transfer your account to a self-directed IRA at an unaffiliated institution or broker.  Because transferring your account will take time, please contact the stock information center as soon as possible for assistance.
 
No wire transfers will be accepted.  Funds received before the completion of the conversion will be held in a segregated account at First Federal. Interest will be paid on payments made by cash, check or money order at our then-current statement savings rate from the date payment is received until completion of the conversion.  If payment is made by authorization of withdrawal from deposit accounts, the funds authorized to be withdrawn from a deposit account will continue to accrue interest at the contractual rate, but may not be used by the subscriber until all of First Northwest Bancorp’s common stock has been sold or the plan of conversion is terminated, whichever is earlier.  If a subscriber authorizes First Federal to withdraw the amount of the purchase price from his or her deposit account, First Federal will do so as of the effective date of the conversion.  First Federal will waive any applicable penalties for early withdrawal from certificate accounts for the purpose of purchasing stock in the offering.
 
If any amount of a subscription order is unfilled, First Federal will make an appropriate refund or cancel an appropriate portion of the related withdrawal authorization, after completion of the conversion.  If the conversion is not consummated, purchasers will have refunded to them all payments made, with interest, and all withdrawal authorizations will be canceled in the case of subscription payments authorized from accounts at First Federal.
 
If any Tax-Qualified Employee Stock Benefit Plans subscribe for shares during the subscription offering, these plans will not be required to pay for the shares subscribed for at the time they subscribe, but rather, they may pay for shares of common stock subscribed for at the purchase price upon completion of the subscription offering and community offering, if all shares are sold, or upon completion of the syndicated or underwritten offering if shares remain to be sold in that offering.  If, after the completion of the subscription offering, the amount of shares to be issued is increased above the maximum of the estimated valuation range included in this prospectus, the Tax-Qualified Employee Stock Benefit Plans will be entitled to increase their subscriptions by a percentage equal to the percentage increase in the amount of shares to be issued above the maximum of the estimated valuation range, provided that such subscription will continue to be subject to applicable purchase limits and stock allocation procedures.
 
It may be possible for you to subscribe for shares of common stock using funds you hold within an IRA.  However, common stock must be held in a self-directed retirement account.  First Federal’s IRAs are not self-directed, so they cannot be invested in common stock.  If you wish to use some or all of the funds in your First Federal IRA, the applicable funds must be transferred to a self-directed account reinvested by an independent trustee, such as a brokerage firm.  If you do not have this type of account, you will need to establish one before placing your stock order.  An annual administrative fee may be payable to the independent trustee.   Because individual circumstances differ and processing of retirement fund orders takes additional time, we recommend that you contact the stock information center promptly, preferably at least two weeks before the end of the offering period, for assistance with purchases using your IRA or any other retirement account that you may have.   Whether you may use these funds for the purchase of shares in the stock offering may depend on timing constraints and possible limitations imposed by the institution where the funds are held.
 
 
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The records of First Federal will control all matters related to the existence of subscription rights and/or one’s ability to purchase shares of common stock in the subscription offering.
 
Should an oversubscription result in an allocation of shares, the allocation of shares will be completed in accordance with the plan of conversion.  Our interpretation of the terms and conditions of the plan of conversion and of the acceptability of the order form will be final.  If a partial payment for your shares is required, we will first take the funds from the cash or check you paid with and secondly from any account from which you wanted funds withdrawn.
 
Restrictions on Transfer of Subscription Rights and Shares
 
Subscription rights are nontransferable. You may not transfer, or enter into any agreement or understanding to transfer, the legal or beneficial ownership of your subscription rights issued under the plan of conversion or the shares of common stock to be issued upon exercise of your subscription rights. Your subscription rights may be exercised only by you and only for your own account. With the exception of individual retirement account stock purchases, the subscription rights of a qualifying account may not be transferred to an account that is in a different form of ownership. Adding or deleting a name or otherwise altering the form of beneficial ownership of a qualifying account will result in the loss of your subscription rights. If you exercise your subscription rights, you will be required to certify that you are purchasing shares solely for your own account and that you have no agreement or understanding regarding the sale or transfer of such shares. Federal and state regulations also prohibit any person from offering, or making an announcement of an offer or intent to make an offer, to purchase such subscription rights or shares of common stock before the completion of the offering.
 
First Federal will refer to the DFI and the FDIC any situations that it believes may involve a transfer of subscription rights and will not honor orders believed by it to involve the transfer of such rights.
 
Issuance of First Northwest Bancorp’s Common Stock
 
Certificates representing shares of common stock issued in the conversion will be mailed to the persons entitled thereto at the registration address noted on the order form, as soon as practicable following consummation of the conversion.  Any certificates returned as undeliverable will be held by us until claimed by persons legally entitled thereto or otherwise disposed of in accordance with applicable law.  Until certificates for the shares of common stock are available and delivered to purchasers, purchasers may not be able to sell the shares of common stock which they ordered.
 
Required Approvals
 
In order to complete the conversion, we will need to receive the final approval of the DFI and a final non-objection letter from the FDIC.  We also will need to have our members approve the plan of conversion and contribution to the foundation at a special meeting of members, which will be called for that purpose.  Finally, the Federal Reserve must approve First Northwest Bancorp’s application to become a bank holding company and to acquire all of First Federal’s common stock, as well as the establishment of the foundation.
 
First Northwest Bancorp may be required to make certain filings with state securities regulatory authorities in connection with the issuance of First Northwest Bancorp common stock in the offerings.
 
Restrictions on Purchase or Transfer of Shares After the Conversion
 
All shares of common stock purchased in connection with the conversion by a director or an executive officer of First Northwest Bancorp and First Federal will be subject to a restriction that the shares not be sold for a period of one year following the conversion except in the event of the death of the director or officer or pursuant to a merger or similar transaction approved by the DFI.  Each certificate for restricted shares will bear a legend giving notice of this restriction, and instructions will be issued to the effect that any transfer within the first year of any certificate or record ownership of the shares other than as provided above is a violation of the restriction.  Any shares of common stock issued at a later date within this one year period as a stock dividend, stock split or otherwise with respect to the restricted stock will be subject to the same restrictions.
 
Purchases of common stock of First Northwest Bancorp by directors, executive officers and their associates during the three-year period following completion of the conversion may be made only through a broker or dealer
 
 
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registered with the SEC, except with the prior written approval of the DFI.  This restriction does not apply, however, to negotiated transactions involving more than 1% of First Northwest Bancorp’s outstanding common stock or to certain purchases of stock pursuant to an employee stock benefit plan.
 
For information regarding the proposed purchases of common stock by officers and directors of First Federal and First Northwest Bancorp, see “Proposed Purchases by Management.”  Any purchases made by the officers and directors of First Federal and First Northwest Bancorp are intended for investment purposes only, and not for resale, including any purchases made for the purpose of meeting the minimum of the offering range.
 
Pursuant to regulations of the DFI, First Northwest Bancorp may not, for a period of one year following completion of this offering, repurchase shares of the common stock except on a pro rata basis, pursuant to an offer approved by the DFI and made to all shareholders, or through open market purchases of up to five percent of the outstanding stock where extraordinary circumstances exist.
 
 
The principal federal regulatory restrictions which affect the ability of any person, firm or entity to acquire First Northwest Bancorp, First Federal or their respective capital stock are summarized below.  Also discussed are certain provisions in First Northwest Bancorp’s articles of incorporation and bylaws which may be deemed to affect the ability of a person, firm or entity to acquire it.  These provisions include a prohibition on any holder of common stock voting more than 10% of the outstanding common stock.
 
Prior Approval of Acquisition of Control
 
Under federal law and Washington law, the written consent of the DFI and either the Federal Reserve or the FDIC is required prior to any person or company acquiring “control” of a Washington-chartered savings bank or its holding company.  Generally, control is conclusively presumed to exist if, among other things, an individual or company or group acting in concert acquires the power to direct the management or policies of First Northwest Bancorp or First Federal or to vote 25% or more of any class of voting stock.  Control is rebuttably presumed to exist under federal law if, among other things, a person acquires more than 10% of any class of voting stock, and the issuer’s securities are registered under Section 12 of the Securities and Exchange Act of 1934 or the person would be the single largest shareholder.  A company that acquires control thereby becomes a bank holding company, subject to restrictions applicable to the operations of bank holding companies and any conditions imposed by the Federal Reserve in connection with its approval of such acquisition.  Such restrictions and conditions may deter potential acquirers from seeking to obtain control of First Northwest Bancorp.  See “How We Are Regulated - Regulation and Supervision of First Northwest Bancorp.
 
Anti-takeover Provisions That are Contained in Sections of First Northwest Bancorp’s Articles of Incorporation and Bylaws
 
The articles of incorporation and bylaws of First Northwest Bancorp contain certain provisions that are intended to encourage a potential acquirer to negotiate any proposed acquisition of First Northwest Bancorp directly with its board of directors.  An unsolicited non-negotiated takeover proposal can seriously disrupt the business and management of a corporation and cause it great expense.  Accordingly, the board of directors believes it is in the best interests of First Northwest Bancorp and its shareholders to encourage potential acquirers to negotiate directly with management.  The board of directors believes that the provisions in the articles of incorporation and bylaws will encourage negotiations and discourage hostile takeover attempts.  The board also believes that these provisions should not discourage persons from proposing a merger or transaction at prices reflective of the true value of First Northwest Bancorp and that otherwise is in the best interests of all shareholders.  However, these provisions may have the effect of discouraging offers to purchase First Northwest Bancorp or its securities that are not approved by the board of directors but which certain of First Northwest Bancorp’s shareholders may deem to be in their best interests or pursuant to which shareholders would receive a substantial premium for their shares over then current market prices.  As a result, shareholders who might desire to participate in such a transaction may not have an opportunity to do so.  These provisions will also render the removal of the current board of directors and management more difficult.  The boards of directors of First Federal and First Northwest Bancorp believe these provisions are in the best interests of the shareholders because they will assist First Northwest Bancorp’s board of directors in managing the affairs of First Northwest Bancorp in the manner they believe to be in the best interests of shareholders generally and because a company’s board of directors is often best able in terms of knowledge
 
 
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regarding the company’s business and prospects, as well as resources, to negotiate the best transaction for its shareholders as a whole.
 
The following description of certain of the provisions of the articles of incorporation and bylaws of First Northwest Bancorp is necessarily general and reference should be made in each instance to the articles of incorporation and bylaws.  See “Where You Can Find More Information” regarding how to obtain a copy of these documents.
 
Board of Directors.   The articles of incorporation provide that the number of directors shall not be less than five nor more than 15.  The initial number of directors is nine, but this number may be changed by resolution of the board of directors.  The board of directors is divided into three groups, with each group containing one-third of the total number of directors, or as near as may be.  This may make it more difficult for a person seeking to acquire control of First Northwest Bancorp to gain majority representation on the board of directors in a relatively short period of time.  First Northwest Bancorp believes this is important in ensuring continuity in the composition and policies of the board of directors.
 
Cumulative Voting.   The articles of incorporation specifically do not permit cumulative voting for the election of directors.  Cumulative voting in an election of directors entitles a shareholder to cast a total number of votes equal to the number of directors to be elected multiplied by the number of his or her shares and to distribute that number of votes among the number of nominees as the shareholder chooses.  The absence of cumulative voting for directors limits the ability of a minority shareholder to elect directors.  Because the holder of less than a majority of First Northwest Bancorp’s shares cannot be assured representation on the board of directors, the absence of cumulative voting may discourage accumulations of First Northwest Bancorp’s shares or proxy contests that would result in changes in First Northwest Bancorp’s management.  The board of directors believes that elimination of cumulative voting will help to assure continuity and stability of management and policies; directors should be elected by a majority of the shareholders to represent the interests of the shareholders as a whole rather than the special representatives of particular minority interests; and efforts to elect directors representing specific minority interests are potentially divisive and could impair the operations of First Northwest Bancorp.
 
Special Meetings.   The articles of incorporation of First Northwest Bancorp provide that special meetings of shareholders of First Northwest Bancorp may be called only by the chief executive officer or by the board of directors.  If a special meeting is not called, shareholder proposals cannot be presented to the shareholders for action until the next annual meeting.  Shareholders are not permitted to call special meetings.
 
Authorized Capital Stock.   The articles of incorporation of First Northwest Bancorp authorize the issuance of 75,000,000 shares of common stock and 5,000,000 shares of preferred stock.  The shares of common stock and preferred stock were authorized in an amount greater than that to be issued in the conversion to provide First Northwest Bancorp’s board of directors with flexibility to effect, among other transactions, financings, acquisitions, stock dividends, stock splits and employee stock options.  However, these additional authorized shares may also be used by the board of directors consistent with its fiduciary duty to deter future attempts to gain control of First Northwest Bancorp.  The board of directors also has sole authority to determine the terms of any one or more series of preferred stock, including voting rights, conversion rates and liquidation preferences.  As a result of the ability to fix voting rights for a series of preferred stock, the board of directors has the power, to the extent consistent with its fiduciary duty, to issue a series of preferred stock to persons friendly to management in order to attempt to block a post tender offer merger or other transaction by which a third party seeks control, and thereby assist management to retain its position.  First Northwest Bancorp’s board of directors currently has no plan to issue additional shares, other than the issuance of additional shares pursuant to the proposed stock-based equity incentive plan.
 
Director Nominations.   The articles of incorporation of First Northwest Bancorp require a shareholder who intends to nominate a candidate for election to the board of directors at a shareholders’ meeting to give written notice to the secretary of First Northwest Bancorp at least 90 days (but not more than 120 days) in advance of the date of the meeting at which such nominations will be made.  The nomination notice is also required to include specified information concerning the nominee and the proposing shareholder.  The board of directors of First Northwest Bancorp believes that it is in the best interests of First Northwest Bancorp and its shareholders to provide sufficient time for the board of directors to study all nominations and to determine whether to recommend to the shareholders that any of these nominees be considered.
 
Supermajority Voting Provisions.   First Northwest Bancorp’s articles of incorporation require the affirmative vote of 80% of the outstanding shares entitled to vote to approve a merger, consolidation or other
 
 
154
 
 
business combination, unless the transaction is approved, prior to consummation, by the vote of at least two-thirds of the number of the continuing directors (as defined in the articles of incorporation) on First Northwest Bancorp’s board of directors.  “Continuing directors” generally includes all members of the board of directors who are not affiliated with any individual, partnership, trust or other person or entity (or the affiliates and associates of such person or entity) which is a beneficial owner of 10% or more of the voting shares of First Northwest Bancorp.  This provision could tend to make the acquisition of First Northwest Bancorp more difficult to accomplish without the cooperation or favorable recommendation of First Northwest Bancorp’s board of directors.
 
Amendment of Articles of Incorporation and Bylaws.   First Northwest Bancorp’s articles of incorporation may be amended by the vote of the holders of a majority of the outstanding shares of its common stock, except that the provisions of the articles of incorporation governing the duration of the corporation, the purpose and powers of the corporation, authorized capital stock, denial of preemptive rights, the number and staggered terms of directors, removal of directors, shareholder nominations and proposals, approval of certain business combinations, the evaluation of certain business combinations, limitation of directors’ liability, indemnification of officers and directors, calling of special meetings of shareholders, the authority to repurchase shares and the manner of amending the bylaws and articles of incorporation may not be repealed, altered, amended or rescinded except by the vote of the holders of at least 80% of the outstanding shares of First Northwest Bancorp.  This provision is intended to prevent the holders of a lesser percentage of the outstanding stock of First Northwest Bancorp from circumventing any of the foregoing provisions by amending the articles of incorporation to delete or modify one of such provisions.
 
First Northwest Bancorp’s bylaws may only be amended by a majority vote of the board of directors of First Northwest Bancorp or by the holders of at least 80% of the outstanding stock by First Northwest Bancorp.
 
Purpose and Takeover Defensive Effects of First Northwest Bancorp’s Articles of Incorporation and Bylaws.   The board of directors believes that the provisions described above are prudent and will reduce First Northwest Bancorp’s vulnerability to takeover attempts and certain other transactions that have not been negotiated with and approved by the board.  These provisions will also assist in the orderly deployment of the conversion proceeds into productive assets during the initial period after the conversion.  The board of directors believes these provisions are in the best interest of First Federal, and First Northwest Bancorp and its shareholders.  In the judgment of the board of directors, First Northwest Bancorp’s board will be in the best position to determine the true value of First Northwest Bancorp and to negotiate more effectively for what may be in the best interests of its shareholders.  Accordingly, the board of directors believes that it is in the best interest of First Northwest Bancorp and its shareholders to encourage potential acquirers to negotiate directly with the board of directors of First Northwest Bancorp and that these provisions will encourage these negotiations and discourage hostile takeover attempts.  It is also the view of the board of directors that these provisions should not discourage persons from proposing a merger or other transaction at a price reflective of the true value of First Northwest Bancorp and that is in the best interest of all shareholders.
 
Attempts to acquire control of financial institutions and their holding companies have recently become increasingly common.  Takeover attempts that have not been negotiated with and approved by the board of directors present to shareholders the risk of a takeover on terms that may be less favorable than might otherwise be available.  A transaction that is negotiated and approved by the board of directors, on the other hand, can be carefully planned and undertaken at an opportune time in order to obtain maximum value of First Northwest Bancorp for its shareholders, with due consideration given to matters such as the management and business of the acquiring corporation and maximum strategic development of First Northwest Bancorp’s assets.
 
An unsolicited takeover proposal can seriously disrupt the business and management of a corporation and cause great expense.  Although a tender offer or other takeover attempt may be made at a price substantially above current market prices, these offers are sometimes made for less than all of the outstanding shares of a target company.  As a result, shareholders may be presented with the alternative of partially liquidating their investment at a time that may be disadvantageous, or retaining their investment in an enterprise that is under different management and whose objectives may not be similar to those of the remaining shareholders.  The concentration of control, which could result from a tender offer or other takeover attempt, could also deprive First Northwest Bancorp’s remaining shareholders of benefits of certain protective provisions of the Securities Exchange Act of 1934, if the number of beneficial owners became less than 1,200, thereby allowing for deregistration.
 
Despite the belief of First Federal and First Northwest Bancorp as to the benefits to shareholders of these provisions of First Northwest Bancorp’s articles of incorporation and bylaws, these provisions may also have the effect of discouraging a future takeover attempt that would not be approved by First Northwest Bancorp’s board of
 
 
155
 
 
directors, but pursuant to which shareholders may receive a substantial premium for their shares over then current market prices.  As a result, shareholders who might desire to participate in such a transaction may not have any opportunity to do so.  These provisions will also render the removal of First Northwest Bancorp’s board of directors and of management more difficult.  The board of directors of First Federal and First Northwest Bancorp, however, have concluded that the potential benefits outweigh the possible disadvantages.
 
Following the conversion, pursuant to applicable law and, if required, following the approval by shareholders, First Northwest Bancorp may adopt additional anti-takeover charter provisions or other devices regarding the acquisition of its equity securities that would be permitted for a Washington business corporation.
 
The cumulative effect of the restrictions on acquisition of First Northwest Bancorp contained in the articles of incorporation and bylaws of First Northwest Bancorp and in Federal and Washington law may be to discourage potential takeover attempts and perpetuate incumbent management, even though certain shareholders of First Northwest Bancorp may deem a potential acquisition to be in their best interests, or deem existing management not to be acting in their best interests.
 
DESCRIPTION OF CAPITAL STOCK OF FIRST NORTHWEST BANCORP
 
General
 
First Northwest Bancorp is authorized to issue 75,000,000 shares of common stock having a par value of $0.01 per share and 5,000,000 shares of preferred stock having a par value of $0.01 per share.  First Northwest Bancorp currently expects to issue up to 8,654,000 shares of common stock   (including shares contributed to the First Federal Community Foundation), subject to adjustment up to 9,958,100 shares, and no shares of preferred stock in the conversion.  Each share of First Northwest Bancorp’s common stock will have the same relative rights as, and will be identical in all respects with, each other share of common stock.  Upon payment of the purchase price for the common stock, in accordance with the plan of conversion and reorganization, all the stock will be duly authorized, fully paid and nonassessable.
 
The common stock of First Northwest Bancorp represents nonwithdrawable capital.  The common stock is not a savings or deposit account and is not insured by the FDIC or any other government agency.
 
Common Stock
 
Dividends.   First Northwest Bancorp can pay dividends out of statutory surplus or from certain net profits if, as and when declared by its board of directors.  The payment of dividends by First Northwest Bancorp is subject to limitations which are imposed by law and applicable regulation.  See “Our Policy Regarding Dividends” and “How We Are Regulated.”  The holders of common stock of First Northwest Bancorp will be entitled to receive and share equally in the dividends declared by the board of directors of First Northwest Bancorp out of funds legally available therefore.  If First Northwest Bancorp issues preferred stock, the holders of preferred stock may have a priority over the holders of the common stock with respect to dividends.
 
Stock Repurchases.   Regulations of Federal Reserve place certain limitations on the repurchase of First Northwest Bancorp’s capital stock.  See “How We Are Regulated.”
 
Voting Rights.   Upon conversion, the holders of common stock of First Northwest Bancorp will possess exclusive voting rights in First Northwest Bancorp.  They will elect First Northwest Bancorp’s board of directors and act on other matters as are required to be presented to them under Washington law or as are otherwise presented to them by the board of directors.  Except as discussed in “Restrictions on Acquisition of First Northwest Bancorp and First Federal,” each holder of common stock will be entitled to one vote per share and will not have any right to cumulate votes in the election of directors.  If First Northwest Bancorp issues preferred stock, holders of the preferred stock may also possess voting rights.  Certain matters require a vote of 80% of the outstanding shares entitled to vote thereon.  See “Restrictions on Acquisition of First Northwest Bancorp and First Federal.”
 
As a state-chartered stock savings bank that is the subsidiary of a holding company, voting rights are vested exclusively in the owners of the shares of capital stock of First Federal, all of which will be owned by First Northwest Bancorp and voted at the direction of First Northwest Bancorp’s board of directors.  Consequently, the holders of the common stock will not have direct control of First Federal.
 
 
156
 
 
Liquidation.   In the event of any liquidation, dissolution or winding up of First Federal, First Northwest Bancorp, as holder of First Federal’s capital stock would be entitled to receive, after payment or provision for payment of all debts and liabilities of First Federal, including all deposit accounts and accrued interest thereon, and after distribution of the balance in the special liquidation account to Eligible Account Holders and Supplemental Eligible Account Holders, all assets of First Federal available for distribution.  In the event of liquidation, dissolution or winding up of First Northwest Bancorp, the holders of its common stock would be entitled to receive, after payment or provision for payment of all its debts and liabilities, all of the assets of First Northwest Bancorp available for distribution.  If preferred stock is issued, the holders thereof may have a priority over the holders of the common stock in the event of liquidation or dissolution.
 
Preemptive Rights.   Holders of the common stock of First Northwest Bancorp will not be entitled to preemptive rights with respect to any shares that may be issued.  The common stock is not subject to redemption.
 
Preferred Stock
 
None of the shares of First Northwest Bancorp’s authorized preferred stock will be issued in the conversion and there are no current plans to issue the preferred stock.  Preferred stock may be issued with the designations, powers, preferences and rights as the board of directors may determine.  The board of directors can, without shareholder approval, issue preferred stock with voting, dividend, liquidation and conversion rights that could dilute the voting strength of the holders of the common stock and may assist management in impeding an unfriendly takeover or attempted change in control.
 
Restrictions on Acquisition
 
Acquisitions of First Northwest Bancorp are restricted by provisions in its articles of incorporation and bylaws and by the rules and regulations of various regulatory agencies.  See “How We Are Regulated - Regulation and Supervision of First Northwest Bancorp” and “Restrictions on Acquisition of First Northwest Bancorp and First Federal.”
 
 
The transfer agent and registrar for First Northwest Bancorp common stock is Registrar & Transfer Company, Cranford, New Jersey.
 
 
The consolidated balance sheets of First Federal as of June 30, 2012 and 2011 and the related consolidated statements of operations, comprehensive income, equity, and cash flows for each of the years in the three-year period ended June 30, 2012 included in this prospectus have been audited by Moss Adams LLP, an independent registered public accounting firm, as set forth in its report thereon appearing elsewhere herein and in the registration statement, and are included in reliance upon the report of this firm given upon the authority as experts in accounting and auditing.
 
RP Financial, LC. has consented to the publication herein of the summary of its report to First Federal setting forth its opinion as to the estimated pro forma market value of the First Northwest Bancorp common stock upon conversion and its letter with respect to subscription rights.
 
 
The legality of the common stock has been passed upon for First Federal by Breyer & Associates PC, McLean, Virginia, special counsel to First Federal and First Northwest Bancorp.  The federal income tax consequences of the conversion have been passed upon for First Federal by Silver, Freedman and Taff, L.L.P., Washington D.C. The Washington State income tax consequences of the conversion have been passed upon for First Northwest Bancorp and First Federal by the Platt Irwin Law Firm, Port Angeles, Washington.  Certain legal matters will be passed upon for Sandler O’Neill + Partners, L.P. by Luse Gorman Pomerenk & Schick, P.C., Washington D.C.
 
 
157
 
 
 
First Northwest Bancorp has filed with the SEC a registration statement under the Securities Act of 1933 with respect to the common stock offered hereby.  As permitted by the rules and regulations of the SEC, this prospectus does not contain all the information set forth in the registration statement.  This information, including the appraisal report which is an exhibit to the registration statement, can be examined without charge at the public reference facilities of the SEC located at 100 F Street, N.E., Washington, D.C. 20549, and copies of this material can be obtained from the SEC at prescribed rates.  You may obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330.  In addition, the SEC maintains a website (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC, including First Northwest Bancorp.  The statements contained in this prospectus as to the contents of any contract or other document filed as an exhibit to the registration statement are, of necessity, brief descriptions thereof and are not necessarily complete; each statement is qualified by reference to the contract or document.  We believe, however, that we have included the material information an investor needs to consider in making an investment decision.  First Federal also maintains a website ( http://www.ourfirstfed.com ), which contains various information about First Federal.  In addition, First Federal files quarterly call reports with the FDIC, which are available at the FDIC’s website ( http://www.fdic.gov ).
 
First Federal has filed with the DFI an Application for Approval of Conversion, which includes proxy materials for the special meeting of members and certain other information.  This prospectus omits certain information contained in the Application for Approval of Conversion.  The Application for Approval of Conversion, including the proxy materials, exhibits and certain other information, may be inspected, without charge, at the office of the Washington Department of Financial Institutions, Division of Banks, Department of Financial Institutions, 150 Israel Road SW, Tumwater, Washington 98501.  A copy of the Application for Approval of Conversion has also been filed with the FDIC.
 
In connection with the conversion, First Northwest Bancorp has registered its common stock with the SEC under Section 12 of the Securities Exchange Act of 1934, and, upon that registration, First Northwest Bancorp and the holders of its stock will become subject to the proxy solicitation rules, reporting requirements and restrictions on stock purchases and sales by directors, officers and greater than 10% shareholders, the annual and periodic reporting and certain other requirements of the Securities Exchange Act of 1934.  Under the plan of conversion, First Northwest Bancorp has undertaken that it will not terminate this registration for a period of at least three years following the conversion.
 
A copy of the plan of conversion, the articles of incorporation and bylaws of First Northwest Bancorp and First Federal are available without charge from First Federal.  Requests for this information should be directed to: Levon L. Mathews, Chief Executive Officer, First Federal, 105 West 8th Street, Port Angeles, Washington 98362.
 
 
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FIRST FEDERAL
 
     
   
Page
     
Report of Independent Registered Public Accounting Firm
  F-2
     
Consolidated Financial Statements
   
     
Consolidated Balance Sheets as of September 30, 2012
(unaudited) and June 30, 2012 and 2011
  F-3
     
Consolidated Statements of Income for the Three Months
Ended September 30, 2012 and 2011 (unaudited) and the
Years Ended June 30, 2012, 2011 and 2010
  F-4
     
Consolidated Statements of Comprehensive Income for the Three Months
Ended September 30, 2012 (unaudited) and for the
Years Ended June 30, 2012, 2011 and 2010
  F-5
     
Consolidated Statements of Equity for the Three Months
Ended September 30, 2012 (unaudited) and for the
Years Ended June 30, 2012, 2011 and 2010
  F-6
     
Consolidated Statements of Cash Flows for the Three Months
Ended September 30, 2012 and 2011 (unaudited) and the
Years Ended June 30, 2012, 2011 and 2010
  F-7
     
Notes to Consolidated Financial Statements
  F-9 - F-60
 
All schedules are omitted because the required information is not applicable or is included in the Consolidated Financial Statements and related Notes.
 
The financial statements of First Northwest Bancorp have been omitted because First Northwest Bancorp has not yet issued any stock, has no assets or liabilities, and has not conducted any business other than that of an organizational nature.
 
 
F-1
 
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
The Board of Directors
First Federal Savings and Loan Association
   of Port Angeles and Subsidiaries
Port Angeles, Washington
 
We have audited the accompanying consolidated balance sheets of First Federal Savings and Loan Association of Port Angeles and Subsidiaries (the “Bank”) as of June 30, 2012 and 2011, and the related consolidated statements of operations, comprehensive income, equity, and cash flows for each of the years in the three-year period ended June 30, 2012. These consolidated financial statements are the responsibility of the Bank’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Bank is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Bank’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of First Federal Savings and Loan Association of Port Angeles and Subsidiaries as of June 30, 2012 and 2011, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 2012, in conformity with accounting principles generally accepted in the United States of America.
 
/s/ Moss Adams LLP
 
Everett, Washington
August 24, 2012
 
 
F-2
 
 
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF
PORT ANGELES AND SUBSIDIARIES
CONSOLIDATED BA LANCE SHEETS (In thousands)
 
ASSETS
 
                   
   
(Unaudited)
             
   
September 30,
   
June 30,
 
   
2012
   
2012
   
2011
 
                   
Cash and due from banks
  $ 11,618     $ 12,427     $ 12,597  
Interest-bearing deposits in banks
    24,907       30,048       23,154  
                         
Total cash and cash equivalents
    36,525       42,475       35,751  
                         
Investment securities available for sale, at fair value
    219,214       218,163       198,917  
Investment securities held to maturity, at amortized cost
    60,702       57,385       37,081  
Loans held for sale
    1,240       418       275  
Loans receivable (net of allowance for loan losses of $8,224, $7,390 and $4,728)
    411,113       400,659       424,187  
Federal Home Loan Bank (FHLB) stock, at cost
    10,722       10,819       10,819  
Accrued interest receivable
    2,466       2,539       2,490  
Premises and equipment, net
    11,932       12,200       12,840  
Mortgage servicing rights, net
    1,666       1,873       2,494  
Bank-owned life insurance, net
    17,804       17,656       16,950  
Real estate owned and repossessed assets
    3,230       2,864       4,475  
Prepaid expenses and other assets
    5,164       4,813       2,572  
                         
Total assets
  $ 781,778     $ 771,864     $ 748,851  
                         
LIABILITIES AND EQUITY
 
                         
LIABILITIES
                       
Deposits
  $ 589,871     $ 583,238     $ 562,398  
Borrowings
    100,033       100,033       100,033  
Deferred tax liability, net
    3,349       2,941       1,427  
Accrued interest payable
    319       316       315  
Accrued expenses and other liabilities
    8,699       7,495       6,998  
Advances from borrowers for taxes and insurance
    1,053       541       460  
                         
Total liabilities
    703,324       694,564       671,631  
                         
COMMITMENTS AND CONTINGENCIES (NOTE 13)
                       
                         
EQUITY
                       
Retained earnings
    75,312       74,677       76,637  
Accumulated other comprehensive income, net of tax
    3,142       2,623       583  
                         
Total equity
    78,454       77,300       77,220  
                         
Total liabilities and equity
  $ 781,778     $ 771,864     $ 748,851  
 
 
F-3
 
 
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF
PORT ANGELES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (In thousands)
 
   
(Unaudited)
                   
   
Three Months Ended
September 30,
   
Years Ended June 30,
 
   
2012
   
2011
   
2012
   
2011
   
2010
 
INTEREST INCOME
                             
Interest and fees on loans receivable
  $ 5,501     $ 5,818     $ 22,705     $ 25,231     $ 30,215  
Interest on mortgage-backed and related securities
    750       873       3,526       3,226       2,533  
Interest on investment securities
    231       169       682       943       1,137  
Interest-bearing deposits and other
    9       2       29       16       11  
                                         
Total interest income
    6,491       6,862       26,942       29,416       33,896  
                                         
INTEREST EXPENSE
                                       
Deposits
    551       863       2,857       3,984       6,926  
Borrowings
    1,080       1,077       4,283       4,274       4,755  
                                         
Total interest expense
    1,631       1,940       7,140       8,258       11,681  
                                         
Net interest income
    4,860       4,922       19,802       21,158       22,215  
                                         
PROVISION FOR LOAN LOSSES
    624       1,548       7,970       926       4,373  
                                         
Net interest income after provision for loan losses
    4,236       3,374       11,832       20,232       17,842  
                                         
NONINTEREST INCOME
                                       
Loan and deposit service fees
    855       799       3,186       3,021       2,322  
Mortgage servicing (expense) fees, net of amortization
    (56 )     54       (19 )     117       100  
Net gain on sales of loans
    110       179       1,503       1,472       2,525  
Net gain on sale of investment securities
    51       -       293       40       908  
Other-than-temporary impairment loss on investment securities
    -       (170 )     (419 )     (829 )     (3,154 )
Increase in cash surrender value of bank-owned life insurance
    148       156       706       551       979  
Other income
    52       9       149       251       492  
                                         
Total noninterest income
    1,160       1,027       5,399       4,623       4,172  
                                         
NONINTEREST EXPENSE
                                       
Compensation and benefits
    2,464       2,363       9,490       9,632       11,089  
Real estate owned and repossessed assets  (income) expenses, net
    (306 )     432       2,519       1,303       529  
Data processing
    528       373       1,637       1,503       1,479  
Occupancy and equipment
    702       732       2,948       2,699       2,715  
Supplies, postage, and telephone
    221       170       756       809       783  
Regulatory assessments and state taxes
    75       112       385       485       366  
Advertising
    87       62       457       370       514  
Professional fees
    236       101       850       1,046       1,401  
FDIC insurance premium
    170       148       656       844       915  
FHLB prepayment penalty
    -       -       -       -       729  
Other
    305       456       1,293       1,074       2,095  
                                         
Total noninterest expense
    4,482       4,949       20,991       19,765       22,615  
                                         
INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR
                                       
INCOME TAXES
    914       (548 )     (3,760 )     5,090       (601 )
                                         
PROVISION (BENEFIT) FOR INCOME TAXES
    279       (328 )     (1,800 )     1,195       (602 )
                                         
NET INCOME (LOSS)
  $ 635     $ (220 )   $ (1,960 )   $ 3,895     $ 1  
 
 
F-4
 
 
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF
PORT ANGELES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
 
   
(Unaudited)
                   
   
Three Months Ended
September 30,
   
Years Ended June 30,
 
   
2012
   
2011
   
2012
   
2011
   
2010
 
                               
NET INCOME (LOSS)
  $ 635     $ (220 )   $ (1,960 )   $ 3,895     $ 1  
                                         
Other comprehensive income, net of tax
                                       
Unrealized gain on securities
                                       
Unrealized holding gain, net of taxes of
                                       
$284, $237, $841, $158, and $407, respectively
    553       461       1,633       308       789  
Reclassification adjustments for gains on sales
                                       
of securities, net of taxes of $17, $0, $100,
                                       
$14, and $309, respectively
    (34 )     -       (193 )     (26 )     (599 )
Reclassification adjustments for other-than-
                                       
temporary impairment on securities, net of taxes
                                       
of $0, $56, $309, $204, and $712, respectively
    -       110       600       395       1,381  
                                         
Other comprehensive income, net
    519       571       2,040       677       1,571  
                                         
COMPREHENSIVE INCOME
  $ 1,154     $ 351     $ 80     $ 4,572     $ 1,572  
 
 
F-5
 
 
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF
PORT ANGELES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF  EQUITY (In thousands)
 
         
Accumulated
       
         
Other
       
         
Comprehensive
       
   
Retained
   
Income (Loss)
   
Total
 
   
Earnings
   
Net of Tax
   
Equity
 
                   
BALANCE, June 30, 2009
  $ 72,741     $ (1,665 )   $ 71,076  
                         
Net income
    1       -       1  
Other comprehensive income, net of tax
            1,571       1,571  
Comprehensive income
                  $ 1,572  
BALANCE, June 30, 2010
    72,742       (94 )     72,648  
                         
Net income
    3,895       -       3,895  
Other comprehensive income, net of tax
            677       677  
                         
Comprehensive income
                  $ 4,572  
BALANCE, June 30, 2011
    76,637       583       77,220  
                         
Net loss
    (1,960 )     -       (1,960 )
Other comprehensive income, net of tax
            2,040       2,040  
                         
Comprehensive income
                  $ 80  
BALANCE, June 30, 2012
  $ 74,677     $ 2,623     $ 77,300  
                         
Net Income
    635       -       635  
Other comprehensive income, net of tax
            519       519  
Comprehensive income
                  $ 1,154  
BALANCE, September 30, 2012 (Unaudited)
  $ 75,312     $ 3,142     $ 78,454  
 
 
F-6
 
 
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF
PORT ANGELES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
 
   
(Unaudited)
                   
   
Three Months Ended
September 30,
   
Years Ended June 30,
 
   
2012
   
2011
   
2012
   
2011
   
2010
 
CASH FLOWS FROM OPERATING ACTIVITIES
                             
Net income (loss)
  $ 635     $ (220 )   $ (1,960 )   $ 3,895     $ 1  
Adjustments to reconcile net income (loss) to net cash from operating
                                       
           activities                                        
Depreciation and amortization
    314       370       1,474       1,237       1,218  
Amortization and accretion of premiums and discounts on investments, net
    866       464       2,574       1,910       731  
Other-than-temporary impairment loss on investment securities
    -       170       419       829       3,154  
Amortization of deferred loan fees, net
    (125 )     (61 )     (239 )     (251 )     (117 )
Origination of loans held for sale
    (4,707 )     (10,480 )     (63,940 )     (53,178 )     (101,393 )
Proceeds from loans held for sale
    3,995       10,013       65,302       55,322       105,094  
Amortization of mortgage servicing rights
    217       167       777       892       871  
Additions to mortgage servicing rights
    (29 )     (42 )     (224 )     (485 )     (818 )
Impairments (recoveries) on the valuation allowance on mortgage servicing rights, net
    19       -       68       (88 )     (164 )
Provision for loan losses
    624       1,548       7,970       926       4,373  
Loss (gain) on sale of real estate owned and repossessed assets
    (287 )     6       62       144       (29 )
Deferred federal income taxes
    141       (140 )     463       (688 )     (1,111 )
Gain on sale of loans
    (110 )     (179 )     (1,503 )     (1,472 )     (2,525 )
Gain on sale of securities available for sale
    (51 )     -       (576 )     (40 )     (908 )
Loss on sale of securities held to maturity
    -       -       283       -       -  
Write-down on real estate owned and repossessed assets
    24       311       1,435       649       375  
Increase in cash surrender value of life insurance
    (148 )     (156 )     (706 )     (551 )     (979 )
Change in assets and liabilities
                                       
Decrease (increase) in accrued interest receivable
    73       (3 )     (49 )     242       412  
Decrease (increase) in prepaid expenses and other assets
    (351 )     34       (2,241 )     813       (2,596 )
Increase (decrease) in accrued interest payable
    3       (2 )     1       (16 )     (155 )
Increase (decrease) in accrued expenses and other liabilities
    1,204       (32 )     479       (93 )     (4,671 )
                                         
Net cash from operating activities
    2,307       1,768       9,869       9,997       763  
                                         
CASH FLOWS FROM INVESTING ACTIVITIES
                                       
Purchase of securities available for sale
    (19,219 )     (38,372 )     (106,391 )     (118,920 )     (145,822 )
Proceeds from maturities, calls, and principal repayments
                                       
of securities available for sale
    15,525       17,555       59,255       64,071       51,160  
Proceeds from sales of securities available for sale
    2,797       -       28,718       12,546       26,454  
Purchase of securities held to maturity
    (7,273 )     -       (34,322 )     (20,864 )     -  
Proceeds from maturities, calls, and principal repayments
                                       
of securities held to maturity
    3,773       3,037       13,191       13,300       8,443  
Proceeds from FHLB stock redemption
    97       -       -       -       -  
Proceeds from sales of securities held to maturity
    -       -       389       -       -  
Proceeds from sale of real estate owned and
                                       
repossessed assets
    946       2       3,711       2,608       1,210  
Loan originations, net of repayments, write-offs, and recoveries
    (12,002 )     3,169       12,217       40,564       46,869  
Purchase of premises and equipment, net
    (46 )     (159 )     (834 )     (683 )     (487 )
                                         
Net cash from investing activities
    (15,402 )     (14,768 )     (24,066 )     (7,378 )     (12,173 )
 
 
F-7
 
 
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF
PORT ANGELES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (In thousands)
 
   
(Unaudited)
                   
   
Three Months Ended
September 30,
   
Years Ended June 30,
 
   
2012
   
2011
   
2012
   
2011
   
2010
 
CASH FLOWS FROM FINANCING ACTIVITIES
                             
Net increase in deposits
    6,633       7,409       20,840       6,175       25,401  
Proceeds from FHLB advances
    -       -       -       -       51,924  
Repayment of FHLB advances
    -       -       -       -       (71,606 )
Proceeds from notes payable
    -       -       -       40       -  
Net increase (decrease) in advances from borrowers
                                       
for taxes and insurance
    512       407       81       (49 )     (91 )
                                         
Net cash from financing activities
    7,145       7,816       20,921       6,166       5,628  
                                         
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
    (5,950 )     (5,184 )     6,724       8,785       (5,782 )
                                         
CASH AND CASH EQUIVALENTS, beginning of year
    42,475       35,751       35,751       26,966       32,748  
                                         
CASH AND CASH EQUIVALENTS, end of year
  $ 36,525     $ 30,567     $ 42,475     $ 35,751     $ 26,966  
                                         
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
                                       
Cash paid during the year for
                                       
Interest on deposits and other borrowings
  $ 1,628     $ 1,942     $ 7,139     $ 8,274     $ 11,836  
                                         
Income taxes
  $ -     $ 700     $ 765     $ 1,485     $ 690  
                                         
Interest income recognized on a cash basis on impaired loans
  $ 43     $ 42     $ 202     $ 216     $ -  
                                         
NONCASH INVESTING ACTIVITIES
                                       
Unrealized gain on securities available for sale
  $ 786     $ 698     $ 2,181     $ 426     $ 288  
                                         
Amount of credit loss on other-than-temporarily-impaired
                                       
securities previously recognized in comprehensive income
  $ -     $ (166 )   $ (909 )   $ (599 )   $ (2,093 )
                                         
Loans foreclosed upon with repossession transferred to
                                       
real estate owned and repossessed assets
  $ 1,049     $ 1,406     $ 3,597     $ 5,803     $ 3,150  
 
 
F-8
 
 
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF
PORT ANGELES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 1 - Summary of Significant Accounting Policies
 
Nature of operations - First Federal Savings and Loan Association of Port Angeles provides commercial and consumer banking services to residents and businesses located primarily on the Olympic Peninsula in the state of Washington. These services include deposit and lending transactions that are supplemented with other borrowing and investing activities.
 
Principles of consolidation - The consolidated financial statements include the accounts of First Federal Savings and Loan Association of Port Angeles, its wholly owned subsidiary, North Olympic Peninsula Services, Inc., and majority-owned Craft3 Development IV, LLC (collectively, First Federal or the Bank). All material intercompany accounts and transactions have been eliminated in consolidation.
 
Plan of conversion and change in corporate form - On May 22, 2012, the Board of Directors of the Bank adopted a plan of conversion (Plan). The Plan sets forth that the Bank proposes to convert into a stock savings bank structure with the establishment of a stock holding company, First Northwest Bancorp (the Company), as parent of the Bank. The Bank will convert to the stock form of ownership, followed by the issuance of all of the Bank’s outstanding stock to the Company. Pursuant to the Plan, the Bank will determine the total offering value and number of shares of common stock based upon a valuation by an independent appraiser. The Bank’s Board of Directors plan includes adopting an employee stock ownership plan (ESOP) which will subscribe for 8% of the common stock sold in the offering. The Plan also includes establishing and funding a charitable foundation with a combination of cash and common stock equal to approximately 8% of the gross offering proceeds received by First Northwest Bancorp. The Company is being organized as a corporation incorporated under the laws of the state of Washington and will own all of the outstanding common stock of the Bank upon completion of the conversion. In order to complete the conversion, the Bank will need to receive the final approval of the Washington State Department of Financial Institutions (DFI) and a final non-objection letter from the U.S. Federal Deposit Insurance Corporation (FDIC). They also will need to have its members approve the Plan at a special meeting of members, which will be called for that purpose. Finally, the Board of Governors of the Federal Reserve must approve the Company’s application to become a bank holding company and to acquire all of the Bank’s common stock.
 
The costs of issuing the common stock will be deferred and deducted from the sales proceeds of the offering. If the conversion is unsuccessful, all deferred costs will be charged to operations. The Bank has $650,000 and $120,000 in incurred and deferred conversion costs as of September 30, 2012 (unaudited) and June 30, 2012, respectively. At the time of conversion, the Bank will establish a liquidation account in an amount equal to its total net worth as of the latest statement of financial condition appearing in the final prospectus. The liquidation account will be maintained for the benefit of eligible depositors who continue to maintain their accounts at the Bank after the conversion. The liquidation account will be reduced annually to the extent that eligible depositors have reduced their qualifying deposits. Subsequent increases will not restore an eligible account holder’s interest in the liquidation account. In the event of a complete liquidation, each eligible depositor will be entitled to receive a distribution from the liquidation account in an amount proportionate to the current adjusted qualifying balances for accounts then held. The liquidation account balance is not available for payment of dividends.
 
Use of estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make assumptions. These assumptions result in estimates that affect the reported amounts of assets and liabilities, revenues and expenses, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expense during the reporting period. 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, mortgage servicing rights, fair value of financial instruments, deferred tax assets and liabilities, and the valuation of impaired loans, real estate owned, and repossessed assets.
 
 
F-9
 
 
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF
PORT ANGELES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 1 - Summary of Significant Accounting Policies (continued)
 
Cash and cash equivalents - Cash and cash equivalents consist of currency on hand, due from banks, and interest-bearing deposits with financial institutions with an original maturity of three months or less. The amounts on deposit fluctuate and, at times, exceed the insured limit by the FDIC, which potentially subjects the Bank to credit risk. The Bank has not experienced any losses due to balances exceeding FDIC insurance limits.
 
Restricted assets - Federal Reserve Board regulations require maintenance of certain minimum reserve balances on deposit with the Federal Reserve Bank. The amount required to be on deposit was approximately $2.8 million and $3.9 million at June 30, 2012 and 2011, respectively. There was no reserve requirement at September 30, 2012 (unaudited). The Bank was in compliance with reserve requirements at September 30, 2012 (unaudited), June 30, 2012 and 2011.
 
Investment securities - Investment securities are classified into one of three categories: (1) held to maturity, (2) available for sale, or (3) trading. The Bank had no trading securities at September 30, 2012 (unaudited), June 30, 2012 or 2011. Investment securities are categorized as held to maturity when the Bank has the positive intent and ability to hold those securities to maturity.
 
Investment securities categorized as available for sale are generally held for investment purposes (to maturity), although unanticipated future events may result in the sale of some securities. Available-for-sale securities are recorded at fair value, with the unrealized holding gain or loss reported in other comprehensive income (OCI), net of tax, as a separate component of equity. Realized gains or losses are determined using the amortized cost basis of securities sold using the specific identification method and are included in earnings. Dividend and interest income on investments are recognized when earned. Premiums and discounts are recognized in interest income using the level yield method over the period to maturity.
 
Securities that are held to maturity are stated at cost and adjusted for amortization of premiums and accretion of discounts, which are recognized as adjustments to interest income.
 
The Bank reviews investment securities for other-than-temporary impairment (OTTI) on a quarterly basis. For debt securities, the Bank considers whether management intends to sell a security or if it is likely that the Bank will be required to sell the security before recovery of the amortized cost basis of the investment, which may be maturity. For debt securities, if management intends to sell the security or it is likely that the Bank will be required to sell the security before recovering its cost basis, the entire impairment loss would be recognized as OTTI and charged against earnings. If management does not intend to sell the security and it is not likely that the Bank will be required to sell the security, but management does not expect to recover the entire amortized cost basis of the security, only the portion of the impairment loss representing credit losses would be recognized in earnings. The credit loss on a security is measured as the difference between the amortized cost basis and the present value of the cash flows expected to be collected. Projected cash flows are discounted by the original or current effective interest rate depending on the nature of the security being measured for potential OTTI. The remaining impairment related to all other factors, i.e. the difference between the present value of the cash flows expected to be collected and fair value, is recognized as a charge to OCI. Impairment losses related to all other factors are presented as separate categories within OCI. If there is an indication of additional credit losses, the security is re-evaluated according to the procedures described above.
 
 
F-10
 
 
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF
PORT ANGELES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 1 - Summary of Significant Accounting Policies (continued)
 
Federal Home Loan Bank stock - The Bank’s investment in Federal Home Loan Bank of Seattle (FHLB) stock is carried at cost, which approximates fair value. As a member of the FHLB system, the Bank is required to maintain a minimum investment in FHLB stock, based on specific percentages of its outstanding mortgages, total assets, or FHLB advances. At September 30, 2012 (unaudited), June 30, 2012 and 2011, the Bank’s minimum investment requirement was approximately $3.9 million, $3.9 million and $4.1 million, respectively. The Bank was in compliance with the FHLB minimum investment requirement at September 30, 2012 (unaudited), June 30, 2012 and 2011. The Bank may request redemption at par value of any stock in excess of the amount the Bank is required to hold. Stock redemptions are granted at the discretion of the FHLB.
 
Management evaluates FHLB stock for impairment based on its assessment of the ultimate recoverability of cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of cost is influenced by criteria such as (1) the significance of any decline in net assets of the FHLB compared with the capital stock amount for the FHLB and the length of time this situation has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, (3) the impact of legislative and regulatory changes on institutions and, accordingly, the customer base of the FHLB, and (4) the liquidity position of the FHLB. Based on its evaluation, the Bank did not recognize an OTTI loss on its FHLB stock at September 30, 2012 and 2011 (unaudited) or June 30, 2012 and 2011.
 
Loans held for sale - Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or market value. Market value is determined based upon market prices from third-party purchasers and brokers. Net unrealized losses, if any, are recognized through a valuation allowance by charges to earnings. Gains or losses on the sale of loans that are held for sale are recognized at the time of sale and determined by the difference between net sale proceeds and the net book value of the loan less the estimated fair value of any retained mortgage servicing rights.
 
Loans receivable - Loans are stated at the amount of unpaid principal, net of unearned income and any deferred fees or costs. All discounts and premiums are recognized over the estimated life of the loan as yield adjustments. The estimated life is adjusted for prepayments.
 
Loans are classified as impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal and interest when due, in accordance with the terms of the original loan agreement. The carrying value of impaired loans is based on the present value of expected future cash flows discounted at each loan’s effective interest rate or, for collateral dependent loans, at fair value of the collateral, less selling costs. If the measurement of each impaired loan’s value is less than the recorded investment in the loan, we recognize this impairment and adjust the carrying value of the loan to fair value through the allowance for loan losses. This can be accomplished by charging off the impaired portion of the loan or establishing a specific component to be provided for in the allowance for loan losses.
 
The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent, unless the credit is well secured and in process of collection. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.
 
 
F-11
 
 
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF
PORT ANGELES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 1 - Summary of Significant Accounting Policies (continued)
 
All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash basis or cost recovery method until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
 
Allowance for loan losses - The Bank 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 financial statements are prepared. The ultimate recovery of loans is susceptible to future market factors beyond the Bank’s control, which may result in losses or recoveries differing significantly from those provided in the consolidated financial statements. In addition, various regulatory agencies, as an integral part of their examination processes, periodically review the Bank’s allowance for loan losses. Such agencies may require the Bank to recognize additional provisions for loan losses based on their judgment using information available to them at the time of their examination.
 
Allowances for losses on specific problem loans are charged to income when it is determined that the value of these loans and properties, in the judgment of management, is impaired. The Bank accounts for impaired loans in accordance with Accounting Standards Codification (ASC) 310-10-35, Receivables—Overall—Subsequent Measureme nt. A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. Smaller balance homogeneous loans, including single-family residential and consumer loans, are excluded from the scope of this statement unless they are subject to a troubled debt restructuring.
 
When a loan has been identified as being impaired, the amount of the impairment is measured by using discounted cash flows, except when it is determined that the sole source of repayment for the loan is the operation or liquidation of the underlying collateral. In such cases, impairment is measured at current fair value of the collateral, reduced by estimated selling costs. When the measurement of the impaired loan is less than the recorded investment in the loan (including collected interest that has been applied to principal, net deferred loan fees or costs, and unamortized premiums or discounts), loan impairment is recognized by establishing or adjusting an allocation of the allowance for loan losses. Uncollected accrued interest is reversed against interest income. If ultimate collection of principal is in doubt, all cash receipts on impaired loans are applied to reduce the principal balance.
 
A troubled debt restructuring (TDR) is a loan for which the Bank, for reasons related to the borrower’s financial difficulties, grants a concession to the borrower that the Bank would not otherwise consider. The loan terms that have been modified or restructured due to the borrower’s financial difficulty include, but are not limited to, a reduction in the stated interest rate; an extension of the maturity; an interest rate below market; a reduction in the face amount of the debt; a reduction in the accrued interest; or extension, deferral, renewal, or rewrite of the original loan terms.
 
TDRs are all considered impaired and may be classified “special mention,” “substandard,” or “doubtful,” depending on the severity of the modification. Loans that were paid current at the time of modification may be upgraded in their classification after a sustained period of repayment performance, usually six months or longer.
 
 
F-12
 
 
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF
PORT ANGELES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 1 - Summary of Significant Accounting Policies (continued)
 
Loans that are past due at the time of modification are classified “substandard” or “doubtful” and placed on nonaccrual status. Those 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.
 
Real estate owned and repossessed assets - Real estate owned and repossessed assets include real estate and personal property acquired through foreclosure or repossession, and may include in-substance foreclosed properties. In-substance foreclosed properties are those properties for which the institution has taken physical possession, regardless of whether formal foreclosure proceedings have taken place.
 
At the time of foreclosure, foreclosed real estate is recorded at the fair value less estimated costs to sell, which becomes the property’s new cost basis. Any write-downs based on the asset’s fair value at date of acquisition are charged to the allowance for loan losses. After foreclosure, valuations are periodically performed by management and property held for sale is carried at the lower of the new cost basis or fair value less estimated costs to sell. Impairment losses on property to be held and used are measured as the amount by which the carrying amount of a property exceeds its fair value.
 
Mortgage servicing rights - Originated servicing rights are recorded when mortgage loans are originated and subsequently sold with the servicing rights retained. Servicing assets are initially recognized at fair value on the consolidated balance sheets. To determine the fair value of servicing rights, management uses a valuation model that calculates the present value of future cash flows. Assumptions used in the valuation model include market discount rates and anticipated prepayment speeds. In addition, estimates of the cost of servicing per loan, an inflation rate, ancillary income per loan, and default rates are used. The initial fair value relating to the servicing rights is capitalized and amortized into noninterest income in proportion to, and over the period of, estimated future net servicing income.
 
Management assesses impairment of the mortgage servicing rights based on recalculations of the present value of remaining future cash flows using updated market discount rates and prepayment speeds. Subsequent loan prepayments and changes in prepayment assumptions in excess of those forecasted can adversely impact the carrying value of the servicing rights. Impairment is assessed on a stratified basis with any impairment recognized through a valuation allowance for each impaired stratum. The servicing rights are stratified based on the predominant risk characteristics of the underlying loans: fixed-rate loans and adjustable-rate loans. The effect of changes in market interest rates on estimated rates of loan prepayments is the predominant risk characteristic for mortgage servicing rights. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds, and default rates and losses.
 
Mortgage servicing income represents fees earned for servicing loans. Fees for servicing mortgage loans are generally based upon a percentage of the principal balance of the loans serviced, as well as related ancillary income such as late charges. Servicing income is recognized as earned, unless collection is doubtful. The caption in the consolidated income statement “Mortgage servicing fees, net of amortization” includes mortgage servicing income, amortization of mortgage servicing rights, the effects of mortgage servicing run-off, and impairment.
 
Income taxes - The Bank accounts for income taxes in accordance with the provisions of ASC 740-10, Income Taxes , which requires the use of the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences, attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
 
 
F-13
 
 
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF
PORT ANGELES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 1 - Summary of Significant Accounting Policies (continued)
 
Premises and equipment - Premises and equipment are stated at cost less accumulated depreciation. Depreciation is recognized and computed on the straight-line method over the estimated useful lives as follows:
 
Buildings  37.5 - 50 years
Furniture and equipment  3 - 10 years
 
Transfers of financial assets - Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Bank, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Bank does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. The mortgage loans that are sold with recourse provisions are accounted for as sales until such time as the loan defaults.
 
From 2007 to 2009, the Bank sold some of its mortgage loans with “life of the loan” recourse provisions, requiring the Bank to repurchase the loan at any time if it defaults. The remaining balance of such loans at September 30, 2012 (unaudited) and June 30, 2012 and 2011, was approximately $6.9 million, $8.0 million, and $10.2 million, respectively. As of June 30, 2012, one loan has been repurchased for $214,000. There is an associated allowance of $53,000, $46,000 and $54,000 at September 30, 2012 (unaudited), June 30, 2012 and 2011, respectively, included in “accrued expenses and other liabilities” on the consolidated balance sheets related to these loans.
 
Bank-owned life insurance - The carrying amount of life insurance approximates fair value. Fair value of life insurance is estimated using the cash surrender value, less applicable surrender charges. The change in cash surrender value is included in other noninterest income.
 
Off-balance-sheet credit-related financial instruments -In the ordinary course of business, the Bank has entered into commitments to extend credit, including commitments under lines of credit, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded when they are funded.
 
Advertising costs - The Bank expenses advertising costs as they are incurred.
 
Comprehensive (loss) income - Accounting principles generally require that recognized revenue, expenses, and gains and losses be included in net (loss) income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the equity section of the consolidated balance sheets, such items, along with net (loss) income, are components of comprehensive (loss) income.
 
Fair value measurements - Fair values of financial instruments are estimated using relevant market information and other assumptions (Note 14). Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect these estimates.
 
Segment information - The Bank’s activities are considered to be a single industry segment for financial reporting purposes. The Bank is engaged in the business of attracting deposits and providing lending services. Substantially all income is derived from a diverse base of commercial, mortgage, and consumer lending activities and investments.
 
 
F-14
 
 
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF
PORT ANGELES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 1 - Summary of Significant Accounting Policies (continued)
 
Recently issued accounting pronouncements - In April 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-02, A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring . This ASU clarifies guidance within Accounting Standards Codification Topic 310, Receivables—Troubled Debt Restructurings by Creditors , of whether a creditor has granted to the borrower a concession during a loan restructuring and clarifies the guidance applicable to evaluating whether a borrower is experiencing financial difficulties. Both of these evaluations must be performed by a creditor during a loan restructuring to determine if the restructuring qualifies as a troubled debt restructuring. This ASU also requires additional disclosures included in ASU 2010-20, but deferred from the original adoption date, regarding troubled debt restructurings to be disclosed. The effective date of this ASU is for the first interim period beginning after June 15, 2011, and is to be applied retrospectively to restructurings occurring on or after January 1, 2011. The adoption of this ASU did not have a material impact on First Federal’s consolidated financial statements.
 
In May 2011, the FASB issued ASU No. 2011 - 03, Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements . The objective is to improve the accounting for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. Topic 860, Transfers and Servicing, prescribes when an entity may or may not recognize a sale upon the transfer of financial assets subject to repurchase agreements. That determination is based, in part, on whether the entity has maintained effective control over the transferred financial assets. The new guidance will be effective for annual and interim periods beginning after December 15, 2011. The adoption of this guidance is not expected to have a material impact on First Federal’s consolidated financial statements.
 
In May 2011, the FASB issued ASU No. 2011 - 04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS . Since 2006, the FASB and the International Accounting Standards Board (IASB) have been working closely together to develop common requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and International Financial Reporting Standards (IFRS) and to ensure that fair value has the same meaning in U.S. GAAP and IFRS. The Amendments in this ASU explain how to measure fair value—they do not require additional fair value measurements and are not intended to establish valuation standards or affect valuation practices outside of financial reporting. The new guidance will be effective for annual and interim periods beginning after December 15, 2011. The adoption of this guidance is not expected to have a material impact on First Federal’s consolidated financial statements.
 
In May 2011, the FASB issued ASU No. 2011 - 05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income . The objective of this ASU is to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. The new guidance eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. The ASU requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total OCI, the components of other comprehensive income, and the total of comprehensive income. The new guidance is effective for annual and interim periods beginning after December 15, 2011. Early adoption was permitted and there were no required transition disclosures. The adoption of this guidance did not have a material impact on First Federal’s consolidated financial statements.
 
 
F-15
 
 
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF
PORT ANGELES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 1 - Summary of Significant Accounting Policies (continued)
 
In December 2011, the FASB issued ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures About Offsetting Assets and Liabilities . The objective of this ASU is to enhance disclosures and provide converged disclosures under U.S. GAAP and IFRS about financial instruments and derivative instruments that are either offset on the statement of financial position or subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset on the statement of financial position. This ASU requires disclosure of both net and gross information for these assets and liabilities. The new guidance will be effective for annual and interim periods beginning on or after January 1, 2013. The adoption of this guidance is not expected to have a material impact on First Federal’s consolidated financial statements.
 
In December 2011, the FASB issued ASU No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 . The objective of this ASU is to defer the effective date of only the changes in ASU No. 2011-05 (see above) that relate to the presentation of reclassification adjustments out of accumulated other comprehensive income on the components of net income and other comprehensive income. This guidance reinstates the requirements for the presentation of reclassifications out of accumulated other comprehensive income that was in place before the issuance of ASU No. 2011-05. The new guidance will be effective for annual and interim periods beginning after December 15, 2011. The adoption of this guidance is not expected to have a material impact on First Federal’s consolidated financial statements.
 
In July 2012, the FASB issued ASU No. 2012-05, Testing Indefinite-Lived Intangible Assets for Impairment.  With the Update, a company testing indefinite-lived intangibles for impairment now has the option to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount in accordance with current guidance. An entity also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. An entity will be able to resume performing the qualitative assessment in any subsequent period.   The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after September 15, 2012.   The adoption of this guidance is not expected to have a material impact on First Federal’s consolidated financial statements.
 
In October 2012, the FASB issued ASU 2012-06, Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution .  The Update clarifies that when an entity recognizes an indemnification asset as a result of a government-assisted acquisition of a financial institution and subsequently, a change in the cash flows expected to be collected on the indemnification asset occurs, as a result of a change in cash flows expected to be collected on the assets subject to indemnification, the reporting entity should subsequently account for the change in the measurement of the indemnification asset on the same basis as the change in the assets subject to indemnification. Any amortization of changes in value should be limited to the contractual term of the indemnification agreement. The amendments are effective for annual and interim reporting periods beginning on or after December 15, 2012. The adoption of this guidance is not expected to have a material impact on First Federal’s consolidated financial statements.
 
Subsequent events - The Bank has evaluated subsequent events for potential recognition and disclosure.
 
Reclassifications - Certain reclassifications have been made to the 2011 and 2010 consolidated financial statements to conform to the 2012 presentation with no effect on net income (loss) or equity.
 
 
F-16
 
 
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF
PORT ANGELES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
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, 2012, are summarized as follows:
 
   
(Unaudited)
 
   
September 30, 2012
 
         
Gross
   
Gross
   
Estimated
 
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
   
Cost
   
Gains
   
Losses
   
Value
 
   
(In thousands)
 
Investment Securities
                       
Available for Sale
                       
Municipal bonds
  $ 2,347     $ 132     $ -     $ 2,479  
SBA 1
    39,261       851       (12 )     40,100  
                                 
Total
  $ 41,608     $ 983     $ (12 )   $ 42,579  
                                 
Mortgage-Backed Securities
                               
Available for Sale
                               
MBS 2 agency
  $ 168,602     $ 3,716     $ (21 )   $ 172,297  
MBS corporate
    4,244       94       -       4,338  
                                 
Total
  $ 172,846     $ 3,810     $ (21 )   $ 176,635  
                                 
Total investment securities available for sale
  $ 214,454     $ 4,793     $ (33 )   $ 219,214  
                                 
Investment Securities
                               
Held to Maturity
                               
Municipal bonds
  $ 17,069     $ 508     $ -     $ 17,577  
SBA
    1,345       8       (1 )     1,352  
                                 
Total
  $ 18,414     $ 516     $ (1 )   $ 18,929  
                                 
Mortgage-Backed Securities
                               
Held to Maturity
                               
MBS agency
  $ 42,288     $ 850     $ -     $ 43,138  
                                 
Total investment securities held to maturity
  $ 60,702     $ 1,366     $ (1 )   $ 62,067  
 
1
U.S. Small Business Administration
2
Mortgage-backed securities
 
 
F-17
 
 
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF
PORT ANGELES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 2 - Securities (continued)
 
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, 2012, are summarized as follows:
 
   
June 30, 2012
 
         
Gross
   
Gross
   
Estimated
 
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
   
Cost
   
Gains
   
Losses
   
Value
 
   
(In thousands)
 
Investment Securities
                       
Available for Sale
                       
Municipal bonds
  $ 2,353     $ 109     $ (2 )   $ 2,460  
SBA
    40,121       630       (23 )     40,728  
                                 
Total
  $ 42,474     $ 739     $ (25 )   $ 43,188  
                                 
Mortgage-Backed Securities
                               
Available for Sale
                               
MBS agency
  $ 167,154     $ 3,271     $ (42 )   $ 170,383  
MBS corporate
    4,561       31       -       4,592  
                                 
Total
  $ 171,715     $ 3,302     $ (42 )   $ 174,975  
                                 
Total investment securities available for sale
  $ 214,189     $ 4,041     $ (67 )   $ 218,163  
                                 
Investment Securities
                               
Held to Maturity
                               
Municipal bonds
  $ 17,390     $ 159     $ (123 )   $ 17,426  
SBA
    1,382       7       (1 )     1,388  
                                 
Total
  $ 18,772     $ 166     $ (124 )   $ 18,814  
                                 
Mortgage-Backed Securities
                               
Held to Maturity
                               
MBS agency
  $ 38,613     $ 637     $ (14 )   $ 39,236  
                                 
Total investment securities held to maturity
  $ 57,385     $ 803     $ (138 )   $ 58,050  
 
 
F-18
 
 
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF
PORT ANGELES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 2 - Securities (continued)
 
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, 2012, are summarized as follows:
 
   
June 30, 2011
 
               
Gross
   
Gross
   
Estimated
 
   
Amortized
   
OCI portion
   
Unrealized
   
Unrealized
   
Fair
 
   
Cost
   
of OTTI
   
Gains
   
Losses
   
Value
 
   
(In thousands)
 
Investment Securities
                             
Available for Sale
                             
Municipal bonds
  $ 100     $ -     $ 7     $ -     $ 107  
SBA
    21,187       -       260       -       21,447  
Agency
    29,976       -       178       -       30,154  
Trust preferred securities 1
    522       (459 )     -       -       63  
                                         
Total
  $ 51,785     $ (459 )   $ 445     $ -     $ 51,771  
                                         
Mortgage-Backed Securities
                                       
Available for Sale
                                       
MBS agency
  $ 140,189     $ -     $ 1,609     $ (129 )   $ 141,669  
MBS corporate
    5,609       -       6       (138 )     5,477  
                                         
Total
  $ 145,798     $ -     $ 1,615     $ (267 )   $ 147,146  
                                         
Total investment securities available for sale
  $ 197,583     $ (459 )   $ 2,060     $ (267 )   $ 198,917  
                                         
Investment Securities
                                       
Held to Maturity
                                       
Municipal bonds
  $ 2,147     $ -     $ 85     $ -     $ 2,232  
SBA
    1,794       -       5       (3 )     1,796  
Trust preferred securities
    991       (451 )     -       -       540  
                                         
Total
  $ 4,932     $ (451 )   $ 90     $ (3 )   $ 4,568  
                                         
Mortgage-Backed Securities
                                       
Held to Maturity
                                       
MBS agency
  $ 32,600     $ -     $ 536     $ (5 )   $ 33,131  
                                         
Total investment securities held to maturity
  $ 37,532     $ (451 )   $ 626     $ (8 )   $ 37,699  
 
1 Represents collateralized debt obligations secured by pooled trust preferred securities
 
 
F-19
 
 
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF
PORT ANGELES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 2 - Securities (continued)
 
The following shows the unrealized gross losses and fair value of the investment portfolio as of:
 
    (Unaudited)  
   
September 30, 2012
 
   
Less Than Twelve Months
   
More Than Twelve Months
   
Total
 
   
Gross
         
Gross
         
Gross
       
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
 
   
Losses
   
Value
   
Losses
   
Value
   
Losses
   
Value
 
   
(In thousands)
 
Investment Securities
                                   
Available for Sale
                                   
SBA
  $ 12     $ 9,293     $ -     $ -     $ 12     $ 9,293  
                                                 
Mortgage-Backed Securities
                                               
Available for Sale
                                               
MBS agency
  $ 11     $ 5,984     $ 10     $ 8,103     $ 21     $ 14,087  
                                                 
Investment Securities
                                               
Held to Maturity
                                               
SBA
  $ -     $ -     $ 1     $ 335     $ 1     $ 335  
 
   
June 30, 2012
 
   
Less Than Twelve Months
   
More Than Twelve Months
   
Total
 
   
Gross
         
Gross
         
Gross
       
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
 
   
Losses
   
Value
   
Losses
   
Value
   
Losses
   
Value
 
   
(In thousands)
 
Investment Securities
                                   
Available for Sale
                                   
Municipal bonds
  $ 2     $ 645     $ -     $ -     $ 2     $ 645  
SBA
    23       9,600       -       -       23       9,600  
Total
  $ 25     $ 10,245     $ -     $ -     $ 25     $ 10,245  
                                                 
Mortgage-Backed Securities
                                               
Available for Sale
                                               
MBS agency
  $ 34     $ 5,929     $ 8     $ 2,612     $ 42     $ 8,541  
                                                 
Investment Securities
                                               
Held to Maturity
                                               
Municipal bonds
  $ 123     $ 7,999     $ -     $ -     $ 123     $ 7,999  
SBA
    -       -       1       339       1       339  
Total
  $ 123     $ 7,999     $ 1     $ 339     $ 124     $ 8,338  
                                                 
Mortgage-Backed Securities
                                               
Held to Maturity
                                               
MBS agency
  $ 14     $ 5,949     $ -     $ -     $ 14     $ 5,949  
 
 
F-20
 
 
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF
PORT ANGELES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 2 - Securities (continued)
 
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:
 
   
June 30, 2011
 
   
Less Than Twelve Months
   
More Than Twelve Months
   
Total
 
   
Gross
         
Gross
         
Gross
       
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
 
   
Losses
   
Value
   
Losses
   
Value
   
Losses
   
Value
 
   
(In thousands)
 
Investment Securities
                                   
Available for Sale
                                   
Trust preferred securities
  $ -     $ -     $ 459     $ 63     $ 459     $ 63  
                                                 
Mortgage-Backed Securities
                                               
Available for Sale
                                               
MBS agency
  $ 129     $ 24,152     $ -     $ -     $ 129     $ 24,152  
MBS corporate
    138       4,417       -       -       138       4,417  
Total
  $ 267     $ 28,569     $ -     $ -     $ 267     $ 28,569  
                                                 
Investment Securities
                                               
Held to Maturity
                                               
SBA
  $ -     $ -     $ 3     $ 529     $ 3     $ 529  
Trust preferred securities
    -       -       451       540       451       540  
Total
  $ -     $ -     $ 454     $ 1,069     $ 454     $ 1,069  
                                                 
Mortgage-Backed Securities
                                               
Held to Maturity
                                               
MBS agency
  $ 5     $ 8,354     $ -     $ -     $ 5     $ 8,354  
 
The Bank may hold certain investment securities in an unrealized loss position that are not considered other than temporarily impaired. At September 30, 2012 (unaudited), there were 6 investment securities with $34,000 of unrealized losses and a fair value of approximately $23.7 million. At June 30, 2012, there were 13 investment securities with $205,000 of unrealized losses and a fair value of approximately $33.1 million. At June 30, 2011, there were 9 investment securities with $275,000 of unrealized losses and a fair value of approximately $37.7 million.
 
The unrealized losses on investments in debt securities relate principally to the general change in interest rates and illiquidity, and not credit quality, that has occurred since the securities’ purchase dates, and such unrecognized losses or gains will continue to vary with general interest rate level fluctuations in the future. As management does not intend to sell the securities, and it is not likely they will be required to sell the securities before their anticipated recovery, no declines are deemed to be other than temporary.
 
The unrealized losses on investment and mortgage-backed securities were caused by interest rate changes. Certain investments in a loss position are guaranteed by government entities or government sponsored entities. It is expected that securities in a loss position would not be settled at a price less than the amortized cost of the investment. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and the Bank does not intend to sell the securities and believes it is not likely they will be required to sell these investments until a market price recovery or maturity, these investments are not considered other than temporarily impaired.
 
 
F-21
 
 
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF
PORT ANGELES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 2 - Securities (continued)
 
First Federal purchased approximately $6.0 million of collateralized debt obligation (CDO) securities between 2002 and 2006 from various issuers. The underlying collateral for these CDO securities were pooled trust preferred securities issued by banks and insurance companies geographically dispersed across the United States. First Federal does not hold any individual trust preferred securities. The estimated fair market value of these securities has declined beginning June 30, 2008, due to the collapse of financial markets and the corresponding impact on the financial institutions that issued those securities. Although all trust preferred CDO securities were graded “A” at the time of purchase, market conditions and performance resulted in downgrades ranging from to “Baa3” to “Ca.”
 
Broker prices were not available for these trust preferred investment securities. Therefore, each security was individually examined for its market value using a discounted cash flow approach. To determine the discount rate used in the cash flow analyses and calculate an appropriate fair value for each security, management made assumptions based on the implied rate of return, general changes in market rates, estimated changes in credit quality and liquidity risk premium, specific nonperformance and default experience of the underlying collateral, and applicable broker discount rates. As of September 30, 2012 (unaudited) First Federal no longer holds any CDO securities.
   
The following is an analysis of amounts relating to OTTI losses on debt securities, recognized in earnings during the three months ended September 30 and the years ended June 30:
 
   
(Unaudited)
                   
   
Three Months Ended
September 30,
   
Years Ended June 30,
 
   
2012
   
2011
   
2012
   
2011
   
2010
 
   
(In thousands)
 
Balance, beginning of period
  $ -     $ 4,477     $ 4,477     $ 3,648     $ 494  
                                         
Additions
                                       
Amount related to the credit loss for which an
                                       
other-than-temporary impairment was not
                                       
previously recognized
    -       4       54       230       1,087  
Increases to the amount related to the credit loss
                                       
for which an other-than-temporary impairment was
                                       
previously recognized
    -       166       365       599       2,067  
Reductions
                                       
Securities sold
    -       -       (4,896 )     -       -  
                                         
Balance, end of period
  $ -     $ 4,647     $ -     $ 4,477     $ 3,648  
 
 
F-22
 
 
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF
PORT ANGELES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 2 - Securities (continued)
 
The amortized cost and estimated fair value of investment and mortgage-backed securities at September 30, 2012 (unaudited) and June 30, 2012, by contractual or expected maturity, are shown in the following table. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
   
(Unaudited)
 
   
September 30, 2012
 
   
Available-for-Sale
   
Held-to-Maturity
 
   
Amortized
   
Estimated
   
Amortized
   
Estimated
 
   
Cost
   
Fair Value
   
Cost
   
Fair Value
 
   
(In thousands)
 
Investment Securities
                       
Due less than one year
  $ -     $ -     $ 420     $ 425  
Due from one to five years
    100       104       1,142       1,205  
Due in over ten years
    41,508       42,475       16,852       17,299  
                                 
    $ 41,608     $ 42,579     $ 18,414     $ 18,929  
                                 
Mortgage-Backed and Related Securities
                               
Due less than one year
  $ -     $ -     $ 93     $ 96  
Due from one to five years
    -       -       867       943  
Due in five to ten years
    641       647       15,841       16,178  
Due in over ten years
    172,205       175,988       25,487       25,921  
                                 
    $ 172,846     $ 176,635     $ 42,288     $ 43,138  
                                 
   
June 30, 2012
 
   
Available-for-Sale
   
Held-to-Maturity
 
   
Amortized
   
Estimated
   
Amortized
   
Estimated
 
   
Cost
   
Fair Value
   
Cost
   
Fair Value
 
   
(In thousands)
 
Investment Securities
                               
Due less than one year
  $ -     $ -     $ 275     $ 277  
Due from one to five years
    100       104       1,538       1,610  
Due in over ten years
    42,374       43,084       16,959       16,927  
                                 
    $ 42,474     $ 43,188     $ 18,772     $ 18,814  
                                 
Mortgage-Backed and Related Securities
                               
Due less than one year
  $ -     $ -     $ 38     $ 40  
Due from one to five years
    -       -       1,151       1,237  
Due in five to ten years
    821       830       17,381       17,644  
Due in over ten years
    170,894       174,145       20,043       20,315  
                                 
    $ 171,715     $ 174,975     $ 38,613     $ 39,236  
 
During the three months ended September 30, 2012 (unaudited), the Bank sold available-for-sale securities with gross proceeds of $2.8 million and gross realized gains of $51,000, with no sales during the three months ended September 30, 2011 (unaudited). During the years ended June 30, 2012, 2011, and 2010, the Bank sold available-for-sale securities, including its available for sale CDO trust preferred securities, with gross proceeds of $28.7 million, $12.5 million, and $26.5 million, and gross realized gains of $757,000, $40,000 and $908,000, respectively. During the year ended June 30,
 
 
F-23
 
 
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF
PORT ANGELES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 2 - Securities (continued)
 
2012, the Bank sold available-for-sale securities with gross realized losses of $181,000, and no gross realized losses for fiscal years ending June 30, 2011 or 2010.
 
During the year ended June 30, 2012, the Bank changed its intent to hold certain trust preferred securities to maturity due to significant deterioration of those credits and their negative impact to the Bank’s risk based capital. The sale of held to maturity trust preferred securities does not impact the Bank’s ability to hold remaining securities in its portfolio until their maturity, and the held to maturity designation of those securities remains unchanged. The Bank sold held to maturity trust preferred securities with gross proceeds of $389,000 and gross realized gains and losses of $49,000 and $332,000, respectively.
 
Note 3 - Loans Receivable
 
Loans receivable consist of the following:
 
   
(Unaudited)
             
   
September 30,
   
June 30,
 
   
2012
   
2012
   
2011
 
   
(In thousands)
 
One to four family
  $ 223,738     $ 215,243     $ 239,043  
Commercial
    119,231       109,399       99,844  
Consumer
    59,831       62,238       68,052  
Construction and land
    18,025       22,689       23,595  
                         
      420,825       409,569       430,534  
Less
                       
Net deferred loan fees
    545       563       597  
Discount on purchased loans, net
    943       957       1,022  
Allowance for loan losses
    8,224       7,390       4,728  
                         
      9,712       8,910       6,347  
                         
Total loans receivable, net
  $ 411,113     $ 400,659     $ 424,187  
 
 
F-24
 
 
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF
PORT ANGELES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 3 - Loans Receivable (continued)
 
Loans, by maturity or repricing date, are as follows:
 
   
(Unaudited)
                 
   
September 30,
   
June 30,
 
    2012     2012     2011  
   
(In thousands)
 
Adjustable-rate loans
                       
Due within one year
  $ 99,314     $ 105,299     $ 105,374  
After one but within five years
    51,955       46,604       39,039  
After five but within ten years
    1,968       1,596       4,169  
After ten years
    122       123       -  
                         
      153,359       153,622       148,582  
Fixed-rate loans
                       
Due within one year
    10,888       9,625       4,461  
After one but within five years
    33,069       34,909       52,128  
After five but within ten years
    26,550       23,065       15,134  
After ten years
    196,959       188,348       210,229  
                         
      267,466       255,947       281,952  
                         
    $ 420,825     $ 409,569     $ 430,534  
 
The adjustable-rate loans have interest rate adjustment limitations and are generally indexed to multiple indices. Future market factors may affect the correlation of adjustable loan interest rates with the rates the Bank pays on the short-term deposits that have been primarily used to fund such loans.
 
Allowance for loan losses for the years ended June 30 is summarized as follows:
 
   
Years Ended June 30,
 
   
2012
   
2011
   
2010
 
   
(In thousands)
 
Balance, beginning of period
  $ 4,728     $ 6,420     $ 3,068  
Provision for loan losses
    7,970       926       4,373  
Charge-offs
    (5,503 )     (2,910 )     (1,097 )
Recoveries
    195       292       76  
                         
Balance, end of period
  $ 7,390     $ 4,728     $ 6,420  
 
 
F-25
 
 
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF
PORT ANGELES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 3 - Loans Receivable (continued)
 
The following tables present the activity in the allowance for loan losses by segment for the three months ended:
 
   
(Unaudited)
 
   
September 30, 2012
 
   
One to Four
               
Construction
             
   
Family
   
Commercial
   
Consumer
   
and Land
   
Unallocated
   
Total
 
   
(In thousands)
 
Beginning balance
  $ 3,464     $ 1,528     $ 2,168     $ 230     $ -     $ 7,390  
Provision for loan losses
    623       (435 )     382       48       6       624  
Charge-offs
    -       -       (137 )     -       -       (137 )
Recoveries
    130       160       57       -       -       347  
                                                 
Ending balance
  $ 4,217     $ 1,253     $ 2,470     $ 278     $ 6     $ 8,224  
                                                 
   
(Unaudited)
 
   
September 30, 2011
 
   
One to Four
                   
Construction
                 
   
Family
   
Commercial
   
Consumer
   
and Land
   
Unallocated
   
Total
 
   
(In thousands)
 
Beginning balance
  $ 2,025     $ 1,329     $ 832     $ 502     $ 40     $ 4,728  
Provision for loan losses
    537       241       508       302       (40 )     1,548  
Charge-offs
    (401 )     (99 )     (209 )     (7 )     -       (716 )
Recoveries
    70       5       11       -       -       86  
                                                 
Ending balance
  $ 2,231     $ 1,476     $ 1,142     $ 797     $ -     $ 5,646  
 
The following table presents the activity in the allowance for loan losses by segment for the year ended:
 
   
June 30, 2012
 
   
One to Four
                   
Construction
                 
   
Family
   
Commercial
   
Consumer
   
and Land
   
Unallocated
   
Total
 
   
(In thousands)
 
Beginning balance
  $ 2,025     $ 1,329     $ 832     $ 502     $ 40     $ 4,728  
Provision for loan losses
    3,826       1,094       3,048       42       (40 )     7,970  
Charge-offs
    (2,482 )     (941 )     (1,766 )     (314 )     -       (5,503 )
Recoveries
    95       46       54       -       -       195  
                                                 
Ending balance
  $ 3,464     $ 1,528     $ 2,168     $ 230     $ -     $ 7,390  
 
 
F-26
 
 
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF
PORT ANGELES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 3 - Loans Receivable (continued)
 
A loan is considered impaired when the Bank 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 for smaller balance loans in the portfolio.
 
The following table presents loans individually evaluated for impairment by class of loans as of:
 
   
(Unaudited)
 
   
September 30, 2012
 
   
Recorded
             
   
Investments
   
Unpaid
       
   
(Loan Balance
   
Principal
   
Related
 
   
Less Charge-off)
   
Balance
   
Allowance
 
   
(In thousands)
 
With no allowance recorded
                 
One to four family
  $ 4,427     $ 4,572     $ -  
Commercial
    4,711       4,799       -  
Consumer
    481       487       -  
Construction and land
    281       282       -  
                         
Loans with no allowance
                       
recorded
    9,900       10,140       -  
                         
With an allowance recorded
                       
One to four family
    4,038       4,072       689  
Commercial
    2,334       2,357       182  
Consumer
    1,336       1,361       714  
Construction and land
    180       180       37  
                         
Loans with an allowance
                       
recorded
    7,888       7,970       1,622  
                         
Total
                       
One to four family
    8,465       8,644       689  
Commercial
    7,045       7,156       182  
Consumer
    1,817       1,848       714  
Construction and land
    461       462       37  
                         
    $ 17,788     $ 18,110     $ 1,622  
 
 
F-27
 
 
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF
PORT ANGELES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 3 - Loans Receivable (continued)
 
The following table presents the average investment in impaired loans and related interest income recognized for the three months ended:
 
   
(Unaudited)
 
   
September 30, 2012
   
September 30, 2011
 
                         
   
Average
   
Interest
   
Average
   
Interest
 
   
Investment in
   
Income
   
Investment in
   
Income
 
   
Impaired Loans
   
Recognized
   
Impaired Loans
   
Recognized
 
   
(In thousands)
 
With no allowance recorded
                       
One to four family
  $ 4,463     $ 17     $ 2,062     $ 31  
Commercial
    3,490       (1 )     2,959       10  
Consumer
    461       3       307       9  
Construction and land
    171       2       244       17  
                                 
Loans with no allowance
                               
recorded
    8,585       21       5,572       67  
                                 
With an allowance recorded
                               
One to four family
    3,734       10       5,725       127  
Commercial
    2,516       3       3,275       3  
Consumer
    1,194       9       1,224       24  
Construction and land
    85       -       530       4  
                                 
Loans with an allowance
                               
recorded
    7,529       22       10,754       158  
                                 
Total
                               
One to four family
    8,197       27       7,787       158  
Commercial
    6,006       2       6,234       13  
Consumer
    1,655       12       1,531       33  
Construction and land
    256       2       774       21  
                                 
    $ 16,114     $ 43     $ 16,326     $ 225  
 
 
F-28
 
 
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF
PORT ANGELES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 3 - Loans Receivable (continued)
 
The following table presents loans individually evaluated for impairment by class of loans as of June 30, 2012:
 
   
Recorded
                         
   
Investments
   
Unpaid
         
Average
   
Interest
 
   
(Loan Balance
   
Principal
   
Related
   
Investment in
   
Income
 
   
Less Charge-off)
   
Balance
   
Allowance
   
Impaired Loans
   
Recognized
 
   
(In thousands)
 
With no allowance recorded
                             
One to four family
  $ 4,689     $ 4,813     $ -     $ 4,494     $ 204  
Commercial
    3,580       3,646       -       3,481       59  
Consumer
    629       642       -       456       46  
Construction and land
    218       219       -       267       34  
                                         
Loans with no allowance
                                       
recorded
    9,116       9,320       -       8,698       343  
                                         
With an allowance recorded
                                       
One to four family
    3,950       3,979       351       3,479       141  
Commercial
    1,923       1,956       511       1,700       24  
Consumer
    761       770       291       824       21  
Construction and land
    -       -       -       119       -  
                                         
Loans with an allowance
                                       
recorded
    6,634       6,705       1,153       6,122       186  
                                         
Total
                                       
One to four family
    8,639       8,792       351       7,973       345  
Commercial
    5,503       5,602       511       5,181       83  
Consumer
    1,390       1,412       291       1,280       67  
Construction and land
    218       219       -       386       34  
                                         
    $ 15,750     $ 16,025     $ 1,153     $ 14,820     $ 529  
 
 
F-29
 
 
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF
PORT ANGELES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 3 - Loans Receivable (continued)
 
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of September 30, 2012:
 
   
(Unaudited)
 
   
Allowance for Loan Losses
   
Loans Receivable
 
         
Ending
   
Ending
         
Ending
   
Ending
 
         
Balance
   
Balance
         
Balance
   
Balance
 
         
Individually
   
Collectively
         
Individually
   
Collectively
 
   
Ending
   
Evaluated for
   
Evaluated for
   
Ending
   
Evaluated for
   
Evaluated for
 
   
Balance
   
Impairment
   
Impairment
   
Balance
   
Impairment
   
Impairment
 
   
(In thousands)
 
One to four family
  $ 4,223     $ 689     $ 3,534     $ 223,738     $ 8,465     $ 215,273  
Commercial
    1,253       182       1,071       119,231       7,045       112,186  
Consumer
    2,470       714       1,756       59,831       1,817       58,014  
Construction and land
    278       37       241       18,025       461       17,564  
                                                 
    $ 8,224     $ 1,622     $ 6,602     $ 420,825     $ 17,788     $ 403,037  
 
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of June 30, 2012:
 
   
Allowance for Loan Losses
   
Loans Receivable
 
         
Ending
   
Ending
         
Ending
   
Ending
 
         
Balance
   
Balance
         
Balance
   
Balance
 
         
Individually
   
Collectively
         
Individually
   
Collectively
 
   
Ending
   
Evaluated for
   
Evaluated for
   
Ending
   
Evaluated for
   
Evaluated for
 
   
Balance
   
Impairment
   
Impairment
   
Balance
   
Impairment
   
Impairment
 
   
(In thousands)
 
One to four family
  $ 3,464     $ 351     $ 3,113     $ 215,243     $ 8,639     $ 206,604  
Commercial
    1,528       511       1,017       109,399       5,503       103,896  
Consumer
    2,168       291       1,877       62,238       1,390       60,848  
Construction and land
    230       -       230       22,689       218       22,471  
                                                 
    $ 7,390     $ 1,153     $ 6,237     $ 409,569     $ 15,750     $ 393,819  
 
 
F-30
 
 
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF
PORT ANGELES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 3 - Loans Receivable (continued)
 
The following table presents the recorded investment in nonaccrual loans by type of loan as of:
 
   
(Unaudited)
       
   
September 30,
   
June 30,
 
   
2012
   
2012
 
   
(In thousands)
 
One to four family
           
One to four family Olympic Peninsula
  $ 4,304     $ 3,909  
One to four family other
    312       1,501  
Commercial
               
Commercial real estate
    5,279       3,626  
Consumer
               
Home equity lines of credit
    304       546  
One to four family second mortgages
    515       336  
Auto
    46       50  
Consumer other
    55       52  
Construction and land
               
Land and development
    258       132  
    $ 11,073     $ 10,152  
 
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.
 
The following table presents past due loans, net of partial loan charge-offs, by type, as of September 30, 2012:
                                     
   
(Unaudited)
 
    30-59     60-89    
90 Days
                   
   
Days
   
Days
   
or More
   
Total
         
Total
 
   
Past Due
   
Past Due
   
Past Due
   
Past Due
   
Current
   
Loans
 
   
(In thousands)
 
One to four family
                                       
One to four family Olympic Peninsula
  $ 983     $ -     $ 3,035     $ 4,018     $ 186,724     $ 190,742  
One to four family other
    83       -       312       395       32,601       32,996  
Commercial
                                               
Multi-family
    -       -       -       -       18,472       18,472  
Commercial real estate
    588       162       3,570       4,320       87,269       91,589  
Commercial business
    -               -       -       9,170       9,170  
Consumer
                                               
Home equity lines of credit
    651       30       159       840       35,763       36,603  
One to four family second mortgages
    65       40       370       475       11,555       12,030  
Auto
    60       43       20       123       4,274       4,397  
Consumer other
    112       -       55       167       6,634       6,801  
Construction and land
                                               
Construction
    -       -       -       -       1,626       1,626  
Land and development
    38       -       258       296       16,103       16,399  
    $ 2,580     $ 275     $ 7,779     $ 10,634     $ 410,191     $ 420,825  
 
 
F-31
 
 
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF
PORT ANGELES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 3 - Loans Receivable (continued)
 
The following table presents past due loans, net of partial loan charge-offs, by type, as of June 30, 2012:
 
    30-59     60-89    
90 Days
                   
   
Days
   
Days
   
or More
   
Total
         
Total
 
   
Past Due
   
Past Due
   
Past Due
   
Past Due
   
Current
   
Loans
 
   
(In thousands)
 
One to four family
                                       
One to four family Olympic Peninsula
  $ 1,643     $ 890     $ 2,298     $ 4,831     $ 176,226     $ 181,057  
One to four family other
    222       -       1,274       1,496       32,690       34,186  
Commercial
                                               
Multi-family
    -       -       -       -       17,175       17,175  
Commercial real estate
    46       273       2,050       2,369       77,596       79,965  
Commercial business
    252       -       -       252       12,007       12,259  
Consumer
                                               
Home equity lines of credit
    625       29       372       1,026       37,545       38,571  
One to four family second mortgages
    119       141       294       554       12,030       12,584  
Auto
    40       5       24       69       3,960       4,029  
Consumer other
    183       72       -       255       6,799       7,054  
Construction and land
                                               
Construction
    -       -       -       -       5,757       5,757  
Land and development
    76       -       132       208       16,724       16,932  
    $ 3,206     $ 1,410     $ 6,444     $ 11,060     $ 398,509     $ 409,569  
 
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. 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 the Bank 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 the Bank classifies problem assets as either substandard or doubtful, it may establish a specific allowance to address the risk specifically or the Bank 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 the Bank to sufficient risk to warrant classification as substandard or doubtful but possess identified weaknesses are designated as either watch or special mention assets. At September 30, 2012 (unaudited) and June 30, 2012, the Bank had loans classified as substandard and doubtful and no loans classified as loss. Loans not otherwise classified are considered pass graded loans.
 
Additionally, the Bank 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.
 
 
F-32
 
 
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF
PORT ANGELES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 3 - Loans Receivable (continued)
 
The following table represents the internally assigned grade as of September 30, 2012, by type of loans:
 
   
(Unaudited)
 
               
Special
   
Sub-
             
   
Pass
   
Watch
   
Mention
   
Standard
   
Doubtful
   
Total
 
   
(In thousands)
 
One to four family
                                   
One to four family
                                   
Olympic Peninsula
  $ 179,921     $ 1,429     $ -     $ 9,392     $ -     $ 190,742  
One to four family other
    31,802       -       -       1,194       -       32,996  
Commercial
                                               
Multi-family
    16,825       1,108       111       428       -       18,472  
Commercial real estate
    70,341       6,829       2,134       12,285       -       91,589  
Commercial business
    7,830       241       301       798       -       9,170  
Consumer
                                               
Home equity lines of credit
    35,028       537       -       1,038       -       36,603  
One to four family
                                               
second mortgage
    11,166       27       38       799       -       12,030  
Auto
    4,270       60       9       58       -       4,397  
Consumer other
    6,630       112       -       59       -       6,801  
Construction and land
                                               
Construction
    1,461       -       -       165       -       1,626  
Land and development
    15,592       -       201       606       -       16,399  
    $ 380,866     $ 10,343     $ 2,794     $ 26,822     $ -     $ 420,825  
 
The following table represents the internally assigned grade as of June 30, 2012, by type of loans:
 
               
Special
   
Sub-
             
   
Pass
   
Watch
   
Mention
   
Standard
   
Doubtful
   
Total
 
   
(In thousands)
 
One to four family
                                   
One to four family
                                   
Olympic Peninsula
  $ 171,953     $ 977     $ 426     $ 7,701     $ -     $ 181,057  
One to four family other
    31,661       222       -       2,303       -       34,186  
Commercial
                                               
Multi-family
    15,518       1,114       111       432       -       17,175  
Commercial real estate
    59,915       6,946       2,146       10,958       -       79,965  
Commercial business
    11,129       288       244       598       -       12,259  
Consumer
                                               
Home equity lines of credit
    37,204       554       29       784       -       38,571  
One to four family
                                               
second mortgage
    11,768       54       138       427       197       12,584  
Auto
    3,930       40       5       54       -       4,029  
Consumer other
    6,738       174       20       122       -       7,054  
Construction and land
                                               
Construction
    2,292       3,465       -       -       -       5,757  
Land and development
    16,230       76       270       356       -       16,932  
    $ 368,338     $ 13,910     $ 3,389     $ 23,735     $ 197     $ 409,569  
 
 
F-33
 
 
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF
PORT ANGELES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 3 - Loans Receivable (continued)
 
The following table represents the credit risk profile based on payment activity as of September 30, 2012, by type of loans:
 
   
(Unaudited)
 
   
Non-
performing
   
Performing
   
Total
 
   
(In thousands)
 
One to four family
                 
One to four family Olympic Peninsula
  $ 4,304     $ 186,438     $ 190,742  
One to four family other
    312       32,684       32,996  
Commercial
                       
Multi-family
    -       18,472       18,472  
Commercial real estate
    5,279       86,310       91,589  
Commercial business
    -       9,170       9,170  
Consumer
                       
Home equity lines of credit
    304       36,299       36,603  
One to four family second mortgage
    515       11,515       12,030  
Auto
    46       4,351       4,397  
Other consumer
    55       6,746       6,801  
Construction and land
                       
Construction
    -       1,626       1,626  
Land and development
    258       16,141       16,399  
                         
    $ 11,073     $ 409,752     $ 420,825  
 
The following table represents the credit risk profile based on payment activity as of June 30, 2012, by type of loans:
 
   
Non-
performing
   
Performing
   
Total
 
   
(In thousands)
 
One to four family
                 
One to four family Olympic Peninsula
  $ 3,909     $ 177,148     $ 181,057  
One to four family other
    1,501       32,685       34,186  
Commercial
                       
Multi-family
    -       17,175       17,175  
Commercial real estate
    3,626       76,339       79,965  
Commercial business
    -       12,259       12,259  
Consumer
                       
Home equity lines of credit
    546       38,025       38,571  
One to four family second mortgage
    336       12,248       12,584  
Auto
    50       3,979       4,029  
Other consumer
    52       7,002       7,054  
Construction and land
                       
Construction
    -       5,757       5,757  
Land and development
    132       16,800       16,932  
                         
    $ 10,152     $ 399,417     $ 409,569  
 
 
F-34
 
 
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF
PORT ANGELES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 3 - Loans Receivable (continued)
 
The following is a summary of information pertaining to impaired loans for the years ended June 30:
 
   
2012
   
2011
 
   
(In thousands)
 
             
Impaired loans without a valuation allowance
  $ 9,116     $ 5,969  
Impaired loans with a valuation allowance
    6,634       9,824  
                 
Total impaired loans
  $ 15,750     $ 15,793  
                 
Valuation allowance related to impaired loans
  $ 1,153     $ 1,656  
                 
Total nonaccrual loans
    10,152       11,991  
                 
Total loans past due 90 days or more and still accruing interest
    -       -  
                 
Average investment in impaired loans
    14,820       15,457  
                 
Interest income recognized on impaired loans
    529       226  
                 
Interest income recognized on a cash basis on impaired loans
    202       216  
 
Troubled debt restructuring - Loans classified as troubled debt restructurings included in impaired loans were $11.0 million $8.9 million and $8.6 million as of September 30, 2012 (unaudited) June 30, 2012 and 2011, respectively, with $6.0 million, $4.1 million and $5.3 million in nonaccrual at September 30, 2012 (unaudited), June 30, 2012 and 2011, respectively. A troubled debt restructuring 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 the Bank is granting the borrower a concession of some kind. The Bank 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 those receivables as troubled debt restructurings, the Bank identified them as impaired for purposes of determining the allowance for loan losses. This requires the loans to 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 troubled debt restructured loans that subsequently default, the method of determining impairment is generally the fair value of the collateral less estimated selling costs.
 
 
F-35
 
 
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF
PORT ANGELES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 3 - Loans Receivable (continued)
 
The following table presents newly restructured loans by class that occurred during the three months ended September 30, 2012, by type of concession granted:
 
   
(Unaudited)
 
   
Number
   
Rate
   
Term
   
Combination
   
Total
 
   
of Contracts
   
Modification
   
Modification
   
Modification
   
Modifications
 
                (In thousands)        
Pre-modification outstanding
                             
recorded investment
                             
One to four family
                             
One to four family Olympic Peninsula
    1     $ 51     $ -     $ -     $ 51  
Commercial
                                       
Commercial real estate
    7       -       817       675       1,492  
Commercial business
    1       -       392       -       392  
Consumer
                                       
One to four family second mortgages
    2       -       -       132       132  
Construction and Land
                                       
Construction
    1       -       -       165       165  
Land and development
    1       -       -       265       265  
                                         
      13     $ 51     $ 1,209     $ 1,237     $ 2,497  
                                         
Post-modification outstanding
                                       
recorded investment
                                       
One to four family
                                       
One to four family Olympic Peninsula
    1     $ 51     $ -     $ -     $ 51  
Commercial
                                       
Commercial real estate
    7       -       817       694       1,511  
Commercial business
    1       -       392       -       392  
Consumer
                                       
One to four family second mortgages
    2       -       -       136       136  
Construction and Land
                                       
Construction
    1       -       -       165       165  
Land and development
    1       -       -       47       47  
                                         
      13     $ 51     $ 1,209     $ 1,042     $ 2,302  
 
 
F-36
 
 
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF
PORT ANGELES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 3 - Loans Receivable (continued)
 
The following table presents newly restructured loans by class that occurred during the three months ended September 30, 2011, by type of concession granted:
 
   
(Unaudited)
 
   
Number
   
Rate
   
Term
   
Combination
   
Total
 
   
of Contracts
   
Modification
   
Modification
   
Modification
   
Modifications
 
                (In thousands)        
Pre-modification outstanding
                             
recorded investment
                             
Consumer
                             
Home equity lines of credit
    1     $ -     $ -     $ 96,008     $ 96,008  
                                         
Post-modification outstanding
                                       
recorded investment
                                       
Consumer
                                       
Home equity lines of credit
    1     $ -     $ -     $ 107,808     $ 107,808  
 
 
F-37
 
 
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF
PORT ANGELES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 3 - Loans Receivable (continued)
 
The following table presents newly restructured loans by class that occurred during the year ended June 30, 2012, by type of concession granted:
 
   
Number
   
Rate
   
Term
   
Combination
   
Total
 
   
of Contracts
   
Modification
   
Modification
   
Modification
   
Modifications
 
                (In thousands)        
Pre-modification outstanding
                             
recorded investment
                             
One to four family
                             
One to four family Olympic Peninsula
    4     $ 592     $ -     $ -     $ 592  
Commercial
                                       
Commercial real estate
    1       -       -       1,318       1,318  
Consumer
                                       
Home equity lines of credit
    3       76       -       108       184  
One to four family second mortgages
    2       144       -       -       144  
Auto
    1       29       -       -       29  
                                         
      11     $ 841     $ -     $ 1,426     $ 2,267  
                                         
Post-modification outstanding
                                       
recorded investment
                                       
One to four family
                                       
One to four family Olympic Peninsula
    4     $ 593     $ -     $ -     $ 593  
Commercial
                                       
Commercial real estate
    1       -       -       1,316       1,316  
Consumer
                                       
Home equity lines of credit
    3       76       -       109       185  
One to four family second mortgages
    2       143       -       -       143  
Auto
    1       29       -       -       29  
                                         
      11     $ 841     $ -     $ 1,425     $ 2,266  
 
 
F-38
 
 
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF
PORT ANGELES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 3 - Loans Receivable (continued)
 
The following table presents troubled debt restructures by class at the three months ended September 30, 2012 and the year ended June 30, 2012, by accrual and nonaccrual status.
 
   
(Unaudited)
                   
   
September 30, 2012
   
June 30, 2012
 
   
Accrual
   
Nonaccrual
   
Total
   
Accrual
   
Nonaccrual
   
Total
 
   
(In thousands)
 
One to four family
                                   
One to four family Olympic Peninsula
  $ 2,357     $ 2,031     $ 4,388     $ 2,190     $ 2,191     $ 4,381  
One to four family other
    335       226       561       338       227       565  
Commercial
                    -                       -  
Multi-family
    286       -       286       287       -       287  
Commercial real estate
    1,088       3,298       4,386       1,591       1,303       2,894  
Commercial business
    392       -       392       -       -       -  
Consumer
                                               
Home equity lines of credit
    139       192       331       139       193       332  
One to four family second mortgages
    239       199       438       243       167       410  
Auto
    -       26       26       -       26       26  
Other consumer
    4       -       4       4       -       4  
Construction and land
                                               
Construction
    165       -       165       -       -       -  
Land and development
    -       47       47       -       -       -  
                                                 
    $ 5,005     $ 6,019     $ 11,024     $ 4,792     $ 4,107     $ 8,899  
 
Troubled debt restructurings for which there was a payment default of more than 30 days past due during the three months ending September 30, 2012 included one land and development loan for $47,000 with a combination modification. During the fiscal year ended June 30, 2012, there was one auto loan for $26,000 with a rate modification, which defaulted during the three months ended September 30, 2011. No additional funds are committed to be advanced in connection with impaired loans at September 30, 2012.
 
 
F-39
 
 
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF
PORT ANGELES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 4 - Real Estate Owned and Repossessed Assets
 
The following table presents a rollforward of real estate owned and repossessed assets for the three months ended September 30 and the years ended June 30:
 
   
(Unaudited)
                   
   
Three Months Ended
September 30,
   
Years Ended June 30,
 
   
2012
   
2011
   
2012
   
2011
   
2010
 
   
(In thousands)
 
Beginning balance
  $ 2,864     $ 4,475     $ 4,475     $ 2,073     $ 479  
Loans transferred to foreclosed assets
    1,049       1,406       3,597       5,803       3,150  
Sales
    (946 )     (2 )     (3,711 )     (2,608 )     (1,210 )
Write-downs
    (24 )     (311 )     (1,435 )     (649 )     (375 )
Net (loss) gain on sales
    287       (6 )     (62 )     (144 )     29  
                                         
Ending balance
  $ 3,230     $ 5,562     $ 2,864     $ 4,475     $ 2,073  
 
The following table presents the breakout of other real estate owned and repossessed assets by type as of:
 
   
(Unaudited)
       
   
September 30,
   
June 30,
 
   
2012
   
2012
 
   
(In thousands)
 
One to four family residential properties
  $ 2,854     $ 2,545  
Land
    320       233  
Commercial real estate
    41       41  
Personal property
    15       45  
                 
    $ 3,230     $ 2,864  
 
 
F-40
 
 
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF
PORT ANGELES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 5 - Premises and Equipment
 
Premises and equipment consist of the following at June 30:
 
   
(Unaudited)
             
   
September 30,
   
June 30,
 
   
2012
   
2012
   
2011
 
   
(In thousands)
 
Land
  $ 2,560     $ 2,560     $ 2,552  
Buildings
    6,115       6,115       6,116  
Building improvements
    5,863       5,863       5,818  
Furniture, fixtures, and equipment
    7,847       7,831       7,369  
Software
    3,313       3,313       2,780  
Automobiles
    208       208       208  
Construction in progress
    37       7       698  
                         
      25,943       25,897       25,541  
Less accumulated depreciation and amortization
    (14,011 )     (13,697 )     (12,701 )
                         
    $ 11,932     $ 12,200     $ 12,840  
 
Operating lease rental payments for buildings were $13,000, $2,000, $17,000, $16,000, and $72,000 for September 30, 2012 and 2011 (unaudited) and June 30, 2012, 2011, and 2010, respectively.
 
Note 6 - Mortgage Servicing Rights
 
Loans serviced for others FHLB, Fannie Mae (FNMA), and Freddie Mac (FHLMC) are not included in the accompanying consolidated balance sheets. The unpaid principal balances of loans, primarily mortgage loans, were $277.8 million, $296.4 million and $350.9 million at September 30, 2012 (unaudited), June 30, 2012 and 2011, respectively.
 
Mortgage servicing rights for the three months ended September 30 and the years ended June 30 are as follows:
 
   
(Unaudited)
                   
   
September 30,
   
June 30,
 
   
2012
   
2011
   
2012
   
2011
   
2010
 
   
(In thousands)
 
Balance at beginning of period
  $ 1,873     $ 2,494     $ 2,494     $ 2,813     $ 2,702  
Additions
    29       42       224       485       818  
Amortization
    (217 )     (167 )     (777 )     (892 )     (871 )
Valuation allowance
    (19 )     -       (68 )     88       164  
                                         
Balance at end of period
  $ 1,666     $ 2,369     $ 1,873     $ 2,494     $ 2,813  
 
 
F-41
 
 
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF
PORT ANGELES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 6 - Mortgage Servicing Rights (continued)
 
The aggregate change in valuation allowance for mortgage servicing rights at September 30 (unaudited) and June 30 is as follows:
 
   
(Unaudited)
                   
   
September 30,
   
June 30,
 
   
2012
   
2011
   
2012
   
2011
   
2010
 
   
(In thousands)
 
Balance at beginning of period
  $ (68 )   $ -     $ -     $ (88 )   $ (252 )
Impairments
    (23 )     -       (68 )     -       -  
Recoveries
    4               -       88       164  
                                         
Balance at end of period
  $ (87 )   $ -     $ (68 )   $ -     $ (88 )
 
The key economic assumptions used in determining the fair value of mortgage servicing rights at September 30 (unaudited) and June 30 are as follows:
 
   
(Unaudited)
                   
   
September 30,
   
June 30,
 
   
2012
   
2011
   
2012
   
2011
   
2010
 
                               
Constant prepayment rate (%)
    20.10       10.30       19.50       12.20       18.40  
Weighted-average life (years)
    3.8       6.4       3.9       5.9       4.4  
Yield to maturity discount
    8.53 %     8.54 %     8.53 %     9.04 %     8.81 %
 
The fair values of mortgage servicing rights are approximately $1.8 million, $2.0 million and $3.3 million at September 30, 2012 (unaudited), June 30, 2012 and 2011, respectively.
 
The following represents servicing and late fees earned in connection with mortgage servicing rights and is included in the accompanying consolidated financial statements as a component of noninterest income for the three months ended September 30 and the years ended June 30:
 
   
(Unaudited)
                   
   
September 30,
   
June 30,
 
   
2012
   
2011
   
2012
   
2011
   
2010
 
   
(In thousands)
 
Servicing fees
  $ 180     $ 221     $ 826     $ 920     $ 807  
Late fees
    10       6       24       27       21  
 
 
F-42
 
 
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF
PORT ANGELES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 7 - Deposits
 
The aggregate amount of time deposits in denominations of greater than $100,000 at September 30, 2012 (unaudited), June 30, 2012 and 2011 was $73.0, $73.0 million and $82.7 million, respectively. Deposits and weighted-average interest rates at September 30 (unaudited) and June 30 consist of the following:
 
   
(Unaudited)
                         
   
Weighted-
         
Weighted-
         
Weighted-
       
   
Average
         
Average
         
Average
       
   
Interest
   
September 30,
   
Interest
   
June 30,
   
Interest
   
June 30,
 
   
Rate
   
2012
   
Rate
   
2012
   
Rate
   
2011
 
   
(In thousands)
 
Savings
    0.10 %   $ 79,638       0.12 %   $ 78,007       0.22 %   $ 73,932  
Transaction accounts
    0.01 %     150,714       0.01 %     142,617       0.05 %     127,101  
Insured money market accounts
    0.22 %     193,665       0.17 %     192,847       0.34 %     169,765  
Certificates of deposit and
                                               
jumbo certificates
    1.02 %     165,854       1.08 %     169,767       1.42 %     191,600  
                                                 
            $ 589,871             $ 583,238             $ 562,398  
                                                 
Weighted-average interest rate
            0.37 %             0.40 %             0.63 %
 
At the three months ended September 30, 2012 and the year ended June 30, 2012, maturities of certificates are as follows:
 
   
(Unaudited)
       
   
September 30,
2012
   
June 30, 2012
 
   
(In thousands)
 
2013
  $ 105,197     $ 109,875  
2014
    32,829       33,452  
2015
    14,408       12,910  
2016
    5,628       6,172  
2017
    7,726       7,154  
Thereafter
    66       204  
                 
    $ 165,854     $ 169,767  
 
 
F-43
 
 
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF
PORT ANGELES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 7 - Deposits (continued)
 
Deposits at September 30, 2012 (unaudited), June 30, 2012 and 2011, include $30.5 million, $25.8 million and $25.1 million, respectively, in public fund deposits. Investment securities with a carrying value of $25.6 million, $26.8 million and $25.6 million are pledged as collateral for these deposits at September 30, 2012 (unaudited), June 30, 2012 and 2011, respectively. This exceeds the minimum collateral requirements established by the Washington Public Deposit Protection Commission.
 
Interest on deposits by type consisted of the following for the three months ended September 30 (unaudited) and the years ended June 30:
 
   
(Unaudited)
                   
   
September 30,
   
June 30,
 
   
2012
   
2011
   
2012
   
2011
   
2010
 
   
(In thousands)
 
Savings
  $ 21     $ 42     $ 118     $ 202     $ 1,101  
Transaction accounts
    2       14       33       75       167  
Insured money market accounts
    88       159       480       729       1,274  
Certificates of deposit and jumbo certificates
    440       648       2,226       2,978       4,384  
                                         
    $ 551     $ 863     $ 2,857     $ 3,984     $ 6,926  
 
Note 8 - Borrowings
 
FHLB Borrowings
The Bank is a member of the Federal Home Loan Bank of Seattle. As a member, the Bank has a committed line of credit of up to 40% of total assets, subject to certain collateral requirements.
 
The Bank has entered into borrowing arrangements, primarily fixed-rate advances, with the FHLB to borrow funds primarily under long-term amortizing loan agreements. All borrowings are secured by stock of, and cash deposits in, the FHLB. Additionally, the Bank has mortgage loans receivable in the amounts of $214.9 million, $219.8 million, and $215.3 million and investment securities with a carrying value of $14.2 million, $15.8 million, and $0 at September 30, 2012 (unaudited), June 30, 2012 and 2011, respectively, pledged as collateral.
 
At September 30, 2012 (unaudited), FHLB borrowings are fixed-rate advances and are scheduled to mature as follows:
 
   
(Unaudited)
 
   
Weighted-Average
   
September 30,
 
   
Interest Rate
   
2012
 
   
(In thousands)
 
Due on or before September 30, 2014
    3.66 %   $ 10,000  
Due on or before September 30, 2015
    4.11 %     44,924  
Due on or before September 30, 2016
    4.50 %     35,000  
Thereafter
    4.35 %     10,000  
                 
            $ 99,924  
 
 
F-44
 
 
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF
PORT ANGELES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 8 - Borrowings (continued)
 
At June 30, 2012 and 2011, FHLB borrowings are fixed-rate advances and are scheduled to mature as follows:
 
   
Weighted-Average
   
June 30,
   
Weighted-Average
   
June 30,
 
   
Interest Rate
   
2012
   
Interest Rate
   
2011
 
   
(In thousands)
 
Due on or before June 30, 2014
    3.66 %   $ 10,000       3.66 %   $ 10,000  
Due on or before June 30, 2015
    4.11 %     44,924       4.11 %     44,924  
Due on or before June 30, 2016
    4.55 %     10,000       4.55 %     10,000  
Thereafter
    4.44 %     35,000       4.44 %     35,000  
                                 
            $ 99,924             $ 99,924  
 
The maximum and average outstanding balances and average interest rates on advances from the FHLB were as follows:
 
   
(Unaudited)
                   
   
September 30,
   
June 30,
 
   
2012
   
2011
   
2012
   
2011
   
2010
 
   
(In thousands)
 
Maximum outstanding at any month-end
  $ 99,924     $ 99,924     $ 99,924     $ 99,924     $ 119,081  
Monthly average outstanding
    99,924       99,924       99,924       99,924       103,554  
Weighted-average interest rates
                                       
Annual
    4.22 %     4.22 %     4.22 %     4.22 %     4.50 %
Period End
    4.22 %     4.22 %     4.22 %     4.22 %     4.22 %
Interest expense during the year
    1,080       1,077       4,283       4,274       4,755  
 
Note Payable
At September 30, 2012 (unaudited), Craft3 Development IV, LLC, a subsidiary of First Federal, holds a fixed-rate promissory note from Craft3, Inc. in the amount of $109,000. Simple interest of 4.50% per annum is calculated on the outstanding principal balance and is due monthly. The entire unpaid principal balance plus any remaining interest due is payable on July 1, 2015.
 
 
F-45
 
 
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF
PORT ANGELES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 9 - Federal Taxes on Income
 
The provision (benefit) for income taxes is summarized as follows:
 
   
(Unaudited)
                   
   
September 30,
   
June 30,
   
2012
   
2011
   
2012
   
2011
   
2010
 
   
(In thousands)
Current
  $ 138     $ (188 )   $ (2,263 )   $ 1,883     $ 509  
Deferred
    141       (140 )     463       (688 )     (1,111 )
                                         
    $ 279     $ (328 )   $ (1,800 )   $ 1,195     $ (602 )
 
A reconciliation of the tax provision (benefit) based on statutory corporate tax rates, estimated to be 34%, on pre-tax income and the provision (benefit) shown in the accompanying consolidated statements of income is summarized as follows:
 
   
(Unaudited)
                   
   
September 30,
   
June 30,
 
   
2012
   
2011
   
2012
   
2011
   
2010
 
   
(In thousands)
Income taxes computed at statutory rates
  $ 309     $ (266 )   $ (1,278 )   $ 1,731     $ (204 )
Tax credits
    (49 )     (62 )     (195 )     (247 )     (247 )
Tax-exempt income
    (50 )     (29 )     (144 )     (64 )     (97 )
BOLI income
    (50 )     (53 )     (240 )     (187 )     (63 )
Other, net
    119       82       57       (38 )     9  
                                         
    $ 279     $ (328 )   $ (1,800 )   $ 1,195     $ (602 )
 
As a result of the bad debt deductions taken in years prior to 1988, retained earnings include accumulated earnings of approximately $6.4 million, on which federal income taxes have not been provided. If, in the future, this portion of retained earnings is used for any purpose other than to absorb losses on loans or on property acquired through foreclosure, federal income taxes may be imposed at the then-prevailing corporate tax rates. The Bank does not contemplate that such amounts will be used for any purpose that would create a federal income tax liability; therefore, no provision has been made.
 
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. There was no valuation allowance at September 30, 2012 (unaudited), June 30, 2012 and 2011.
 
The Bank complied with the various regulatory provisions of the New Markets Tax Credit program and, therefore, has earned approximately $296,000 of credits that will be claimed on the Bank’s current-year tax return. As of September 30, 2012 (unaudited), the Bank continues to participate in the New Markets Tax Credit program that began in its fiscal year ending June 30, 2008. The Bank will receive tax credits of approximately $1.9 million over seven years. Tax benefits related to these credits will be recognized for financial reporting purposes in different periods than the credits are recognized in the Bank’s income tax returns due to a yearly tax basis reduction resulting in a gain for income tax purposes
 
 
F-46
 
 
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF
PORT ANGELES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 9 - Federal Taxes on Income (continued)
 
at the end of the tax credit period. The financial reporting tax credit will total approximately $1.3 million over the seven-year period, the available tax credit of $1.9 million less the reduction of the tax gain of $655,000 calculated at the Bank’s current tax rate of 34%.
 
The Bank applies the provisions of FASB ASC 740 that require the application of a more-likely-than-not recognition criterion. First Federal had no unrecognized tax assets for the three months ended September 30, 2012 (unaudited), and the years ended June 30, 2012 and 2011. During the three months ended September 30, 2012 and 2011 (unaudited), and the years ended June 20, 2012, 2011, and 2010, the Bank recognized no interest and penalties. The Bank recognizes interest and penalties in income tax expense. The Bank files income tax returns in the U.S. federal jurisdiction and is no longer subject to U.S. federal income tax examinations by tax authorities for years ending before June 30, 2009.
 
The components of net deferred tax assets and liabilities are summarized as follows:

   
(Unaudited)
             
   
September 30,
   
June 30,
 
   
2012
   
2012
   
2011
 
   
(In thousands)
 
Deferred tax assets
                 
Allowance for loan losses
  $ 2,439     $ 2,440     $ 1,298  
Accrued compensation
    234       187       143  
Nonaccrual loans
    11       11       17  
Impairment on securities
    -       -       1,522  
Other
    (12 )     97       162  
                         
Total deferred tax assets
    2,672       2,735       3,142  
                         
Deferred tax liabilities
                       
Deferred loan fees
    657       657       811  
Unrealized gain on securities available for sale
    1,618       1,351       300  
FHLB stock dividends
    1,984       1,984       1,984  
Accumulated depreciation
    1,588       1,518       1,388  
Prepaid expense
    174       166       86  
                         
Total deferred tax liabilities
    6,021       5,676       4,569  
                         
Net deferred tax liability
  $ 3,349     $ 2,941     $ 1,427  
 
 
F-47
 
 
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF
PORT ANGELES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 10 - Retirement Plans
 
The Bank participates in the Pentegra Defined Benefit Plan for Financial Institutions (the Pentegra DB Plan), a tax-qualified defined-benefit pension plan that covers substantially all employees after one year of continuous employment. Pension benefits vest over a period of five years of credited service. The Pentegra DB Plan’s Employer Identification Number is 13-5645888 and the Plan Number is 12004. The Pentegra DB Plan operates as a multi-employer plan for accounting purposes and as a multiple-employer plan under the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code. There are no collective bargaining agreements in place that require contributions to the Pentegra DB Plan. The Pentegra Defined Benefit Plan was frozen and no new benefits were allowed as of February 1, 2010.
 
The Pentegra DB Plan is a single plan under Internal Revenue Code Section 413(c) and, as a result, all of the assets stand behind all of the liabilities. Accordingly, under the Pentegra DB Plan, contributions made by a participating employer may be used to provide benefits to participants of other participating employers.
 
The table below presents the funded status (market value of plan assets divided by funding target) of the plan as of:
 
   
June 30,
   
2012
   
2011
 
             
Source
 
Valuation Report
   
Valuation Report
 
Our plan
    81.8%       84.2%  
 
There was no change to the funded status of the plan as of September 30, 2012. The Bank’s contributions to the Pentegra DB Plan are not more than 5% of the total contributions to the Pentegra DB Plan. The Bank’s policy is to fund pension costs as accrued.
 
Total contributions during the three months ended September 30 (unaudited) were:
 
2012
 
2011
 
Date Paid
 
Amount
 
Date Paid
 
Amount
 
(In thousands)
N/A
  $ -  
9/14/2011
  $ 66  
                   
                   
    $ -       $ 66  
 
Total contributions during the years ended June 30 were:
 
2012
 
2011
 
2010
 
Date Paid
 
Amount
 
Date Paid
 
Amount
 
Date Paid
 
Amount
 
(In thousands)
9/14/2011
  $ 66  
12/9/2010
  $ 475  
10/15/2009
  $ 146  
11/30/2011
    393            
12/28/2009
    515  
                             
    $ 459       $ 475       $ 661  
 
 
F-48
 
 
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF
PORT ANGELES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 10 - Retirement Plans (continued)
 
The Bank also sponsors a non-qualified Deferred Compensation Plan for members of the Board of Directors and eligible officer-level employees. This Plan, approved by the Board on February 1, 2012, allows eligible participants to defer and invest a portion of their earnings in a selection of investment options identified in the plan at no expense to the Bank. All deferrals are remitted to Pentegra, the Plan Administrator, and held in a trust.
 
The Plan also includes a Supplemental Executive Retirement Plan (SERP) for the Chief Executive Officer (CEO) that was approved by the Board. Contributions to the SERP began in October 2010. The annual contribution to the SERP is equivalent to 10% of the CEO’s annual salary and is remitted to Pentegra, the Plan Administrator, and held in a trust. For the three months ended September 30, 2012 (unaudited) and the fiscal year ended June 30, 2012 and 2011, the Bank recorded $10,000, $45,000, and $4,000 expense, respectively, related specifically to the SERP plan.
 
During the year ended June 30, 1994, the Bank began participation in a multi-employer 401(k) plan funded by employees and a Bank matching program. Employees may contribute up to 20% of their pre-tax compensation to the 401(k) plan and the Bank matches 50% of this contribution, applicable only to the first 6% of salary contributed. The employer contributions were $28,000, $33,000, $97,000, $86,000, and $4,000 during the three months ended September 30, 2012 and 2011 (unaudited) and the years ended June 30, 2012, 2011, and 2010, respectively.
 
Note 11 - Regulatory Capital Requirements
 
The Bank is subject to various regulatory capital requirements administered by federal agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
 
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of total and Tier I capital to risk-weighted assets, core capital to total assets, and tangible capital to tangible assets (set forth in the following table).
 
The DFI approved the Bank’s conversion from a federally chartered mutual savings and loan association to a Washington State chartered mutual savings bank in 2011. This resulted in the Bank’s primary regulator changing from the Office of the Comptroller of the Currency to the FDIC and DFI.
 
As of September 30, 2012 (unaudited), the most recent notification from the DFI categorized the Bank as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized,” the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes have changed the Bank’s category.
 
At periodic intervals, the DFI and FDIC routinely examine the Bank as part of its legally prescribed oversight of the banking industry. Based on these examinations, the regulators can direct that the Bank’s consolidated financial statements be adjusted in accordance with their findings. A future examination by the DFI and FDIC could include a review of certain transactions or other amounts reported in the Bank’s consolidated financial statements.
 
 
F-49
 
 
  FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF
PORT ANGELES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 11 - Regulatory Capital Requirements (continued)
 
In view of the uncertain regulatory environment in which the Bank operates, the extent, if any, to which a forthcoming regulatory examination may ultimately result in adjustments to the accompanying consolidated financial statements cannot presently be determined.
 
At September 30, 2012 and June 30, 2012, regulatory capital for First Federal was calculated in accordance with the FDIC’s Call Report guidelines. At June 30, 2011, regulatory capital was calculated in accordance with the Office of Thrift Supervision’s Thrift Financial Report guidelines. There were no material changes to regulatory capital ratios as a result of this change.
 
The Bank’s actual and required capital amounts and ratios are presented in the following table:
 
                           
To Be Categorized
 
                           
As Well Capitalized
 
               
For Capital
   
Under Prompt Corrective
 
   
Actual
   
Adequacy Purposes
   
Action Provision
 
   
Amount
   
Ratio
   
Amount
   
Ratio
   
Amount
   
Ratio
 
   
(In thousands)
 
As of September 30, 2012
                                   
Tier I capital
                                   
(to average assets)
  $ 75,280       9.67 %   $ 31,144       4.00 %   $ 38,930       5.00 %
Tier I capital
                                               
(to risk-weighted assets)
  $ 75,280       20.31 %   $ 14,823       4.00 %   $ 22,235       6.00 %
Total capital
                                               
(to risk-weighted assets)
  $ 79,959       21.58 %   $ 29,646       8.00 %   $ 37,058       10.00 %
                                                 
As of June 30, 2012
                                               
Tier I capital
                                               
(to average assets)
  $ 74,610       9.70 %   $ 30,766       4.00 %   $ 38,458       5.00 %
Tier I capital
                                               
(to risk-weighted assets)
  $ 74,610       20.51 %   $ 14,551       4.00 %   $ 21,824       6.00 %
Total capital
                                               
(to risk-weighted assets)
  $ 79,178       21.77 %   $ 29,099       8.00 %   $ 36,374       10.00 %
                                                 
As of June 30, 2011
                                               
Tier I capital
                                               
(to average assets)
  $ 76,387       10.32 %   $ 29,617       4.00 %   $ 37,022       5.00 %
Tier I capital
                                               
(to risk-weighted assets)
  $ 76,387       20.64 %   $ 14,804       4.00 %   $ 22,205       6.00 %
Total capital
                                               
(to risk-weighted assets)
  $ 79,460       21.49 %   $ 29,607       8.00 %   $ 37,009       10.00 %
 
 
F-50
 
 
  FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF
PORT ANGELES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 12 - Related Party Transactions
 
Certain directors and executive officers are also customers who transact business with the Bank. All loans and commitments included in such transactions were made in compliance with applicable laws on substantially the same terms (including interest rates and collateral) as those prevailing at the time for comparable transactions with other persons and do not involve more than the normal risk of collectability or present any other unfavorable features. The Bank had loans outstanding in the amounts of $1.4 million, $3.5 million, $1.5 million and $3.5 million at September 30, 2012 and 2011 (unaudited) and June 30, 2012 and 2011, respectively. During the three months ended September 30, 2012 (unaudited), there were no loan advances and loan repayments totaled $12,000 on these loans. During the three months ended September 30, 2011 (unaudited), loan advances totaled $36,000 and loan repayments totaled $22,000 on these loans.  During the year ended June 30, 2012, loan advances totaled $7,000, loan repayments totaled $184,000, and removal of loans to an individual no longer considered a related party totaled $1.9 million. During the year ended June 30, 2011, loan advances totaled $1.7 million and loan repayments totaled $857,000 on these loans.
 
Deposits and certificates from related parties totaled $4.8 million, $4.9 million and $2.5 million at September 30, 2012 (unaudited), June 30, 2012 and 2011, respectively.
 
Note 13 - Commitments and Contingencies
 
The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments generally represent a commitment to extend credit in the form of loans. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets.
 
The Bank’s exposure to credit loss, in the event of nonperformance by the other party to the financial instrument for commitments to extend credit, is represented by the contractual notional amount of those instruments. The Bank uses the same credit policies in making commitments as it does for on-balance-sheet instruments. Management does not anticipate any material loss as a result of these transactions.
 
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established by the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The Bank has not incurred any significant losses on its commitments for the three months ended September 30, 2012 (unaudited) and years ended June 30, 2012 and 2011.
 
The following financial instruments were outstanding whose contract amounts represent credit risk at September 30 (unaudited) and June 30:
 
     (Unaudited)              
     September 30,       June 30,  
   
2012
   
2012
   
2011
 
   
(In thousands)
 
Commitments to grant loans
  $ 13,688     $ 926     $ 4,004  
Standby letters of credit
    207       488       335  
Unfunded commitments under lines of credit or existing loans
    37,804       38,916       46,453  
 
 
F-51
 
 
  FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF
PORT ANGELES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 13 - Commitments and Contingencies (continued)
 
Legal contingencies - Various legal claims may arise from time to time in the normal course of business, which, in the opinion of management, have no current material effect on the Bank’s consolidated financial statements.
 
Significant group concentrations of credit risk - Concentration of credit risk is the risk associated with a lack of diversification, such as having substantial loan concentrations in a specific type of loan within the Bank’s loan portfolio, thereby exposing the Bank to greater risks resulting from adverse economic, political, regulatory, geographic, industrial, or credit developments. Loans are generally limited, by state banking regulations, to 20 percent of the Bank’s equity, excluding accumulated other comprehensive income. At September 30, 2012, and at June 30, 2012 and 2011, the Bank’s most significant concentration of credit risk was in loans secured by real estate. These loans totaled approximately $401.7 million, $386.6 million, and $409.8 million, or 95.1%, 94.3%, and 95.2% of the Bank’s total loan portfolio at September 30, 2012, and June 30, 2012 and 2011, respectively. Real estate construction, including land acquisition and land development, commercial real estate, multifamily, home equity, and one to four family residential loans are included in the total loans secured by real estate for purposes of this calculation. There has been deterioration in the real estate market over the last three years, which has led to a significant increase in nonperforming loans and the allowance for loan losses.
 
At September 30, 2012 (unaudited), and at June 30, 2012 and 2011, the Bank’s most significant investment concentration of credit risk was with the U.S. Government, its agencies, and Government Sponsored Enterprises. The Bank’s exposure, which results from positions in securities issued by the U.S. Government, its agencies, and securities guaranteed by Government Sponsored Enterprises, was $266.8, or 91.8%, $261.9 million, or 91.5%, and $208.3 million, or 84.4%, of the Bank’s total investment portfolio (including FHLB stock) at September 30, 2012 (unaudited) and June 30, 2012 and 2011, respectively.
 
Note 14 - 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 Bank’s principal market. The Bank 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 Bank’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.
 
 
F-52
 
 
  FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF
PORT ANGELES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 14 - Fair Value Accounting and Measurement (continued)
 
The hierarchy gives the highest ranking to Level 1 inputs and the lowest ranking to Level 3 inputs. The level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the overall fair value measurement.
 
Qualitative disclosures of valuation techniques -   Securities available for sale: where quoted prices are available in an active market, securities are classified as Level 1. Level 1 instruments include highly liquid government bonds, securities issued by the U.S. Treasury, and exchange-traded equity securities.
 
If quoted prices are not available, management determines fair value using pricing models, quoted prices of similar securities, which are considered Level 2, or discounted cash flows. In certain cases, where there is limited activity in the market for a particular instrument, assumptions must be made to determine their fair value. Such instruments are classified as Level 3.
 
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.
 
 
F-53
 
 
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF
PORT ANGELES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 14 - Fair Value Accounting and Measurement (continued)
 
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 table shows the Bank’s assets and liabilities measured at fair value on a recurring basis as of:
 
   
(Unaudited)
 
   
September 30, 2012
 
   
Quoted Prices in
   
Significant
             
   
Active Markets for
   
Other
   
Significant
       
   
Identical Assets
   
Observable
   
Unobservable
       
   
or Liabilities
   
Inputs
   
Inputs
       
   
(Level 1)
   
(Level 2)
   
(Level 3)
   
Total
 
   
(In thousands)
 
Securities available-for-sale
                       
Municipal bonds
  $ -     $ 2,479     $ -     $ 2,479  
SBA
    -       40,100       -       40,100  
MBS agency
    -       172,297       -       172,297  
MBS corporate
    -       4,338       -       4,338  
                                 
    $ -     $ 219,214     $ -     $ 219,214  
                                 
   
June 30, 2012
 
   
Quoted Prices in
   
Significant
                 
   
Active Markets for
   
Other
   
Significant
         
   
Identical Assets
   
Observable
   
Unobservable
         
   
or Liabilities
   
Inputs
   
Inputs
         
   
(Level 1)
   
(Level 2)
   
(Level 3)
   
Total
 
   
(In thousands)
 
Securities available-for-sale
                               
Municipal bonds
  $ -     $ 2,460     $ -     $ 2,460  
SBA
    -       40,728       -       40,728  
MBS agency
    -       170,383       -       170,383  
MBS corporate
    -       4,592       -       4,592  
                                 
    $ -     $ 218,163     $ -     $ 218,163  
 
 
F-54
 
 
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF
PORT ANGELES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 14 - Fair Value Accounting and Measurement (continued)
 
The following table shows the Bank’s assets and liabilities measured at fair value on a recurring basis as of:
 
   
June 30, 2011
 
   
Quoted Prices in
   
Significant
                 
   
Active Markets for
   
Other
   
Significant
         
   
Identical Assets
   
Observable
   
Unobservable
         
   
or Liabilities
   
Inputs
   
Inputs
         
   
(Level 1)
   
(Level 2)
   
(Level 3)
   
Total
 
   
(In thousands)
 
Securities available-for-sale
                               
Municipal bonds
  $ -     $ 107     $ -     $ 107  
SBA
    -       21,447       -       21,447  
Agency
    -       30,154       -       30,154  
Trust preferred securities available for sale
    -       -       63       63  
MBS agency
    -       141,669       -       141,669  
MBS corporate
    -       5,477       -       5,477  
                                 
    $ -     $ 198,854     $ 63     $ 198,917  
 
The following table presents gains and losses on assets measured at fair value on a recurring basis during 2012:
 
   
Trust Preferred
 
   
Securities
 
   
Available for Sale
 
   
(Level 3)
 
   
(In thousands)
 
Beginning balance at June 30, 2010
  $ 266  
Realized losses included in earnings
    (603 )
Net change in unrealized losses
    400  
         
Ending balance at June 30, 2011
    63  
         
Beginning balance at June 30, 2011
    63  
Realized losses included in earnings
    (278 )
Net change in unrealized losses
    215  
         
Ending balance at June 30, 2012
  $ -  
 
 
F-55
 
 
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF
PORT ANGELES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 14 - Fair Value Accounting and Measurement (continued)
 
Assets 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.
 
The following table presents the Bank’s assets measured at fair value on a nonrecurring basis as of:
 
   
(Unaudited)
 
   
September 30, 2012
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
   
(In thousands)
 
Mortgage servicing rights
  $ -     $ -     $ 1,832     $ 1,832  
Impaired loans
    -       -       17,788       17,788  
Foreclosed assets
    -       -       3,230       3,230  
                                 
    $ -     $ -     $ 22,850     $ 22,850  
                                 
                                 
   
June 30, 2012
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
   
(In thousands)
 
Mortgage servicing rights
  $ -     $ -     $ 2,020     $ 2,020  
Impaired loans
    -       -       15,750       15,750  
Foreclosed assets
    -       -       2,864       2,864  
                                 
    $ -     $ -     $ 20,634     $ 20,634  
                                 
                                 
                                 
   
June 30, 2011
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
   
(In thousands)
 
Trust preferred securities held to maturity
  $ -     $ -     $ 540     $ 540  
Mortgage servicing rights
    -       -       3,253       3,253  
Impaired loans
    -       -       15,793       15,793  
Foreclosed assets
    -       -       4,475       4,475  
                                 
    $ -     $ -     $ 24,061     $ 24,061  
 
 
F-56
 
 
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF
PORT ANGELES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 14 - Fair Value Accounting and Measurement (continued)
 
The following table presents the techniques used to value assets measured at fair value on a nonrecurring basis:
 
   
Fair Value at
             
   
September 30,
 
Valuation
     
Range (Weighted-
 
   
2012
 
Technique
 
Unobservable Input
 
Average) 2
 
   
(In thousands)
             
Mortgage Servicing Rights
  $ 1,832  
Discounted cash flows
 
Key assumptions 1
  N/A  
Impaired loans
    17,788  
Market comparable
 
Discount to Appraisal
  0% - 37% (9%)  
Real estate owned and repossessed assets
    3,230  
Market comparable
 
Discount to Appraisal
  0% - 30% (9%)  
 
1  
Key assumptions include estimated servicing revenues, servicing expenses, prepayment speeds, and discount rates.
2  
Discount to appraisal disposition value.
 
The following table presents the amount of gains and (losses) for the three months ended September 30 (unaudited) and years ended June 30, relating to assets measured at fair value on a nonrecurring basis:
 
   
Total Gains and (Losses)
 
   
(Unaudited)
             
   
September 30,
   
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
   
(In thousands)
 
Trust preferred securities
                       
held to maturity
  $ -     $ (170 )   $ (175 )   $ (225 )
Mortgage servicing rights
    (19 )     -       (68 )     -  
Impaired loans
    (137 )     -       (5,503 )     (2,910 )
Foreclosed assets
    263       (317 )     (1,497 )     (793 )
                                 
    $ 107     $ (487 )   $ (7,243 )   $ (3,928 )
 
 
F-57
 
 
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF
PORT ANGELES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 14 - Fair Value Accounting and Measurement (continued)
 
A summary of carrying value and estimated fair value of financial instruments is summarized as follows:
 
           (Unaudited)        
   
 
   
September 30, 2012
       
   
Level 1
   
Level 2
   
Level 3
   
Total
 
   
Carrying
   
Fair
   
Carrying
   
Fair
   
Carrying
   
Fair
   
Carrying
   
Fair
 
   
Amount
   
Value
   
Amount
   
Value
   
Amount
   
Value
   
Amount
   
Value
 
   
(In thousands)
 
Financial assets
                                               
Cash and cash equivalents
  $ 36,525     $ 36,525     $ -     $ -     $ -     $ -     $ 36,525     $ 36,525  
Investment securities
                                                               
available for sale
    -       -       219,214       219,214       -       -       219,214       219,214  
Investment securities
                                                               
held to maturity
    -       -       60,702       62,067       -       -       60,702       62,067  
Loans held for sale
    -       -       1,240       1,240       -       -       1,240       1,240  
Loans receivable, net
                                    411,113       433,354       411,113       433,354  
FHLB stock
    -       -       10,722       10,722       -       -       10,722       10,722  
Mortgage servicing rights, net
    -       -       -       -       1,666       1,832       1,666       1,832  
Bank-owned life insurance
    -       -       17,804       17,804       -       -       17,804       17,804  
                                                                 
Financial liabilities
                                                               
Demand deposits
  $ -     $ -     $ 424,017     $ 424,017     $ -     $ -     $ 424,017     $ 424,017  
Time deposits
    -       -       -       -       165,854       167,540       165,854       167,540  
Borrowings
    -       -       100,033       111,270       -       -       100,033       111,270  
 
   
June 30, 2012
   
June 30, 2011
 
   
Carrying
   
Fair
   
Carrying
   
Fair
 
   
Amount
   
Value
   
Amount
   
Value
 
   
(In thousands)
 
Financial assets
                       
Cash and cash equivalents
  $ 42,475     $ 42,475     $ 35,751     $ 35,751  
Investment securities
                               
available for sale
    218,163       218,163       198,917       198,917  
Investment securities
                               
held to maturity
    57,385       58,050       37,081       37,701  
Loans held for sale
    418       418       275       275  
Loans receivable, net
    400,659       420,384       424,187       422,838  
FHLB stock
    10,819       10,819       10,819       10,819  
Mortgage servicing rights, net
    1,873       2,020       2,494       3,253  
Bank-owned life insurance
    17,656       17,656       16,950       16,950  
                                 
Financial liabilities
                               
Demand deposits
  $ 413,471     $ 413,471     $ 370,798     $ 370,797  
Time deposits
    169,767       171,396       191,600       193,313  
Borrowings
    100,033       111,493       100,033       108,943  
 
 
F-58
 
 
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF
PORT ANGELES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 14 - Fair Value Accounting and Measurement (continued)
 
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 Bank. The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value:
 
Cash and cash equivalents - For short-term instruments, including cash and due from banks, and interest bearing deposits with banks, the carrying amount is a reasonable estimate of fair value.
 
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. Management periodically reviews the pricing information received from the third-party pricing service and compares it to a secondary pricing service, evaluating significant price variances between services to determine an appropriate estimate of fair value to report. Valuation of trust preferred securities was periodically performed and evaluated using a discounted cash flow model.
 
Loans held for sale - For loans held for sale, carrying value approximates fair value.
 
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 and foreclosed 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 or a broker price opinion provided by an independent third party.
 
FHLB stock - For FHLB stock, carrying value approximates fair value.
 
Mortgage servicing rights - The estimated fair value of the 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.
 
Bank owned life insurance assets - Fair values of insurance policies owned are based on the insurance contract’s cash surrender value.
 
 
F-59
 
 
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF
PORT ANGELES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 14 - Fair Value Accounting and Measurement (continued)
 
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, 2012 (unaudited), June 30, 2012 and 2011. 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 - Fixed and variable term borrowings are valued using a discounted replacement cost of funds approach. Option structures use discounted market price less an appropriate spread to adjust for the option.
 
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.
 
 
F-60
 
 
 
You should rely only on the information contained in this document or that to which we have referred you.  We have not authorized anyone to provide you with information that is different.  This document does not constitute an offer to sell, or the solicitation of an offer to buy, any of the securities offered hereby to any person in any jurisdiction in which such offer or solicitation would be unlawful.  The affairs of First Federal or First Northwest Bancorp may change after the date of this prospectus; delivery of this document and the sales of shares made hereunder does not mean otherwise.
 
 
 
 
First Northwest Bancorp
 
(Proposed Holding Company for
First Federal)
 
 
UP TO
8,050,000 SHARES
(Subject to increase up to 9,257,500 Shares)
 
 
 
 
PROSPECTUS
 
 
 
 
 
 
 
 
 
 
SANDLER O’NEILL + PARTNERS, L.P.
 
 
 
_______________ __, 2013
 
 
Dealer Prospectus Delivery Obligation
 
Until _________ __, 2013 all dealers effecting transactions in the registered securities, whether or not participating in this offering, may be required to deliver a prospectus.  This is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
 
 

 
 
 
PART II – INFORMATION NOT REQUIRED IN PROSPECTUS
 
Item 13. Other Expenses of Issuance and Distribution
 
Legal fees and expenses                                                                                                        
  $ 450,000  
Securities marketing legal fees and other fees and expenses                                                                                                        
      (1)
EDGAR, copying, printing, postage and mailing                                                                                                        
    352,000  
Appraisal preparation fees and expenses                                                                                                        
    96,000  
Business plan preparation fees and expenses                                                                                                        
    40,000  
Accounting fees and expenses                                                                                                        
    215,000  
Securities marketing fees and expenses                                                                                                        
    710,000 (2)
Data processing fees and expenses                                                                                                        
    95,000  
SEC registration fee                                                                                                        
    13,583  
Blue Sky fees and expenses                                                                                                        
    5,000  
NASDAQ listing fee                                                                                                        
    50,000  
Stock transfer agent and regular fees and expenses                                                                                                        
    6,000  
Other expenses - NASD filing fee; certificate printing                                                                                                        
    15,000  
Total                                                                                                        
  $ 2,047,583  
 
  (1)      Included in securities marketing fees and expenses.
 
(2)      Represents $585,280 of securities marketing fees at 1% for the number of shares sold in the offering at the midpoint of the offering range.
 
Item 14. Indemnification of Directors and Officers
 
In accordance with the Washington Business Corporation Act ( “ WBCA ” ), R.C.W. § 23B.08.570, Article XIV of First Northwest Bancorp’s Articles of Incorporation provides as follows:
 
Indemnification .  The Corporation shall indemnify and advance expenses to its directors, officers, agents and employees as follows:
 
A.           Directors and Officers .  In all circumstances and to the full extent permitted by the WBCA, the Corporation shall indemnify any person who is or was a director or officer of the Corporation and who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative and whether formal or informal (including an action by or in the right of the Corporation), by reason of the fact that he is or was a director or officer of the Corporation, against expenses, judgments, fines, and amounts paid in settlement and incurred by him in connection with such action, suit or proceeding.  However, such indemnity shall not apply to: (a) acts or omissions of the director or officer in connection with a proceeding by or in the right of the Corporation in which the director or officer is finally adjudged liable to the Corporation; (b) conduct of the director or officer finally adjudged to violate RCW Section 23B.08.310 (relating to unlawful distributions by the Corporation) or (c) any transaction with respect to which it was finally adjudged that such director and officer personally received a benefit in money, property or services to which the director was not legally entitled.  The Corporation shall advance expenses incurred in a proceeding for such persons pursuant to the terms set forth in a separate directors’ resolution or contract.
 
B.            Implementation .  The Board of Directors may take such action as is necessary to carry out these indemnification and expense advancement provisions.  It is expressly empowered to adopt, approve and amend from time to time such bylaws, resolutions, contracts or further indemnification and expense advancement arrangements as may be permitted by law, implementing these provisions.  Such bylaws, resolutions, contracts or further arrangements shall include, but not be limited to, implementing the manner in which determinations as to any indemnity or advancement of expenses shall be made.
 
C.            Survival of Indemnification Rights .  No amendment or repeal of this Article XIV shall apply to or have any effect on any right to indemnification provided hereunder with respect to acts or omissions occurring prior to such amendment or repeal.
 
 
II-1
 
 
D.            Employees and Agents .  The Corporation may, by action of the Board of Directors, provide indemnification and pay expenses in advance of the final disposition of a proceeding to employees and agents of the Corporation with the same scope and effect as the provisions of this Article XIV with respect to the indemnification and advancement of expenses of directors and officers of the Corporation or pursuant to rights granted under, or provided by, the WBCA or otherwise.
 
E.            Service for Other Entities .  The indemnification and advancement of expenses provided under this Article XIV shall apply to directors, officers, employees or agents of the Corporation for both (a) service in such capacities for the Corporation and (b) service at the Corporation’s request as a director, officer, partner, trustee, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust, employee benefit plan or other enterprise.  A person is considered to be serving an employee benefit plan at the Corporation’s request if such person’s duties to the Corporation also impose duties on, or otherwise involve services by, the director to the plan or to participants in or beneficiaries of the plan.
 
F.            Insurance .  The Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, trustee, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against liability asserted against him and incurred by him in such capacity or arising out of his status as such, whether or not the Corporation would have had the power to indemnify him against such liability under the provisions of this bylaw and the WBCA.
 
G.            Other Rights .  The indemnification provided by this section shall not be deemed exclusive of any other right to which those indemnified may be entitled under any other bylaw, agreement, vote of shareholders or disinterested directors, or otherwise, both as to action in his official capacity and as to action in another capacity while holding such an office, and shall continue as to a person who has ceased to be a director, trustee, officer, employee or agent and shall inure to the benefit of the heirs executors, and administrators of such person.
 
Item 15. Recent Sales of Unregistered Securities
 
 Not Applicable.
 
Item 16. Exhibits and Financial Statement Schedules
 
(a) Exhibits  -- See  the Exhibit Index filed as part of this Registration Statement
 
(b) Financial Statement Schedules
 
FIRST FEDERAL
INDEX TO FINANCIAL STATEMENTS
 
     
Page
       
Report of Independent Registered Public Accounting Firm  
F-2
       
Financial Statements    
       
 
Consolidated Balance Sheets as of September 30, 2012
      (unaudited) and June 30, 2012 and 2011
   
F-3
 
Consolidated Statements of Income for the Three Months
      Ended September 30, 2012 and 2011 (unaudited) and the
      Years Ended June 30, 2012, 2011 and 2010
    F-4
 
Consolidated Statements of Comprehensive Income for the Three Months
      Ended September 30, 2012 (unaudited) and for the
      Years Ended June 30, 2012, 2011 and 2010
 
F-5
 
Consolidated Statements of Equity for the Three Months Ended September 30,
      2012 (unaudited) and for the Years Ended June 30, 2012, 2011 and 2010
 
F-6
 
Consolidated Statements of Cash Flows for the Three Months
      Ended September 30, 2012 and 2011 (unaudited) and the
      Years Ended June 30, 2012, 2011 and 2010
 
F-7
Notes to Consolidated Financial Statements
 
F-9 - F-60
 
 
II-2
 
 
All schedules are omitted because the required information is not applicable or is included in the Financial Statements and related Notes.
 
The financial statements of First Northwest   Bancorp   have been omitted because First Northwest   Bancorp   has not yet issued any stock, has no assets or liabilities, and has not conducted any business other than that of an organizational nature.
 
Item 17. Undertakings
 
         The undersigned registrant hereby undertakes:
 
 
(1)
To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:
 
 
(i)
To include any prospectus required by section 10(a)(3) of the Securities Act of 1933;

 
(ii)
To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Securities and Exchange Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the “ Calculation of Registration Fee” table in the effective registration statement;

 
(iii)
To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement.
 
 
(2)
That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be the initial bona fide offering thereof.
 
 
(3)
To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.
 
 
(4)
That, for purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective.
 
 
(5)
That, for the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

 
(6)
That, for the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities:

The undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:

 
(i)
Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424;

 
(ii)
Any free writing prospectus relating to the offering prepared by or on behalf of the II-6 undersigned registrant or used or referred to by the undersigned registrant;
 
 
II-3
 
 
 
(iii)
The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and

 
(iv)
Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.

    The undersigned registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser.

    Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
 
 
II-4
 
 
SIGNATURES
 
Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Port Angeles, State of Washington, on the 21st day of November, 2012.
 
  FIRST NORTHWEST   BANCORP  
       
 
By:
/s/ Levon L. Mathews  
    Levon L. Mathews  
    President and Chief Executive Officer  
    (Principal Executive Officer)  
 
POWER OF ATTORNEY
 
We, the undersigned directors and officers of First Northwest Bancorp, do hereby severally constitute and appoint Levon L. Mathews or Laurence J. Hueth, as our true and lawful attorney and agent, to do any and all things and acts in our names in the capacities indicated below and to execute all instruments for us and in our names in the capacities indicated below which said Levon L. Mathews or Laurence J. Hueth may deem necessary or advisable to enable First Northwest Bancorp, to comply with the Securities Act of 1933 and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with the registration statement on Form S-1 relating to the offering of First Northwest Bancorp’s Common Stock, including specifically but not limited to, power and authority to sign, for us or any of us in our names in the capacities indicated below, the registration statement and any and all amendments (including post-effective amendments) thereto; and we hereby ratify and confirm all that Levon L. Mathews or Laurence J. Hueth shall do or cause to be done by virtue hereof.
 
Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed below by the following persons in the capacities and on the dates indicated.
 
/s/ Levon L. Mathews
 
/s/ Laurence J. Hueth
Levon L. Mathews
 
Laurence J. Hueth
President, Chief Executive Officer and Director
(Principal Executive Officer)
 
Director, Executive Vice President and Chief
Operating, Financial and Risk Officer
 (Principal Financial and Accounting Officer)
     
Date:  November 21, 2012
 
Date:  November 21, 2012
     
/s/ Richard G. Kott
 
/s/ Stephen E. Oliver
Richard G. Kott
 
Stephen E. Oliver
Chairman of the Board
 
Vice Chairman of the Board
     
Date:  November 21, 2012
 
Date: November 21, 2012
     
/s/ David A. Blake
 
/s/ Lloyd J. Eisenman
David A. Blake
 
Lloyd J. Eisenman
Director
 
Director
     
Date:  November 21, 2012
 
Date:  November 21, 2012
 
 
II-5
 
 
/s/ David T. Flodstrom
 
/s/ Jennifer Zaccardo
David T. Flodstrom
 
Jennifer Zaccardo
Director
 
Director
     
Date:  November 21, 2012
 
Date:  November 21, 2012
     
/s/ Cindy H. Finnie
   
Cindy H. Finnie
   
Director
   
     
Date:  November 21, 2012
   
 
 
II-6
 
 
EXHIBIT INDEX
 
Exhibit
Number
 
Description of Document
     
1.1
 
Engagement Letter for Offering Services between First Federal Savings and Loan Association of Port Angeles ( “ First Federal ” ) and Sandler O’Neill + Partners, L.P.
     
1.2
 
Engagement Letter for Records Management between First Federal and Sandler O’Neill + Partners, L.P.
     
1.3
 
Form of proposed Agency Agreement among First Northwest   Bancorp and First Federal and Sandler O’Neill + Partners, L.P.   (a)
     
2
 
Plan of Conversion of First Federal
     
3.1
 
Articles of Incorporation of First Northwest Bancorp
     
3.2
 
Bylaws of First Northwest Bancorp
     
4
 
Form of Certificate for Common Stock
     
5
 
Opinion of Breyer & Associates PC regarding legality of securities registered
     
8.1
 
Federal Tax Opinion of Silver Freedman & Taff, L.L.P.
     
8.2
 
State Tax Opinion of the Platt Irwin Law Firm
     
8.3
 
Opinion of RP Financial, LC. as to the value of subscription rights
     
10.1
 
Form of First Northwest Bancorp Employee Stock Ownership Plan
     
10.2
 
Form of First Federal Employee Severance Compensation Plan
     
10.3
 
Form of Employment Agreement for Levon L. Mathews
     
10.4
 
Form of Employment Agreement for Laurence J. Hueth and Clifford A. Frydenberg
     
10.5
 
Form of Employment Agreement for Elaine T. Gentilo, Gina E. Lowman and Joyce L. Ruiz
     
10.6
 
401(k) Retirement Plan
     
21
 
Subsidiaries of First Northwest Bancorp
     
23.1
 
Consent of Moss Adams LLP
     
23.2
 
Consent of Breyer & Associates PC (contained in its opinion filed as Exhibit 5)
     
23.3
 
Consent of Silver Freedman and Taff, L.L.P. (contained in its opinion filed as Exhibit 8.1)
     
23.4
 
Consent of the Platt Irwin Law Firm (contained in its opinion filed as Exhibit 8.2)
     
23.5
 
Consent of RP Financial, LC.
     
24.1
 
Power of attorney (contained in the signature page of the registration statement)
     
99.1
 
Order and Certification Form
     
99.2
 
Solicitation and Marketing Materials
     
99.3
 
Engagement Letter between First Federal and Feldman Financial Advisors, Inc.
 
 
 
 
 
99.4
 
Engagement Letter between First Federal and RP Financial, LC.
     
99.5
 
Appraisal Report of RP Financial, LC. (b)
 
(a)
To be filed by amendment.
 
(b)
Excludes certain tabular and statistical information pursuant to a hardship exemption request made under Rule 202 of Regulation S-T.
 
Exhibit 1.1
 
(LOGO) (LOGO)  
 
April 4, 2012
 
Board of Directors
First Federal Savings and Loan Association of Port Angeles
105 West 8 th Street
Port Angeles, Washington  98362
 
Attention:   Mr. Levon L. Mathews  
  President & Chief Executive Officer  
 
Ladies and Gentlemen:
 
We understand that the Board of Directors of First Federal Savings and Loan Association of Port Angeles (the “Bank”) is considering the adoption of a Plan of Conversion (the “Plan”) pursuant to which the Bank will be converted from mutual to stock form (the “Conversion”), and shares of the common stock (the “Common Stock”) of the proposed new holding company for the Bank (the “Holding Company,” and together with the Bank, the “Company”) will be offered and sold to the Bank’s eligible account holders in a Subscription Offering and, if not fully subscribed, to members of the Bank’s community in a direct Community Offering and to the general public in a Syndicated Offering (collectively, the “Offering”).  Sandler O’Neill & Partners, L.P. (“Sandler O’Neill”) is pleased to assist the Company with the Offering.  This letter is to confirm the terms and conditions of our engagement.
 
OFFERING SERVICES
 
Sandler O’Neill will act as exclusive marketing agent for the Company in the Offering.  We will work with the Company and its management, counsel, accountants and other advisors on the Offering and anticipate that our services will include the following, each as may be necessary and as the Company may reasonably request:
 
1.           Consulting as to the financial and securities market implications of the Plan and any related corporate documents;
 
2.           Reviewing with the Board the financial impact of the Offering on the Company, based upon the independent appraiser’s appraisal of the Common Stock;
 
3.           Reviewing all offering documents, including the Prospectus, stock order forms and related offering materials (it being understood that preparation and filing of such documents will be the responsibility of the Company and its counsel);
 
SANDLER O ’ NEILL + PARTNERS, L.P.
1251 Avenue of the Americas, 6th Floor, New York, NY 10020
T: (212) 466-7700 / (800) 635-6855
www.sandleroneill.com
 
 
 
 
 
  (LOGO)
Board of Directors
First Federal Savings and Loan
Association of Port Angeles
April 4, 2012
Page 2
 
4.           Assisting in the design, implementation and execution of local, regional or other marketing strategies for the Offering;
 
5.           Assisting management in scheduling and preparing for meetings with potential investors in connection with the Offering, including local community meetings within the Company’s operating footprint; and
 
6.           Providing such other general advice and assistance as may be requested to promote the successful completion of the Offering.
 
SUBSCRIPTION AND COMMUNITY OFFERING FEES
 
If the Offering is consummated, the Company agrees to pay Sandler O’Neill for its services a fee of 1.00% of the aggregate Actual Purchase Price of the shares of Common Stock sold in the Subscription Offering and direct Community Offering, excluding in each case shares purchased by or on behalf of (i) any employee benefit plan or trust of the Company established for the benefit of its directors, officers and employees, (ii) any charitable foundation established by the Company (or any shares contributed to such a charitable foundation), and (iii) any director, officer or employee of the Company, members of their immediate families, their personal trusts and business entities controlled by them.  For purposes of this letter, the term “Actual Purchase Price” shall mean the price at which the shares of the Company’s common stock are sold in the Offering.  All fees payable to Sandler O’Neill hereunder shall be payable in cash at the time of the closing of the Offering.
 
If (a) Sandler O’Neill’s engagement hereunder is terminated for any of the reasons provided for under the second paragraph of the section of this letter captioned “Definitive Agreement,” or (b) the Offering is terminated by the Company, no fee shall be payable by the Company to Sandler O’Neill hereunder; provided, however , the Company shall reimburse Sandler O’Neill for its reasonable out-of-pocket expenses (including legal fees) incurred in connection with its engagement hereunder and for any fees and expenses incurred by Sandler O’Neill on behalf of the Company pursuant to the second paragraph under the section captioned “Costs and Expenses” below, subject to the provisions of that section.
 
 
 
 
 
  (LOGO)
Board of Directors
First Federal Savings and Loan
Association of Port Angeles
April 4, 2012
Page 3
 
All fees and expense reimbursements payable to Sandler O’Neill hereunder shall be payable in cash at the time of the closing of the Offering, or upon the termination of Sandler O’Neill’s engagement hereunder or termination of the Offering, as the case may be.  In recognition of the long lead times involved in the stock offering process, the Company agrees to make an advance payment to Sandler O’Neill in the amount of $25,000, payable upon execution of this letter, which shall be credited against any fees or reimbursement of expenses payable hereunder.  In the event that the advance payment exceeds the amount due in payment of fees and reimbursement of expenses hereunder, the excess shall be refunded to the Company.
 
SYNDICATED OFFERING
 
In addition to the Subscription and Community Offering Fees set forth above, if any shares of Common Stock remain available after the expiration of the Subscription Offering and Community Offering, at the request of the Company and subject to the continued satisfaction of the conditions set forth in the second paragraph under the caption “Definitive Agreement” below, Sandler O’Neill will seek to form a syndicate of registered dealers to assist in the sale of such Common Stock in a Syndicated Offering on a best efforts basis, subject to the terms and conditions to be set forth in a selected dealers agreement.  With respect to any shares of the Common Stock sold by Sandler O’Neill or any other FINRA member firm under any selected dealers agreements in a Syndicated Offering, the Company agrees to pay a commission not to exceed 5.25% of the aggregate Actual Purchase Price of the Shares sold in such offering.  Sandler O’Neill will endeavor to distribute the Common Stock among dealers approved by the Company in a fashion that best meets the distribution objectives of the Company and the requirements of the Plan, which may result in limiting the allocation of stock to certain selected dealers.  It is understood that in no event shall Sandler O’Neill be obligated to act as a selected dealer or to take or purchase any shares of the Common Stock in the Offering.
 
COSTS AND EXPENSES
 
In addition to any fees that may be payable to Sandler O’Neill hereunder and the expenses to be borne by the Company pursuant to the following paragraph, the Company agrees to reimburse Sandler O’Neill, upon request made from time to time, for its reasonable out-of-pocket expenses incurred in connection with its engagement hereunder, regardless of whether the Offering is consummated, including, without limitation, legal fees and expenses, travel, meals, lodging, postage, syndication  and document production expenses, up to a maximum of $115,000 if no Syndicated Offering is held and a maximum of $140,000 if a Syndicated Offering is held; provided, however , that shall Sandler O’Neill shall document such expenses to the reasonable satisfaction of the Company.  The provisions of this paragraph are not intended to apply to or in any way impair the indemnification provisions of this letter.
 
 
 
 
 
  (LOGO)
Board of Directors
First Federal Savings and Loan
Association of Port Angeles
April 4, 2012
Page 4
 
As is customary, the Company will bear all other expenses incurred in connection with the Offering, including, without limitation, (i) the cost of obtaining all securities and bank regulatory approvals, including any required FINRA filing fees; (ii) the cost of printing and distributing the offering materials; (iii) the costs of blue sky qualification (including fees and expenses of blue sky counsel) of the shares in the various states; (iv) listing fees; and (v) all fees and disbursements of the Company’s counsel, accountants, conversion agent  and other advisors.  In the event Sandler O’Neill incurs any such fees and expenses on behalf of the Company, the Company will reimburse Sandler O’Neill for such fees and expenses whether or not the Offering is consummated.
 
POST-CONVERSION GENERAL ADVISORY SERVICES
 
If the Conversion is consummated, Sandler O ’ Neill agrees to act as an independent financial advisor to the Company in connection with the Company’s general strategic planning (“General Advisory Services”).  In connection with such General Advisory Services, we would expect to work with the Company’s management, its counsel, accountants and other advisors to assess the Company’s strategic alternatives and assist in developing a tactical plan to enhance the value of the Company.  We anticipate that our activities would include, as appropriate, those activities outlined in Exhibit A hereto.  Sandler O’Neill shall provide such services at the Company’s request for a period of three years following the completion of the Conversion at no additional fee; provided, however , that the Company shall reimburse Sandler O’Neill for its reasonable out-of-pocket expenses incurred in connection with providing such services.  Thereafter, if both parties wish to continue the relationship, the parties will enter into a separate advisory services agreement on terms and conditions to be negotiated at such time.  Notwithstanding the above, the Company is under no obligation to request such services.  It is further understood and agreed that the scope of the above-outlined services does not include specific transaction-related services, which would be covered by a separate engagement letter between the Company and Sandler O’Neill outlining the services to be provided as well as the fees for those services.
 
DUE DILIGENCE REVIEW
 
Sandler O’Neill’s obligation to perform the services contemplated by this letter shall be subject to the satisfactory completion of such investigation and inquiries relating to the Company and its directors, officers, agents and employees as Sandler O’Neill and its counsel in their sole discretion may deem appropriate under the circumstances.  In this regard, the Company agrees that, at its expense, it will make available to Sandler O’Neill all information that Sandler O’Neill requests, and will allow Sandler O’Neill the opportunity to discuss with the Company’s management the financial condition, business and operations of the Company.  The Company acknowledges that Sandler O’Neill will rely upon the accuracy and completeness of all information received from the Company and its directors, trustees, officers, employees, agents, independent accountants and counsel.
 
 
 
 
 
  (LOGO)
Board of Directors
First Federal Savings and Loan
Association of Port Angeles
April 4, 2012
Page 5
 
BLUE SKY MATTERS
 
Sandler O’Neill and the Company agree that the Company’s counsel shall serve as counsel with respect to blue sky matters in connection with the Offering.  The Company will cause such counsel to prepare a Blue Sky Memorandum related to the Offering, including Sandler O’Neill’s and any other broker-dealer’s participation therein, and shall furnish Sandler O’Neill a copy thereof addressed to Sandler O’Neill or upon which such counsel shall state Sandler O’Neill may rely.
 
CONFIDENTIALITY
 
Except as contemplated in connection with the performance of its services under this agreement, as authorized by the Company or as required by law, regulation or legal process, Sandler O’Neill agrees that it will treat as confidential all material, non-public information relating to the Company obtained in connection with its engagement hereunder (the “Confidential Information”); provided, however , that Sandler O’Neill may disclose such information to its agents and advisors who are assisting or advising Sandler O’Neill in performing its services hereunder who have agreed to be bound by the terms and conditions of this paragraph.  As used in this paragraph, the term “Confidential Information” shall not include information which (a) is or becomes generally available to the public other than as a result of a disclosure by Sandler O’Neill, (b) was available to Sandler O’Neill on a non-confidential basis prior to its disclosure to Sandler O’Neill by the Company, or (c) becomes available to Sandler O’Neill on a non-confidential basis from a person other than the Company who is not otherwise known to Sandler O’Neill to be bound not to disclose such information pursuant to a contractual, legal or fiduciary obligation.
 
The Company hereby acknowledges and agrees that the financial models and presentations used by Sandler O’Neill in performing its services hereunder have been developed by and are proprietary to Sandler O’Neill and are protected under applicable copyright laws.  The Company agrees that it will not reproduce or distribute all or any portion of such models or presentations without the prior written consent of Sandler O’Neill.
 
 
 
 
 
  (LOGO)
Board of Directors
First Federal Savings and Loan
Association of Port Angeles
April 4, 2012
Page 6
 
INDEMNIFICATION
 
Since Sandler O’Neill will be acting on behalf of the Bank and the Holding Company in connection with the Offering, the Bank and the Holding Company agree to indemnify and hold Sandler O’Neill and its affiliates and their respective partners, directors, officers, employees, agents and controlling persons within the meaning of Section 15 of the Securities Act of 1933 or Section 20 of the Securities Exchange Act of 1934 (Sandler O’Neill and each such person being an “Indemnified Party”) harmless from and against any and all losses, claims, damages and liabilities, joint or several, to which such Indemnified Party may become subject under applicable federal or state law, or otherwise, related to or arising out of the Offering or the engagement of Sandler O’Neill pursuant to, or the performance by Sandler O’Neill of the services contemplated by, this letter, and will reimburse any Indemnified Party for all expenses (including reasonable legal fees and expenses) as they are incurred, including expenses incurred in connection with the investigation of, preparation for or defense of any pending or threatened claim or any action or proceeding arising therefrom, whether or not such Indemnified Party is a party; provided, however , that the Company will not be liable in any such case to the extent that any such loss, claim, damage, liability or expense (i) arises out of or is based upon any untrue statement of a material fact or the omission of a material fact required to be stated therein or necessary to make not misleading any statements contained in any final prospectus, or any amendment or supplement thereto, made in reliance on and in conformity with written information furnished to the Company by Sandler O’Neill expressly for use therein, or (ii) is primarily attributable to the gross negligence, willful misconduct or bad faith of Sandler O’Neill.  If the foregoing indemnification is unavailable for any reason, the Company agrees to contribute to such losses, claims, damages, liabilities and expenses in the proportion that its financial interest in the Offerings bears to that of Sandler O’Neill.
 
The Company agrees to notify Sandler O’Neill promptly of the assertion against it or any other person of any claim or the commencement of any action or proceeding relating to any transaction contemplated by this agreement.
 
DEFINITIVE AGREEMENT
 
Sandler O’Neill and the Company agree that (a) except as set forth in clause (b), the foregoing represents the general intention of the Company and Sandler O’Neill with respect to the services to be provided by Sandler O’Neill in connection with the Offering, which will serve as a basis for Sandler O’Neill commencing activities, and (b) the only legal and binding obligations of the Company and Sandler O’Neill with respect to the Offering shall be (1) the Company’s obligation to reimburse costs and expenses pursuant to the section captioned “Costs and Expenses,” (2) those set forth under the captions “Confidentiality” and “Indemnification,” and (3) as set forth in a duly negotiated and executed definitive Agency Agreement to be entered into prior to the commencement of the Subscription and Community Offering relating to the services of Sandler O’Neill in connection with the Offering.  Such Agency Agreement shall be in form and content satisfactory to Sandler O’Neill and the Company and their respective counsel and shall contain standard indemnification and contribution provisions consistent herewith.
 
 
 
 
 
  (LOGO)
Board of Directors
First Federal Savings and Loan
Association of Port Angeles
April 4, 2012
Page 7
 
Sandler O’Neill’s execution of such Agency Agreement shall also be subject to (i) Sandler O’Neill’s satisfaction with its investigation of the Company’s business, financial condition and results of operations, (ii) preparation of offering materials that are satisfactory to Sandler O’Neill, (iii) compliance with all relevant legal and regulatory requirements to the reasonable satisfaction of Sandler O’Neill, (iv) agreement that the price established by the independent appraiser is reasonable, and (v) market conditions at the time of the proposed offering.  Sandler O’Neill may terminate this agreement if such Agency Agreement is not entered into prior to June 30, 2013.
 
This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and can be altered only by written consent signed by the parties.  This Agreement shall be construed and enforced in accordance with the laws of the State of New York, without regard to the conflicts of laws principles thereof.
 
Please confirm that the foregoing correctly sets forth our agreement by signing and returning to Sandler O’Neill the duplicate copy of this letter enclosed herewith.
 
 
Very truly yours,
SANDLER O’NEILL & PARTNERS, L.P.
 
  By: Sandler O’Neill & Partners Corp.,  
    the sole general partner  
       
  By:
/s/ Catherine A. Lawton
 
   
Catherine A. Lawton
 
   
An Officer of the Corporation
 
 
Accepted and agreed to as of
the date first above written:
 
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF PORT ANGELES
 
By:
/s/  Levon L. Mathews  
  Levon L. Mathews  
  President and Chief Executive Officer  
     
By:
/s/ Larry Hueth   
  LARRY HUETH  
  EVP - COO / CFO  
 
 
 
 
 
  (LOGO)
Board of Directors
First Federal Savings and Loan
Association of Port Angeles
April 4, 2012
Page 8
 
EXHIBIT    A
 
GENERAL ADVISORY SERVICES
 
1.
A review and analysis of the Company’s current business and financial condition, including its operating strategies, balance sheet composition, historical operating performance, branch structure and market share, and the Company’s competitive position relative to selected peer groups;
 
2.
Creation of a base case financial model to serve as a benchmark for analyzing alternative strategies;
 
3.
An analysis of the impact on the franchise value of altering the Company’s dividend policy, implementing a stock repurchase program, or restructuring the balance sheet;
 
4.
An analysis of the Company’s acquisition resources, objectives and capacity to compete for acquisition opportunities;
 
5.
A summary of recent merger and acquisition trends in the financial services industry, including tactics employed by others and typical terms and values involved;
 
6.
A review of other strategic alternatives which could provide long-term benefits and enhanced value to the Company;
 
7.
Periodic reviews with the Board of Directors of the Company of Sandler O’Neill’s findings; and
 
8.
Ongoing general advice and counsel to management and the Board of Directors of the Company with respect to strategic issues.
 
 
Exhibit 1.2
 
(LOGO) (LOGO)  
March 23, 2012
 
 
 
Mr. Levon L. Mathews
President & Chief Executive Officer
First Federal Savings and Loan Association of Port Angeles
105 West 8th Street
Port Angeles, Washington  98362
 
Dear Mr. Mathews:
 
Sandler O’Neill & Partners, L.P. (“Sandler O’Neill”) is pleased to act as records management agent to First Federal Savings and Loan Association of Port Angeles (the “Bank”) in connection with the Bank’s proposed conversion from mutual to stock form (the “Conversion”).  This letter is to confirm the terms and conditions of our engagement.
 
SERVICES AND FEES
 
In our role as Records Management Agent, we anticipate that our services will include the services outlined below, each as may be necessary and as the Company may reasonably request:
 
 
I.
Consolidation of Accounts and Vote Calculation
 
 
II.
Design and Preparation of Proxy and Stock Order Forms
 
 
III.
Organization and Supervision of the Conversion Center
 
 
IV.
Proxy Solicitation and Special Meeting Services
 
 
V.
Subscription Services
 
Each of these services is further described in Appendix A to this agreement.
 
For its services hereunder, the Company agrees to pay Sandler O’Neill a fee of $45,000.  This fee is based upon the requirements of current regulations and the Plan of Conversion (the “Plan”) as currently contemplated.  Any unusual items or duplication of service required as a result of a material change in the regulations or the Plan or a material delay or other similar events may result in extra charges that will be covered in a separate agreement if and when they occur.  All fees under this agreement shall be payable in cash, as follows: (a) $25,000 payable upon execution of this agreement, which shall be non-refundable; and (b) the balance upon the completion of the Conversion.
 
SANDLER O ’ NEILL + PARTNERS, L.P.
1251 Avenue of the Americas, 6th Floor, New York, NY 10020
T: (212) 466-7700 / (800) 635-6855
www.sandleroneill.com
 
 
 
 
 
(LOGO)
Mr. Levon L. Mathews
March 23, 2012
Page 2
 
COSTS AND EXPENSES
 
In addition to any fees that may be payable to Sandler O’Neill hereunder, the Company agrees to reimburse Sandler O’Neill, upon request made from time to time, for its reasonable out-of-pocket expenses incurred in connection with its engagement hereunder, regardless of whether the Conversion is consummated, including, without limitation, travel, lodging, meals, telephone, postage, forms and other similar expenses, up to a maximum of $50,000; provided, however , that Sandler O’Neill shall document such expenses to the reasonable satisfaction of the Company.  It is understood that all expenses associated with the operation of the Conversion Center will be borne by the Company.
 
RELIANCE ON INFORMATION PROVIDED
 
The Company will provide Sandler O’Neill with such information as Sandler O’Neill may reasonably require to carry out its duties.  The Company recognizes and confirms that Sandler O’Neill (a) will use and rely on such information in performing the services contemplated by this agreement without having independently verified the same, and (b) does not assume responsibility for the accuracy or completeness of the information.  The Company will also inform Sandler O’Neill within a reasonable period of time of any changes in the Plan that require changes in Sandler O’Neill’s services.  If a substantial expense results from any such change, the parties shall negotiate an equitable adjustment in the fee.
 
LIMITATIONS
 
Sandler O’Neill, as Records Management Agent hereunder, (a) shall have no duties or obligations other than those specifically set forth herein; (b) will be regarded as making no representations and having no responsibilities as to the validity, sufficiency, value or genuineness of any order form or any stock certificates or the shares represented thereby, and will not be required to and will make no representations as to the validity, value or genuineness of the offer; (c) shall not be liable to any person or entity, including the Company, by reason of any error of judgment or for any act done by it in good faith, or for any mistake of law or fact in connection with this agreement and the performance hereof unless caused by or arising out of its own willful misconduct, bad faith or gross negligence; (d) will not be obliged to take any legal action hereunder which might in its judgment involve any expense or liability, unless it shall have been furnished with reasonable indemnity satisfactory to it; and (e) may rely on and shall be protected in acting in reliance upon any certificate, instrument, opinion, notice, letter, telex, telegram, or other document or security delivered to it and in good faith believed by it to be genuine and to have been signed by the proper party or parties.
 
 
 
 
 
(LOGO)
Mr. Levon L. Mathews
March 23, 2012
Page 3
 
Anything in this agreement to the contrary notwithstanding, in no event shall Sandler O’Neill be liable for special, indirect or consequential loss or damage of any kind whatsoever (including but not limited to lost profits), even if Sandler O’Neill has been advised of the likelihood of such loss or damage and regardless of the form of action.
 
INDEMNIFICATION
 
The Company agrees to indemnify and hold Sandler O’Neill and its affiliates and their respective partners, directors, officers, employees, agents and controlling persons (Sandler O’Neill and each such person being an “Indemnified Party”) harmless from and against any and all losses, claims, damages and liabilities, joint or several, to which such Indemnified Party may become subject under applicable federal or state law, or otherwise, related to or arising out of the engagement of Sandler O’Neill pursuant to, and the performance by Sandler O’Neill of the services contemplated by, this letter, and will reimburse any Indemnified Party for all expenses (including reasonable counsel fees and expenses) as they are incurred, including expenses incurred in connection with the investigation of, preparation for or defense of any pending or threatened claim or any action or proceeding arising therefrom, whether or not such Indemnified Party is a party.  The Company will not be liable under the foregoing indemnification provision to the extent that any loss, claim, damage, liability or expense is found in a final judgment by a court of competent jurisdiction to have resulted primarily from Sandler O’Neill’s willful misconduct, bad faith or gross negligence.
 
MISCELLANEOUS
 
The following addresses shall be sufficient for written notices to each other:
 
 
 If to you:
First Federal Savings and Loan Association of Port Angeles
   
105 West 8th Street
   
Port Angeles, Washington  98362
   
Attention:          Mr. Levon L. Mathews
     
 
 If to us:
Sandler O’Neill & Partners, L.P.
   
1251 Avenue of the Americas
   
New York, New York  10020
   
Attention:          General Counsel
     
 
The Agreement and appendix hereto constitute the entire Agreement between the parties with respect to the subject matter hereof and can be altered only by written consent signed by the parties. This Agreement is governed by the laws of the State of New York.
 
 
 
 
 
(LOGO)
Mr. Levon L. Mathews
March 23, 2012
Page 4
 
Please confirm that the foregoing correctly sets forth our agreement by signing and returning to Sandler O’Neill the duplicate copy of this letter enclosed herewith.
 
 
 
Very truly yours,
 
Sandler O’Neill & Partners, L.P.
 
 
By:
Sandler O’Neill & Partners Corp.,  
    the sole general partner  
       
  By:
/s/ Catherine A. Lawton
 
   
      Catherine A. Lawton
 
   
      An Officer of the Corporation
 
 
Accepted and agreed to as of
the date first above written:
 
First Federal Savings and Loan Association
of Port Angeles
     
By:
/s/  Levon L. Mathews  
  Levon L. Mathews  
  President and Chief Executive Officer  
     
By:
/s/ Larry Hueth   
  Larry Hueth   
  EVP - COO / CFO  
 
 
 
 
 
(LOGO)  
 
APPENDIX A
 
OUTLINE OF RECORDS MANAGEMENT AGENT SERVICES
 
I.        Consolidation of Accounts/Vote Calculation
 
1.
Consolidate files in accordance with regulatory guidelines and create central file.
 
2.
Our EDP format will be provided to your data processing department.
 
3.
Vote calculation.
 
II.       Design and Preparation of Proxy and Stock Order Forms
 
1.
Assist in designing proxy forms and stock order forms for voting and ordering stock.
 
2.
Prepare account holder data for proxy and stock order forms.
 
3.
Target group identification for proxy solicitation.
 
III.      Organization and Supervision of Conversion Center
 
1.
Advising on physical organization of the Conversion Center, including materials requirements.
 
2.
Assist in training of all Bank and temporary personnel who will be staffing the Conversion Center.
 
3.
Establish reporting procedures.
 
4.
On-site supervision of the Conversion Center during the solicitation/offering period.
 
IV.      Special Meeting Services
 
1.
Proxy and ballot tabulation.
 
2.
Act as or support inspector of election, it being understood that Sandler O’Neill will not act as inspector of election in the case of a contested election.
 
3.
If required, delete voting record date accounts closed prior to special meeting.
 
4.
Produce final report of vote.
 
V.       Subscription Services
 
1.
Produce list of depositors by state (Blue Sky report).
 
2.
Production of subscription rights and research books.
 
3.
Stock order form processing.
 
4.
Acknowledgment letter to confirm receipt of stock order.
 
5.
Daily reports and analysis.
 
6.
Proration calculation and share allocation in the event of an oversubscription.
 
7.
Produce charter shareholder list.
 
8.
Interface with transfer agent for stock certificate issuance.
 
9.
Refund and interest calculations.
 
10.
Confirmation letter to confirm purchase of stock.
 
11.
Notification of full/partial rejection of orders.
 
12.
Production of 1099/Debit tape.
 
 
A - 1
 
Exhibit 2
 
PLAN OF CONVERSION
 
OF
 
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF PORT ANGELES
PORT ANGELES, WASHINGTON
 
AS ADOPTED ON MAY 22, 2012
AND AMENDED ON NOVEMBER 20, 2012
 
 
 
 
 
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF PORT ANGELES
PORT ANGELES, WASHINGTON
 
PLAN OF CONVERSION
FROM STATE MUTUAL SAVINGS BANK
TO STATE STOCK SAVINGS BANK
AND FORMATION OF A HOLDING COMPANY
 
INTRODUCTION
 
I.              General
 
On May 22, 2012, the Board of Trustees (“Directors”) of First Federal Savings and Loan Association of Port Angeles (“First Federal”) adopted, and on November 20, 2012 subsequently amended, by unanimous vote this Plan of Conversion (“Plan”), which provides for the conversion of First Federal from a state chartered mutual savings bank to a state chartered stock savings bank and the concurrent formation of a holding company for First Federal (“Holding Company”).  The Board of Directors believes that the conversion of First Federal to stock form and the formation of the Holding Company is in the best interests of First Federal and its members.  The Board of Directors determined that this Plan equitably provides for the interests of the members through the granting of subscription rights and the establishment of a liquidation account.   The Conversion is intended to provide an additional source of capital not now available in order to allow First Federal and the Holding Company to better serve the needs of the community through increased lending to support continued growth in First Federal’s loan portfolios, expansion of customer services and to facilitate future expansion by First Federal. The Board of Directors further desires to reorganize First Federal as the wholly owned subsidiary of a holding company to enhance flexibility of operations, diversification of business opportunities and financial capability for business and regulatory purposes and to enable First Federal to compete more effectively with other financial service organizations.  In addition, opportunities for stock ownership by officers and other employees of First Federal and the Holding Company will provide an effective performance incentive and means of attracting and retaining qualified personnel.
 
All capitalized terms contained in the Plan shall have the meanings ascribed to them in Section II hereof.
 
Pursuant to the Plan, shares of Conversion Stock will be offered as part of the Conversion in a Subscription Offering pursuant to nontransferable Subscription Rights at a predetermined and uniform price first to First Federal’s Eligible Account Holders, second to Tax-Qualified Employee Stock Benefit Plans, third to Supplemental Eligible Account Holders, and then to Other Members of First Federal.  Concurrently with the Subscription Offering, shares not subscribed for in the Subscription Offering will be offered as part of the Conversion to the general public in a Direct Community Offering.  Shares remaining may then be offered to the general public in a Syndicated Community Offering, a Public Offering or otherwise.  The aggregate purchase price of the Conversion Stock will be based upon an independent appraisal of First Federal and will reflect the estimated pro forma market value of First Federal as a subsidiary of the Holding Company.  Members as of specified dates will be granted non-transferable Subscription Rights to purchase Conversion Stock, and a liquidation account will be established for the benefit of depositors as of specified dates.
 
Consummation of the Conversion is subject to the approval of this Plan and the Conversion by the Division and must be adopted by a majority of the total number of votes eligible to be cast at a special meeting of the Members of First Federal to be called to consider the Conversion.  In addition, in order to consummate the Conversion, this Plan must be filed with and receive the non-objection of the FDIC in accordance with applicable FDIC regulations.
 
After the Conversion, First Federal will continue to be regulated by the Division, as its chartering authority, and by the FDIC, which insures First Federal’s deposits.  After the Conversion, the Holding Company will be regulated by the Federal Reserve.  In addition, all insured savings deposits will continue to be insured by the FDIC up to the maximum provided by law.
 
No change will be made in the Board of Directors or manage­ment of First Federal as a result of the Conversion.
 
 
 
 
 
II.             Definitions
 
As used in this Plan, the terms set forth below have the following meanings:
 
A.            Acting in Concert :  (i) Knowing participation in a joint activity or interdependent conscious parallel action towards a common goal whether or not pursuant to an express agreement; or (ii) a combination or pooling of voting or other interests in the securities of an issuer for a common purpose pursuant to any contract, understanding, relationship, agreement or other arrangement, whether written or otherwise.  Persons living at the same address as indicated on the records of First Federal, whether or not related, will be deemed to be Acting in Concert, unless otherwise determined by the Board of Directors of First Federal.  A Person who acts in concert with another Person (“other party”) shall also be deemed to be acting in concert with any Person who is also acting in concert with that other party, except that any Tax-Qualified Employee Stock Benefit Plan will not be deemed to be acting in concert with its trustee or a Person who serves in a similar capacity solely for the purpose of determining whether stock held by the trustee and stock held by the Tax-Qualified Employee Benefit Plan will be aggregated, and participants or beneficiaries of any such Tax-Qualified Employee Stock Benefit Plan will not be deemed to be acting in concert solely as a result of their common interests as participants or beneficiaries.  When Persons act together for such purpose, their group is deemed to have acquired their stock.  The determination of whether a group is Acting in Concert shall be made solely by the Board of Directors of First Federal or Officers designated by the Board of Directors of First Federal and may be based on any evidence upon which the Board or such Officer chooses to rely, including, without limitation, the fact that such Persons have joint accounts at First Federal or the fact that such Persons have filed joint Schedules 13D or Schedules 13G with the SEC with respect to other companies.  Directors, Officers and employees of First Federal and the Holding Company shall not be deemed to be Acting in Concert solely as a result of their capacities as such.
 
B.             Application :  The application submitted to the Division and the FDIC for approval of the Conversion.
 
C.             Associate :  When used to indicate a relationship with any Person, means (i) any corporation or organization (other than First Federal or a majority-owned subsidiary of First Federal, or the Holding Company) of which such Person is an officer or partner or is, directly or indirectly, the beneficial owner of 10% or more of any class of equity securities, (ii) any trust or other estate in which such Person has a substantial beneficial interest or as to which such Person serves as trustee or in a similar fiduciary capacity, except a Tax-Qualified Employee Stock Benefit Plan, (iii) any relative or spouse of such Person, or any relative of such spouse, who has the same home as such Person or who is a Director or Officer of First Federal, any of its subsidiaries, or the Holding Company and (iv) any person Acting in Concert with any of the persons or entities specified in clauses (i) through (iii) above; provided, however, that any Tax-Qualified or Non-Tax Qualified Employee Plan shall not be deemed to be an Associate of any Director or Officer of First Federal, and of its subsidiaries, or the Holding Company solely as a result of their capacities as such.  When used to refer to a Person other than an Officer or Director of First Federal, First Federal in its sole discretion may determine the Persons that are Associates of other Persons.
 
D.             Capital Stock :  Any and all authorized capital stock in the Converted Savings Bank.
 
E.             Common Stock :  Any and all authorized common stock in the Holding Company subsequent to the Conversion.
 
F.             Conversion : Collectively, (i) amendment of First Federal’s Articles of Incorporation and Bylaws to authorize issuance of shares of Capital Stock by the Converted Savings Bank and to conform to the requirements of a Washington-chartered stock savings bank under the laws of the State of Washington and regulations of the Division; (ii) issuance and sale of Conversion Stock by the Holding Company in the Subscription Offering, Direct Community Offering (if any), Syndicated Community Offering (if any), and Public Offering (if any); and (iii) purchase by the Holding Company of the Capital Stock of the Converted Savings Bank to be issued in the Conversion immediately following or concurrently with the close of the sale of all Conversion Stock.  All such transactions shall occur substantially simultaneously.
 
G.             Conversion Stock :  Holding Company Common Stock to be issued and sold by the Holding Company pursuant to this Plan.
 
 
2
 
 
H.             Converted Savings Bank : First Federal Savings and Loan Association of Port Angeles, in stock form after the Conversion.
 
I.              Deposit Account :  Any withdrawable account maintained at First Federal, including, without limitation, savings, time, demand, NOW, money market, certificate and passbook accounts.
 
J.              Director :  A member of the Board of Directors of either First Federal or the Holding Company.
 
K.             Direct Community Offering :  The offering for sale of Conversion Stock to the public.
 
L.              Division :  The Washington Department of Financial Institutions, Division of Banks.
 
M.            Eligible Account Holder : Any Person holding a Qualifying Deposit in First Federal on the Eligibility Record Date.
 
N.             Eligibility Record Date : Close of business on March 31, 2011.
 
O.             ESOP :  The Tax-Qualified Employee Stock Benefit Plan adopted by the Holding Company or First Federal in connection with the Conversion, the purpose of which shall be to acquire capital stock of the Holding Company, including Conversion Stock.
 
P.             FDIC :  Federal Deposit Insurance Corporation.
 
Q.             Federal Reserve :  The Board of Governors of the Federal Reserve System.
 
R.             First Federal : First Federal Savings and Loan Association of Port Angeles.
 
W.           Foundation :  The charitable foundation to be established by the Holding Company and First Federal that will qualify as an exempt organization under Section 501(c)(3) of the Internal Revenue Code.
 
T.             FR Y-3 Application :  The application submitted to the Federal Reserve on FR Y-3 for approval of the Holding Company’s acquisition of all of the Capital Stock of the Converted Savings Bank.
 
U.             Holding Company :  A corporation to be formed under state law by First Federal for the purpose of becoming a holding company through the issuance and sale of its stock under the Plan, and concurrent acquisition of 100% of the Capital Stock of the Converted Savings Bank to be issued pursuant to the Plan.
 
V.             Holding Company Stock :  Any and all authorized capital stock of the Holding Company.
 
X.             Local Community : Clallam and Jefferson counties in Washington, the counties in which First Federal maintains offices.
 
Y.             Market Maker :  A dealer ( i.e. , any Person who engages directly or indirectly as agent, broker, or principal in the business of offering, buying, selling, or otherwise dealing or trading in securities issued by another Person) who, with respect to a particular security, (i) regularly publishes bona fide, competitive bid and offer quotations in a recognized inter-dealer quotation system; or (ii) furnishes bona fide competitive bid and offer quotations on request; and (iii) is ready, willing and able to effect transactions in reasonable quantities at his quoted prices with other brokers or dealers.
 
Z.             Members :  All Persons or entities who qualify as members pursuant to First Federal’s Bylaws and shall include any Person holding a Deposit Account and borrowers from First Federal as of the close of business on the Record Date.
 
AA.         Non-Tax Qualified Employee Plan : Any defined benefit plan or defined contribution plan of First Federal or the Holding Company, such as an employee stock ownership plan, stock bonus plan, profit sharing plan or other plan, which with its related trust does not meet the requirements to be “qualified” under Section 401 of the Internal Revenue Code.
 
 
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BB.          Notice :  The Notice of Intent to Convert to Stock Form, including amendments thereto, as filed by First Federal with the FDIC pursuant to 12 C.F.R. Part 303.
 
CC.          Officer :  An executive officer of First Federal or the Holding Company, which includes the President, Executive Vice President, Senior Vice Presidents, Vice Presidents in charge of principal business functions, the Secretary and the Treasurer as well as any other person performing similar functions.
 
DD.          Order Forms :  Forms to be used to order Con­version Stock sent to Eligible Account Holders and other parties eligible to purchase Conversion Stock in the Subscription Offering or Direct Community Offering pursuant to the Plan.
 
EE.           Other Member : A Member (other than Eligible Account Holders or Supplemental Eligible Account Hold­ers) of First Federal as of the Record Date.
 
FF.           Person :  An individual, a corporation, a limited liability company, a partnership, a limited liability partnership, an association, a joint stock company, a trust, an unincorporated organization or a government or any political subdivision thereof.
 
GG.          Plan or Plan of Conversion :  This Plan of Conversion as adopted by the Board of Directors of First Federal and any amendment hereto approved as provided herein.
 
HH.          Plan Participants : means any individual participant in a Tax-Qualified Employee Stock Benefit Plan.
 
II.             Public Offering : Means an underwritten firm commitment offering to the public through one or more underwriters.
 
JJ.            Qualifying Deposit :  The aggregate balance of all Deposit Accounts of (i) an Eligible Account Holder at the close of business on the Eligibility Record Date and (ii) a Supplemental Eligible Account Holder at the close of business on the Supplemental Eligibility Record Date; provided, however, in either case that no aggregation of Deposit Accounts with a combined balance of less than fifty dollars ($50.00) shall constitute a Qualifying Deposit.
 
KK.          RCW :  Revised Code of Washington, as amended.
 
LL.           Record Date :  Date which determines which Members are entitled to vote at the Special Meeting.
 
MM.       Registration Statement :  The registration statement on Form S-1 or other applicable forms filed by the Holding Company with the SEC for the purpose of registering the Conversion Stock under the Securities Act of 1933, as amended.
 
NN.          SEC : U.S. Securities and Exchange Commission.
 
OO.          Special Meeting :  The special meeting of Members called for the purpose of considering and voting on the Plan, including any adjournments of such meeting.
 
PP.           Subscription Offering :  The offering of Conversion Stock to Eligible Account Holders, Tax-Qualified Employee Stock Benefit Plans, Supplemental Eligible Account Holders and Other Members under the Plan.
 
                QQ.          Subscription Rights :  Non-transferable, non-negotiable, personal rights of Eligible Account Holders, Tax-Qualified Employee Stock Benefit Plans, Supplemental Eli­gible Account Holders and Other Members to purchase Conversion Stock.
 
RR.          Supplemental Eligible Account Holder :  Any Person holding a Qualifying Deposit (other than an Officer or Director or their Associates) on the Supplemental Eligibility Record Date provided, however, that any Director or Officer of First Federal employed, appointed or elected for the first time to such office after the Eligibility Record Date, and his or her Associates, shall not be precluded from being a Supplemental Eligible Account Holder solely by reason of holding such office.
 
 
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SS.            Supplemental Eligibility Record Date :  The date for determining Qualifying Deposits of Supplemental Eligible Account Holders and shall be the last day of the calendar quarter preceding the approval of the Plan by the Division.
 
TT.           Syndicated Community Offering :  The offering for sale by a syndicate of broker-dealers to the general public of shares of Conversion Stock not purchased in the Subscription Offering and the Direct Community Offering.
 
UU.          Tax Qualified Employee Stock Benefit Plan : Any defined benefit plan or defined contribution plan of First Federal or Holding Company, such as an employee stock ownership plan, stock bonus plan, profit-sharing plan or other plan, which is established for the benefit of the employees of the Holding Company and/or First Federal and which, with its related trust meets the requirements to be “qualified” under section 401of the Internal Revenue Code.  A “Non-Tax-Qualified Employee Stock Benefit Plan” is any defined benefit plan or defined contribution plan that is not so qualified.
 
III.            General Procedure For Conversion .
 
A.           The Board of Directors of First Federal shall adopt the Plan by a vote of not less than two-thirds of its entire membership.
 
B.           The Holding Company shall be incorporated under state law and the Board of Directors of the Holding Company shall concur in the Plan by at least a two-thirds vote.
 
C.           An Application for Conversion, including the Plan, will be submitted, together with all requisite material, to the Division for approval and the FDIC for its non-objection, and the Holding Company shall file the FR Y-3 Application with the Federal Reserve.  First Federal also will cause notice of the adoption of the Plan by the Board of Directors of First Federal to be given by publication in a newspaper having general circulation in each community in which an office of First Federal is located; and will make available copies of the Plan at each office of First Federal for inspection by Members. After receipt of notice from the Division to do so, First Federal and will again publish, in accordance with the requirements of applicable regulations of the Division, a notice of the filing with the Division of an application to convert First Federal from mutual to stock form.  The Holding Company will also publish such notices as may be required in connection with the FR Y-3 Application and by the regulations and policies of the Federal Reserve.
 
D.           The Holding Company shall file a Registration Statement with the SEC to register the Conversion Stock under the Securities Act of 1933, as amended, and shall further register the Conversion Stock under any applicable state securities laws.  Upon registration and after the receipt of all required regulatory approvals, the Conversion Stock shall be first offered for sale in a Subscription Offering to Eligible Account Holders, Tax-Qualified Employee Stock Benefit Plans, Supplemental Eligible Account Holders, if any, and Other Members.  It is anticipated that any shares of Conversion Stock remaining unsold after the Subscription Offering will be sold through a Direct Community Offering and/or a Syndicated Community Offering or a Public Offering.  The Purchase Price per share for the Conversion Stock shall be a uniform price determined in accordance with Section X hereof.  The Holding Company shall contribute to First Federal an amount of the net proceeds received by the Holding Company from the sale of Conversion Stock as shall be determined by the Boards of Directors of the Holding Company and First Federal and as shall be approved by the Division and the FDIC.
 
E.            Promptly following approval of the Application for Conversion by the Division and receipt of a notice of non-objection from the FDIC, this Plan will be submitted to the Members for their consideration and approval at the Special Meeting.  First Federal may, at its option, mail to all Members as of the Record Date, at their last known address appearing on the records of First Federal, a proxy statement in either long or summary form describing the Plan which will be submitted to a vote of the Members at the Special Meeting.  The Holding Company shall also mail to Eligible Account Holders, Tax Qualified Employee Stock Benefit Plans, Supplemental Eligible Account Holders and Other Members either a prospectus (“Prospectus”), as provided in Section VII hereof, an Order Form for the purchase of Conversion Stock or a letter informing them of their right to receive a Prospectus and Order Form and a postage prepaid card to request such materials, subject to the provisions of Section X hereof.  The Plan must be approved by the affirmative vote of at least a majority of the total number of votes eligible to be cast by Members at the Special Meeting.
 
 
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F.             Subscription Rights will be issued without payment therefor to Eligible Account Holders, Tax Qualified Employee Stock Benefit Plans, Supplemental Eligible Account Holders and Other Members as set forth in Section X hereof.
 
G.            The effective date of the Conversion shall be the date set forth in Section IX hereof.  Upon the effective date, the following transactions shall occur:
 
 (i)            First Federal shall convert from mutual to stock form;
 
 (ii)          Certain depositors of First Federal will be granted interests in the liquidation account to be established by First Federal pursuant to Section XV hereof;
 
 (iii)         The Holding Company shall sell an amount of Conversion Stock determined in accordance with Section X hereof; and
 
 (iv)         The Holding Company shall acquire 100% of the to be outstanding Capital Stock of the Converted Savings Bank in exchange for at least 50% of the net proceeds from the sale of Conversion Stock in the Conversion.
 
H.            The home office and branch offices of First Federal shall be unaffected by the Conversion.
 
I.             First Federal shall obtain an opinion of its tax advisors or a favorable ruling from the United States Internal Revenue Service which shall state that the Conversion will not result in any gain or loss for Federal income tax purposes to First Federal or its Eligible Account Holders, Supplemental Eligible Account Holders and Other Members.  Receipt of a favorable opinion or ruling is a condition precedent to completion of the Conversion.
 
J.             First Federal and the Holding Company may retain and pay for the services of financial and other advisors and investment bankers to assist in connection with any or all aspects of the Conversion, including in connection with the Subscription Offering, Direct Community Offering and/or any Syndicated Community Offering or Public Offering, the payment of fees to brokers and investment bankers for assisting Persons in completing and/or submitting Order Forms.
 
IV.            Meeting of Members
 
Upon receipt of approval of the Application by the Division and (i) receipt from the FDIC of a conditional intention to issue a notice of non-objection or (ii) expiration of the time period for FDIC review and objection without receipt of an objection by the FDIC, the Special Meeting shall be scheduled in accordance with First Federal’s Bylaws.  Promptly after receipt of approval from the Division and at least 20 days but not more than 45 days prior to the Special Meeting, First Federal shall distribute proxy solicitation materials to all Members and beneficial owners of accounts held in fiduciary capacities where the beneficial owners possess voting rights, as of the Record Date.  The proxy solicitation materials shall include a copy of the proxy statement to be used in connection with such solicita­tion (“Proxy Statement”) and other documents authorized for use by the regulatory authorities and may also include a copy of the Plan and/or a Prospectus as provided in Section VII below.  First Federal shall also advise each Eli­gible Account Holder and Supplemental Eligible Account Holder not entitled to vote at the Special Meeting of the proposed Conver­sion and the scheduled Special Meeting, and provide a postage prepaid card on which to indicate whether he wishes to receive the Prospectus, if the Subscription Offering is not held concurrently with the proxy solicitation.
 
At the Special Meeting, an affirmative vote of not less than a majority of the total outstanding votes of the Members is required for approval of the Plan.  For purposes of voting at the Special Meeting, Members who are depositors of First Federal shall be entitled to cast one vote for each $100, or fraction thereof, of the aggregate withdrawable value of all of the depositor’s Deposit Accounts as of the Record Date.  Members who are borrowers shall be entitled to cast one vote in addition to any votes they may also be entitled to cast as depositors, and no Member shall be entitled to cast more than 1,000 votes.  Voting may be in person or by proxy.  The Division shall be notified promptly of the actions of the Members.
 
 
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V.             Summary Proxy Statement
 
The Proxy Statement furnished to Members may be in summary form, provided that a statement is made in bold-face type that a more detailed description of the Conversion may be obtained by returning an enclosed postage prepaid card or other written communication requesting supplemental information.  With­out prior approval of the Division, the Special Meeting shall not be held less than 20 days after the last day on which the supple­ment­al information statement is mailed to requesting Members.  The supplemental information statement may be combined with the Prospectus if the Subscription Offering is commenced concurrently with or during the proxy solicitation of Members for the Special Meeting.
 
VI.            Timing of Subscription Offering
 
The Holding Company may commence the Subscription Offering and, provided that the Subscription Offering has commenced, may commence the Direct Community Offering concurrently with or during the proxy solicitation of Members.  The Holding Company may close the Subscription Offering before the Special Meeting, provided that the offer and sale of the Conversion Stock shall be conditioned upon approval of the Plan by the Members at the Special Meeting.
 
The timing of the commencement of the Subscription Offering shall be determined by First Federal in consultation with any financial or advisory or investment banking firm retained by them in connection with the Conversion.  First Federal may consider a number of factors in determining such timing, including, but not limited to, their current and projected future earnings, local and national economic conditions, and the prevailing market for stocks in general and stocks of financial institutions in particular.  First Federal shall have the right to withdraw, terminate, suspend, delay, revoke or modify any such Subscription Offering, at any time and from time to time, as they in their sole discretion may determine, without liability to any Person, subject to compliance with applicable securities laws and any necessary regulatory approval or concurrence.
 
First Federal and the Holding Company shall, promptly after the Division has approved the Application and authorized the Proxy Statement and Prospectus for use, the FDIC has issued its non-objection letter, the SEC has declared the Registration Statement, which includes the Prospectus, effective and all other required regulatory approvals have been obtained, distribute or make available the Prospectus, together with Order Forms for the purchase of Conversion Stock, to all Eligible Account Holders, Tax-Qualified Employee Stock Benefit Plans, Supplemental Eligible Account Holders and Other Members, at their last known addresses appearing on the records of First Federal as of the Record Date for the purpose of enabling them to exercise their respective Subscription Rights.
 
VII.           Offering Documents
 
First Federal’s proxy solicitation materials may require Eligible Account Holders, Supplemental Eligible Account Holders and Other Members to return to First Federal by a reasonable certain date a postage prepaid card or other written communication requesting receipt of a Prospectus with respect to the Subscription Offering, provided that if the  Prospectus is not mailed concurrently with the proxy solicitation materials, the Subscription Offering shall not be closed until the expiration of 30 days after the mailing of the proxy solicitation materials.  If the Subscription Offering is not commenced within 45 days after the Special Meeting, First Federal may transmit, not more than 30 days prior to the commencement of the Subscription Offering, to each Eligible Account Holder, Supplemental Eligible Account Holder and other eligible subscribers who had been furnished with proxy solicitation materials a notice which shall state that First Federal is not required to furnish a Prospectus to them unless they return by a reasonable date certain a postage prepaid card or other written communication requesting the receipt of the Prospectus.
 
Prior to commencement of the Subscription Offering, the Direct Community Offering, the Syndicated Community Offering and the Public Offering, the Holding Company shall file the Registration Statement.  The Holding Company shall not distribute the final Prospectus until the Registration Statement containing same has been declared effective by the SEC.
 
 
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VIII.         Combined Subscription and Direct Community Offering
 
Instead of a separate Subscription Offering, all Subscription Rights may be exercised by delivery of properly completed and executed Order Forms to First Federal or the selling group utilized in connection with the Direct Community Offering and/or the Syndicated Community Offering or Public Offering.  If a separate Subscription Offering is not held, orders for Conversion Stock in the Direct Community Offering shall first be filled pursuant to the priorities and limitations stated in Section X.C. , below.
 
IX.            Effective Date
 
After receipt of all orders for Conversion Stock, and concurrently with the execution thereof, the amendment of First Federal’s mutual Articles of Incorporation and Bylaws to authorize the issuance of shares of Capital Stock and to conform to the requirements of a Washington-chartered capital stock savings bank will be declared effective by the Division, the amended Articles of Incorporation and Bylaws approved by the Members will become effective.  At such time, the Conversion Stock will be issued and sold by the Holding Company, the Capital Stock to be issued in the Conversion will be issued and sold to the Holding Company, and the Converted Savings Bank will become a wholly owned subsidiary of the Holding Company.  The Converted Savings Bank will issue to the Holding Company 1,000 shares of its common stock, representing all of the shares of Capital Stock to be issued by the Converted Savings Bank, and the Holding Company will make payment to the Converted Savings Bank of that portion of the aggregate net proceeds realized by the Holding Company from the sale of the Conversion Stock under the Plan as may be authorized or required by the Division or the FDIC.
 
X.             Stock Offering
 
A.             Number of Shares
 
The number of shares of Conversion Stock to be offered pursuant to the Plan shall be determined initially by the Boards of Directors of First Federal and the Holding Company in conjunction with the determination of the Purchase Price (as that term is defined in Section X.B. below).  The number of shares to be offered may be subsequently adjusted by the Boards of Directors of First Federal and the Holding Company prior to completion of the offering.
 
B.             Independent Evaluation and Purchase Price of Shares
 
The aggregate price at which the Conversion Stock shall be sold shall be consistent with the estimated pro forma market value of the Conversion Stock, based upon an independent valuation as provided for in this Section X.B .  First Federal shall cause the independent appraiser to prepare a pro forma valuation of the aggregate market value of the Holding Company Common Stock, giving effect to completion of the Conversion, which shall be submitted to the Division and the FDIC as part of the Application, such valuation to be expressed in terms of an estimated valuation range.
 
Prior to the commencement of the Subscription Offering, an estimated valuation range will be established, which shall be equal to the estimated pro forma market value of the Conversion Stock, as determined by the independent appraiser.  The maximum of the estimated valuation range shall be no more than 15% above the average of the minimum and maximum of such range and the minimum of which shall be no more than 15% below such average. The maximum of the estimated valuation range may be increased by up to 15% subsequent to the Subscription Offering to reflect changes in market and financial conditions or demand for the shares.  From time to time, as appropriate or as required by applicable law or the Division, First Federal shall cause the independent appraiser to review developments subsequent to its valuation to determine whether the estimated valuation range should be revised.
 
All shares of Conversion Stock sold in the Conversion, including shares sold in any Direct Community Offering, shall be sold at a uniform price per share, referred to herein as the “Purchase Price.”  Based on the estimated valuation range, the Board of Directors of First Federal shall determine the offering range by fixing the Purchase Price and establishing a range of the number of shares of Conversion Stock to be offered.  The total number of shares of Conversion Stock offered and the Purchase Price shall be subject to increase or decrease at any time prior to any Syndicated Community Offering or other method of sale to reflect changes in market and financial conditions.  If the aggregate purchase price of the Conversion Stock sold in the Subscription Offering, Direct Community Offering,  Syndicated Community Offering and Public Offering is below the minimum of the offering range, or materially above the maximum of the offering range, resolicitation of purchasers may be required; provided, that up to a 15%  increase in the number of shares to be issued which is supported by an appropriate change in the estimated pro forma market value of the Conversion Stock, will not be deemed material so as to require a resolicitation.  If a resolicitation of purchasers is required, it shall be effected in such manner and within such time as First Federal shall establish, with the approval of the Division.
 
 
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Notwithstanding the foregoing, shares of Conversion Stock will not be issued unless, prior to the consummation of the Conversion, the independent appraiser confirms to First Federal and the Division that, to the best knowledge of the independent appraiser, nothing of a material nature has occurred which, taking into account all relevant factors, would cause the independent appraiser to conclude that the number of shares of Conversion Stock issued in the Conversion multiplied by the Purchase Price is incompatible with the estimate of the aggregate consolidated pro forma market value of the Conversion Stock.  If such confirmation is not received, First Federal may cancel the offerings, extend the Conversion and establish a new estimated valuation range, hold new offerings, or take such other action as the Division may permit.
 
If subscriptions for shares of Conversion Stock are in excess of the maximum of the offering range, available shares shall be allocated in the following order of priority: (i) if there is an oversubscription at the Eligible Account Holder level, to fill unfulfilled subscriptions of Eligible Account Holders in accordance with Section X.C.1 ; (ii) to fill the Tax-Qualified Employee Stock Benefit Plans’ subscriptions in accordance with Section X.C.2 ; and (iii) if there is an oversubscription at the Supplemental Eligible Account Holder level, to fill unfulfilled subscriptions of Supplemental Eligible Account Holders in accordance with Section X.C.3 , and (iv) if there is an oversubscription at the Other Member level, to fill unfilled subscriptions of Other Members in accordance with Section X.C.4 .
 
The Holding Company Common Stock to be issued pursuant to this Plan shall upon issuance be fully paid and non-assessable.
 
C.             Method of Offering Shares
 
Subscription Rights shall be issued at no cost to Eligible Account Holders, Tax-Qualified Employee Stock Benefit Plans, Supplemental Eligible Account Holders and Other Members pursuant to priorities established by this Plan and the requirements of the Division and the FDIC.  In order to effect the Conversion, all shares of Conversion Stock proposed to be issued in connection with the Conversion must be sold and, to the extent that shares are available, no subscriber shall be allowed to purchase less than 25 shares; provided, however, that if the Purchase Price is greater than $20 per share, the minimum number of shares which must be subscribed for shall be adjusted so that the aggregate actual purchase price required to be paid for such minimum number of shares does not exceed $500.  The priorities established for the purchase of shares are as follows:
 
1.              Category 1:  Eligible Account Holders
 
        a.            Each Eligible Account Holder shall receive, without payment, Subscription Rights entitling such Eligible Account Holder to purchase that number of shares of Conversion Stock which is equal to the greater of the maximum purchase limitation established for the Direct Community Offering, one-tenth of one percent of the total offering or 15 times the product (rounded down to the next whole number) obtained by multiplying the total number of shares of Conversion Stock to be issued by a fraction of which the numerator is the amount of the Qualifying Deposit of the Eligible Account Holder and the denominator is the total amount of Qualifying Deposits of all Eligible Account Holders, in each case subject to Sections X.E. and X.J. below.  If the allocation made in this paragraph results in an oversubscription, shares of Conversion Stock shall be allocated among subscribing Eligible Account Holders so as to permit each such account holder, to the extent possible, to purchase a number of shares of Conversion Stock sufficient to make his total allocation equal to 100 shares of Conversion Stock or the total amount of his subscription, whichever is less.  Any shares of Conversion Stock not so allocated shall be allocated among the subscribing Eligible Account Holders on an equitable basis, related to the amounts of their respective Qualifying Deposits as compared to the total Qualifying Deposits of all Eligible Account Holders whose subscriptions remain unfilled.
 
 
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b.           Subscription Rights received by Officers and Directors of First Federal and the Holding Company, and their Associates, as Eligible Account Holders, based on their increased deposits in First Federal in the one-year period preceding the Eligibility Record Date shall be subordinated to all other subscriptions involving the exercise of Subscription Rights pursuant to this Category.
 
2.              Category 2: Tax-Qualified Employee Stock Benefit Plans
 
a.            Tax-Qualified Employee Stock Benefit Plans of First Federal shall receive, without payment, non-transferable Subscription Rights to purchase in the aggregate up to 10% of the Conversion Stock.  The Subscription Rights granted to Tax-Qualified Stock Benefit Plans of First Federal shall be subject to the availability of shares of Conversion Stock after taking into account the shares of Conversion Stock purchased by Eligible Account Holders.  Because the Subscription Rights granted to Tax-Qualified Employee Stock Benefit Plans of First Federal are subordinate to the Subscription Rights granted to Eligible Account Holders, it is possible that the subscription order of Tax-Qualified Employee Stock Benefit Plans of First Federal will not be filled as a result of an oversubscription by Eligible Account Holders.  To the extent that Tax-Qualified Employee Stock Benefit Plans of First Federal are unable to purchase in the aggregate up to 10% of the shares of Conversion Stock issued in the Conversion as a result of such an oversubscription, Tax-Qualified Employee Stock Benefit Plans of First Federal may purchase shares in the open market following the consummation of the Conversion.  Tax-Qualified Employee Stock Benefit Plans may use funds contributed by or borrowed from the Holding Company or First Federal and/or borrowed from an independent financial institution to exercise such Subscription Rights, and the Holding Company and First Federal may make scheduled discretionary contributions thereto, provided that such contributions do not cause the Holding Company or First Federal to fail to meet any applicable capital requirements.
 
                b.             Shares of Conversion Stock purchased by any individual participant in a Tax-Qualified Employee Stock Benefit Plan using funds therein pursuant to the exercise of Subscription Rights granted to such participant in his individual capacity as an Eligible Account Holder,  Supplemental Eligible Account Holder or Other Member or purchases by such participant in the Direct Community Offering shall not be deemed to be purchases by a Tax-Qualified Employee Stock Benefit Plan for purposes of calculating the maximum amount of Conversion Stock that Tax-Qualified Employee Stock Benefit Plans may purchase pursuant to the first sentence of  subparagraph 2.a. above if the individual participant controls or directs the investment authority with respect to such account or subaccount.
 
3.              Category 3:  Supplemental Eligible Account Holders
 
a.           In the event that the Eligibility Record Date is more than 15 months prior to the date of the latest amendment to the Application filed prior to the Division’s approval, then, and only in that event, each Supplemental Eligible Account Holder shall receive, without payment, Subscription Rights entitling such Supplemental Eligible Account Holder to purchase that number of shares of Conversion Stock which is equal to the greater of the maximum purchase limitation established for the Direct Community Offering, one-tenth of one percent of the total offering or 15 times the product (rounded down to the next whole number) obtained by multiplying the total number of shares of Conversion Stock to be issued by a fraction of which the numerator is the amount of the Qualifying Deposit of the Supplemental Eligible Account Holder and the denominator is the total amount of the Qualifying Deposits of all Supplemental Eligible Account Holders, in each case subject to Sections  X.E. and X.J. below.
 
b.           Subscription Rights received pursuant to this category shall be subordinated to Subscription Rights granted to Eligible Account Holders and Tax-Qualified Employee Stock Benefit Plans.
 
 
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c.           Any Subscription Rights to purchase shares of Conversion Stock received by an Eligible Account Holder in accordance with Category Number 1 shall reduce to the extent thereof the Subscription Rights to be distributed pursuant to this Category.
 
d.           In the event of an oversubscription for shares of Conversion Stock pursuant to this Category, shares of Conversion Stock shall be allocated among the subscribing Supplemental Eligible Account Holders as follows:
 
   (1)           Shares of Conversion Stock shall be allocated so as to permit each such Supplemental Eligible Account Holder, to the extent possible, to purchase a number of shares of Conversion Stock sufficient to make his total allocation (including the number of shares of Conversion Stock, if any, allocated in accordance with Category Number 1) equal to 100 shares of Conversion Stock or the total amount of his subscription, whichever is less.
 
   (2)           Any shares of Conversion Stock not allocated in accordance with subparagraph (1) above shall be allocated among the subscribing Supplemental Eligible Account Holders on an equitable basis, related to the amounts of their respective Qualifying Deposits as compared to the total Qualifying Deposits of all Supplemental Eligible Account Holders whose subscriptions remain unfilled.
 
d.           If a Person is an Eligible Account Holder and a Supplemental Eligible Account Holder, such Person’s allocation as an Eligible Account Holder shall be included in determining the number of shares of Conversion Stock that may be allocated to the Person as a Supplemental Eligible Account Holder.
 
4.              Category 4:  Other Members
 
Other Members shall receive Subscription Rights to purchase shares of Conversion Stock, after satisfying the subscriptions of Eligible Account Holders, Tax-Qualified Employee Stock Benefit Plans and Supplemental Eligible Account Holders pursuant to Category Nos. l, 2 and 3 above, subject to the following conditions:
 
a.           Each such Other Member shall be entitled to subscribe for the greater of the maximum purchase limitation established for the Direct Community Offering or one-tenth of one percent of the total offering.
 
b.           In the event of an oversubscription for shares of Conversion Stock pursuant to Category No. 4, the shares of Conversion Stock available shall be allocated among the subscribing Other Members pro rata on the basis of the amounts of their respective subscriptions.
 
D.             Direct Community Offering, Syndicated Community Offering, Public Offering and Other Offerings
 
1.            Any shares of Conversion Stock not purchased through the exercise of Subscription Rights set forth in Category Nos. 1 through 4 above may be sold by First Federal and the Holding Company to Persons under such terms and conditions as may be established by First Federal’s and the Holding Company’s Boards of Directors with the concurrence of the Division.  If less than the total number of shares of Common Stock offered by the Holding Company are sold in the Subscription Offering, it is anticipated that all remaining shares of Common Stock shall, if practicable, be sold in a Direct Community Offering. Subject to the requirements set forth herein, the manner in which the Common Stock is sold in the Direct Community Offering shall have as the objective the achievement of the widest possible distribution of such stock. The Direct Community Offering may commence concurrently with, at any time during, or as soon as possible after the completion of, the Subscription Offering, and the Direct Community Offering must be completed within 45 days after completion of the Subscription Offering, unless extended by First Federal and the Holding Company with the approval of the Division.
 
 
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2.             In the event of a Direct Community Offering, all shares of Common Stock that are not subscribed for in the Subscription Offering shall be offered for sale by means of a direct community marketing program, which may provide for the use of brokers, dealers or investment banking firms experienced in the sale of financial institution securities. Any available shares in excess of those not subscribed for in the Subscription Offering will be available for purchase by members of the general public to whom a Prospectus is delivered by the Holding Company or on its behalf, with preference given first to natural persons in the Local Community.
 
3.            A Prospectus and Order Form shall be furnished to such Persons as First Federal and the Holding Company may select in connection with the Direct Community Offering, and each order for Common Stock in the Direct Community Offering shall be subject to the absolute right of First Federal and the Holding Company to accept or reject any such order in whole or in part either at the time of receipt of an order or as soon as practicable following completion of the Direct Community Offering. Available shares will be allocated first to each natural person in the Local Community whose order is accepted in an amount equal to the lesser of 100 shares or the number of shares subscribed for by each such person, if possible. Thereafter, unallocated shares shall be allocated among the natural persons in the Local Community whose accepted orders remain unsatisfied in the same proportion that the unfilled order bears to the total unfilled orders of all natural persons in the Local Community whose accepted orders remain unsatisfied, provided that no fractional shares shall be issued. If there are any shares remaining after all accepted orders by such persons have been satisfied, such remaining shares shall be allocated to other members of the general public who purchase in the Direct Community Offering, applying the same allocation described above for natural persons in the Local Community.
 
4.             No Person may purchase more than $200,000 of Common Stock in the Direct Community Offering; provided, however, that this amount may be increased to up to 5% of the total offering of shares of Common Stock or decreased to less than $200,000 upon resolution of the Boards of Directors of First Federal and the Holding Company, subject to any required regulatory approval but without the further approval of Members or the resolicitation of subscribers.
 
5.            Subject to such terms, conditions and procedures as may be determined by First Federal and the Holding Company, all shares of Conversion Stock not subscribed for in the Subscription Offering or ordered in the Direct Community Offering may be sold by a syndicate of broker-dealers to the general public in a Syndicated Community Offering.  Each order for Conversion Stock in the Syndicated Community Offering shall be subject to the absolute right of First Federal and the Holding Company to accept or reject any such order in whole or in part either at the time of receipt of an order or as soon as practicable after completion of the Syndicated Community Offering. The amount of Common Stock that any Person may purchase in the Syndicated Community Offering shall not exceed $200,000 of Common Stock, provided, however, that this amount may be increased to up to 5% of the total offering of shares of Common Stock or decreased to less than $200,000 upon resolution of the Boards of Directors of First Federal and the Holding Company, subject to any required regulatory approval but without the further approval of Members or the resolicitation of subscribers; and provided further that, to the extent applicable, and subject to the limitations on purchases of Common Stock set forth in this Section X.D and Section X.E of this Plan, orders for Common Stock in the Syndicated Community Offering, unless the Division permits otherwise, shall first be filled to a maximum of 2% of the total number of shares of Common Stock sold in the Subscription Offering, Direct Community Offering and/or any Syndicated Community Offering or Public Offering Offering and thereafter any remaining shares shall be allocated on an equal number of shares per order basis until all orders have been filled, provided no fractional shares shall be issued.  First Federal and the Holding Company may commence the Syndicated Community Offering concurrently with, at any time during, or as soon as practicable after the end of, the Subscription Offering and/or Direct Community Offering, provided that the Syndicated Community Offering must be completed within 45 days after the completion of the Subscription Offering, unless extended by First Federal and the Holding Company with the approval of the Division.
 
6.            First Federal and the Holding Company may sell any shares of Common Stock remaining following the Subscription Offering, Direct Community Offering and/or in a Syndicated Community Offering or in a Public Offering. The provisions of Section X hereof shall not be applicable to the sales to underwriters for purposes of the Public Offering but shall be applicable to sales by the underwriters to the public. The price to be paid by the underwriters in such an offering shall be equal to the Purchase Price less an underwriting discount to be negotiated among such underwriters and First Federal and the Holding Company, subject to any required regulatory approval or consent.
 
 
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7.             If for any reason a Syndicated Community Offering or Public Offering of shares of Conversion Stock not sold in the Subscription Offering and the Direct Community Offering cannot be effected, or in the event that any insignificant residue of shares of Conversion Stock is not sold in the Subscription Offering, Direct Community Offering or Syndicated Community Offering, First Federal and the Holding Company shall use their best efforts to obtain other purchasers for such shares in such manner and upon such conditions as may be satisfactory to the Division.
 
8.             In the event a Direct Community Offering, Syndicated Community Offering or Public Offering does not appear to be feasible, First Federal and the Holding Company will immediately consult with the Division to determine the most viable alternative available to effect the completion of the Conversion.  Should no viable alternative exist, First Federal and the Holding Company may terminate the Conversion with the concurrence of the Division.
 
 
E.
Limitations Upon Purchases
 
The following additional limitations and exceptions shall be imposed upon purchases of shares of Conversion Stock:
 
1.              Except for Tax-Qualified Employee Stock Benefit Plans as set forth in Section X.C.2. herein, and in addition to the other restrictions and limitations set forth herein, no Person (or group of Persons exercising Subscription Rights through a single Deposit Account) may subscribe for or purchase more than $200,000 of Common Stock in the Subscription Offering, Direct Community Offering and/or any Syndicated Community Offering or Public Offering and no Person, any Person together with any Associates or Persons otherwise Acting in Concert may, directly or indirectly, subscribe for or purchase more than $400,000 of Common Stock in the Subscription Offering, Direct Community Offering and/or any Syndicated Community Offering or Public Offering.
 
2.             The maximum number of shares of Common Stock that may be purchased in the Conversion by the ESOP shall not exceed 8% of the total Common Stock issued in the Conversion, including any shares of Common Stock contributed to the Foundation, and the maximum number of shares that may be allocated to all Tax-Qualified Employee Stock Benefit Plans shall not exceed 10% of the total Common Stock issued in the Conversion, including shares of Common Stock contributed to the Foundation; provided, however, that purchases of Common Stock that are made by Plan Participants pursuant to the exercise of Subscription Rights granted to such Plan Participant in his or her individual capacity as a Participant or purchases by a Plan Participant in the Direct Community Offering using the funds thereof held in Tax-Qualified Employee Stock Benefit Plans shall not be deemed to be purchases by a Tax-Qualified Employee Stock Benefit Plan for purposes of this Section X.E .
 
3.             Officers and Directors and Associates thereof may not purchase in the aggregate more than 25% of the shares issued in the Conversion.
 
4.             The members of the Boards of Directors of First Federal and the Holding Company will not be deemed to be Associates or a group of Persons Acting in Concert with other Directors solely as a result of membership on either of the Boards of Directors.
 
5.              First Federal’s and the Holding Company’s Boards of Directors, with the approval of the Division and without further approval of Members, may, as a result of market conditions and other factors, increase or decrease the purchase limitation in Sections D.1 or E.1 above or the number of shares of Conversion Stock to be sold in the Conversion.  The Boards of Directors of First Federal and the Holding Company may, in their sole discretion, increase the maximum purchase limitation set forth above with Division approval to provide that any Person, group of associated Persons, or Persons otherwise Acting in Concert subscribing for 5%, may purchase between 5% and 10%  as long as the aggregate amount that such subscribers purchase does not exceed 10%  of the total stock offering.  If the maximum purchase limitations or the number of shares of Conversion Stock to be sold in the Conversion are increased, First Federal and the Holding Company are only required to resolicit Persons who subscribed for the maximum purchase amount and may, in the sole discretion of First Federal and the Holding Company, resolicit certain other large subscribers.  If First Federal and the Holding Company decrease the maximum purchase limitations or the number of shares of Conversion Stock to be sold in the Conversion, the orders of any Person who subscribed for the maximum purchase amount shall be decreased by the minimum amount necessary so that such Person shall be in compliance with the then maximum number of shares permitted to be subscribed for by such Person.
 
 
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6.             Notwithstanding any other provisions of this Plan, no person shall be entitled to purchase any Conversion Stock to the extent such purchase would be illegal under any federal law or state law or regulation or would violate regulations or policies of the Financial Industry Regulatory Authority, particularly those regarding free riding and withholding.  The Holding Company and/or its agents may ask for a legal opinion from any purchaser as to the legality of such purchase and may refuse to honor any purchase order if such opinion is not timely furnished or is not deemed acceptable in the sole discretion of the Holding Company.
 
7.              Prior to and during the Subscription Offering, Direct Community Offering and/or any Syndicated Community Offering or Public Offering, no Person shall (1) transfer, or enter into any agreement or understanding to transfer, the legal or beneficial ownership of any Subscription Rights or shares of Conversion Stock; (2) make any offer, or any announcement of an offer, to purchase any Conversion Stock from anyone but the Holding Company; or (3) knowingly acquire more than the maximum purchase amount allowable under this Plan.
 
EACH PERSON PURCHASING CONVERSION STOCK IN THE OFFERINGS WILL BE DEEMED TO CONFIRM THAT SUCH PURCHASE DOES NOT CONFLICT WITH THE PURCHASE LIMITATIONS IN THIS PLAN.  ALL QUESTIONS CONCERNING WHETHER ANY PERSONS ARE ASSOCIATES OR A GROUP ACTING IN CONCERT OR WHETHER ANY PURCHASE CONFLICTS WITH THE PURCHASE LIMITATIONS IN THIS PLAN OR OTHERWISE VIOLATES ANY PROVISION OF THIS PLAN SHALL BE DETERMINED BY FIRST FEDERAL AND THE HOLDING COMPANY IN THEIR SOLE DISCRETION. SUCH DETERMINATION SHALL BE CONCLUSIVE, FINAL AND BINDING ON ALL PERSONS AND FIRST FEDERAL AND THE HOLDING COMPANY MAY TAKE ANY REMEDIAL ACTION, INCLUDING WITHOUT LIMITATION REJECTING THE PURCHASE OR REFERRING THE MATTER TO THE DIVISION FOR INVESTIGATION AND ACTION, AS IN THEIR SOLE DISCRETION FIRST FEDERAL AND THE HOLDING COMPANY MAY DEEM APPROPRIATE.
 
F.              Restrictions On and Other Characteristics of the Conversion Stock
 
1.                Transferability .  Conversion Stock purchased by Officers and Directors of First Federal and the Holding Company shall not be sold or otherwise disposed of for value for a period of one year from the effective date of Conversion, except for any disposition following the death of the original purchaser.
 
The Conversion Stock issued by the Holding Company to such Officers and Directors shall bear a legend giving appropriate notice of the one-year holding period restriction.  Said legend shall state as follows:
 
“The shares evidenced by this certificate are restricted as to transfer for a period of one year from the date of this certificate pursuant to the laws of the State of Washington.  These shares may not be transferred prior thereto without a legal opinion of counsel that said transfer is permissible under the provisions of applicable laws and regulations.  This restrictive legend shall be deemed null and void after one year from the date of this certificate.”
 
In addition, the Holding Company shall give appropriate instructions to the transfer agent of the Holding Company Stock with respect to the foregoing restrictions.  Any shares of Holding Company Stock subsequently issued as a stock dividend, stock split or otherwise, with respect to any such restricted stock, shall be subject to the same holding period restrictions for such Persons as may be then applicable to such restricted stock.
 
 
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2.              Subsequent Purchases by Officers and Directors .  Without prior approval of the Division, if applicable, Officers and Directors of the Converted Savings Bank and the Holding Company, and their Associates, shall be prohibited for a period of three years following completion of the Conversion from purchasing outstanding shares of Holding Company Stock, except from a broker or dealer registered with the SEC and/or the Secretary of State of the State of Washington.  Notwithstanding this restriction, purchases involving more than 1% of the total outstanding shares of Holding Company Stock and purchases made and shares held by a Tax-Qualified or Non-Tax-Qualified Employee Stock Benefit Plan which may be attributable to such Directors and Officers may be made in negotiated transactions without the Division’s permission or the use of a broker or dealer.
 
3.              Repurchase and Dividend Rights .  The Holding Company may repurchase Holding Company Stock subject to applicable laws and regulations.
 
The Converted Savings Bank may not declare or pay a cash dividend on the Capital Stock if the result thereof would be to reduce the regulatory capital of the Converted Savings Bank below (i) the amount required for the liquidation account or (ii) the amount required by the Division.
 
Any dividend declared or paid on, or repurchase of, the Capital Stock shall be in compliance with the rules and regulations of the Division, or other applicable regulations.  The above limitations shall not preclude payment of dividends on, or repurchases of, Capital Stock in the event applicable regulatory limitations are liberalized subsequent to the Conversion.
 
4.              Voting Rights .  After the Conversion, exclusive voting rights with respect to the Holding Company shall be vested in the holders of Holding Company Stock and the Holding Company will have exclusive voting rights with respect to the Capital Stock.
 
G.             Mailing of Offering Materials and Collation of Subscriptions
 
The sale of all shares of Conversion Stock offered pursuant to the Plan must be completed within 24 months after approval of the Plan at the Special Meeting.  After (i) approval of the Plan by the Division, (ii) the receipt of a notice of non-objection from the FDIC with respect to the Notice or expiration of the time period for FDIC review and objection without receipt of an objection from the FDIC and (iii) the declaration of the effectiveness of the Registration Statement, the Holding Company shall distribute Prospectuses and Order Forms for the purchase of shares of Conversion Stock in accordance with the terms of the Plan.
 
The recipient of an Order Form shall be provided not less than 20 days nor more than 45 days from the date of mailing, unless extended, to properly complete, execute and return the Order Form to First Federal and the Holding Company.  Self-addressed, postage prepaid, return envelopes shall accompany all Order Forms when they are mailed.  Failure of any eligible subscriber to return a properly completed and executed Order Form within the prescribed time limits shall be deemed a waiver and a release by such eligible subscriber of any rights to purchase shares of Conversion Stock under the Plan.
 
The sale of all shares of Conversion Stock proposed to be sold in connection with the Conversion must be completed within 45 days after the last day of the Subscription Offering, unless extended by First Federal and the Holding Company with the approval of the Division.
 
H.             Method of Payment
 
Payment for all shares of Conversion Stock may be made by check or by money order, or if a subscriber has a Deposit Account in First Federal such subscriber may authorize First Federal to charge the subscriber’s Deposit Account.  The Holding Company shall pay interest at not less than the passbook rate on all amounts paid in cash or by check or money order to purchase shares of Conversion Stock in the Subscription Offering from the date payment is received until the Conversion is completed or terminated.    All funds received before the completion of the Conversion will be held in a segregated account at First Federal, or at First Federal’s discretion, at an independent insured depository institution.  First Federal is not permitted knowingly to loan funds, and will use its best efforts to insure that credit is not extended, to any Person for the purpose of purchasing Conversion Stock.
 
 
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If a subscriber authorizes First Federal to charge the subscriber’s Deposit Account, the funds shall remain in the subscriber’s Deposit Account and shall continue to earn interest, but may not be used by such subscriber until the Conversion is completed or terminated, whichever is earlier.  The withdrawal shall be given effect only concurrently with the sale of all shares of Conversion Stock proposed to be sold in the Conversion and only to the extent necessary to satisfy the subscription at a price equal to the Purchase Price.  First Federal shall allow subscribers to purchase shares of Conversion Stock by withdrawing funds from certificate accounts held with First Federal without the assessment of early withdrawal penalties, subject to the approval, if necessary, of the applicable regulatory authorities.  In the case of early withdrawal of only a portion of such account, the certificate evidencing such account shall be canceled if the remaining balance of the account is less than the applicable minimum balance requirement.  In that event, the remaining balance shall earn interest at the passbook rate.  This waiver of the early withdrawal penalty is applicable only to withdrawals made in connection with the purchase of Conversion Stock under the Plan.
 
In the event of an unfilled amount of any subscription order, First Federal will make an appropriate refund or cancel an appropriate portion of the related withdrawal authorization, after consummation of the sale of the Conversion Stock.  If for any reason the sale of the Conversion Stock is not consummated, purchasers will have refunded to them all payments made and all withdrawal authorizations will be canceled in the case of subscription payments authorized from accounts at First Federal.
 
Tax-Qualified Employee Stock Benefit Plans may subscribe for shares by submitting an Order Form, along with evidence of a loan commitment for the purchase of shares, if applicable, during the Subscription Offering and by making payment for the shares on the date of the closing of the Conversion.
 
I.               Order Forms; Insufficient Payment
 
A single Order Form for all Deposit Accounts maintained with First Federal by any Eligible Account Holder, any Supplemental Eligible Account Holder and any Other Member may be furnished, irrespective of the number of Deposit Accounts maintained with First Federal on the applicable record date.  No person holding a Subscription Right may exceed any otherwise applicable purchase limitation by submitting multiple orders for Conversion Stock.  Multiple orders are subject to adjustment, as appropriate, on a pro rata basis and deposit balances will be divided equally among such orders in allocating shares in the event of an oversubscription.
 
First Federal and the Holding Company shall have the absolute right, in their sole discretion and without liability to any participant or other Person, to reject any Order Form, including, but not limited to, any Order Form that is (i) improperly completed or executed; (ii) not timely received; (iii) not accompanied by the proper payment (or authorization of withdrawal from a Deposit Account with sufficient funds therein); or (iv) submitted by a Person whose representations First Federal and the Holding Company believe to be false or who they otherwise believe, either alone, or Acting in Concert with others, is violating, evading or circumventing, or intends to violate, evade or circumvent, the  terms and conditions of this Plan.  Furthermore, in the event Order Forms (i) are not delivered and are returned, or notice of non-delivery is given, to First Federal or the Holding Company by the United States Postal Service or (ii) are not mailed pursuant to a “no mail” order placed in effect by the account holder, the Subscription Rights of the Person to which such rights have been granted will lapse as though such Person failed to return the contemplated Order Form within the time period specified thereon.  First Federal and the Holding Company may, but will not be required to, waive any irregularity on any Order Form or may require the submission of corrected Order Forms or the remittance of full payment for shares of Conversion Stock by such date as they may specify.  Subscription orders once tendered are irrevocable.  The interpretation of First Federal and the Holding Company of the terms and conditions of the Order Forms shall be final and conclusive, subject to the authority of the Division.
 
J.              Members in Non-Qualified States or in Foreign Countries
 
First Federal and the Holding Company shall make reasonable efforts to comply with the securities laws of all states of the United States in which Persons entitled to subscribe for shares of Conversion Stock pursuant to the Plan reside.  However, no such Person shall be offered or receive any such shares under the Plan who resides in a foreign country.
 
 
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XI.           Articles of Incorporation and Bylaws
 
As part of the Conversion, Amended and Restated Articles of Incorporation and Bylaws for the Converted Savings Bank will be adopted to authorize the Converted Savings Bank to operate as a Washington-chartered capital stock savings bank.  By approving the Plan, the Members shall thereby approve such Articles of Incorporation and Bylaws.  Prior to completion of the Conversion, the proposed Articles of Incorporation and Bylaws may be amended in accordance with the provisions and limitations for amending the Plan under Section XIX below.  The effective date of the adoption of the Articles of Incorporation and Bylaws shall be the date of the issuance of the Conversion Stock and the Capital Stock, which shall be the date of consummation of the Conversion.
 
XII.          Establishment and Funding of Charitable Foundation
 
As part of the Conversion, the Holding Company will establish the Foundation that is tax-exempt under Section 501(c)(3) of the Internal Revenue Code, and to donate to the Foundation cash or stock from authorized, but unissued, shares of Holding Company Common Stock not to exceed 8% of the number of shares of Common Stock sold in the Conversion.  The Foundation will be formed in connection with the Conversion in order to complement First Federal’s existing community reinvestment activities and to share with First Federal’s local community a part of First Federal’s financial success as a locally-headquartered, community-minded, financial services institution.  The funding of the Foundation with Common Stock of the Holding Company accomplishes this goal by enabling the community to share in the growth and profitability of the Holding Company and First Federal over the long term. The Foundation will be dedicated to the promotion of charitable purposes including community development, grants or donations to support housing assistance, not-for-profit community groups and other types of organizations or civic-minded projects.  The Foundation will annually distribute total grants to assist charitable organizations or to fund projects within its local community of not less than 5% of the average fair value of Foundation assets each year.  In order to serve the purposes for which it was formed and maintain its status as a tax-exempt organization under Internal Revenue Code Section 501(c)(3), the Foundation may sell, on an annual basis, or from time to time, a limited portion of its Holding Company Common Stock.
 
The Board of Directors of the Foundation will be comprised of individuals who are Officers and/or Directors of the Holding Company or First Federal and, for at least five years after the Conversion, at least one of the Foundation Board of Directors will be an independent person from First Federal’s local community who is not an Officer, Director or employee of the Holding Company or First Federal, and who has experience with local community charitable organizations and grant making.  Those Directors of First Federal or the Holding Company who will also serve on the Board of Directors of the Foundation will be identified prior to adoption of this Plan by the Board of Directors of the Holding Company.  Those Directors so identified will not participate in discussions concerning contributions to the Foundation and will not vote on such matters.  They also will comply with various conflict of interest requirements.
 
The Board of Directors of the Foundation will be responsible for establishing the polices of the Foundation with respect to grants or donations, consistent with the stated purposes of the Foundation.  The establishment and funding of the Foundation as part of the Conversion is subject to the approval of the Federal Reserve.
 
XIII.         Post Conversion Filing and Market Making
 
In connection with the Conversion, the Holding Company shall register the Conversion Stock with the SEC pursuant to the Securities Exchange Act of 1934, as amended, and shall undertake not to deregister such Conversion Stock for a period of three years thereafter.  The Holding Company shall use its best efforts to encourage and assist various Market Makers to establish and maintain a market for the shares of its stock.  The Holding Company shall also use its best efforts to list its stock through The Nasdaq Stock Market LLC or on any other national or regional securities exchange.
 
 
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XIV.         Status of Deposit Accounts and Loans Subsequent to Conversion
 
All Deposit Accounts shall retain the same status after Conversion (except for voting and liquidation rights) as these accounts had prior to Conversion.  Each Deposit Account holder shall retain, without payment, a withdrawable Deposit Account or accounts after the Conversion, equal in amount to the withdrawable value of such holder’s Deposit Account or accounts prior to Conversion.  All Deposit Accounts will continue to be insured by the Deposit Insurance Fund of the FDIC up to the applicable limits of insurance coverage.  All loans shall retain the same status after the Conversion as they had prior to the Conversion.  See Section X.F.4. with respect to the termination of voting rights of Members.
 
XV.          Liquidation Account
 
After the Conversion, holders of Deposit Accounts shall not be entitled to share in any residual assets in the event of liquidation of the Converted Savings Bank.  However, First Federal shall, at the time of the Conversion, establish a liquidation account in an amount equal to its total net worth as of the date of the latest statement of financial condition contained in the final Prospectus.  The function of the liquidation account shall be to establish a priority on liquidation and, except as provided in Section X.F.3 above, the existence of the liquidation account shall not operate to restrict the use or application of any of the net worth of the Converted Savings Bank.
 
The liquidation account shall be maintained by the Converted Savings Bank subsequent to the Conversion for the benefit of Eligible Account Holders and Supplemental Eligible Account Holders who retain their Deposit Accounts in the Converted Savings Bank.  Each Eligible Account Holder and Supplemental Eligible Account Holder shall, with respect to each Deposit Account held, have a related inchoate interest in a portion of the liquidation account balance (“subaccount”).
 
The initial subaccount balance for a Deposit Account held by an Eligible Account Holder or a Supplemental Eligible Account Holder shall be determined by multiplying the opening balance in the liquidation account by a fraction of which the numerator is the amount of such holder’s Qualifying Deposit on the Eligibility Record Date or Supplemental Eligibility Record Date, as applicable, and the denominator is the total amount of Qualifying Deposits of all Eligible Account Holders or Supplemental Eligible Account Holders, as applicable, on the applicable date.  If an account holder holds a Deposit Account on the Eligibility Record Date and a separate Deposit Account on the Supplemental Eligibility Record Date, separate initial subaccount balances shall be determined on the basis of the Qualifying Deposits in such Deposit Accounts on each such record date.  Such initial subaccount balance shall not be increased, and it shall be subject to downward adjustment as provided below.
 
If the deposit balance in any Deposit Account of an Eligible Account Holder or Supplemental Eligible Account Holder at the close of business on any annual closing date subsequent to the Eligibility Record Date is less than the lesser of (i) the deposit balance in such Deposit Account at the close of business on any other annual closing date subsequent to the Eligibility Record Date or the Supplemental Eligibility Record Date or (ii) the amount of the deposit balance in such Deposit Account on the Eligibility Record Date or the Supplemental Eligibility Record Date, then the subaccount balance for such Deposit Account shall be adjusted by reducing such subaccount balance in an amount proportionate to the reduction in such deposit balance.  In the event of a downward adjustment, such subaccount balance shall not be subsequently increased, notwithstanding any increase in the deposit balance of the related Deposit Account.  If any such Deposit Account is closed, the related subaccount balance shall be reduced to zero.
 
In the event of a complete liquidation of the Converted Savings Bank, each Eligible Account Holder and Supplemental Eligible Account Holder shall be entitled to receive a liquidation distribution from the liquidation account in the amount of the then current adjusted subaccount balance(s) for Deposit Account(s) then held by such holder before any liquidation distribution may be made to stockholders.  No merger, consolidation, bulk purchase of assets with assumptions of Deposit Accounts and other liabilities or similar transactions with another Federally-insured institution in which the Converted Savings Bank is not the surviving institution shall be considered to be a complete liquidation.  In any such transaction, the liquidation account shall be assumed by the surviving institution.
 
 
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Subsequent to the completion of the Conversion, the Converted Savings Bank may not declare or pay cash dividends on, or repurchase any of, its Capital Stock, if such dividend or repurchase would reduce the Converted Savings Bank’s regulatory capital below the amount then required for the liquidation account.  Otherwise the existence of the Converted Savings Bank’s obligation hereunder with respect to the liquidation account shall not operate to restrict the use or application of any of the capital accounts of First Federal.  The Converted Savings Bank shall not be required to set aside funds in connection with its obligation hereunder with respect to the liquidation account.  Eligible Account Holders and Supplemental Eligible Account Holders do not retain any voting rights in either the Holding Company or First Federal based on their liquidation subaccounts.
 
XVI.         Restrictions on Acquisition of Stock of the Holding Company
 
A.            For a period of three years following completion of the Conversion, no Person may make directly, or indirectly, any offer to acquire or actually acquire Holding Company Common Stock if, after consummation of such acquisition, such person would be the beneficial owner of more than 10% of the Holding Company’s Common Stock, without the prior approval of the Division.  However, approval is not required for purchases directly from the Holding Company or the underwriters or selling group acting on its behalf with a view towards public resale, or for purchases not exceeding 1% per annum of the shares outstanding.  Civil penalties may be imposed by the Division for willful violation or assistance of any violation.
 
B.            The Holding Company may provide in its articles of incorporation a provision that, for a specified period of up to five years following the date of the completion of the Conversion, no Person shall directly or indirectly offer to acquire or actually acquire the beneficial ownership of more than 10%  of any class of equity security of the Holding Company.  Such provisions would not apply to the acquisition of securities by Tax-Qualified Employee Stock Benefit Plans provided that such plans do not have beneficial ownership of more than 25% of any class of equity security of the Holding Company. The Holding Company may provide in its articles of incorporation for such other provisions affecting the acquisition of its stock as shall be determined by its Board of Directors.
 
XVII.        Directors and Officers of the Converted Savings Bank
 
The Conversion is not intended to result in any change in the Directors or Officers of First Federal.  Each Person serving as a Director of First Federal at the time of Conversion shall continue to serve as a member of the Converted Savings Bank’s Board of Directors, subject to the Converted Savings Bank’s charter and bylaws. The Persons serving as Officers of First Federal immediately prior to the Conversion will continue to serve at the discretion of the Board of Directors in their respective capacities as Officers of the Converted Savings Bank. In connection with the Conversion, First Federal and the Holding Company may enter into employment agreements and change of control agreements on such terms and with such officers as shall be determined by the Boards of Directors of First Federal and the Holding Company.
 
XVIII.      Executive Compensation
 
A.            The Holding Company and First Federal are authorized to adopt Tax-Qualified Employee Stock Benefit Plans in connection with the Conversion, including without limitation an employee stock ownership plan.
 
B.            Subsequent to the Conversion, the Holding Company and First Federal are authorized to adopt executive compensation or other benefit programs, including but not limited to, compensation plans involving stock options, stock appreciation rights, restricted stock plans, employee recognition programs and similar plans, provided however that, with respect to any such plan implemented during the one-year period subsequent to the date of consummation of the Conversion, any such plan: (i) shall be disclosed in the Prospectus; (ii) in the case of stock option, employee recognition or grant plans, shall be submitted for approval by the holders of the Holding Company Common Stock no earlier than six months following consummation of the Conversion; and (iii) shall comply with all other applicable requirements of the Division.
 
C.             Existing, as well as any newly created, Tax-Qualified Employee Stock Benefit Plans may purchase shares of Conversion Stock in the Subscription Offering and the Direct Community Offering, to the extent permitted by the terms of such benefit plans and this Plan.
 
D.            The Holding Company and First Federal are authorized, subject to any required regulatory approval, to enter into employment or severance agreements with their executive officers.
 
 
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XIX.        Amendment or Termination of Plan
 
If necessary or desirable, the Plan may be amended by a two-thirds vote of First Federal’s Board of Directors, at any time prior to submission of the Plan and proxy materials to the Members.  At any time after submission of the Plan and proxy materials to the Members, the Plan may be amended by a two-thirds vote of the Board of Directors only with the concurrence of the Division.  The Plan may be terminated by a two-thirds vote of the Board of Directors at any time prior to the Special Meeting, and at any time following such Special Meeting with the concurrence of the Division.  In its discretion, the Board of Directors may modify or terminate the Plan upon the order of the regulatory authorities without a resolicitation of proxies or another meeting of the Members.
 
In the event that mandatory new regulations pertaining to conversions are adopted by the Division prior to the completion of the Conversion, the Plan shall be amended to conform to the new mandatory regulations without a resolicitation of proxies or another meeting of Members.  In the event that new conversion regulations adopted by the Division prior to completion of the Conversion contain optional provisions, the Plan may be amended to utilize such optional provisions at the discretion of the Board of Directors without a resolicitation of proxies or another meeting of Members.
 
By adoption of the Plan, the Members authorize the Board of Directors to amend and/or terminate the Plan under the circumstances set forth above.
 
XX.          Expenses of the Conversion
 
First Federal and the Holding Company shall use their best efforts to assure that expenses incurred in connection with the Conversion shall be reasonable.
 
XXI.         Contributions to Tax-Qualified Plans
 
The Holding Company and/or the Converted Savings Bank may make discretionary contributions to the Tax-Qualified Employee Stock Benefit Plans, provided such contributions do not cause the Converted Savings Bank to fail to meet its regulatory capital requirements.
 
XXII.
Severability
 
If any term, provision, covenant or restriction contained in this Plan is held by a court or a federal or state regulatory agency of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions contained in this Plan shall remain in full force and effect, and shall in no way be affected, impaired or invalidated.
 
XXIII.
Miscellaneous
 
This Plan is to be governed by and construed in accordance with the laws of the State of Washington.  All interpretations of this Plan and application of its provisions to particular circumstances shall be made by the Board of Directors of First Federal and all such interpretations shall be final, subject to the authority of the Division.   Section headings are not to be considered a part of this Plan, but are included solely for convenience of reference and shall in no way define, limit, extend, or describe the scope or intent of any of the provisions hereof.  Any reference to a Section or Paragraph shall refer to a Section or Paragraph of this Plan, unless otherwise stated.  Except for such rights as are set forth herein for Eligible Account Holders, Supplemental Eligible Account Holders and Other Members, this Plan shall create no rights in any Person. The terms defined in this Plan have the meanings assigned to them in this Plan and include the plural as well as the singular, and words of any gender shall include each other gender where appropriate.
 
* * * * *
 
 
20 
Exhibit 3.1
 
ARTICLES OF INCORPORATION
OF
FIRST NORTHWEST BANCORP
 
Pursuant to the provisions of Title 23B of the Revised Code of Washington (“RCW”) (the Washington Business Corporation Act as now in existence or as may hereafter be amended, the “WBCA”), the following shall constitute the Articles of Incorporation of First Northwest Bancorp, a Washington corporation:

ARTICLE I
 
Name
 
The name of the corporation is First Northwest Bancorp (the “Corporation”).

ARTICLE II

Duration
 
The duration of the Corporation is perpetual.

ARTICLE III

Purpose and Powers

The purpose for which the Corporation is organized is to act as a bank holding company and to transact all other lawful business for which corporations may be incorporated under the WBCA. The Corporation shall have all and may exercise all the express, implied and incidental powers of a corporation organized under the WBCA.

ARTICLE IV

Capital Stock

The total number of shares of all classes of capital stock which the Corporation has authority to issue is 80,000,000, of which 75,000,000 shall be common stock of par value of $0.01 per share, and of which 5,000,000 shall be serial preferred stock of par value of $0.01 per share. The shares may be issued from time to time as authorized by the Board of Directors without further approval of the shareholders, except to the extent that such approval is required by governing law, rule or regulation. The consideration for the issuance of the shares shall be paid in full before their issuance and shall not be less than the stated par value per share. Upon payment of such consideration, such shares shall be deemed to be fully paid and nonassessable. Upon authorization by its Board of Directors, the Corporation may issue its own shares in exchange for or in conversion of its outstanding shares or distribute its own shares, pro rata to its shareholders or the shareholders of one or more classes or series, to effectuate stock dividends or splits, and any such transaction shall not require consideration.

Except as expressly provided by applicable law, these Articles of Incorporation or by any resolution of the Board of Directors designating and establishing the terms of any series of preferred stock, no holders of any class or series of capital stock shall have any right to vote as a separate class or series or to vote more than one vote per share. The shareholders of the Corporation shall not be entitled to cumulative voting in any election of directors.
 
 
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A description of the different classes and series (if any) of the Corporation’s capital stock and a statement of the designations, and the relative rights, preferences, limitations and voting powers of the shares of each class and series (if any) of capital stock are as follows:
 
A.            Common Stock . On matters on which holders of common stock are entitled to vote, each holder of shares of common stock shall be entitled to one vote for each share held by such holder.
                                      
Whenever there shall have been paid, or declared and set aside for payment, to the holders of the outstanding shares of any class of stock having preference over the common stock as to the payment of dividends, the full amount of dividends and of sinking fund, retirement fund or other retirement payments, if any, to which such holders are respectively entitled in preference to the common stock, then dividends may be paid on the common stock and on any class or series of stock entitled to participate therewith as to dividends, out of any assets legally available for the payment of dividends, but only when and as declared by the Board of Directors.

In the event of any liquidation, dissolution or winding up of the Corporation, the holders of the common stock (and the holders of any class or series of stock entitled to participate with the common stock in the distribution of assets) shall be entitled to receive, in cash or in kind, the assets of the Corporation available for distribution remaining after: (i) payment or provision for payment of the Corporation’s debts and liabilities; (ii) distributions or provision for distributions in settlement of the liquidation account established for certain depositors of First Federal Savings and Loan Association of Port Angeles (the “Association”) in connection with the Association’s mutual-to-stock conversion; and (iii) distributions or provision for distributions to holders of any class or series of stock having preference over the common stock in the liquidation, dissolution or winding up of the Corporation. Each share of common stock shall have the same relative rights as and be identical in all respects with all the other shares of common stock.

B.            Serial Preferred Stock . The Board of Directors of the Corporation is authorized by resolution or resolutions from time to time adopted to provide for the issuance of preferred stock in series and to fix and state the voting powers, designations, preferences and relative, participating, optional or other special rights of the shares of each such series and the qualifications, limitations and restrictions thereof, including, but not limited to, determination of any of the following:

   (a) The distinctive serial designation and the number of shares constituting such series;

   (b) The dividend rate or the amount of dividends to be paid on the shares of such series, whether dividends shall be cumulative and, if so, from which date or dates, the payment date or dates for dividends, and the participating or other special rights, if any, with respect to dividends;

   (c) The voting powers, full or limited, if any, of shares of such series;

   (d) Whether the shares of such series shall be redeemable and, if so, the price(s) at which, and the terms and conditions on which, such shares may be redeemed;

   (e) The amount(s) payable upon the shares of such series in the event of voluntary or involuntary liquidation, dissolution or winding up of the Corporation;

   (f) Whether the shares or such series shall be entitled to the benefit of a sinking or retirement fund to be applied to the purchase or redemption of such shares, and if so entitled, the amount of such fund and the manner of its application, including the price(s) at which such shares may be redeemed or purchased through the application of such fund;

   (g) Whether the shares of such series shall be convertible into, or exchangeable for, shares of any other class or classes or of any other series of the same or any other class or classes of stock of the Corporation, and, if so convertible or exchangeable, the conversion price(s), or the rate or rates of exchange, and the adjustments thereof, if any, at which such conversion or exchange may be made, and any other terms and conditions of such conversion or exchange;

   (h) The price or other consideration for which the shares of such series shall be issued; and
 
 
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(i) Whether the shares of such series which are redeemed or converted shall have the status of authorized but unissued shares of serial preferred stock and whether such shares may be reissued as shares of the same or any other series of serial preferred stock.

Each share of each series of preferred stock shall have the same relative rights as and be identical in all respects with all other shares of the same series.

C.            1.            Notwithstanding any other provision of these Articles of Incorporation, in no event shall any record owner of any outstanding common stock which is beneficially owned, directly or indirectly, by a person who, as of any record date for the determination of shareholders entitled to vote on any matter, beneficially owns in excess of 10% of the then-outstanding shares of common stock (“Limit”), be entitled, or permitted to any vote in respect of the shares held in excess of the Limit, unless a majority of the Whole Board (as hereinafter defined) shall have by resolution granted in advance such entitlement or permission. The number of votes which may be cast by any record owner by virtue of the provisions hereof in respect of common stock beneficially owned by such person owning shares in excess of the Limit shall be a number equal to the total number of votes which a single record owner of all common stock owned by such person would be entitled to cast after giving effect to the provisions hereof, multiplied by a fraction, the numerator of which is the number of shares of such class or series which are both beneficially owned by such person and owned of record by such record owner and the denominator of which is the total number of shares of common stock beneficially owned by such person owning shares in excess of the Limit.

 
2.           The following definitions shall apply to this Section C of this Article VII.

  (a)           “Affiliate” shall have the meaning ascribed to it in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as in effect on the date of filing of these Articles of Incorporation.

  (b)           “Beneficial ownership” shall be determined pursuant to Rule 13d-3 of the General Rules and Regulations under the Securities Exchange Act of 1934 (or any successor rule or statutory provision), or, if said Rule 13d-3 shall be rescinded and there shall be no successor rule or provision thereto, pursuant to said Rule 13d-3 as in effect on the date of filing of these Articles of Incorporation; provided, however , that a person shall, in any event, also be deemed the “beneficial owner” of any common stock:

(i)           which such person or any of its Affiliates beneficially owns, directly or indirectly; or
 
(ii)           which such person or any of its Affiliates has (A) the right to acquire (whether such right is exercisable immediately or only after the passage of time), pursuant to any agreement, arrangement or understanding (but shall not be deemed to be the beneficial owner of any voting shares solely by reason of an agreement, contract, or other arrangement with the Corporation to effect any transaction which is described in any one or more of subparagraphs A(1)(a) through (h) of Article XI hereof or upon the exercise of conversion rights, exchange rights, warrants or options or otherwise), or (B) sole or shared voting or investment power with respect thereto pursuant to any agreement, arrangement, understanding, relationship or otherwise (but shall not be deemed to be the beneficial owner of any voting shares solely by reason of a revocable proxy granted for a particular meeting of shareholders, pursuant to a public solicitation of proxies for such meeting, with respect to shares of which neither such person nor any such Affiliate is otherwise deemed the beneficial owner); or
 
 
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(iii)           which are beneficially owned, directly or indirectly, by any other person with which such first mentioned person or any of its Affiliates acts as a partnership, limited partnership, syndicate or other group pursuant to any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares of capital stock of the Corporation; and provided further, however , that (i) no director or officer of the Corporation (or any Affiliate of any such director or officer) shall, solely by reason of any or all of such directors or officers acting in their capacities as such, be deemed, for any purposes hereof, to beneficially own any common stock beneficially owned by any other such director or officer (or any Affiliate thereof), and (ii) neither any employee stock ownership or similar plan of the Corporation or any subsidiary of the Corporation, nor any trustee with respect thereto or any Affiliate of such trustee (solely by reason of such capacity of such trustee), shall be deemed, for any purposes hereof, to beneficially own any common stock held under any such plan. For purposes of computing the percentage beneficial ownership of common stock of a person, the outstanding common stock shall include shares deemed owned by such person through application of this subsection but shall not include any other common stock which may be issuable by the Corporation pursuant to any agreement, or upon exercise of conversion rights, warrants or options, or otherwise. For all other purposes, the outstanding common stock shall include only common stock then outstanding and shall not include any common stock which may be issuable by the Corporation pursuant to any agreement, or upon the exercise of conversion rights, warrants or options, or otherwise.

  (c)           A “person” shall mean any individual, firm, corporation or other entity.

  (d)           “Whole Board” shall mean the total number of directors which the Corporation would have if there were no vacancies on the Board of Directors.

3.           The Board of Directors shall have the power to construe and apply the provisions of this Section C and to make all determinations necessary or desirable to implement such provisions, including but not limited to matters with respect to (i) the number of shares of common stock beneficially owned by any person, (ii) whether a person is an Affiliate of another, (iii) whether a person has an agreement, arrangement or understanding with another as to the matters referred to in the definition of beneficial ownership, (iv) the application of any other definition or operative provision of this Section C to the given facts or (v) any other matter relating to the applicability or effect of this Section C.

4.           The Board of Directors shall have the right to demand that any person who is reasonably believed to beneficially own common stock in excess of the Limit (or holds of record common stock beneficially owned by any person in excess of the Limit) supply the Corporation with complete information as to (i) the record owner(s) of all shares beneficially owned by such person who is reasonably believed to own shares in excess of the Limit and (ii) any other factual matter relating to the applicability or effect of this section as may reasonably be required of such person.

5.           Except as otherwise provided by law or expressly provided in this Section C, the presence, in person or by proxy, of the holders of record of shares of capital stock of the Corporation entitling the holders thereof to cast a majority of the votes (after giving effect, if required, to the provisions of this Section C) entitled to be cast by the holders of shares of capital stock of the Corporation shall constitute a quorum at all meetings of the shareholders, and every reference in these Articles of Incorporation to a majority or other proportion of capital stock (or the holders thereof) for purposes of determining any quorum requirement or any requirement for shareholder consent or approval shall be deemed to refer to such majority or other proportion of the votes (or the holders thereof) then entitled to be cast in respect of such capital stock.

6.           Any constructions, applications or determinations made by the Board of Directors pursuant to this Section C in good faith and on the basis of such information and assistance as was then reasonably available for such purpose shall be conclusive and binding upon the Corporation and its shareholders.

7.           In the event any provision (or portion thereof) of this Section C shall be found to be invalid, prohibited or unenforceable for any reason, the remaining provisions (or portions thereof) of this Section C shall remain in full force and effect, and shall be construed as if such invalid, prohibited or unenforceable provision had been stricken herefrom or otherwise rendered inapplicable, it being the intent of the Corporation and its shareholders that each such remaining provision (or portion thereof) of this Section C remain, to the fullest extent permitted by law, applicable and enforceable as to all shareholders, including shareholders owning an amount of stock over the Limit, notwithstanding any such finding.
 
 
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ARTICLE V

Preemptive Rights

Holders of the capital stock of the Corporation shall not be entitled to preemptive rights with respect to any shares of the Corporation which may be issued.

ARTICLE VI

Initial Directors

The persons who shall serve as the initial directors of the Corporation are: Richard G. Kott, Stephen E. Oliver, David A. Blake, Lloyd J. Eisenman, Cindy H. Finnie, David T. Flodstrom, Laurence J. Hueth, Levon L. Mathews, and Jennifer Zaccardo . The address of each initial director is 105 West 8th Street, Port Angeles, Washington 98362. The initial directors (or their successors) shall serve until the first annual meeting of shareholders, at which time they may stand for reelection, if so nominated, for terms based on the respective groups described in Part B of Article VII to which they have been nominated.

ARTICLE VII

Directors

A.            Number . The Corporation shall be under the direction of a Board of Directors. The number of directors shall be as provided in the Corporation’s Bylaws, but in no event shall be fewer than five nor more than 15.

B.            Classified Board . Effective beginning with the election of directors at the first annual meeting of shareholders, the Board of Directors, other than those directors who may be elected by the holders of any class or series of preferred stock, shall be divided into three groups, with each group containing one-third of the total number of directors, or as near as may be. The terms of the directors elected to serve in the first group shall expire at the second annual shareholders’ meeting, the terms of the directors elected to serve in the second group shall expire at the third annual shareholders’ meeting, and the terms of the directors elected to serve in the third group shall expire at the fourth annual shareholders’ meeting. At the second annual shareholders’ meeting and each annual shareholders’ meeting held thereafter, directors shall be elected for a term of three years to succeed those whose terms expire.

C.            Vacancies . Any vacancy occurring in the Board of Directors may be filled only by the affirmative vote of a majority of the remaining directors, whether or not there remains a quorum of the Board of Directors. A director elected to fill a vacancy shall be elected for a term which expires at the next shareholders’ meeting at which directors are elected. A directorship to be filled by reason of an increase in the number of directors may be filled by election by the Board of Directors for a term continuing only until the next election of directors by the shareholders.

ARTICLE VIII

Removal of Directors

Notwithstanding any other provisions of these Articles of Incorporation or the Corporation’s Bylaws (and notwithstanding the fact that some lesser percentage may be specified by law, these Articles of Incorporation or the Corporation’s Bylaws), any director or the entire Board of Directors may be removed only for cause and only by the affirmative vote of the holders of at least 80% of the total votes eligible to be cast at a special meeting of shareholders called for the purpose of removing the director. For purpose of this Article VIII, “cause” shall mean fraudulent or dishonest acts, a gross abuse of authority in discharge of duties to the Corporation or acts that are detrimental or hostile to the interests of the Corporation.
 
 
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ARTICLE IX

Registered Office and Agent

The registered office of the Corporation shall be located at 105 West 8th Street, Port Angeles, Washington 98362. The initial registered agent of the Corporation at such address shall be Levon L. Mathews.

ARTICLE X

Notice for Shareholder Nominations and Proposals

A.           Nominations for the election of directors and proposals for any new business to be taken up at any annual meeting of shareholders may be made by the Board of Directors of the Corporation or by any shareholder of the Corporation entitled to vote generally in the election of directors. In order for a shareholder of the Corporation to make any such nominations and/or proposals, he or she shall give notice thereof in writing, that is received by the Secretary of the Corporation not less than 90 days nor more than 120 days prior to any such meeting; provided, however, that if less than 100 days’ notice of the date of the meeting is given to shareholders (either by mail or other transmission or by public announcement), such written notice shall be delivered or mailed, as prescribed, to the Secretary of the Corporation not later than the close of the tenth day following the day on which notice of the date of the meeting was first so given to shareholders. The term “public announcement” shall mean disclosure (i) in a press release reported by a nationally recognized news service, (ii) in a document publicly filed or furnished by the Corporation with the U.S. Securities and Exchange Commission or (iii) on a website maintained by the Corporation. Each such notice given by a shareholder with respect to nominations for election of directors shall set forth: (i) the name, age, business address and, if known, residence address of each nominee proposed in such notice, (ii) the principal occupation or employment of each such nominee, (iii) the number of shares of stock of the Corporation which are beneficially owned by each such nominee, (iv) such other information as would be required to be included in a proxy statement soliciting proxies for the election of the proposed nominee pursuant to Regulation 14A of the General Rules and Regulations of the Securities Exchange Act of 1934, including, without limitation, such person’s written consent to being named in the proxy statement as a nominee and to serving as a director, if elected, and (v) as to the shareholder giving such notice (a) his or her name and address as they appear on the Corporation’s books and (b) the class and number of shares of the Corporation which are beneficially owned by such shareholder. In addition, the shareholder making such nomination shall promptly provide any other information reasonably requested by the Corporation.

B.           Each such notice given by a shareholder to the Secretary with respect to business proposals to bring before a meeting shall set forth in writing as to each matter: (i) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting; (ii) the name and address, as they appear on the Corporation’s books, of the shareholder proposing such business; (iii) the class and number of shares of the Corporation which are beneficially owned by the shareholder; and (iv) any material interest of the shareholder in such business. Notwithstanding anything in these Articles of Incorporation to the contrary, no business shall be conducted at the meeting except in accordance with the procedures set forth in this Article.

C.           The Chairman of the annual meeting of shareholders may, if the facts warrant, determine and declare to the meeting that a nomination or proposal was not made in accordance with the foregoing procedure, and, if the Chairman should so determine, the defective nomination or proposal shall be disregarded.

D.           At any special meeting of shareholders, only business within the purpose or purposes described in the Corporation’s notice of the meeting may be conducted at the meeting.
 
 
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ARTICLE XI

Approval of Certain Business Combinations

The shareholder vote required to approve Business Combinations (as hereinafter defined) shall be as set forth in this section.

A.           1.           Except as otherwise expressly provided in this Article XI, the affirmative vote of the holders of (i) at least 80% of the outstanding shares entitled to vote thereon (and, if any class or series of shares is entitled to vote thereon separately, the affirmative vote of the holders of at least 80% of the outstanding shares of each such class or series), and (ii) at least a majority of the outstanding shares entitled to vote thereon, not including shares deemed beneficially owned by a Related Person (as hereinafter defined), shall be required to authorize any of the following:

  (a) any merger or consolidation of the Corporation with or into a Related Person;

  (b) any sale, lease, exchange, transfer or other disposition, including without limitation, a mortgage, or any other security device, of all or any Substantial Part (as hereinafter defined) of the assets of the Corporation (including without limitation any voting securities of a subsidiary) or of a subsidiary, to a Related Person;

  (c) any merger or consolidation of a Related Person with or into the Corporation or a subsidiary of the Corporation;

  (d) any sale, lease, exchange, transfer or other disposition of all or any Substantial Part of the assets of a Related Person to the Corporation or a subsidiary of the Corporation;

  (e) the issuance of any securities of the Corporation or a subsidiary of the Corporation to a Related Person in exchange for cash, securities or other property (or a combination thereof) having an aggregate fair market value exceeding 25% of the total consolidated assets of the Corporation except pursuant to an employee benefit plan of the Corporation or any subsidiary of the Corporation;

  (f) the acquisition by the Corporation or a subsidiary of the Corporation of any securities of a Related Person;

  (g) any reclassification of the common stock of the Corporation, or any recapitalization involving the common stock of the Corporation which has the effect, directly or indirectly, of increasing the proportionate share of the outstanding shares of the Corporation’s common stock, or of outstanding securities convertible into the Corporation’s common stock, directly or indirectly held by any Related Person (a “Disproportionate Transaction”); provided, however, that no such transaction shall be deemed a Disproportionate Transaction if the increase in the proportionate ownership of the Related Person as a result of such transaction is no greater than the increase experienced by the other security holders generally;

  (h) any liquidation or dissolution of the Corporation proposed by or on behalf of any Related Person; and

  (i) any agreement, contract or other arrangement providing for any of the transactions described in this Article XI.

2.           Such affirmative vote shall be required notwithstanding any other provision of these Articles of Incorporation, any provision of law, or any agreement with any regulatory agency or national securities exchange which might otherwise permit a lesser vote or no vote.
 
 
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3.           The term “Business Combination” as used in this Article XI shall mean any transaction which is referred to in any one or more of subparagraphs (a) through (i) above.

B.           The provisions of Part A of this Article XI shall not be applicable to any particular Business Combination, which shall require only such affirmative vote as is required by any other provision of these Articles of Incorporation, any provision of law, or any agreement with any regulatory agency or national securities exchange, if such particular Business Combination shall have been approved by two-thirds of the Continuing Directors (as hereinafter defined); provided, however , that such approval shall only be effective if obtained at a meeting at which a Continuing Director Quorum (as hereinafter defined) is present.

C.            For the purposes of this Article XI the following definitions apply:

1.           The term “Related Person” shall mean and include (a) any individual, corporation, partnership or other person or entity which together with its “affiliates” (as that term is defined in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934), that “beneficially owns” (as that term is defined in Rule 13d-3 of the General Rules and Regulations under the Securities Act of 1934) in the aggregate 10% or more of the outstanding shares of the common stock of the Corporation (excluding tax-qualified benefit plans of the Corporation); and (b) any “affiliate” (as that term is defined in Rule 12b-2 under the Securities Exchange Act of 1934) of any such individual, corporation, partnership or other person or entity. Without limitation, any shares of the common stock of the Corporation which any Related Person has the right to acquire pursuant to any agreement, or upon exercise or conversion rights, warrants or options, or otherwise, shall be deemed “beneficially owned” by such Related Person.

2.           The term “Substantial Part” shall mean more than 25% of the total assets of the Corporation or of a subsidiary, as applicable (in the case of a transaction under subparagraph A.1(b) of this Article XI), or of a Related Person (in the case of a transaction under subparagraph A.1(d) of this Article XI) as of the end of its most recent fiscal year prior to when the determination is made.

3.           The term “Continuing Director” shall mean any member of the Board of Directors of the Corporation who is unaffiliated with the Related Person and was a member of the Board of Directors prior to the time the Related Person became a Related Person, and any successor of a Continuing Director who is unaffiliated with the Related Person and is recommended to succeed a Continuing Director by a majority of Continuing Directors then on the Board of Directors.

4.           The term “Continuing Director Quorum” shall mean seventy-five percent (75%) of the Continuing Directors capable of exercising the powers conferred on them.

D.           Nothing contained in this Article XI shall be construed to relieve a Related Person from any fiduciary obligation imposed by law. In addition, nothing contained in this Article XI shall prevent any shareholders of the Corporation from objecting to any Business Combination and from demanding any appraisal rights which may be available to such shareholder.

E.            No amendment, alteration, change or repeal of any provision of the Article XI may be effected unless it is approved at a meeting of the Corporation’s shareholders called for that purpose. Notwithstanding any other provision of these Articles of Incorporation, the affirmative vote of the holders of not less than 80% of the outstanding shares entitled to vote thereon shall be required to amend, alter, change, or repeal, directly or indirectly, any provision of this Article XI; provided, however , that the preceding provisions of this Part E shall not be applicable to any amendment to this Article XI if such amendment receives this affirmative vote required by law and any other provisions of these Articles of Incorporation and if such amendment has been approved by a majority of the Continuing Directors.
 
 
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ARTICLE XII
 
Evaluation of Business Combinations and Other Transactions

In connection with the exercise of its judgment in determining what is in the best interests of the Corporation and of the shareholders, when evaluating (and making any recommendation to the Corporation’s shareholders with regard to) a Business Combination (as defined in Article XI), a tender or exchange offer or any other actual or proposed transaction which would or may involve a change in control of the Corporation (whether by purchases of shares of stock or any other securities of the Corporation in the open market, or otherwise, tender offer, merger, consolidation, share exchange, dissolution, liquidation, sale of all or substantially all of the assets of the Corporation, proxy solicitation or otherwise), the Board of Directors of the Corporation, in addition to considering the adequacy of the amount to be paid in connection with any such transaction, may consider all of the following factors and any other factors which it deems relevant: (i) the social and economic effects of the transaction on the Corporation and its subsidiaries, employees, depositors, loan and other customers, creditors and other elements of the communities in which the Corporation and its subsidiaries operate or are located; (ii) the business and financial condition and earnings prospects of the acquiring person or entity, including, but not limited to, debt service and other existing financial obligations, financial obligations to be incurred in connection with the acquisition and other likely financial obligations of the acquiring person or entity and the possible effect of such conditions upon the Corporation and its subsidiaries and the other elements of the communities in which the Corporation and its subsidiaries operate or are located; and (iii) the competence, experience, and integrity of the acquiring person or entity and its or their management.
 
ARTICLE XIII

Limitation of Directors’ Liability

To the fullest extent permitted by the WBCA, a director of the Corporation shall not be personally liable to the Corporation or its shareholders for monetary damages for conduct as a director, except for liability of the director for acts or omissions that involve: (i) intentional misconduct by the director; (ii) a knowing violation of law by the director; (iii) conduct violating RCW Section 23B.08.310 (relating to unlawful distributions by the Corporation); or (iv) any transaction from which the director will personally receive a benefit in money, property or services to which the director is not legally entitled. If the WBCA is amended in the future to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the full extent permitted by the WBCA, as so amended, without any requirement or further action by shareholders. An amendment or repeal of this Article XIII shall not adversely affect any right or protection of a director of the Corporation existing at the time of such amendment or repeal.

ARTICLE XIV

Indemnification

The Corporation shall indemnify and advance expenses to its directors, officers, agents and employees as follows:

A.            Directors and Officers . In all circumstances and to the full extent permitted by the WBCA, the Corporation shall indemnify any person who is or was a director or officer of the Corporation and who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative and whether formal or informal (including an action by or in the right of the Corporation), by reason of the fact that he is or was a director or officer of the Corporation, against expenses, judgments, fines, and amounts paid in settlement and incurred by him in connection with such action, suit or proceeding. However, such indemnity shall not apply to: (a) acts or omissions of the director or officer in connection with a proceeding by or in the right of the Corporation in which the director or officer is finally adjudged liable to the Corporation; (b) conduct of the director or officer finally adjudged to violate RCW Section 23B.08.310 (relating to unlawful distributions by the Corporation) or (c) any transaction with respect to which it was finally adjudged that such director and officer personally received a benefit in money, property or services to which the director was not legally entitled. The Corporation shall advance expenses incurred in a proceeding for such persons pursuant to the terms set forth in a separate directors’ resolution or contract.
 
 
First Northwest Bancorp Articles of Incorporation Page 9 of 14  
 
 
B.            Implementation . The Board of Directors may take such action as is necessary to carry out these indemnification and expense advancement provisions. It is expressly empowered to adopt, approve and amend from time to time such bylaws, resolutions, contracts or further indemnification and expense advancement arrangements as may be permitted by law, implementing these provisions. Such bylaws, resolutions, contracts or further arrangements shall include, but not be limited to, implementing the manner in which determinations as to any indemnity or advancement of expenses shall be made.

C.            Survival of Indemnification Rights . No amendment or repeal of this Article XIV shall apply to or have any effect on any right to indemnification provided hereunder with respect to acts or omissions occurring prior to such amendment or repeal.

D.            Employees and Agents . The Corporation may, by action of the Board of Directors, provide indemnification and pay expenses in advance of the final disposition of a proceeding to employees and agents of the Corporation with the same scope and effect as the provisions of this Article XIV with respect to the indemnification and advancement of expenses of directors and officers of the Corporation or pursuant to rights granted under, or provided by, the WBCA or otherwise.

E.            Service for Other Entities . The indemnification and advancement of expenses provided under this Article XIV shall apply to directors, officers, employees or agents of the Corporation for both (a) service in such capacities for the Corporation and (b) service at the Corporation’s request as a director, officer, partner, trustee, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust, employee benefit plan or other enterprise. A person is considered to be serving an employee benefit plan at the Corporation’s request if such person’s duties to the Corporation also impose duties on, or otherwise involve services by, the director to the plan or to participants in or beneficiaries of the plan.

F.            Insurance . The Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, trustee, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against liability asserted against him and incurred by him in such capacity or arising out of his status as such, whether or not the Corporation would have had the power to indemnify him against such liability under the provisions of this bylaw and the WBCA.

G.            Other Rights . The indemnification provided by this section shall not be deemed exclusive of any other right to which those indemnified may be entitled under any other bylaw, agreement, vote of shareholders or disinterested directors, or otherwise, both as to action in his official capacity and as to action in another capacity while holding such an office, and shall continue as to a person who has ceased to be a director, trustee, officer, employee or agent and shall inure to the benefit of the heirs executors, and administrators of such person.

ARTICLE XV

Special Meeting of Shareholders

Special meetings of the shareholders for any purpose or purposes may be called only by the Chief Executive Officer or by the Board of Directors. The right of shareholders of the Corporation to call special meetings is specifically denied.
 
 
First Northwest Bancorp Articles of Incorporation Page 10 of 14  
 
 
ARTICLE XVI

Repurchase of Shares

The Corporation may from time to time, pursuant to authorization by the Board of Directors of the Corporation and without action by the shareholders, purchase or otherwise acquire shares of any class, bonds, debentures, notes, scrip, warrants, obligations, evidences of indebtedness or other securities of the Corporation in such manner, upon such terms, and in such amounts as the Board of Directors shall determine; subject, however, to such limitations or restrictions, if any, as are contained in the express terms of any class of shares of the Corporation outstanding at the time of the purchase or acquisition in question or as are imposed by law.

ARTICLE XVII

Amendment of Bylaws

In furtherance and not in limitation of the powers conferred by statute, the Board of Directors of the Corporation is expressly authorized to make, repeal, alter, amend and rescind the Bylaws of the Corporation by a majority vote of the Board of Directors. Notwithstanding any other provision of these Articles of Incorporation or the Bylaws of the Corporation (and notwithstanding the fact that some lesser percentage may be specified by law), the Bylaws shall not be adopted, repealed, altered, amended or rescinded by the shareholders of the Corporation except by the vote of the holders of not less than 80% of the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors (considered for this purpose as one class) cast at a meeting of the shareholders called for that purpose (provided that notice of such proposed adoption, repeal, alteration, amendment or rescission is included in the notice of such meeting), or, as set forth above, by the Board of Directors.

ARTICLE XVIII

Amendment of Articles of Incorporation

The Corporation reserves the right to repeal, alter, amend or rescind any provision contained in these Articles of Incorporation in the manner now or hereafter prescribed by law, and all rights conferred on shareholders herein are granted subject to this reservation. Notwithstanding the foregoing, the provisions set forth in Articles II, III, IV (other than a change to the number of authorized shares of the Corporation’s capital stock), V, VII, VIII, X, XI (except as provided in Part E. of Article XI), XII, XIII, XIV, XV, XVI, XVII, XIX and XX and this Article XVIII of these Articles of Incorporation may not be repealed, altered, amended or rescinded in any respect unless the same is approved by the affirmative vote of the holders of not less than 80% of the votes entitled to be cast by each separate voting group entitled to vote thereon, cast at a meeting of the shareholders called for that purpose (provided that notice of such proposed adoption, repeal, alteration, amendment or rescission is included in the notice of such meeting).

ARTICLE XIX

Shareholder Vote Required on Certain Matters

Subject to Articles XI and XVIII of these Articles of Incorporation, if shareholder approval of any of the following matters is required under the WBCA, such matter may be approved by a majority of the votes in each voting group (except as otherwise provided in Article XX of these Articles of Incorporation) entitled to be cast on such matter: (a) amendment to these Articles of Incorporation, (b) a plan of merger or share exchange of the Corporation with any other corporation; (c) the sale, lease, exchange, or other disposition, whether in one transaction or a series of transactions, by the Corporation of all or substantially all of the Corporation’s property other than in the usual and regular course of business; or (d) the dissolution of the Corporation. This Article is intended to reduce the voting requirements otherwise prescribed by the WBCA with respect to the foregoing matters, subject to Articles XI and XVIII of these Articles of Incorporation.
 
 
First Northwest Bancorp Articles of Incorporation Page 11 of 14  
 
 
ARTICLE XX

Limitation of Separate Class Voting to Extent Permitted by Law

Except to the extent expressly provided in the preferences, limitations, voting powers, and relative rights set forth in these Articles of Incorporation or any amendment thereto with respect to a particular class or series of shares, the holders of each outstanding class or series of shares of the Corporation are not entitled to vote as a separate voting group: (a) on any amendment to these Articles of Incorporation with respect to which such class or series would otherwise be entitled under RCW 23B.10.040(1)(a), (e), or (f) to vote as a separate voting group, (b) on any plan of merger or share exchange with respect to which such class or series would otherwise be entitled under RCW 23B.11.035 to vote as a separate voting group, or (c) on any transaction pursuant to RCW 23B.12.020.

ARTICLE XXI

Incorporator

The name and mailing address of the incorporator is Levon L. Mathews, 105 West 8th Street, Port Angeles, Washington 98362.

* * *
 
First Northwest Bancorp Articles of Incorporation Page 12 of 14  
 
 
Executed this 10th day of August 2012.
 
 
 
/s/ Levon L. Mathews     
    Levon L. Mathews  
     Incorporator  
 
 
First Northwest Bancorp Articles of Incorporation Page 13 of 14  
 
                                                                 
CONSENT TO APPOINTMENT AS REGISTERED AGENT

I, Levon L. Mathews, hereby consent to serve as Registered Agent in the State of Washington for First Northwest Bancorp. I understand that as agent for the Corporation, it will be my responsibility to accept Service of Process on behalf of the Corporation; to forward license renewals and other mail to the Corporation; and to immediately notify the Office of the Secretary of State in the event of my resignation or of any changes in the Registered Office address.

By:
/s/ Levon L. Mathews
 
Levon L. Mathews, Incorporator
 
8/10/12
 
(Signature of Registered Agent)
 
(Print Name and Title)
 
(Date)
 

 
First Northwest Bancorp Articles of Incorporation   Page 14 of 14  
 
 
 
Exhibit 3.2
 
BYLAWS
OF
FIRST NORTHWEST BANCORP
 
ARTICLE I
 
Principal Office
 
SECTION 1.           Principal Office .  The principal office and place of business of the corporation in the state of Washington shall be located in the City of Port Angeles, Clallam County.
 
SECTION 2.            Other Offices .  The corporation may have such other offices as the Board of Directors may designate or the business of the corporation may require from time to time.
 
ARTICLE II
 
Shareholders
 
SECTION 1.            Place of Meetings .   All annual and special meetings of the shareholders shall be held at the principal office of the corporation or at such other place within or outside the State of Washington as the Board of Directors may determine.
 
SECTION 2.            Annual Meeting .   A meeting of the shareholders of the corporation for the election of directors and for the transaction of any other business of the corporation shall be held at a date and time as the Board of Directors may determine.
 
SECTION 3.           Special Meetings .   Special meetings of the shareholders for any purpose or purposes shall be called in accordance with the procedures set forth in the Articles of Incorporation. Only business within the purpose or purposes described in the meeting notice may be conducted at a special meeting of the shareholders.
 
SECTION 4.            Conduct of Meetings .   Annual and special meetings shall be conducted in accordance with rules prescribed by the presiding officer of the meeting, unless otherwise prescribed by these Bylaws.  The Board of Directors shall designate, when present, either the chairman of the board or the president to preside at such meetings.
 
SECTION 5.          Notice of Meeting .   Notice in writing or by electronic transmission, in either case in accordance with Section 23B.01.410 of the Revised Code of Washington, stating the place, date and time of the meeting and, in the case of a special meeting of shareholders, a description of the purpose or purposes for which the meeting is called, shall be given not less than 10 nor more than 60 days before the date of the meeting, by or at the direction of the chairman of the board, the vice chairman of the board, the president, or the secretary calling the meeting, to each shareholder of record entitled to vote at such meeting; provided, however , that notice of a shareholders meeting to act on an amendment to the Articles of Incorporation, a plan of merger or share exchange, a proposed sale of assets pursuant to Section 23B.12.020 of the Revised Code of Washington or any successor statutory provision, or the dissolution of the corporation shall be given no fewer than 20 nor more than 60 days before the meeting date.  If mailed, such notice shall be deemed to be delivered when deposited in the mail, addressed to the shareholder at the address as it appears on the stock transfer books or records of the corporation as of the record date prescribed in Section 6 of this Article II, with postage thereon prepaid.  When any shareholders’ meeting, either annual or special, is adjourned for 120 days or more, notice of the adjourned meeting shall be given as in the case of an original meeting.  It shall not be necessary to give any notice of the date, time and place of any meeting adjourned for less than 120 days or of the business to be transacted at the meeting, other than an announcement at the meeting at which such adjournment is taken.
 
 
First Northwest Bancorp Bylaws   Page  1 of 11  November 20, 2012
 
 
SECTION 6.            Fixing of Record Date .   For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or shareholders entitled to receive payment of any dividend, or in order to make a determination of shareholders for any other proper purpose, the Board of Directors shall fix, in advance, a date as the record date for any such determination of shareholders.  Such date in any case shall be not more than 70 days, and in case of a meeting of shareholders, not less than 10 days prior to the date on which the particular action, requiring such determination of shareholders, is to be taken.  If no record date is fixed for the determination of shareholders entitled to notice of or to vote at a meeting of shareholders, or shareholders entitled to receive payment of a dividend, the day before the date on which the first notice of the meeting is delivered or the date on which the resolution of the Board of Directors declaring such dividend is adopted, as the case may be, shall be the record date for such determination of shareholders.  When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this section, such determination shall apply to any adjournment of the meeting, unless the Board of Directors fixes a new record date, which it must do if the meeting is adjourned more than 120 days after the date is fixed for the original meeting.
 
SECTION 7.           Voting Lists .   At least 10 days before each meeting of the shareholders, the officer or agent having charge of the stock transfer books for shares of the corporation shall make a complete list of the shareholders entitled to vote at such meeting, or any adjournment thereof, arranged in alphabetical order, with the address of and the number of shares held by each.  This list of shareholders shall be kept on file at the principal office of the corporation or at a place identified in the meeting notice in the city where the meeting will be held and shall be subject to inspection by any shareholder, the shareholder’s agent or the shareholder’s attorney at any time during regular business hours and at the shareholder’s expense, for a period of 10 days prior to such meeting.  Such list shall also be produced and kept open at the time and place of the meeting and shall be subject to inspection by any shareholder, the shareholder’s agent or the shareholder’s attorney at any time during the meeting or any adjournment.  The original stock transfer book shall be prima facie evidence of the shareholders entitled to examine such list or transfer books or to vote at any meeting of shareholders.  Failure to comply with the requirements of this Bylaw shall not affect the validity of any action taken at the meeting.
 
SECTION 8.            Quorum .   A majority of the outstanding shares of the corporation entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of shareholders.  Shares entitled to vote as a separate voting group may take action on a matter at a meeting only if a quorum of those shares exists with respect to that matter.  The shareholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum.  If a quorum is present or represented at a meeting, a majority of those present or represented may transact any business which comes before the meeting, unless a greater percentage is required by law, the Articles of Incorporation, or these Bylaws.  If less than a quorum of the outstanding shares is represented at a meeting, a majority of the shares so represented may adjourn the meeting from time to time without further notice.  At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified, and in the case of any adjourned meeting called for the election of directors, those who attend the second of the adjourned meetings, although less than a quorum, shall nevertheless constitute a quorum for the purpose of electing directors.
 
SECTION 9.            Proxies .   At all meetings of shareholders, a shareholder may vote by proxy executed in writing by the shareholder or by his duly authorized attorney in fact or by any other means of voting by proxy permitted under the Washington Business Corporation Act (or any successor law), including, without limitation, via electronic transmission.  Proxies solicited on behalf of management shall be voted as directed by the shareholder or, in the absence of such direction, as determined by the proxy committee or a majority of the Board of Directors.  All proxies shall be filed with the secretary of the corporation before or at the commencement of meetings.  An appointment of a proxy is valid for eleven months unless a longer period is expressly provided in the appointment.  An appointment of a proxy is revocable by the shareholder unless the appointment indicates that it is irrevocable and the appointment is coupled with an interest.
 
 
First Northwest Bancorp Bylaws   Page  2 of 11  November 20, 2012
 
 
SECTION 10.         Voting of Shares by Certain Holders .   Shares standing in the name of another corporation may be voted by any officer, agent or proxy as the bylaws of such corporation may prescribe, or, in the absence of such provision, as the Board of Directors of such corporation may determine.  A certified copy of a resolution adopted by such directors shall be conclusive as to their action.
 
Shares held by an administrator, executor, guardian or conservator may be voted by him or her, either in person or by proxy, without a transfer of such shares into his or her name.  Shares standing in the name of a trustee may be voted by him or her, either in person or by proxy, but no trustee shall be entitled to vote shares held by him or her without a transfer of such shares into his or her name.
 
Shares standing in the name of a receiver may be voted by such receiver, and shares held by or under the control of a receiver may be voted by such receiver without the transfer thereof into his name if authority so to do is contained in an appropriate order of the court or other public authority by which such receiver was appointed.
 
If shares are held jointly by three or more fiduciaries, the will of the majority of the fiduciaries shall control the manner of voting or giving of a proxy, unless the instrument or order appointing such fiduciaries otherwise directs.
 
A shareholder, whose shares are pledged, shall be entitled to vote such shares until the shares have been transferred into the name of the pledgee, and thereafter, the pledgee shall be entitled to vote the shares so transferred.
 
Neither treasury shares of its own stock held by the corporation, nor shares held by another corporation, if a majority of the shares entitled to vote for the election of directors of such other corporation are held by the corporation, shall be voted at any meeting or counted in determining the total number of outstanding shares at any given time for purposes of any meeting.
 
SECTION 11.         Voting .   Every holder of outstanding shares of capital stock of the corporation entitled to vote at any meeting shall be entitled to the number of votes (if any) as set forth in the Articles of Incorporation.  Unless otherwise provided in the Articles of Incorporation, by statute, or by these Bylaws, if a quorum exists, any action, other than the election of directors, is approved by a voting group if the votes cast within the voting group favoring the action exceed the votes cast within the group opposing the action.  In any election of directors the candidates elected are those receiving the largest number of votes cast by the shares entitled to vote in the election, up to the number of directors to be elected by such shares.
 
SECTION 12.         Informal Action by Shareholders .   Any action required to be taken at a meeting of the shareholders, or any other action which may be taken at a meeting of the shareholders, may be taken without a meeting if consent in writing, setting forth the action so taken, shall be given by all of the shareholders entitled to vote with respect to the subject matter.
 
ARTICLE III
 
Board of Directors
 
SECTION 1.           General Powers .   All corporate   powers shall be exercised by, or under authority of, and the business and affairs of the corporation shall be managed under the direction of, the Board of Directors.  The Board of Directors shall annually elect a chairman of the board and a vice-chairman   from among its members and shall designate, when present, either the chairman of the board or the vice-chairman   to preside at its meetings.
 
 
First Northwest Bancorp Bylaws   Page  3 of 11  November 20, 2012
 
 
SECTION 2.           Chairman and Vice-Chairman .
 
(a)              Board Chairman. The chairman of the board shall be nominated and elected in accordance with the following procedure: At least thirty (30) days before the regularly scheduled board meeting immediately preceding the annual organizational meeting, the then chairman or the board shall appoint a three (3) member board chairman nominating committee composed of two outside directors and the president. The board chairman nominating committee shall make a report recommending a nominee or nominees at the regular board meeting immediately preceding the annual organizational meeting; other nominations may be made by board members at said meeting; the chairman shall be elected at the annual organizational meeting from among the nominees so designated. The term of office of the chairman of the board shall be three (3) years, or until the chairman’s successor is elected and qualified.
 
(b)             Board Vice-Chairman. Following election of the chairman of the board, the chairman of the board shall nominate one or more candidates from the board of directors for the position of vice-chairman. The vice-chairman shall be an outside director of the corporation, and the nominee or nominees of the chairman shall be from among the outside directors. The vice-chairman shall be elected at the annual organizational meeting from among the nominees so designated. The office of vice-chairman of the board shall be rotated among the outside directors of the corporation, and no person shall serve consecutive terms as vice-chairman, unless the full Board of Directors approves the nomination as being in the best interest of the Bank based upon specific findings that the nominee possesses expertise vital to the proper functioning of the Board by confidential ballot. Any such approval shall require the vote of a 75% majority of the Board members other than the proposed nominee.
 
                 The vice-chairman shall communicate regularly with the chairman of the board and the chief executive officer of the corporation, so as to be fully advised of the business of the corporation and remain adequately prepared to succeed to the duties of the chairman if events so require. The vice-chairman of the board shall perform all duties of the chairman of the board in the event the office of chairman of the board shall become vacant during the term of the chairman due to death or disability beyond fourteen (14) days, or if the chairman of the board is otherwise unavailable to perform necessary duties of the office. The vice-chairman of the board shall continue to perform such duties and serve in all respects as board chairman until such time as a new chairman of the board is elected. The vice-chairman of the board shall perform such additional duties as may be requested of the office by the chairman of the board.
 
SECTION 3.            Number, Term and Election .   Subject to the limitations on the number of directors set forth in the Articles of Incorporation, the number of directors of the corporation shall be fixed from time to time exclusively by resolution adopted by the Board of Directors.  Except for the initial directors (or their successors) serving prior to the first annual meeting of shareholders of the corporation and any directors elected by the holders of one or more series of preferred stock, voting separately as a class, the terms of the corporation’s directors shall be staggered in accordance with the provisions of the corporation’s Articles of Incorporation.  Directors shall be elected by ballot each year at the annual meeting of shareholders.
 
SECTION 4.            Regular and Special Meetings .   A regular meeting of the Board of Directors shall be held without other notice than this Bylaw immediately after the annual meeting of shareholders.  The Board of Directors may provide, by resolution, the time and place, for the holding of additional regular meetings without other notice than such resolution.
 
Special meetings of the Board of Directors may be called by or at the request of the chairman of the board, the president, or one-third of the directors.  The persons authorized to call special meetings of the Board of Directors may fix any place, within or outside the State of Washington, as the place for holding any special meeting of the Board of Directors called by such persons.
 
 
First Northwest Bancorp Bylaws   Page  4 of 11  November 20, 2012
 
 
Any or all directors may participate in a regular or special meeting by, or conduct the meeting through the use of, any means of communication by which all directors participating can hear each other during the meeting.  A director participating in a meeting by this means is deemed to be present in person at the meeting.
 
SECTION 5.          Notice of Special Meetings .   Notice in writing or by electronic transmission, in either case in accordance with Section 23B.01.410 of the Revised Code of Washington, of the date, time and place of any special meeting shall be given to each director at least two days prior thereto delivered personally, by electronic transmission (provided that the director has consented to receive an electronically transmitted notice either (i) in the form of a record and has designated in the consent the address, location or system to which such notice may be electronically transmitted or (ii) by any other means permitted under Section 23B.01.410 of the Revised Code of Washington) or by facsimile or at least five days previous thereto delivered by mail at the address at which the director is most likely to be reached.  If mailed to the address at which the director is most likely to be reached, such notice shall be deemed to be delivered when deposited in the mail so addressed, with postage thereon prepaid.  Any director may waive notice of any meeting by a writing filed with the secretary.  The attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except where a director at the beginning of the meeting, or promptly upon his or her arrival, objects to holding the meeting or transacting business at the meeting and does not thereafter vote for or assent to any action approved at the meeting.  Neither the business to be transacted at, nor the purpose of, any meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting.
 
SECTION 6.            Quorum .   A majority of the number of directors fixed in accordance with Section 2 of this Article III shall constitute a quorum for the transaction of business at any meeting of the Board of Directors, but if less than such majority is present at a meeting, a majority of the directors present may adjourn the meeting from time to time.  Notice of any adjourned meeting shall be given in the same manner as prescribed by Section 4 of this Article III.
 
SECTION 7.            Manner of Acting .   The act of the majority of the directors present at a meeting or adjourned meeting at which a quorum is present shall be the act of the Board of Directors, unless a greater number is prescribed by the Articles of Incorporation or these Bylaws.
 
SECTION 8.            Action Without a Meeting .   Any action required or permitted to be taken by the Board of Directors at a meeting may be taken without a meeting if one or more consents describing the action so taken are executed by each director either before or after the action becomes effective, and delivered to the corporation for inclusion in the minutes or filing with the corporate records, which consents are set forth either (a) in an executed record or (b) if the corporation has designated an address, location, or system to which the consents may be electronically transmitted and the consent is electronically transmitted to the designated address, location, or system, in an executed electronically transmitted record.
 
SECTION 9.           Resignation .   Any director may resign at any time by delivering notice in the form of an executed resignation to the Board of Directors, the chairman of the board, the president or the secretary.  A notice of resignation is effective when the resignation is delivered unless the resignation specifies a later effective date, or an effective date determined upon the happening of an event or events.  More than three consecutive absences from regular meetings of the Board of Directors, unless excused by resolution of the Board of Directors, shall automatically constitute a resignation, effective when such resignation is accepted by the Board of Directors.
 
SECTION 10.         Vacancies .   Vacancies occurring in the Board of Directors may be filled only in accordance with the procedures set forth in the Articles of Incorporation.
 
 
First Northwest Bancorp Bylaws   Page  5 of 11  November 20, 2012
 
 
SECTION 11.         Compensation .   A director may receive, by the affirmative vote of a majority of all the directors, reasonable compensation for (i) attendance at meetings of the Board of Directors; (ii) a retainer for services as a director (iii) service as an officer of the corporation, provided his duties as officer require and receive his regular and faithful attendance at the corporation; and (iv) service as a member of a committee of the Board of Directors; provided, however, that a director receiving compensation for services as an officer pursuant to (iii) shall not receive any additional compensation for service under (i) (ii) and (iv).  Attendance fees shall be paid whether the meetings are attended in person or via teleconference.
 
SECTION 12.         Presumption of Assent .   A director of the corporation who is present at a meeting of the Board of Directors at which corporate action is approved shall be deemed to have assented to the action taken unless (a) the director objects at the beginning of the meeting, or promptly upon the director’s arrival, to holding it or transacting business at the meeting; (b) the director’s dissent or abstention as to the action is entered in the minutes of the meeting; or (c) the director delivers notice of the director’s dissent or abstention as to the action to the presiding officer of the meeting before adjournment or to the corporation within a reasonable time after adjournment of the meeting.  Such right to dissent or abstain shall not apply to a director who voted in favor of such action.
 
SECTION 13.         Performance of Duties.   A director shall perform his or her duties as a director, including the duties as a member or any committee of the board upon which he or she may serve, in good faith, in a manner he or she reasonably believes to be in the best interest of the corporation, and with such care as an ordinarily prudent person in a like position would use under similar circumstances.  In performing such duties, a director shall be entitled to rely on information, opinion, reports or statements, including financial statements and other financial data, in each case prepared or presented by:  (i) one or more officers or employees of the corporation whom the director reasonably believes to be reliable and competent in the matters presented; (ii) legal counsel, public accountants or other persons as to matters which the director reasonably believes to be within such person’s professional or expert competence; or (iii) a committee of the board upon which he or she does not serve, which committee the director reasonably believes to merit confidence.  However, a director shall not be considered to be acting in good faith if he or she has knowledge concerning the matter in question that would cause such reliance to be unwarranted.
 
SECTION 14.         Additional Qualifications.   Each director shall at all times be the beneficial owner of not less than 100 shares of capital stock of the corporation, excluding any shares that the director has received pursuant to the corporation’s benefit programs.  A person shall not be a director of the corporation if that individual:  (i) is not a resident of the United States; (ii) has been adjudicated a bankrupt or has taken the benefit of any insolvency law or has made a general assignment for the benefit of creditors; (iii) has suffered a judgment for a sum of money which has remained unsatisfied after all legal proceedings have been of record or unsecured on appeal for a period of more than three months;(iv) if he or she is under indictment for, or has ever been convicted of, a criminal offense involving dishonesty or breach of trust and the penalty against whom a banking agency has, within the past ten (1)) year, issued a cease and desist order for conduct involving dishonesty or breach of trust and that order is final and subject to appeal; or (v) is a director of a bank, trust company, national banking association, a majority of the Board of Directors of which are directors of this corporation.
 
SECTION 15.         Mandatory Retirement . A mandatory retirement from the Board of Directors shall, except in the exceptional circumstances herein described, be required at the age of seventy-five (75) years. A member of the Board of Directors may continue a term beyond age seventy-five (75) until the next annual meeting and may thereafter be nominated for additional terms of office, not to exceed one year, beyond age seventy-five (75) subject to the following requirements: (a) the Board of Directors’ nominating committee must include a recommendation that an individual who is over the age of seventy-five (75) be nominated to continue to serve on the Board of Directors; and (b) the full Board of Directors must also approve the nomination as being in the best interest of the corporation based upon specific findings that the nominee possesses expertise vital to the proper functioning of the board by confidential ballot. Any such approval shall require the vote of a 75% majority of the board members other than the proposed nominee. Following approval of such nomination by the board, any such individual shall be subject to election at the annual meeting in accordance with the Bylaws of the corporation. In no event shall a board member serve beyond the term during which they reach eighty (80) years of age.
 
 
First Northwest Bancorp Bylaws   Page  6 of 11  November 20, 2012
 
 
ARTICLE IV
 
Committees of the Board of Directors
 
SECTION 1.           Appointment .  The Board of Directors may, by resolution adopted by a majority of the full board, create one or more committees, each consisting of two or more directors, to serve at the pleasure of the Board of Directors.  All committee members are to be appointed by the chairman of the board.  Among the committees created by the Board of Directors, one committee will be established as the executive committee, consisting of three (3) directors, which committee shall act on behalf of the Board of Directors with respect to specifically delegated functions authorized by law. 
 
SECTION 2.          Authority .  Any committee created by the Board of Directors shall have all the authority of the Board of Directors, except to the extent, if any, that such authority shall be limited by the Board of Directors; and except also that no committee shall have the authority of the Board of Directors to:  approve a distribution except according to a general formula or method prescribed by the Board of Directors; approve or propose to shareholders a corporate action that the Washington Business Corporation Act requires be approved by shareholders; fill vacancies on the Board of Directors or on any of its committee; amend the corporation’s Articles of Incorporation in a manner that does not require shareholder approval or amend these Bylaws; approve a plan of merger not requiring shareholder approval; or approve the issuance or sale or contract for sale of shares, or determine the designation and relative rights, preferences, and limitations of a class or series of shares, except that the Board of Directors may authorize a committee, or a senior executive officer of the corporation, to do so within limits specifically prescribed by the Board of Directors.
 
SECTION 3.           Tenure .  Subject to the provisions of Section 8 of this Article IV, each member of a committee shall hold office until his or her successor is appointed by the Board of Directors.
 
SECTION 4.          Meetings .  Unless the Board of Directors shall otherwise provide, regular meetings of any committee shall be at such times and places as are determined by the Board of Directors, or by any such committee.  Special meetings of any such committee may be held at the principal executive office of the corporation, or at any place which has been designated from time to time by resolution of such committee or by consent of all members thereof, and may be called by any member thereof upon notice stating the place, date, and hour of the meeting, which notice shall be given in the manner provided for the giving of notice to members of the Board of Directors of the time and place of special meetings of the Board of Directors in Article III, Section 4, or waived in the manner provided in Article III, Section 5.
 
Any or all members of a committee may participate in a regular or special meeting by, or conduct the meeting through the use of, any means of communication by which all members participating can hear each other during the meeting.  A committee member participating in a meeting by this means is deemed to be present in person at the meeting
 
SECTION 5.           Quorum .  A majority of the members of a committee shall constitute a quorum for the transaction of any business at a meeting thereof, and action of a committee must be authorized by the affirmative vote of a majority of the members present at a meeting at which a quorum is present.
 
 
First Northwest Bancorp Bylaws   Page  7 of 11  November 20, 2012
 
 
SECTION 6.           Action Without a Meeting .  Any action required or permitted to be taken by any committee at a meeting may be taken without a meeting if one or more consents setting forth the action so taken are executed by each member of the committee either before or after the action becomes effective, and delivered to the corporation for inclusion in the minutes or filing with the corporate records, each of which consent is set forth either (a) in an executed record or (b) if the corporation has designated an address, location, or system to which the consents may be electronically transmitted and the consent is electronically transmitted to the designated address, location, or system, in an executed electronically transmitted record.
 
SECTION 7.            Vacancies.   Any vacancy in a committee may be filled by the chairman of the board as soon as practicable.  In the event that the chairman does not appoint any vacancy in the committee as soon as practicable, any vacancy in a committee may be filled by a resolution adopted by a majority of the full Board of Directors.
 
SECTION 8.            Resignations and Removal .  Any member of a committee may be removed at any time with or without cause by resolution adopted by a majority of the full Board of Directors.  Any member of a committee may resign from the committee at any time by delivering notice in the form of an executed resignation to the Board of Directors, the chairman of the board, the president or the secretary.  A notice of resignation is effective when the resignation is delivered unless the resignation specifies a later effective date, or an effective date determined upon the happening of an event or events.
 
SECTION 9.           Procedure.   Unless the Board of Directors otherwise provides, each committee may fix its own rules of procedure which shall not be inconsistent with these Bylaws or with any charter adopted by the Board of Directors for the committee.  The committee shall keep regular minutes of its proceedings and report the same to the Board of Directors for its information at the meeting held next after the proceedings shall have occurred.
 
ARTICLE V
 
Officers
 
SECTION 1.           Positions .  The officers of the corporation shall include a president, one or more vice presidents, a secretary and a treasurer, each of whom shall be elected by the Board of Directors.  The Board of Directors may also designate the chairman of the board as an officer.  The president shall be the chief executive officer unless the Board of Directors determines otherwise.  The offices of the secretary and treasurer may be held by the same person and a vice president may also be either the secretary or the treasurer.  The Board of Directors may designate one or more vice presidents as executive vice president or senior vice president.  The Board of Directors may also elect or authorize the appointment of such other officers as the business of the corporation may require.  The officers shall have such authority and perform such duties as the Board of Directors may from time to time authorize or determine.  In the absence of action by the Board of Directors, the officers shall have such powers and duties as generally pertain to their respective offices.
 
SECTION 2.           Election and Term of Office .  The officers of the corporation shall be elected annually by the Board of Directors at the first meeting of the Board of Directors held after each annual meeting of the shareholders.  If the election of officers is not held at such meeting, such election shall be held as soon thereafter as possible.  Each officer shall hold office until his successor shall have been duly elected and qualified or until his death or until he shall resign or shall have been removed in the manner hereinafter provided.  Election or appointment of an officer, employee or agent shall not of itself create contract rights.  The Board of Directors may authorize the corporation to enter into an employment contract with any officer in accordance with applicable law.  Any officer of the corporation who also serves as a director of the corporation, shall resign as a director effective with such resignation, removal, disqualification or otherwise, as an officer of the corporation.
 
SECTION 3.           Removal .  Any officer may be removed by vote of two-thirds of the full Board of Directors, and any officer other than the president may be removed by the president, but such removal, other than for cause, shall be without prejudice to the contract rights, if any, of the person so removed.
 
 
First Northwest Bancorp Bylaws   Page  8 of 11  November 20, 2012
 
 
SECTION 4.           Vacancies .  At the recommendation and nomination of the president, a vacancy in any office because of death, resignation, removal, disqualification or otherwise, may be filled by the Board of Directors for the unexpired portion of the term.
 
SECTION 5.           Remuneration .  The remuneration of the officers shall be fixed from time to time by the Board of Directors giving due regard to the recommendations of the president and no officer shall be prevented from receiving such remuneration by reason of the fact that he is also a director of the corporation.
 
SECTION 6.           Secretary. The secretary shall prepare and maintain full and correct records of all meeting of the shareholders and of the board.  The secretary shall promptly inform the Board of Governors of the Federal Reserve System in writing of any change in the address of the office of the corporation or the location of its principal records.  He or she shall perform such other duties as he or she may be directed to perform by resolution of the board not inconsistent with state law, regulations and these Bylaws.
 
The board may appoint one or more assistant secretaries, and may authorize them, under the direction of the secretary of the corporation, to perform any of the duties entrusted to, and delegated by, the secretary.
 
ARTICLE VI
 
Contracts, Loans, Checks and Deposits
 
SECTION 1.           Contracts .   Except as otherwise prescribed by these Bylaws with respect to certificates for shares, the Board of Directors may authorize any officer, employee, or agent of the corporation to enter into any contract or execute and deliver any instrument in the name of and on behalf of the corporation.  Such authority may be general or confined to specific instances.
 
SECTION 2.           Loans .   No loans shall be contracted on behalf of the corporation and no evidence of indebtedness shall be issued in its name, unless authorized by the Board of Directors.  Such authority may be general or confined to specific instances.
 
SECTION 3.            Checks, Drafts, Etc .   All checks, drafts, or other orders for the payment of money, notes, or other evidences of indebtedness in the name of the corporation shall be signed by one or more officer, employee, or agent of the corporation in such manner as shall from time to time be determined by the Board of Directors.
 
SECTION 4.           Deposits .   All funds of the corporation not otherwise employed shall be deposits from time to time to the credit of the corporation in any of its duly authorized depositories as the Board of Directors may select.
 
SECTION 5.           Contracts with Directors and Officers.   To the fullest extent authorized by and in conformance with Washington law, the corporation may enter into contracts with and otherwise transact business as vendor, purchaser, or otherwise, with its directors, officers, employees and shareholders and with corporations, associations, firms, and entities in which they are or may become interested as directors, officers, shareholders, or otherwise, as freely as though such interest did not exist, except that no loans shall be made by the corporation secured by its shares, other than a loan made by the corporation to a tax-qualified employee stock ownership plan of the corporation or any of its affiliates.  In the absence of fraud, the fact that any director, officer, employee, shareholder, or any corporation, association, firm or other entity of which any director, officer, employee or shareholder is interested, is in any way interested in any transaction or contract shall not make the transaction or contract void or voidable, or require the director, officer, employee or shareholder to account to this corporation for any profits therefrom if the transaction or contract is or shall be authorized, ratified, or approved by (i) the vote of a majority of the Board of Directors excluding any interested director or directors, (ii) the written consent of the holders of a majority of the shares entitled to vote, or (iii) a general resolution approving the acts of the directors and officers adopted at a shareholders meeting by vote of the holders of the majority of the shares entitled to vote.  All loans to officers and directors shall be subject to Federal and state laws and regulations.  Nothing herein contained shall create or imply any liability in the circumstances above described or prevent the authorization, ratification or approval of such transactions or contracts in any other manner.
 
 
First Northwest Bancorp Bylaws   Page  9 of 11  November 20, 2012
 
 
SECTION 6.           Shares of Another Corporation .   Shares of another corporation held by this corporation may be voted by the president or any vice president, or by proxy appointment form by either of them, unless the directors by resolution shall designate some other person to vote the shares.
 
ARTICLE VII
 
Shares of Capital Stock and Their Transfer
 
SECTION 1.           Certificates for Shares and Uncertificated Shares .   Certificates representing shares of capital stock of the corporation shall be in such form as shall be determined by the Board of Directors and consistent with applicable law.  Such certificates shall be signed by the chief executive officer, the president, any vice president or by any other officer of the corporation authorized by the Board of Directors, attested by the secretary or an assistant secretary.  The signatures of such officers upon a certificate may be facsimiles if the certificate is manually signed on behalf of a transfer agent or a registrar, other than the corporation itself or one of its employees.  Each certificate for shares of capital stock shall be consecutively numbered or otherwise identified.  The name and address of the person to whom the shares are issued, with the number of shares and date of issue, shall be entered on the stock transfer books of the corporation.  All certificates surrendered to the corporation for transfer shall be canceled and no new certificate shall be issued until the former certificate for the like number of shares has been surrendered and canceled, except that in case of a lost or destroyed certificate, a new certificate may be issued therefor upon such terms and indemnity to the corporation as the Board of Directors may prescribe.  Notwithstanding the foregoing, the Board of Directors may provide by resolution or resolutions that some or all of any or all classes or series of the corporation’s stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by certificates until such certificate is surrendered to the corporation. In addition, notwithstanding the adoption of any such resolution providing for uncertificated shares, every holder of capital stock of the corporation theretofore represented by certificates and, upon request, every holder of uncertificated shares, shall be entitled to have a certificate for shares of capital stock of the corporation signed by, or in the name of the corporation as set forth above, certifying the number of shares owned by such stockholder in the corporation.
 
SECTION 2.            Transfer of Shares .   Stock of the corporation shall be transferable in the manner prescribed by applicable law and in these Bylaws.  Transfers of stock shall be made on the books of the corporation, and in the case of certificated shares of stock, only by the person named in the certificate or by such person’s attorney lawfully constituted in writing and upon the surrender of the certificate therefor, properly endorsed for transfer and payment of all necessary transfer taxes; or, in the case of uncertificated shares of stock, upon receipt of proper transfer instructions from the registered holder of the shares or by such person’s attorney lawfully constituted in writing, and upon payment of all necessary transfer taxes and compliance with appropriate procedures for transferring shares in uncertificated form; provided, however, that such surrender and endorsement, compliance or payment of taxes shall not be required in any case in which the officers of the corporation shall determine to waive such requirement.  With respect to certificated shares of stock, every certificate exchanged, returned or surrendered to the corporation shall be marked “Cancelled,” with the date of cancellation, by the secretary or assistant secretary of the corporation or the transfer agent thereof.  No transfer of stock shall be valid as against the corporation for any purpose until it shall have been entered in the stock records of the corporation by an entry showing from and to whom transferred.
 
 
First Northwest Bancorp Bylaws   Page  10 of 11  November 20, 2012
 
 
SECTION 3.            Certification of Beneficial Ownership .   The Board of Directors may adopt by resolution a procedure whereby a shareholder of the corporation may certify in writing to the corporation that all or a portion of the shares registered in the name of such shareholder are held for the account of a specified person or persons.  Upon receipt by the corporation of a certification complying with such procedure, the persons specified in the certification shall be deemed, for the purpose or purposes set forth in the certification, to be the holders of record of the number of shares specified in place of the shareholder making the certification.
 
         SECTION 4.            Lost Certificates .   The Board of Directors may direct a new certificate or uncertificated shares to be issued in place of any certificate theretofore issued by the corporation alleged to have been lost, stolen, or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen, or destroyed.  When authorizing such issuance of a new certificate or uncertificated shares, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen, or destroyed certificate, or his legal representative, to give the corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost, stolen, or destroyed.
 
ARTICLE VIII
 
Fiscal Year; Annual Audit
 
The fiscal year of the corporation shall end on the last day of June of each year.  The corporation shall be subject to an annual audit as of the end of its fiscal year by the independent public accountants appointed by and responsible to the Board of Directors.
 
ARTICLE IX
 
Dividends
 
Subject to the terms of the corporation’s Articles of Incorporation and the laws of the State of Washington, the Board of Directors may, from time to time, declare, and the corporation may pay, dividends upon its outstanding shares of capital stock.
 
ARTICLE X
 
Amendments
 
In accordance with the corporation’s Articles of Incorporation, these Bylaws may be repealed, altered, amended or rescinded by the shareholders of the corporation only by vote of not less than 80% of the outstanding shares of capital stock of the corporation entitled to vote generally in the election of directors (considered for this purpose as one class) cast at a meeting of the shareholders called for that purpose (provided that notice of such proposed repeal, alteration, amendment or rescission is included in the notice of such meeting).  In addition, the Board of Directors may repeal, alter, amend or rescind these Bylaws by vote of a majority of the Board of Directors.
 
*      *      *
 
Amended this 20 th day of November, 2012.
 
First Northwest Bancorp Bylaws    Page  11 of 11   November 20, 2012
 
 
 
Exhibit 4
 
FIRST NORTHWEST BANCORP
 
INCORPORATED UNDER THE LAWS OF THE STATE OF WASHINGTON
 
COMMON STOCK
CUSIP
 
See Reverse For
 
Certain Definitions
 
THIS CERTIFIES THAT
 
is the owner of
 
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, $0.01 PAR VALUE PER SHARE, OF
 
First Northwest Bancorp (“Corporation”), a stock corporation incorporated under the laws of the State of Washington. The shares represented by this Certificate are transferable only on the stock transfer books of the Corporation by the holder of record hereof or by such holder’s duly authorized attorney or legal representative upon the surrender of this Certificate properly endorsed. Such shares are non-withdrawable and not insurable. Such shares are not insured by the federal government. The Articles and shares represented hereby are issued and shall be held subject to all provisions of the Articles of Incorporation and Bylaws of the Corporation and any amendments thereto (copies of which are on file with the Transfer Agent), to all of which provisions the holder by acceptance hereof, assents.
 
          IN WITNESS WHEREOF, First Northwest Bancorp has caused this Certificate to be executed by the facsimile signatures of its duly authorized officers and has caused a facsimile of its corporate seal to be hereunto affixed.
   
CORPORATE SECRETARY
PRESIDENT AND CHIEF EXECUTIVE OFFICER
   
 
TRANSFER AGENT
 
[SEAL]
 
 
 
 
 
FIRST NORTHWEST BANCORP
 
          The shares represented by this Certificate are issued subject to all the provisions of the Articles of Incorporation and Bylaws of First Northwest Bancorp (“Corporation”) as from time to time amended (copies of which are on file with the Transfer Agent and at the principal executive offices of the Corporation).
 
          The shares represented by this Certificate are subject to a limitation contained in the Articles of Incorporation to the effect that in no event shall any record owner of any outstanding common stock which is beneficially owned, directly or indirectly, by a person who beneficially owns in excess of 10% of the outstanding shares of common stock (the “Limit”) be entitled or permitted to vote in respect of the shares held in excess of the Limit, unless a majority of the whole Board of Directors, as defined in the Articles of Incorporation shall have by resolution granted in advance such entitlement or permission.
 
          The Board of Directors of the Corporation is authorized by resolution(s), from time to time adopted, to provide for the issuance of preferred stock in series and to fix and state the powers, designations, preferences and relative, participating, optional or other special rights of the shares of each such series and the qualifications, limitations and restrictions thereof. The Corporation will furnish to any shareholder upon request and without charge a full description of each class of stock and any series thereof.
 
          The shares represented by this Certificate may not be cumulatively voted on any matter. The affirmative vote of the holders of at least 80% of the voting stock of the Corporation, voting together as a single class, shall be required to approve certain business combinations and other transactions, pursuant to the Articles of Incorporation, or to amend certain provisions of the Articles of Incorporation.
 
          The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as through they were written out in full according to applicable laws or regulations.
     
TEN COM
-as tenants in common
TEN ENT
-as tenants by the entireties
JT TEN
-as joint tenants with right of survivorship and not as tenants in common
UNIF GIFT MIN ACT
-_______Custodian _______ under Uniform Gifts to Minors Act ________
 
    (Cust)                       (Minor)
(State)
     
Additional abbreviations may also be used though not in the above list.
 
          For value received, ________________________________________ hereby sell, assign and transfer unto
 
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
 
 
 
Please print or typewrite name and address, including postal zip code, of assignee
 
 
shares of the common stock evidenced by this Certificate, and do hereby irrevocably constitute and appoint __________________________________, Attorney, to transfer the said shares on the books of the within named Corporation, with full power of substitution.
 
Dated _________________
 
__________________________________
 
 
Signature
 
     
 
__________________________________
 
 
Signature
 
NOTICE:  The signature to this assignment must correspond with the name as written upon the face of the Certificate in every particular, without alteration or enlargement or any change whatever.
 
 
Exhibit 5
 
November 21, 2012
 
Board of Directors
First Northwest Bancorp
105 West 8th Street
Port Angeles, Washington 98362
 
 
Re:
First Northwest Bancorp
 
To the Board of Directors:
 
You have requested our opinion as special counsel for First Northwest Bancorp, a Washington corporation (the “Company”), in connection with the Registration Statement on Form S-1 (the “Registration Statement”) filed by the Company initially on November 21, 2012 with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the “Securities Act”).
 
In rendering this opinion, we understand that the common stock of the Company, par value $0.01 per share (the “Common Stock”) will be offered and sold in the manner described in the prospectus contain in the Registration Statement (the “Prospectus”).
 
This opinion is being furnished in accordance with the requirements of Item 601(b)(5) of Regulation S-K under the Securities Act, and no opinion is expressed herein as to any matter pertaining to the contents of the Registration Statement or Prospectus, other than as to the validity of the Common Stock.
 
We have examined the originals, or copies identified to our satisfaction, of such corporate records of the Company, certificates of public officials, officers of the Company, and other persons, and such other documents, agreements and instruments as we have deemed relevant and necessary for the basis of our opinion hereinafter expressed. In such examination, we have assumed the following: (a) the authenticity of original documents and the genuineness of all signatures; (b) the conformity to the originals of all documents submitted to us as copies; and (c) the truth, accuracy, and completeness of the information, representations and warranties contained in the records, documents, instruments, and certificates we have reviewed.
 
 
 
 
 
Securities and Exchange Commission
November 21, 2012
Page 2
 
Based on and subject to the foregoing, and assuming that: (i) the Registration Statement and any amendments thereto (including post-effective amendments) will have become effective and comply with all applicable laws; (ii) the Registration Statement will be effective and will comply with all applicable laws at the time the Common Stock is offered or issued as contemplated by the Registration Statement; and (iii) the Common Stock will be issued and sold in the manner stated in the Registration Statement and the Prospectus; we are of opinion that:
 
 
1.
The Common Stock that will be issued in connection with the Registration Statement will be validly issued, fully paid and non assessable.
 
We express no opinion as to laws other than the laws of the State of Washington with respect to the opinions set forth in paragraph (1) above, including the provisions of the Washington State Constitution and the reported judicial decisions interpreting such law. No opinion is expressed herein with respect to the qualification of the Common Stock under the securities or blue sky laws of any other state or any foreign jurisdiction.
 
We hereby consent to the reference to us under the heading “Legal and Tax Opinions” in the Prospectus and to the filing of this opinion as Exhibit 5 to the Registration Statement. By giving this consent, we do not admit that we are within the category of persons whose consent is required under Section 7 of the Securities Act and the rules and regulations promulgated thereunder.
 
 
  Very truly yours,  
     
  /s/ Breyer & Associates PC  
  BREYER & ASSOCIATES PC  
 
Exhibit 8.1
 
 
 
LAW OFFICES
 
     
 
Silver, Freedman & Taff , L.L.P.
A LIMITED LIABILITY PARTNERSHIP INCLUDING
PROFESSIONAL CORPORATIONS
 
     
 
3299 K STREET N.W.
 
 
SUITE 100
 
 
WASHINGTON, D.C. 20007
 
 
PHONE: (202) 295-4500
WRITER = S DIRECT DIAL NUMBER
 
FAX:   (202) 337-5502
(202) 295-4503
 
WWW.SFTLAW.COM
 
 
 
 
 
November 14, 2012
 
 
Board of Directors
First Federal Savings and Loan Association of Port Angeles
105 West 8 th Street
Port Angeles, Washington 98362


 
RE:
Federal Income Tax Opinion Relating To The Conversion Of First Federal Savings and Loan Association of Port Angeles, Port Angeles, Washington, From a State-Chartered Mutual Savings and Loan Association To A State-Chartered Stock Savings Bank Under Section 368(a)(1)(E) or 368(a)(1)(F) of the Internal Revenue Code of 1986, As Amended
 
 
Gentlemen:

In accordance with your request set forth hereinbelow is the opinion of this firm relating to the federal income tax consequences of the conversion of First Federal Savings and Loan Association of Port Angeles, Port Angeles, Washington from a state-chartered mutual savings and loan association to a state-chartered stock savings bank pursuant to the provisions of Section 368(a)(1)(E) or Section 368(a)(1)(F) of the Internal Revenue Code of 1986, as amended (the “Code”).

Capitalized terms used herein which are not expressly defined herein shall have the meaning ascribed to them in the Plan of Conversion adopted by the Board of Directors of Mutual on May 22, 2012, (the “Plan”).

Based solely on the terms and conditions of the Plan, the accuracy of the factual statements and representations contained in a letter from Mutual to us of even date for purposes of our opinion and our analysis and examination of applicable federal income tax laws, rulings, regulations, and judicial precedents, we are of the opinion that:

(1)     The Conversion will constitute a reorganization within the meaning of Section 368(a)(1)(E) or Section 368(a)(1)(F) of the Code.  Neither First Federal nor Converted Savings Bank will recognize any gain or loss as a result of the transaction (Rev. Rul. 80-105, 1980-1 C.B. 78).  First Federal and Converted Savings Bank will each be a party to a reorganization within the meaning of Section 368(b) of the Code.
 
 
 
 
November 14, 2012
Page 2
 
(2)     Converted Savings Bank will recognize no gain or loss upon the receipt of money and other property, if any, in the Conversion, in exchange for its shares.  (Section 1032(a) of the Code).

(3)     No gain or loss will be recognized by Holding Company upon the receipt of money for Conversion Stock.  (Section 1032(a) of the Code).

(4)     Except to the extent that Section 362(e) of the Code is applicable, the basis of First Federal's assets in the hands of Converted Savings Bank will be the same as the basis of those assets in the hands of First Federal immediately prior to the transaction.  (Section 362(b) of the Code).

(5)     Converted Savings Bank's holding period of the assets of First Federal will include the period during which such assets were held by First Federal prior to the Conversion.  (Section 1223(2) of the Code).

(6)     The creation of the liquidation account on the records of Converted Savings Bank will have no effect on First Federal's or Converted Savings Bank's taxable income, deductions, or additions to the reserve for bad debts.

(7)     No income will be recognized by Holding Company on the distribution of Subscription Rights unless the issuance of the Subscription Rights results in gain to recipients thereof.  It is more likely than not that no income will be recognized by Holding Company on the distribution of Subscription Rights.

(8)     It is more likely than not that the fair market value of the Subscription Rights is zero.  Thus, it is more likely than not that no gain will be recognized by Eligible Account Holders, Supplemental Account Holders or Other Members upon their receipt of Subscription Rights.  Gain, if any, realized by the aforesaid account holders and Other Members will not exceed the fair market value of the Subscription Rights received.  If gain is recognized by account holders and Other Members upon the distribution to them of Subscription Rights, the Holding Company could also recognize income on the distribution of Subscription Rights.  No gain should be recognized by the recipients of Subscription Rights or Holding Company upon the exercise of Subscription Rights.
 
(9)     A depositor's basis in his deposit accounts of Converted Savings Bank will be the same as the basis of his deposit accounts in First Federal.  (Section 1012 of the Code).  The basis of the interest in the liquidation account of Converted Savings Bank received by Eligible Account Holders and Supplemental Eligible Account Holders will be equal to the cost of such property, i.e. , the fair market value of the proprietary interest in Mutual, which in this transaction we believe to have no fair market or economic value consistent with the conclusions reached by RP Financial, LC in its letter to you relating to the value of the liquidation account and Subscription Rights.

(10)          The basis of Conversion Stock to its shareholders will be the purchase price thereof.  (Section 1012 of the Code).
 
 
 
 
November 14, 2012
Page 3
 
(11)          A shareholder's holding period for Conversion Stock acquired through the exercise of the Subscription Rights should begin on the date on which the Subscription Rights are exercised.  (Section 1223(6) of the Code).  The holding period for the Conversion Stock purchased pursuant to the Direct Community Offering or Syndicated Community Offering will commence on the date following the date on which such stock is purchased.  (Rev. Rul. 70-598, 1970-2 C.B. 168).

(12)          Regardless of any book entries that are made for the establishment of the liquidation account, the reorganization will not diminish the accumulated earnings and profits of First Federal available for the subsequent distribution of dividends, within the meaning of Section 316 of the Code.  Section 1.312-11(b) and (c) of the Regulations.  Converted Savings Bank will succeed to and take into account the earnings and profits, or deficit in earnings and profits, of First Federal as of the date of Conversion.

(13)          The reasoning in support of our opinions in paragraph 7 and 8 is set forth hereinbelow.  We understand that the Subscription Rights will be granted at no cost to recipients, will be legally non-transferable, will be of short duration, and will only entitle recipients to purchase Conversion Stock at fair market value, being the same price to be paid by the general public in the Direct Community Offering or Syndicated Community Offering.  We also note that the Internal Revenue Service has not in the past concluded that subscription rights in like transactions have any value.  In addition, we are relying on a letter from RP Financial, LC  to you stating its conclusion that the Subscriptions Rights do not have any economic or market value at the time of distribution or at the time the rights are exercised in the Subscription Offering.  Based on the foregoing, we believe it is more likely than not that the Subscription Rights have no value.  More likely than not means there is a greater than fifty percent likelihood that our conclusion is correct.

The above opinions are effective to the extent that First Federal is solvent.  Based upon our review of the financial statements of First Federal and related financial information provided to us by First Federal, we have concluded that First Federal is solvent as of the date hereof.  No opinion is expressed about the tax treatment of the transaction if First Federal is not solvent, which determination is made at the end of the tax year in which the transaction is consummated.

No opinion is expressed as to the tax treatment of the transaction under the provisions of any of the other sections of the Code and Income Tax Regulations which may also be applicable thereto, including without limitation, whether the transaction results in an ownership change under Section 382 of the Code subjecting the pre-change losses of First Federal (such as net unrealized built in losses) to the restrictions and limitations of Section 382 of the Code, or to the tax treatment of any conditions existing at the time of, or effects resulting from, the transaction which are not specifically covered by the opinions set forth above.
 
 
 
 
November 14, 2012
Page 4
 
We are furnishing this opinion in connection with the filing of Holding Company’s S-1 Resignation Statement on Form S-1, as amended and this opinion is not to be relied upon for any other purpose without our prior written consent.  We hereby consent to the filing of this opinion with the Securities and Exchange Commission as an exhibit to such Registration Statement, and to the references therein to us.  In giving such consent, we do not thereby admit that we are in the category of persons whose consent is required under Section 7 of the Securities Act of 1933, as amended.
 
 
 
Very truly yours,
 
       
 
 
   
  /s/ Silver, Freedman & Taff, L.L.P.  
       
  SILVER, FREEDMAN & TAFF, L.L.P.  

 
Exhibit 8.2

 
 
 
Gary R. Colley
Stephen C. Moriarty
David H. Neupert
Patrick M. Irwin
Simon Barnhart
Christopher J. Riffle*
Joshua W. Fox*
GRAPHIC
 
Sequim Office
495 West Alder Street
 (360) 681-5000
 
Stephen E. Oliver, Of Counsel
Bart G. Irwin (Retired)
Frank B. Platt ( 1926 - 2009 )
Stanley A. Taylor ( 1911 - 2001 )
 
403 South Peabody
Port Angeles, Washington 98362
(360) 457-3327
Fax (360) 452-5010
Email: pmirwin@plattirwin.com
Port Townsend Office
914 Washington Street
 (360) 385-4399
 
Please address all mail to the
Port Angeles  Office
*(Also licensed in Nebraska)
 
 


November 15, 2012


Board of Directors
FIRST FEDERAL SAVINGS AND LOAN
ASSN OF PORT ANGELES
PO Box 351
Port Angeles, WA  98362

Re:           Tax Opinion

Dear Board of Directors:

This letter is in response to your request for an opinion of this firm regarding the potential tax consequences of (a) First Federal Savings and Loan Association of Port Angeles converting from a Washington chartered mutual savings bank to a Washington chartered stock savings bank, (b) the sale of all of the shares in the newly converted First Federal (“First Federal”) to a newly formed parent corporation (the “Holding Company”), and (c)followed by the issuance of stock by the Holding Company pursuant to the Plan of Conversion adopted by the Board of Directors of First Federal on May 22, 2012 (the “Plan”).

Please be aware that this opinion is limited to taxes that may be imposed by the State of Washington.  You have received, or will receive shortly, an opinion letter from the firm Silver, Freedman & Taff, L.L.P., regarding the federal tax consequences of First Federal converting to a stock company to First Federal, its Holding Company, and the deposit holders of First Federal under those aspects of federal law as set forth within its letter.  We express no opinion regarding the federal tax implications regarding the above described transactions, or the opinion expressed by Silver, Freedman & Taff, L.L.P.  We do however, rely upon the same representations of facts made by First Federal in its November 14, 2012 letter to Silver, Freedman & Taff, L.L.P., as well as those assumptions stated or implied herein.

Since the rights appurtenant to deposit holders accounts have no value (according to the Silver, Freedman & Taff, L.L.P., opinion letter), the accounts are exempt from Washington property tax for reasons explained below.  The Plan does not involve any act or activity on which a deposit holder could be taxed by the State of Washington (e.g., sale of a good, or earnings in a business).  Therefore there are no negative tax consequences, under Washington taxation, for a deposit holder. The remainder of this letter expresses our opinion regarding the potential tax consequences applicable to First Federal and the Holding Company only.
 
 
 
 
 
Board of Directors
November 15, 2012
Page 2
 
 
Washington Taxation

Since the State of Washington does not impose an income tax, there is no income tax implication.  There are, however, four (4) potential forms of taxation that may apply to the transactions described above.  They are:  property tax, retail sales tax, use tax and business and occupation tax.  Each are addressed separately below.

1.      Property Tax

The stock acquired by the Holding Company from First Federal is property that would be open to taxation unless there is an exemption by statute or regulation. The Holding Company’s ownership of stock, or any intangible personal property for that matter, is specifically exempt from ad valorem taxation of property under RCW 84.36.070.  No property tax would be owed.

2.      Retail Sales Tax

Any retail sale of property in Washington may be open to taxation.  This would potentially include the sale of stock from First Federal to its Holding Company.  Such a sale is exempt from taxation for two reasons.  First, Washington Administrative Code provision (“WAC”) 458-20-106 exempts transfers of capital assets to a corporation by any individual or business entity in exchange for “capital stock therein.”  This is the specific transaction contemplated in the Plan.  Second, under the same WAC provision, transfers pursuant to reorganization under 26 U.S.C. Sec. 368 of the Internal Revenue Code, when capital gains or ordinary income is not realized, are exempt from retail sales tax in Washington.  We rely upon the opinion expressed in the letter from Silver, Freedman & Taff, L.L.P., that the Plan, once carried out, is such a qualifying reorganization.  Under either of these exemptions, no retail sales tax would be owed.

3.      Use Tax

Use tax applies to the sale of assets that are not subject to retail sales tax and when no exemption to the tax applies.  Both the acquisition of First Federal’s stock by the Holding Company, and the conversion of First Federal from a mutually owned institution to a shareholder owned bank, could trigger use taxation.

a.     Acquisition of Stock .  No use tax is due in the case of the Holding Company’s acquisition of First Federal’s stock.  Neither First Federal nor the Holding Company will pay use tax under WAC 458-20-106 since, as with retail sales tax, a transfer of capital assets to a business in exchange for an “adjustment of the beneficial interest in the business[,]” such as receiving stock, is exempt from use tax.
 
 
 
 
 
Board of Directors
November 15, 2012
Page 3

 
b.     The Conversion .  In rare instances, a business converting from one form of business to another can be an event triggering use tax.  Assuming First Federal has paid use tax or retail sales tax on all of the assets it now holds, no new tax will be owed upon the conversion to a stock company.

4.      Business and Occupation Tax

Business and occupation tax is levied against income earned in the course of an individual’s or entity’s regular business activities.  Under WAC 458-20-106, sales that are “casual or isolated” in nature fall outside of the entity’s regular “business” and are exempt from taxation.  A sale is “casual or isolated” if the individual or entity does not sell anything of the same “type” as what is being sold.  Both First Federal and the Holding Company are selling their own respective stock in themselves pursuant to the Plan for the expressed limited purpose of initially capitalizing the two corporations.  Neither corporation is in the “business” of issuing their own stock.  Based on the isolated and distinct nature of the transaction, it is our reasoned opinion that no business and occupation tax will be owed by virtue of the issuance of stock in exchange for capital contributions.  There is, at this time, no published court opinion, an opinion of the Board of Tax Appeals, or a specific statute or code weighing in on this particular issue.

Conclusion

Based on the information provided by First Federal to Silver, Freedman & Taff, L.L.P., in First Federal’s letter dated November 14, 2012, information otherwise communicated to us by First Federal, the Plan, and the assumptions expressed and implied above, it is our opinion that no adverse tax consequences, under the laws of the State of Washington, will result from the transactions described above.  This opinion is expressed on a more likely than not basis.

As noted at the outset of this letter, our opinion is limited to the tax implications with the State of Washington regarding the Plan.  We render no opinion with regard to any other legal implications of the Plan, the federal tax consequences of such a conversion, or the tax or legal implications of any act or omission that may take place after the Plan is executed.

We consent to the filing of this opinion with the Washington Department of Financial Institutions, Division of Banks, and the Federal Deposit Insurance Corporation as an exhibit to the Application for Approval of Conversion, if you choose to do so.

We also consent to the filing of this opinion with the Securities and Exchange Commission as an exhibit to the Registration Statement on Form S-1 and to the reference to the Platt Irwin Law Firm in the Prospectus, which is a part of the Registration Statement under headings “The Conversion –Effects of the Conversion – Tax Effects of the Conversion” and “Legal and Tax Opinions” should you wish to do so.

 
Sincerely,
 
       
 
PLATT IRWIN LAW FIRM
 
 
  /s/ Patrick M. Irwin  
       
 
Patrick M. Irwin
 


PMI:ss

Exhibit 8.3
 
RP ®   FINANCIAL, LC.
Advisory | Planning | Valuation
 
 
November 21, 2012
 
Board of Directors
First Federal Savings and Loan Association of Port Angeles
105 West Eighth Street
Port Angeles, Washington  98362
 
Members of the Board of Directors:
 
Re:          Plan of Conversion
First Northwest Bancorp
First Federal Savings and Loan Association of Port Angeles
 
Members of the Board:
 
All capitalized terms not otherwise defined in this letter have the meanings given such terms in the Plan of Conversion (the “Plan”) adopted by the Board of Directors of First Federal Savings and Loan Association of Port Angeles (the “Bank”).  Pursuant to the Plan, the Bank will convert from mutual to stock form and issue all of the Bank’s outstanding capital stock to First Northwest Bancorp (the “Company”).  Simultaneously, the Company will offer shares of its common stock for sale in a public offering.
 
        We understand that in accordance with the Plan, subscription rights to purchase shares of common stock in the Company are to be issued to: (1) Eligible Account Holders; (2) Tax-Qualified Plans Employee Stock Benefit Plans; (3) Supplemental Eligible Account Holders; and (4) Other Members.  Based solely upon our observation that the subscription rights will be available to such parties without cost, will be legally non-transferable and of short duration, and will afford such parties the right only to purchase shares of common stock at the same price as will be paid by members of the general public in the community and underwritten offerings, but without undertaking any independent investigation of state or federal law or the position of the Internal Revenue Service with respect to this issue, we are of the belief that, as a factual matter:
 
 
(1)
the subscription rights will have no ascertainable market value; and,
 
 
(2)
the price at which the subscription rights are exercisable will not be more or less than the pro forma market value of the shares upon issuance.
 
Changes in the local and national economy, the legislative and regulatory environment, the stock market, interest rates, and other external forces (such as natural disasters or significant world events) may occur from time to time, often with great unpredictability and may materially impact the value of thrift stocks as a whole or the Company’s value alone.  Accordingly, no assurance can be given that persons who subscribe to shares of common stock in the subscription offering will thereafter be able to buy or sell such shares at the same price paid in the subscription offering.
 
  Sincerely,
   
  /s/ RP Financial, LC.  
   
  RP Financial, LC.
 
   
Washington Headquarters
 
Three Ballston Plaza
Telephone: (703) 528-1700
1100 North Glebe Road, Suite 600
Fax No.: (703) 528-1788
Arlington, VA 22201
Toll-Free No.: (866) 723-0594
www.rpfinancial.com
E-Mail: mail@rpfinancial.com
 
 
Exhibit 10.1
 
FIRST NORTHWEST BANCORP
EMPLOYEE STOCK OWNERSHIP PLAN
 
Effective January 1, 2013

 
 
 

FIRST NORTHWEST BANCORP
EMPLOYEE STOCK OWNERSHIP PLAN
 
TABLE OF CONTENTS
         
PREAMBLE
1
         
ARTICLE I - DEFINITION OF TERMS AND CONSTRUCTION
2
 
1.1
Definitions
2
   
(a)
Account
2
   
(b)
Act
2
   
(c)
Administrator
2
   
(d)
Annual Additions
2
   
(e)
Authorized Leave of Absence
2
   
(f)
Beneficiary
2
   
(g)
Board of Directors
3
   
(h)
Break
3
   
(i)
Code
3
   
(j)
Compensation
3
   
(k)
Date of Hire
4
   
(l)
Disability
4
   
(m)
Disability Retirement Date
4
   
(n)
Early Retirement Date
4
   
(o)
Effective Date
4
   
(p)
Eligibility Period
4
   
(q)
Employee
5
   
(r)
Employee Stock Ownership Account
5
   
(s)
Employee Stock Ownership Contribution
5
   
(t)
Employee Stock Ownership Suspense Account
5
   
(u)
Employer
5
   
(v)
Employer Securities
5
   
(v-1)
Employment Commencement Date
5
   
(w)
Entry Date
5
   
(x)
Exempt Loan
5
   
(y)
Exempt Loan Suspense Account
6
   
(z)
Financed Shares
6
   
(aa)
Former Participant
6
   
(bb)
Fund
6
   
(cc)
Hour of Service
6
   
(dd)
Investment Adjustments
6
   
(ee)
Limitation Year
6
   
(ff)
Normal Retirement Date
6
   
(ff-1)
One Year Period of Severance
6
   
(gg)
Participant
7
   
(gg-1)
Period of Severance
7
   
(hh)
Plan
7
   
(ii)
Plan Year
7
   
(jj)
Qualified Domestic Relations Order
7
   
(kk)
Qualified Military Service
7
   
(ll)
Related Employer
7
   
(mm)
Retirement
8
   
(nn)
Service
8
   
(oo)
Sponsor
8
   
(pp)
Statutory Compensation
8

 
 
 
 
   
(qq)
Trust Agreement
8
   
(rr)
Trustee
8
   
(ss)
Valuation Date
8
   
(tt)
Year of Eligibility Service
8
   
(uu)
Year of Vesting Service
8
 
1.2
Plurals and Gender
9
 
1.3
Incorporation of Trust Agreement
9
 
1.4
Headings
9
 
1.5
Severability
9
 
1.6
References to Governmental Regulations
9
 
1.7
Notices
9
 
1.8
Evidence
9
 
1.9
Action by Employer
9
         
ARTICLE II - PARTICIPATION
10
 
2.1
Commencement of Participation
10
 
2.2
Termination of Participation
10
 
2.3
Resumption of Participation
10
 
2.4
Determination of Eligibility
10
 
2.5
Restricted Participation
11
         
ARTICLE III - CREDITED SERVICE
12
 
3.1
Service Counted for Eligibility Purposes
12
 
3.2
Service Counted for Vesting Purposes
12
 
3.3
Credit for Pre-Break Service
12
 
3.4
Service Credit During Authorized Leaves
12
 
3.5
Service Credit During Maternity or Paternity Leave
13
 
3.6
Ineligible Employees
13
 
3.7
Military Service Provisions
13
 
3.8
Elapsed Time Method of Crediting Service
14
         
ARTICLE IV - CONTRIBUTIONS
15
 
4.1
Employee Stock Ownership Contribution
15
 
4.2
Time and Manner of Employee Stock Ownership Contribution
15
 
4.3
Records of Contributions
16
 
4.4
Erroneous Contributions
16
         
ARTICLE V - ACCOUNTS, ALLOCATIONS AND INVESTMENTS
17
 
5.1
Establishment of Separate Participant Accounts
17
 
5.2
Establishment of Suspense Accounts
17
 
5.3
Allocation of Earnings, Losses and Expenses
18
 
5.4
Application of Forfeitures
18
 
5.5
Allocation of Employee Stock Ownership Contribution
18
 
5.6
Limitation on Annual Additions
19
 
5.7
Erroneous Allocations
19
 
5.8
Value of Participant’s Account
19
 
5.9
Investment of Account Balances
19
         
ARTICLE VI - RETIREMENT, DEATH AND DESIGNATION OF BENEFICIARY
20
 
6.1
Normal Retirement
20
 
6.2
Early Retirement
20
 
6.3
Disability Retirement
20
 
6.4
Death Benefits
20
 
6.5
Designation of Beneficiary and Manner of Payment
20

 
 
 

ARTICLE VII - VESTING AND FORFEITURES
22
 
7.1
Vesting on Death, Disability and Normal Retirement
22
 
7.2
Vesting on Termination of Participation
22
 
7.3
Forfeitures
22
         
ARTICLE VIII - EMPLOYEE STOCK OWNERSHIP PROVISIONS
24
 
8.1
Right to Demand Employer Securities
24
 
8.2
Voting Rights; Tendering Shares
24
 
8.3
Nondiscrimination in Employee Stock Ownership Contribution
25
 
8.4
Dividends
25
 
8.5
Exempt Loans
26
 
8.6
Exempt Loan Payments
27
 
8.7
Put Option
28
 
8.8
Diversification Requirements
29
 
8.9
Independent Appraiser
29
         
ARTICLE IX - PAYMENTS AND DISTRIBUTIONS
30
 
9.1
Payments on Termination of Service - In General
30
 
9.2
Commencement of Payments
30
 
9.3
Mandatory Commencement of Benefits
31
 
9.4
Required Beginning Dates
33
 
9.5
Form of Payment
34
 
9.6
Payments Upon Termination of Plan
34
 
9.7
Distributions Pursuant to Qualified Domestic Relations Orders
34
 
9.8
ESOP Distribution Rules
35
 
9.9
Direct Rollover
35
 
9.10
Share Legend
36
 
9.11
Power to Reduce Benefit
36
         
ARTICLE X - PROVISIONS RELATING TO TOP-HEAVY PLANS
37
 
10.1
Top-Heavy Rules to Control
37
 
10.2
Top-Heavy Plan Definitions
37
 
10.3
Calculation of Accrued Benefits
38
 
10.4
Determination of Top-Heavy Status
39
 
10.5
Minimum Contribution
39
         
ARTICLE XI - ADMINISTRATION
41
 
11.1
Appointment of Administrator
41
 
11.2
Resignation or Removal of Administrator
41
 
11.3
Appointment of Successors: Terms of Office, Etc.
41
 
11.4
Powers and Duties of Administrator
41
 
11.5
Action by Administrator
42
 
11.6
Participation by Administrator
42
 
11.7
Agents
43
 
11.8
Allocation of Duties
43
 
11.9
Delegation of Duties
43
 
11.10
Administrator’s Action Conclusive
43
 
11.11
Compensation and Expenses of Administrator
43
 
11.12
Records and Reports
43
 
11.13
Reports of Fund Open to Participants
43
 
11.14
Named Fiduciary
44
 
11.15
Information from Employer
44
 
11.16
Responsibilities of Directors
44

 
 
 

 
11.17
Liability and Indemnification
44
         
ARTICLE XII - CLAIMS PROCEDURE
45
 
12.1
Notice of Denial
45
 
12.2
Right to Reconsideration
45
 
12.3
Review of Documents
45
 
12.4
Decision by Administrator
45
 
12.5
Notice by Administrator
45
 
12.6
Special Claims Procedures
45
         
ARTICLE XIII - AMENDMENTS, TERMINATION AND MERGER
47
 
13.1
Amendments
47
 
13.2
Effect of Change In Control
47
 
13.3
Consolidation or Merger of Trust
48
 
13.4
Bankruptcy or Insolvency of Employer
49
 
13.5
Voluntary Termination
49
 
13.6
Partial Termination of Plan or Permanent Discontinuance of Contributions
49
         
ARTICLE XIV - MISCELLANEOUS
50
 
14.1
No Diversion of Funds
50
 
14.2
Liability Limited
50
 
14.3
Facility of Payment
50
 
14.4
Spendthrift Clause
50
 
14.5
Benefits Limited to Fund
50
 
14.6
Cooperation of Parties
51
 
14.7
Payments Due Missing Persons
51
 
14.8
Governing Law
51
 
14.9
Nonguarantee of Employment
51
 
14.10
Counsel
51
 
14.11
Purposes
51
 
14.12
Invalidity
52

 
 
 
 
FIRST NORTHWEST BANCORP
 
EMPLOYEE STOCK OWNERSHIP PLAN

PREAMBLE

THIS PLAN AGREEMENT, made and entered into this ____ day of ______________, 20___, by and between First Northwest Bancorp (hereinafter referred to as “Sponsor” or “Employer”) and   Pentegra Trust Company (hereinafter referred to as “Trustee”), is to witnesseth that:

WHEREAS, effective as of January 13, 2013,  First Northwest Bancorp has adopted the First Northwest Bancorp Employee Stock Ownership Plan (“Plan”) in order to enable Participants to share in the growth and prosperity of the Sponsor and its wholly owned subsidiary, First Federal Savings and Loan Association of Port Angeles, and to provide Participants with an opportunity to accumulate capital for their future economic security by accumulating funds to provide retirement, death and disability benefits; and

WHEREAS,  the Plan is a stock bonus plan, designed to meet the applicable requirements of Code Section 409, and an employee stock ownership plan, designed to meet the applicable requirements of Code Section 4975(e)(7) and Act Section 407(d)(6); and

WHEREAS, the Plan is intended to invest primarily in “qualifying employer securities” as defined in Code Section 4975(e)(8); and

WHEREAS, The Sponsor intends that the Plan will qualify under Code Sections 401(a) and 501(a) and will comply with such provisions; and

WHEREAS, the Sponsor’s Board of Directors has resolved to adopt, continue, sponsor, and maintain the Plan for the benefit of eligible employees.

NOW, THEREFORE, in consideration of the foregoing premises, effective  January 13, 2013 , except to the extent a different effective date is prescribed by applicable pension legislation, or except to the extent a particular Plan section specifies a different effective date, the sponsor adopts and agrees to maintain that certain stock bonus plan and employee stock ownership plan qualified under Code Section 401(a) and 4975(e)(7) and Treas. Reg. §1.401-1(b)(1)(iii) known as the “First Northwest Bancorp Employee Stock Ownership Plan” in accordance with the provisions set forth herein.  Notwithstanding the foregoing, the rights of any person (including such person ’ s beneficiaries) who terminated employment or who retired on or before any effective date, or the effective date of a particular amend­­ment, shall be deter­mined solely under the terms of this Plan as in effect on the date of his termination of employment or retirement, unless such per­son is thereafter reemployed and again becomes a participant.
 
 
 
 
 
ARTICLE I
DEFINITION OF TERMS AND CONSTRUCTION

1.1            Definitions .

Unless a different meaning is plainly implied by the context, the following terms as used in this Plan shall have the following meanings:

(a)            “Account” shall mean a Participant’s or Former Participant’s entire accrued benefit under the Plan, including the balance credited to his Employee Stock Ownership Account and any other account described in Section 5.1.

(b)            “Act” shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, or any successor statute, together with the applicable regulations promulgated thereunder.

(c)            “Administrator” shall mean the fiduciary provided for in Article XI.

(d)            “Annual Additions” shall mean, with respect to each Participant, the sum of those amounts allocated to the Participant’s Account under this Plan and accounts under any other qualified defined contribution plan to which the Employer or a Related Employer contributes for any Limitation Year, consisting of the following:

(1)   Employer contributions;

(2)   Forfeitures; and

(3)   Employee contributions (if any).

Annual Additions shall not include any Investment Adjustment.  Annual Additions also shall not include employer contributions which are used by the Trust to pay interest on an Exempt Loan nor any forfeitures of Employer Securities purchased with the proceeds of an Exempt Loan, provided that not more than one-third of the employer contributions are allocated to Participants who are among the group of employees deemed “highly compensated employees” within the meaning of Code Section 414(q), as further described in Section 8.3.  Annual Additions also shall not include any other amounts not considered annual additions pursuant Treasury Regulations issued under Code Section 415.

(e)            “Authorized Leave of Absence” shall mean an absence from Service with respect to which the Employee may or may not be entitled to Compensation and which meets any one of the following requirements:

(1)            Service in any of the armed forces of the United States for up to 36 months, provided that the Employee resumes Service within 90 days after discharge, or such longer period of time during which such Employee’s employment rights are protected by law; or

(2)            Any other absence or leave expressly approved and granted by the Employer.  In approving such leaves of absence, the Employer shall treat all Employees on a uniform and nondiscriminatory basis.

(f)            “Beneficiary” shall mean such legal or natural persons, who may be designated contingently or successively, as may be designated by the Participant pursuant to Section 6.5 to receive benefits after the death of the Participant, or in the absence of a valid designation, such persons specified in Section 6.5(b) to receive benefits after the death of the Participant.
 
 
2
 
 
(g)            “Board of Directors” shall mean the Board of Directors of the Sponsor.

(h)            “Break” shall mean a Plan Year during which an Employee fails to complete more than 500 Hours of Service.  No Break shall occur while a Participant is performing Qualified Military Service.  If the Plan uses the elapsed time method of crediting Service (pursuant to Section 3.8), then references herein to “Break” or “Breaks” shall be deemed to refer to a One-Year Period(s) of Severance.

(i)            “Code” shall mean the Internal Revenue Code of 1986, as amended from time to time, or any successor statute, together with the applicable regulations promulgated thereunder.

(j)            “Compensation” shall be defined as follows:

(1)           Generally.   Compensation shall mean an Employee’s base salary and commissions (disregarding commissions in excess of $50,000 and taking into amounts attributable to such compensation which are deferred under an election under Code Sections 125(a), 132(f)(4) or 402(e)(3).  Only Compensation (as herein defined) that is paid to the Employee after he becomes a Participant shall be taken into account.

(2)           Statutory Compensation.  For purposes of applying the limitations of Code Section 415 and certain other statutory purposes, , the term “Compensation” shall mean wages within the meaning of Code Section 3401(a) for purposes of income tax withholding at the source but determined without regard to any rules that limit the remuneration included in wages based on the nature or location of the employment or the services performed (such as the exception for agricultural labor in Code section 3401(a)(2)), that are paid to an Employee by the Employer for services rendered to the Employer during a Plan Year, plus amounts that would be included in wages but for an election under Code Sections 125(a), 132(f)(4), 402(e)(3), 402(h)(1)(B), 402(k), or 457(b), but excluding amounts paid or reimbursed by the Employer for moving expenses incurred by the Participant, but only to the extent that, at the time of the payment, it is reasonable to believe that these amounts are deductible by the Participant under Code Section 217.  Back pay, within the meaning of section 1.415(c)-2(g)(8) of the Treasury Regulations, shall be treated as Statutory Compensation for the Plan Year to which the back pay relates to the extent the back pay represents wages and compensation that would otherwise be included in this definition.  This paragraph shall be interpreted in a manner consistent with the Regulations under Code Section 415.

(3)           General timing rule.  In order to be taken into account for a Plan Year under subparagraphs (1) and (2) above, Compensation must be actually paid or made available to a Participant (or, if earlier, includible in the gross income of the Participant) within the Plan Year or Limitation Year, as the case may be. For this purpose, compensation is treated as paid on a date if it is actually paid on that date or it would have been paid on that date but for an election under Code section 125, 132(f)(4), 401(k), 403(b), 408(k), 408(p)(2)(A)(i), or 457(b).
 
 
3
 
 
(4)           Special rules regarding severance compensation.  For purposes of applying subparagraphs (1) and (2) above, in order to be taken into account for a Plan Year or Limitation Year, Compensation must be paid or treated as paid to the Participant prior to the Participant’s severance from employment with the Employer maintaining the plan.  For this purpose, severance from employment is determined in the same manner as under Treasury Regulation Section 1.401(k)-1(d)(2) except that, for purposes of determining the employer of an employee, the modifications provided under Code Section 415(h) to the employer aggregation rules apply.

(5)           Notwithstanding subparagraph (4), for purposes of applying the definition in (2) above, Compensation for a Plan Year shall also include Compensation paid by the later of 2 1/2 months after an Employee’s severance from employment (as defined in subparagraph (4)) with the Employer maintaining the Plan or the end of the Plan Year that includes the date of the Employee’s severance from employment with the Employer maintaining the Plan, if the payment is regular Compensation for services during the Employee’s regular working hours, or Compensation for services outside the Employee’s regular working hours (such as overtime or shift differential), commissions, bonuses, or other similar payments, and, absent a severance from employment, the payments would have been paid to the Employee while the Employee continued in employment with the Employer.  Any payments not described above shall not be considered Compensation if paid after severance from employment, even if they are paid by the later of 2 1/2 months after the date of severance from employment or the end of the Limitation Year that includes the date of severance from employment.

(6)           Dollar Limitation.   Notwithstanding anything herein to the contrary, the annual Compensation of each Participant taken into account under the Plan for any purpose during any Plan Year shall not exceed the compensation limitation set forth in Code Section 401(a)(17) ($250,000 for the 2012 Plan Year.  This limitation shall be adjusted from time to time as permitted by Code Section 401(a)(17)(B).

(k)            “Date of Hire” shall mean the date on which an Employee shall perform his first Hour of Service.  Notwithstanding the foregoing, in the event that an Employee incurs one or more consecutive Breaks after his initial Date of Hire which results in the forfeiture of his pre-Break Service pursuant to Section 3.3, his “Date of Hire” shall thereafter be the date on which he completes his first Hour of Service after such Break or Breaks.

(l)             “Disability” shall mean a physical or mental impairment which prevents a Participant from performing the duties assigned to him by the Employer, and which either has caused the Social Security Administration to classify the individual as “disabled” for purposes of Social Security or qualifies as a disability under a long-term disability plan maintained by the Employer in which the Participant participates.  The determination of whether a Participant has a Disability shall be made by a qualified physician selected by the Administrator.

(m)           “Disability Retirement Date” shall mean the date a Participant is determined to have incurred a Disability while employed by an Employer.

(n)            “Early Retirement Date” .   There is no early retirement under this Plan.

(o)            “Effective Date” shall mean January 13, 2013.

(p)            “Eligibility Period” shall mean the period of 12 consecutive months commencing on an Employee’s Date of Hire.  Succeeding Eligibility Periods after the initial Eligibility Period shall be based on the Plan Year beginning with the Plan Year which includes the first anniversary date of an Employee’s Date of Hire, and subsequent Plan Years.
 
 
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(q)            “Employee” shall mean any person who is classified as an employee by the Employer or a Related Employer, including officers, but excluding directors in their capacity as such.  Individuals not originally classified as Employees who are later classified as such for any reason shall not be treated as Employees under the Plan.

(r)             “Employee Stock Ownership Account” shall mean the separate bookkeeping account established for each Participant pursuant to Section 5.1(a).

(s)            “Employee Stock Ownership Contribution” shall mean the cash, Employer Securities, or both that are contributed to the Plan by the Employer pursuant to Article IV.

(t)             “Employee Stock Ownership Suspense Account” shall mean the temporary account in which the Trustee may maintain any Employee Stock Ownership Contribution that is made prior to the last day of the Plan Year for which it is made, as described in Section 5.2.

(u)            “Employer” shall mean First Northwest Bancorp and its wholly owned subsidiary, First Federal Savings and Loan Association of Port Angeles, or any successors to the aforesaid corporations by merger, consolidation or otherwise, which may agree to continue this Plan, or any Related Employer or any other business organization which, with the consent of the Sponsor, shall agree to become a party to this Plan.  To the extent required by the Code or the Act, references herein to the Employer shall also include all Related Employers, whether or not they are participating in this Plan.

(v)            “Employer Securities” shall mean the common stock issued by First Northwest Bancorp.  Such term shall also mean, in the discretion of the Board of Directors, any other common stock issued by the Employer or any Related Employer having voting power and dividend rights equal to or in excess of:

(1)           that class of common stock of the Employer or a Related Employer having the greatest voting power, and

(2)           that class of common stock of the Employer or a Related Employer having the greatest dividend rights.

Non-callable preferred stock shall be treated as Employer Securities if such stock is convertible at any time into stock which meets the requirements of (1) and (2) next above and if such conversion is at a conversion price which (as of the date of the acquisition by the Plan) is reasonable.  For purposes of the last preceding sentence, preferred stock shall be treated as non-callable if, after the call, there will be a reasonable opportunity for a conversion which meets the requirements of the last preceding sentence.

(v-1)        “Employment Commencement Date” shall mean the first date on which the Eligible Employee performs an Hour of Service.

(w)           “Entry Date” shall mean each January 1 and July 1.

(x)            “Exempt Loan” shall mean a loan described at Section 4975(d)(3) of the Code to the Trustee to purchase Employer Securities for the Plan, made or guaranteed by a disqualified person, as defined at Section 4975(e)(2) of the Code, including, but not limited to, a direct loan of cash, a purchase money transaction, an assumption of an obligation of the Trustee, an unsecured guarantee or the use of assets of such disqualified person as collateral for such a loan.
 
 
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(y)            “Exempt Loan Suspense Account” shall mean the account to which Financed Shares are initially credited until they are released in accordance with Section 8.5.

(z)            “Financed Shares” shall mean the Employer Securities acquired by the Trustee with the proceeds of an Exempt Loan and which are credited to the Exempt Loan Suspense Account until they are released in accordance with Section 8.5.

(aa)          “Former Participant” shall mean any previous Participant whose participation has terminated but who has a vested Account in the Plan which has not been distributed in full.

(bb)          “Fund” shall mean the trust fund maintained by the Trustee pursuant to the Trust Agreement in order to provide for the payment of the benefits specified in the Plan.

(cc)          “Hour of Service” shall mean each hour for which an Employee is directly or indirectly paid or entitled to payment by the Employer or a Related Employer for the performance of duties or for reasons other than the performance of duties (such as vacation time, holidays, sickness, disability, paid lay-offs, jury duty and similar periods of paid nonworking time).  To the extent not otherwise included, Hours of Service shall also include each hour for which back pay, irrespective of mitigation of damages, is either awarded or agreed to by the Employer or a Related Employer.  Hours of working time shall be credited on the basis of actual hours worked, even though compensated at a premium rate for overtime or other reasons.  In computing and crediting Hours of Service for an Employee under this Plan, the rules set forth in Sections 2530.200b-2(b) and (c) of the Department of Labor Regulations shall apply, said sections being herein incorporated by reference.  Hours of Service shall be credited to the Plan Year or other relevant period during which the services were performed or the nonworking time occurred, regardless of the time when compensation therefor may be paid.  Any Employee for whom no hourly employment records are kept by the Employer or a Related Employer shall be credited with 45 Hours of Service for each calendar week in which he would have been credited with a least one Hour or Service under the foregoing provisions, if hourly records were available.  Solely for purposes of determining whether a Break for participation and vesting purposes has occurred in an Eligibility Period or a Plan Year, an individual who is absent from work for maternity or paternity reasons shall receive credit for the Hours of Service which would otherwise have been credited to such individual but for such absence, or in any case in which such hours cannot be determined, 8 Hours of Service per day of such absence.  For purposes of Section 1.1(cc), an absence from work for maternity or paternity reasons means an absence (1) by reason of the pregnancy of the individual, (2) by reason of the birth of a child of the individual, (3) by reason of the placement of a child with the individual in connection with the adoption of such child by such individual, or (4) for purposes of caring for such child for a period beginning immediately following such birth or placement.  The Hours of Service credited under this provision shall be credited (1) in the computation period in which the absence begins if the crediting is necessary to prevent a Break in that period, or (2) in all other cases, in the following computation period.

(dd)         “Investment Adjustments” shall mean the increases and/or decreases in the value of a Participant’s Account attributable to earnings, gains, losses and expenses of the Fund, as set forth in Section 5.3.

(ee)          “Limitation Year” shall mean the Plan Year.

(ff)            “Normal Retirement Date” shall mean the date on which a Participant attains age 65 or the fifth anniversary of the date the Employee commences participation in the Plan .

(ff-1)        “One-Year Period of Severance” shall mean a Period of Severance of at least 12 consecutive months.  In the case of an individual who is absent from work for maternity or paternity reasons, the 12-consecutive month period beginning on the first anniversary of the first date of such absence shall not constitute a One-Year Period of Severance.  For purposes of this paragraph, an absence from work for maternity or paternity reasons means an absence (1) by reason of the pregnancy of the individual, (2) by reason of the birth of a child of the individual, (3) by reason of the placement of a child with the individual in connection with the adoption of such child by such individual, or (4) for purposes of caring for such child for a period beginning immediately following such birth or placement.
 
 
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(gg)         “Participant” shall mean an Employee who has met all of the eligibility requirements of the Plan and who is currently included in the Plan as provided in Article II hereof; provided, however, that the term “Participant” shall not include (1) leased employees (as defined herein), (2) any individual who is employed by a Related Employer that has not adopted the Plan, (3) any Employee who is a non-resident alien individual and who has no earned income from sources within the United States, or (4) any Employee who is included in a unit of Employees covered by a collective-bargaining agreement with the Employer or a Related Employer that does not expressly provide for participation of such Employees in the Plan, where there has been good-faith bargaining between the Employer or a Related Employer and Employees’ representatives on the subject of retirement benefits.  To the extent required by the Code or the Act, or appropriate based on the context, references herein to Participant shall include Former Participant.  The term “leased employee” means any person (other than an employee of the recipient) who pursuant to an agreement between the recipient and any other person (“leasing organization”) has performed services for the recipient (or for the recipient and related persons determined in accordance with Code Section 414(n)(6)) on a substantially full time basis for a period of at least one year, and such services are performed under primary direction or control by the recipient.

(gg-1)      “Period of Severance” shall mean a continuous period of time during which the Employee does not perform an Hour of Service for the Employer.  Such period begins on the date the Employee retires, dies, quits or is discharged, or if earlier, the 12 month anniversary of the date on which the Employee was otherwise first absent from service.

(hh)         “Plan” shall mean the First Northwest Bancorp Employee Stock Ownership Plan, as described herein or as hereafter amended from time to time.

(ii)            “Plan Year” shall mean the twelve month period commencing January 1 and ending December 31.

(jj)            “Qualified Domestic Relations Order” shall mean any judgment, decree or order that satisfies the requirements to be a “qualified domestic relations order,” as defined in Section 414(p) of the Code.

(kk)          “Qualified Military Service” shall have the meaning provided for in Code Section 414(u).

(ll)            “Related Employer” shall mean any entity that is:

(1)           a member of a controlled group of corporations that includes the Employer, while it is a member of such controlled group (within the meaning of Section 414(b) of the Code);

(2)           a member of a group of trades or businesses under common control with the Employer, while it is under common control (within the meaning of Section 414(c) of the Code);

(3)           a member of an affiliated service group that includes the Employer, while it is a member of such affiliated service group (within the meaning of Section 414(m) of the Code); or
 
 
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(4)           a leasing or other organization that is required to be aggregated with the Employer pursuant to the provisions of Section 414(n) or 414(o) of the Code.

(mm)        “Retirement” shall mean termination of employment which qualifies a retirement under Article VI.

(nn)         “Service” shall mean, for purposes of eligibility to participate and vesting, employment with the Employer or any Related Employer, and for purposes of allocation of the Employee Stock Ownership Contribution and forfeitures, employment with the Employer.

(oo)         “Sponsor” shall mean First Northwest Bancorp.

(pp)        “ Statutory Compensation” shall mean Compensation as defined in Section 1.1(j)(2), as modified and limited by Sections 1.1(j)(3) through (6).
 
(qq)         “Trust Agreement” shall mean the agreement by and between the Sponsor and the Trustee, as in effect from time to time, whether set forth herein or otherwise.

(rr)           “Trustee” shall mean the trustee or trustees by whom the assets of the Plan are held, as provided in the Trust Agreement, or his or their successors.

(ss)          “Valuation Date” shall mean the last day of each Plan Year.  Notwithstanding the foregoing, the Trustee may value the Trust as frequently as each business day of the Plan Year to determine the fair market value of each Participant’s Account under the Plan.  For transactions involving the Plan and a disqualified person (within the meaning of Code Section 4975(e)(2)), the valuation date shall be the date of the transaction.

(tt)           “Year of Eligibility Service” shall mean an Eligibility Period during which an Employee is credited with at least 1,000 Hours of Service, except as otherwise specified in Article III.  If the Plan uses the elapsed time method: (i) “Year of Eligibility Service” means a twelve month period of time beginning on an Employee’s Employment Commencement Date and ending on the date on which eligibility service is being determined; (ii) in order to determine the number of whole Years of Eligibility Service under the elapsed time method, nonsuccessive periods of service and less than whole year periods of service shall be aggregated on the basis that 12 months of service (30 days are deemed to be a month in the case of the aggregation of fractional months) or 365 days of service are equal to a whole year of service; (iii) an Employee will also receive credit for any Period of Severance of less than 12 consecutive months; and (iv) if less than one Year of Eligibility Service is required in Article III, such service shall be determined by substituting such period for “twelve month” and “Year” where they appear in this paragraph.

(uu)         “Year of Vesting Service” shall mean a Plan Year during which an Employee is credited with at least 1,000 Hours of Service, except as otherwise specified in Article III.  If the Plan uses the elapsed time method: (i) “Year of Vesting Service” means a twelve month period of time beginning on an Employee’s Employment Commencement Date and ending on the date on which vesting service is being determined; (ii) in order to determine the number of whole Years of Vesting Service under the elapsed time method, nonsuccessive periods of service and less than whole year periods of service shall be aggregated on the basis that 12 months of service (30 days are deemed to be a month in the case of the aggregation of fractional months) or 365 days of service are equal to a whole year of service; and (iii) an Employee will also receive credit for any Period of Severance of less than 12 consecutive months.
 
 
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1.2            Plurals and Gender .

Where appearing in the Plan and the Trust Agreement, the masculine gender shall include the feminine and neuter genders, and the singular shall include the plural, and vice versa, unless the context clearly indicates otherwise.

1.3            Incorporation of Trust Agreement .

If there is a separate Trust Agreement, then that Trust Agreement, as the same may be amended from time to time, is intended to be and hereby is incorporated by reference into this Plan.  All contributions made under the Plan will be held, managed and controlled by the Trustee pursuant to the terms and conditions of the Trust Agreement.

1.4            Headings .

The headings and sub-headings in this Plan are inserted for the convenience of reference only and are to be ignored in any construction of the provisions hereof.

1.5            Severability .

In case any provision of this Plan shall be held illegal or void, such illegality or invalidity shall not affect the remaining provisions of this Plan, but shall be fully severable, and the Plan shall be construed and enforced as if said illegal or invalid provisions had never been inserted herein.

1.6            References to Governmental Regulations .

References in this Plan to regulations issued by the Internal Revenue Service, the Department of Labor, or other governmental agencies shall include all regulations, rulings, procedures, releases and other position statements issued by any such agency.

1.7            Notices .

Any notice or document required to be filed with the Administrator or Trustee under the Plan will be properly filed if delivered or mailed by registered mail, postage prepaid, to the Administrator in care of the Sponsor or to the Trustee, each at its principal business offices.  Any notice required under the Plan may be waived in writing by the person entitled to notice.

1.8            Evidence .

Evidence required of anyone under the Plan may be by certificate, affidavit, document or other information which the person acting on it considers pertinent and reliable, and signed, made or presented by the proper party or parties.
 
1.9            Action by Employer .

Any action required or permitted to be taken by any entity constituting the Employer under the Plan shall be by resolution of its Board of Directors or by a person or persons authorized by its Board of Directors.
 
 
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ARTICLE II
PARTICIPATION

2.1            Commencement of Participation .

(a)           Any Employee who is eligible to become a Participant in accordance with Section 1.1(gg) hereof shall initially become a Participant on the Entry Date coincident with or next following the date on which he has attained age twenty-one (21) and completes one Year of Eligibility Service.

(b)           Any Employee who had satisfied the requirements set forth in Section 2.1(a) during the 12 consecutive month period prior to the Effective Date shall become a Participant on the Effective Date, provided he is still employed by the Employer on the Effective Date.

(c)           An Employee who is actively employed by the Employer or on an Authorized Leave of Absence on the original Effective Date shall be considered a Participant on such original Effective Date, unless the Employee is described within a classification that is not treated as a “Participant”, as defined in Section 1.1(gg).

2.2            Termination of Participation .

After commencement or resumption of his participation, an Employee shall remain a Participant during each consecutive Plan Year thereafter until the earliest of the following dates:

(a)           His actual Retirement date;

(b)           His date of death; or

(c)           The last day of a Plan Year during which he incurs a Break.

2.3            Resumption of Participation .

(a)           Any Participant whose employment terminates and who resumes Service before he incurs a Break shall resume participation immediately on the date he is reemployed.

(b)           Except as otherwise provided in Section 2.3(c), any Participant who incurs one or more Breaks and resumes Service shall resume participation retroactively as of the first day of the first Plan Year in which he completes a Year of Eligibility Service after such Break(s).

(c)           Any Participant who incurs one or more Breaks and resumes Service, but whose pre-Break Service is not reinstated to his credit pursuant to Section 3.3, shall be treated as a new Employee and shall again be required to satisfy the eligibility requirements contained in Section 2.1(a) before resuming participation on the appropriate Entry Date, as specified in Section 2.1(a).

2.4            Determination of Eligibility .

The Administrator shall determine the eligibility of Employees in accordance with the provisions of this Article.  For each Plan Year, the Employer shall furnish the Administrator a list of all Employees, indicating their Date of Hire, their Hours of Service during their Eligibility Period, their date of birth, the original date of their reemployment with the Employer, if any, and any Breaks they may have incurred.

 
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2.5            Restricted Participation .

Subject to the terms and conditions of the Plan, during the period between the Participant’s date of termination of participation in the Plan (as described in Section 2.2) and the distribution of his entire Account (as described in Article IX), and during any period that a Participant does not meet the requirements of Section 2.1(a) or is employed by a Related Employer that is not participating in the Plan (or otherwise is not within a classification of Employee that is considered a Participant as defined herein), the Participant or, in the event of the Participant’s death, the Beneficiary of the Participant, will be considered and treated as a Participant for all purposes of the Plan, except as follows:

(a)           the Participant will not share in the Employee Stock Ownership Contribution and forfeitures (as described in Sections 7.2 and 7.3), except as provided in Sections 5.4 and 5.5; and

(b)           the Beneficiary of a deceased Participant cannot designate a Beneficiary under Section 6.5.
 
 
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ARTICLE III
CREDITED SERVICE

3.1            Service Counted for Eligibility Purposes .

Except as provided in Section 3.3, all Years of Eligibility Service completed by an Employee shall be counted in determining his eligibility to become a Participant on and after the Effective Date, regardless of whether such Service was completed before or after the Effective Date.

3.2            Service Counted for Vesting Purposes .

All Years of Vesting Service completed by an Employee (including Years of Vesting Service completed prior to the Effective Date) shall be counted in determining his vested interest in this Plan, except the following:

(a)           Service which is disregarded under the provisions of Section 3.3;

(b)           Service prior to the Effective Date of this Plan if such Service would have been disregarded under the “break in service” rules (within the meaning of Section 1.411(a)-5(b) of the Treasury Regulations).

3.3            Credit for Pre-Break Service .

Upon his resumption of participation following one or a series of consecutive Breaks, an Employee’s pre-Break Service shall be reinstated to his credit for eligibility and vesting purposes only if either:

(a)           He was vested in any portion of his accrued benefit at the time the Break(s) began; or

(b)           The number of his consecutive Breaks does not equal or exceed the greater of 5 or the number of his Years of Eligibility Service or Years of Vesting Service, as the case may be, credited to him before the Breaks began.

Except as provided in the foregoing, none of an Employee’s Service prior to one or a series of consecutive Breaks shall be counted for any purpose in connection with his participation in this Plan thereafter.

3.4            Service Credit During Authorized Leaves .

An Employee shall receive no Service credit under Section 3.1 or 3.2 during any Authorized Leave of Absence.  However, solely for the purpose of determining whether he has incurred a Break (if the Plan does not use the elapsed time method of crediting Service) during any Plan Year in which he is absent from Service for one or more Authorized Leaves of Absence, he shall be credited with 45 Hours of Service for each week during any such leave period.  Notwithstanding the foregoing, if an Employee fails to return to Service on or before the end of a leave period, he shall be deemed to have terminated Service as of the first day of such leave period and his credit for Hours of Service, determined under this Section 3.4, shall be revoked.
 
 
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3.5            Service Credit During Maternity or Paternity Leave .

For purposes of determining whether a Break has occurred for participation and vesting purposes, an individual who is on maternity or paternity leave as described in Section 1.1(cc) or 1.1(ff-1), as applicable, shall be deemed to have completed Hours of Service during such period of absence, all in accordance with Section 1.1(cc) or 1.1(ff-1), as applicable.  Notwithstanding the foregoing, no such credit shall be given unless the individual furnishes to the Administrator such timely information as the Administrator may reasonably require to determine:

(a)           that the absence from Service was attributable to one of the maternity or paternity reasons enumerated in Section 1.1(cc) or 1.1(ff-1), as applicable; and
 
(b)            the number of days of such absence.

In no event, however, shall any credit be given for such leave other than for determining whether a Break has occurred.

3.6            Ineligible Employees .

Notwithstanding any provisions of this Plan to the contrary, any Employee who is ineligible to participate in this Plan either because of his failure

(a)           To meet the eligibility requirements contained in Article II; or

(b)           To be a Participant, as defined in Section 1.1(gg),

shall, nevertheless, earn Years of Eligibility Service and Years of Vesting Service pursuant to the rules contained in this Article III.  However, such Employee shall not be entitled to an allocation of any contributions or forfeitures hereunder unless and until he becomes a Participant in this Plan, and then, only during his period of participation.

3.7            Military Service Provisions .
 
(a)           In General. Notwithstanding any provision of this Plan to the contrary, contributions, benefits and service credit with respect to qualified military service shall be provided in accordance with Code Section 414(u).
 
(b)           Death Benefits Under USERRA. If a Participant dies while performing Qualified Military Service, the survivors of the Participant are entitled to any additional benefits provided under the plan as if the Participant had resumed and then terminated employment on account of death pursuant to Code Section 401(a)(37), Notice 2010-5 and any superseding guidance.
 
(c)           Differential Military Pay. Pursuant to Code Section 414(u)(12), Notice 2010-5 and any superseding guidance, a Participant receiving differential wage payments (as defined in Code Section 3401(h)(2)) shall be treated as an Employee of the Employer making the payment and the differential wage payments shall be treated as Compensation under the Plan.
 
(d)           Deemed Severance. If a Participant performs service in the uniformed services (as defined in Code Section 414(u)(12)(B)) on active duty for a period of more than 30 days, the Participant will be deemed to have a severance from employment solely for purposes of eligibility for distribution of amounts not subject to Code Section 412. However, the Plan will not distribute such a Participant’s account on account of this deemed severance unless the Participant specifically elects to receive a benefit distribution hereunder. If a Participant elects to receive a distribution on account of this deemed severance, then the individual may not make an elective deferral or employee contribution during the 6-month period beginning on the date of the distribution. If a Participant would be entitled to a distribution on account of a deemed severance, and a distribution on account of another Plan provision (such as a qualified reservist distribution), then the other Plan provision will control and the 6-month suspension will not apply.
 
 
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3.8            Elapsed Time Method of Crediting Service .

The Plan shall use the elapsed time method of crediting Service.
 
 
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ARTICLE IV
CONTRIBUTIONS

4.1            Employee Stock Ownership Contribution .

(a)           Subject to all of the provisions of this Article IV, for each Plan Year commencing on or after the Effective Date, the Employer shall make an Employee Stock Ownership Contribution to the Fund in such amount as may be determined by resolution of the Board of Directors in its discretion; provided, however, that the Employer shall contribute an amount in cash not less than the amount required to enable the Trustee to discharge any indebtedness incurred with respect to an Exempt Loan in accordance with Section 8.6(c).  If any part of the Employee Stock Ownership Contribution under this Section 4.1 for any Plan Year is in cash in an amount exceeding the amount needed to pay the amount due during or prior to such Plan Year with respect to an Exempt Loan, such cash shall be applied by the Trustee, as directed by the Administrator in its sole discretion, either to the purchase of Employer Securities or to repay an Exempt Loan.  Contributions hereunder shall be in the form of cash, Employer Securities or any combination thereof.  In determining the value of Employer Securities transferred to the Fund as an Employee Stock Ownership Contribution, the Administrator may determine the average of closing prices of such securities for a period of up to 90 consecutive days immediately preceding the date on which the securities are contributed to the Fund.  In the event that the Employer Securities are not readily tradable on an established securities market, the value of the Employer Securities transferred to the Fund shall be determined by an independent appraiser in accordance with Section 8.9.

(b)           Subject to Section 4.1(a), in no event shall the Employee Stock Ownership Contribution exceed for any Plan Year the maximum amount that may be deducted by the Employer under Section 404 of the Code, nor shall such contribution cause the Employer to violate its regulatory capital requirements.  Each Employee Stock Ownership Contribution by the Employer shall be deemed to be made on the express condition that the Plan, as then in effect, shall be qualified under Sections 401(a) and 501(a) of the Code and that the amount of such contribution shall be deductible from the Employer’s income under Section 404 of the Code.

4.2            Time and Manner of Employee Stock Ownership Contribution .

(a)           The Employee Stock Ownership Contribution (if any) for each Plan Year shall be paid to the Trustee in one lump sum or installments at any time on or before the expiration of the time prescribed by law (including any extensions) for filing of the Employer’s federal income tax return for its fiscal year ending concurrent with or during such Plan Year; provided, however, that the Employee Stock Ownership Contribution (if any) for a Plan Year shall be made in a timely manner to make any required payment of principal and/or interest on an Exempt Loan for such Plan Year.  Any portion of the Employee Stock Ownership Contribution for each Plan Year that may be made prior to the last day of the Plan Year shall, if there is an Exempt Loan outstanding at such time, at the election of the Administrator, either (i) be applied immediately to make payments on such Exempt Loan or (ii) be maintained in the Employee Stock Ownership Suspense Account described in Section 5.2 until the last day of such Plan Year.

(b)           If an Employee Stock Ownership Contribution for a Plan Year is paid after the close of the Employer’s fiscal year which ends concurrent with or during such Plan Year but on or prior to the due date (including any extensions) for filing of the Employer’s federal income tax return for such fiscal year, it shall be considered, for allocation purposes, as an Employee Stock Ownership Contribution to the Fund for the Plan Year for which it was computed and accrued, unless such contribution is accompanied by a statement to the Trustee, signed by the Employer, which specifies that the Employee Stock Ownership Contribution is made with respect to the Plan Year in which it is received by the Trustee.  Any Employee Stock Ownership Contribution paid by the Employer during any Plan Year but after the due date (including any extensions) for filing of its federal income tax return for the fiscal year of the Employer ending on or before the last day of the preceding Plan Year shall be treated, for allocation purposes, as an Employee Stock Ownership Contribution to the Fund for the Plan Year in which the contribution is paid to the Trustee.
 
 
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(c)           Notwithstanding anything contained herein to the contrary, no Employee Stock Ownership Contribution shall be made for any Plan Year that would cause the Plan to violate the requirements of Section 5.6 (related to the Code Section 415 limitations).

4.3            Records of Contributions .

The Employer shall deliver at least annually to the Trustee, with respect to the Employee Stock Ownership Contribution contemplated in Section 4.1, a certificate of the Administrator, in such form as the Trustee shall approve, setting forth:

(a)           The aggregate amount of such contribution, if any, to the Fund for such Plan Year;

(b)           The names, Internal Revenue Service identifying numbers and current residential addresses of all Participants in the Plan;

(c)           The amount and category of contributions to be allocated to each such Participant; and

(d)           Any other information reasonably required for the proper operation of the Plan.

4.4            Erroneous Contributions .

(a)           Notwithstanding anything herein to the contrary, upon the Employer’s written request, a contribution which was made by a mistake of fact, or conditioned upon the initial qualification of the Plan, under Code Section 401(a), or upon the deductibility of the contribution under Section 404 of the Code, shall be returned to the Employer by the Trustee within one year after the payment of the contribution, the denial of the qualification or the disallowance of the deduction (to the extent disallowed), whichever is applicable; provided, however, that in the case of denial of the initial qualification of the Plan, a contribution shall not be returned unless an Application for Determination has been timely filed with the Internal Revenue Service.  Any portion of a contribution returned pursuant to this Section 4.4 shall be adjusted to reflect its proportionate share of the losses of the Fund, but shall not be adjusted to reflect any earnings or gains.  Notwithstanding any provisions of this Plan to the contrary, the right or claim of any Participant or Beneficiary to any asset of the Fund or any benefit under this Plan shall be subject to and limited by this Section 4.4.

(b)           In no event shall Employee contributions be accepted.  Any such Employee contributions (and any earnings attributable thereto) mistakenly received by the Trustee shall promptly be returned to the Participant.
 
 
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ARTICLE V
ACCOUNTS, ALLOCATIONS AND INVESTMENTS

5.1            Establishment of Separate Participant Accounts .

The Administrator shall establish and maintain a separate Account for each Participant in the Plan and for each Former Participant in accordance with the provisions of this Article V.  Such separate Account shall be for bookkeeping purposes only and shall not require a segregation of the Fund, and no Participant, Former Participant or Beneficiary shall acquire any right to or interest in any specific assets of the Fund as a result of the allocations provided for under this Plan.

(a)            Employee Stock Ownership Accounts .

The Administrator shall establish a separate Employee Stock Ownership Account in the Fund for each Participant.  The Administrator may establish subaccounts hereunder, an Employer Stock Account reflecting a Participant’s interest in Employer Securities held by the Fund, and an Other Investments Account reflecting the Participant’s interest in his Employee Stock Ownership Account other than Employer Securities.  Each Participant’s Employer Stock Account shall reflect his share of any Employee Stock Ownership Contribution made in Employer Securities, his allocable share of forfeitures (as described in Section 5.4), and any Employer Securities attributable to earnings on such stock.  Each Participant’s Other Investments Account shall reflect any Employee Stock Ownership Contribution made in cash, any cash dividends on Employer Securities allocated and credited to his Employee Stock Ownership Account (other than currently distributable dividends) and his share of corresponding cash forfeitures, and any income, gains, losses, appreciation, or depreciation attributable thereto.   Dividends attributable to Employer Securities that are allocated to a Participant pursuant to Section 8.4 (and not distributable thereunder) shall be treated as part of the Participant’s Employee Stock Ownership Account.

(b)            Other Accounts .

The Administrator shall establish such other separate accounts for each Participant as may be necessary or desirable for the convenient administration of the Fund.

5.2            Establishment of Suspense Accounts .

The Administrator shall establish a separate Employee Stock Ownership Suspense Account.  There shall be credited to such account any Employee Stock Ownership Contribution that may be made prior to the last day of the Plan Year and that are allocable to the Employee Stock Ownership Suspense Account pursuant to Section 4.2(a).  The Employee Stock Ownership Suspense Account shall share proportionately as to time and amount in any Investment Adjustments.  As of the last day of each Plan Year, the balance of the Employee Stock Ownership Suspense Account shall be added to the Employee Stock Ownership Contribution and allocated to the Employee Stock Ownership Accounts of Participants as provided in Section 5.5, except as provided herein.  In the event that the Plan takes an Exempt Loan, the Employer Securities purchased thereby shall be allocated as Financed Shares to a separate Exempt Loan Suspense Account, from which Employer Securities shall be released in accordance with Section 8.5 and shall be allocated in accordance with Section 8.6(b).
 
 
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5.3            Allocation of Earnings, Losses and Expenses .

Except as otherwise provided in this instrument, as of each Valuation Date, any increase or decrease in the net worth of the aggregate Employee Stock Ownership Accounts held in the Fund attributable to earnings, losses, expenses and unrealized appreciation or depreciation in each such account, as determined by the Trustee, shall be credited to or deducted from the appropriate suspense accounts and all Participants’ Employee Stock Ownership Accounts, in accordance with this Section.  Earnings, losses, and unrealized appreciation or depreciation in Employer Securities in a Participant’s Employee Stock Ownership Account shall be determined and allocated only to such account, but such determination shall be made immediately prior to crediting any Contributions and forfeitures for the current Plan Year, but after adjustment for any transfer to or from such accounts.  Earnings, losses, and unrealized appreciation or depreciation in investments other than Employer Securities in the Participant’s Other Investment Accounts shall be allocated in the proportion that the value of each such account (determined immediately prior to such allocation and before crediting any Contributions and forfeitures for the current Plan Year but after adjustment for any transfer to or from such accounts and for the time such funds were in such accounts) bears to the value of all Other Investment Accounts.  Provided, however, cash dividends paid to the Plan shall be allocated or otherwise disposed of in accordance with Plan Section 8.4. Plan expenses paid from the assets of this employee pension benefit plan shall be allocated across all Accounts in the proportion that the value of each Participant’s Account bears to the value of all Participant Accounts.

5.4            Application of Forfeitures .

Forfeitures occurring during the Plan Year may, at the discretion of the Administrator, be used to pay or reimburse expenses of the Plan, to the extent such payment or reimbursement is consistent with the applicable fiduciary requirements of the Act.  As of the last day of each Plan Year, all forfeitures which have not been applied in accordance with the preceding sentence shall be added to the Employee Stock Ownership Contribution (if any) for such year and allocated among the Participants’ Employee Stock Ownership Accounts, as appropriate, in the manner provided in Section 5.5.

5.5            Allocation of Employee Stock Ownership Contribution .

As of the last day of each Plan Year for which the Employer shall make an Employee Stock Ownership Contribution, the Administrator shall allocate the Employee Stock Ownership Contribution (including reallocable forfeitures) for such Plan Year to the Employee Stock Ownership Account of each Participant who completed a Year of Vesting Service during that Plan Year, provided that he is still employed by the Employer on the last day of the Plan Year (or the Participant terminated employment with the Employer and all Related Employers during the Plan Year on account of death, Disability or after attaining Normal Retirement Age).  Such allocation shall be made in the same proportion that each such Participant’s Compensation (defined in Section 1.1(j)(1), as modified by Section 1.1(j)(3) through (6)) for such Plan Year bears to the total Compensation (defined in Section 1.1(j)(1), as modified by Section 1.1(j)(3) through (6)) of all such Participants for such Plan Year, subject to Section 5.6.  Furthermore, if a Participant completes a Year of Vesting Service and is on an Authorized Leave of Absence on the last day of the Plan Year, such a Participant shall be entitled to an allocation based on his Compensation earned during such Plan Year.
 
 
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5.6            Limitation on Annual Additions .

(a)           Notwithstanding any provisions of this Plan to the contrary, the total Annual Additions credited to a Participant’s Account under this Plan (and accounts under any other defined contribution plan maintained by the Employer or a Related Employer) for any Limitation Year shall not exceed the lesser of:

(1)           the applicable dollar limitation provided for in Code Section 415(c)(1)(A) for the Limitation ($50,000 for Limitation Years commencing in 2012), as adjusted for increases in the cost-of-living under Code Section 415(d), or
 
(2)            100 percent of the Participant’s Statutory Compensation for the Limitation Year.

(b)           This Section 5.6 shall be applied in a manner consistent with the Treasury Regulations under Code Section 415, which shall be incorporated herein by this reference, except as provided herein or in the definition of Compensation.

(c)           In the event that the limitations on Annual Additions described in Section 5.6(a) above are exceeded with respect to any Participant in any Limitation Year, then:

(1)           The Administrator shall determine to what extent the Annual Additions to any Participant’s Employee Stock Ownership Account must be reduced in each Limitation Year.  The Administrator shall reduce the Annual Additions to all other qualified, tax-exempt retirement plans maintained by the Employer or a Related Employer in accordance with the terms contained therein for required reductions or reallocations mandated by Section 415 of the Code before reducing any Annual Additions in this Plan.

(2)           If any excess Annual Additions remain, then the excess shall be corrected pursuant to a correction method provided for in the Internal Revenue Service employee plans compliance resolution system (EPCRS) then in effect.

5.7            Erroneous Allocations .

No Participant shall be entitled to any Annual Additions or other allocations to his Account in excess of those permitted under Sections 5.3, 5.4, 5.5, and 5.6.  If it is determined at any time that the Administrator has erred in accepting and allocating any contributions or forfeitures under this Plan, or in allocating Investment Adjustments, or in excluding or including any person as a Participant, then the Administrator, in a uniform and nondiscriminatory manner, shall determine the manner in which such error shall be corrected and shall promptly advise the Trustee in writing of such error and of the method for correcting such error.  The accounts of any or all Participants may be revised, if necessary, in order to correct such error.  To the extent applicable, such correction shall be made in accordance with the requirements of the Internal Revenue Service employee plans compliance resolution system (EPCRS) then in effect.

5.8            Value of Participant’s Account .

At any time, the value of a Participant’s Account shall consist of the aggregate value of his Employee Stock Ownership Account and his distribution account, if any, determined as of the next-preceding Valuation Date.  The Administrator shall maintain adequate records of the cost basis of Employer Securities allocated to each Participant’s Employee Stock Ownership Account.

5.9            Investment of Account Balances .

The Employee Stock Ownership Accounts shall be invested primarily in Employer Securities.  All sales of Employer Securities by the Trustee attributable to the Employee Stock Ownership Accounts of all Participants shall be charged pro rata to the Employee Stock Ownership Accounts of all Participants.
 
 
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ARTICLE VI
RETIREMENT, DEATH AND DESIGNATION OF BENEFICIARY

6.1            Normal Retirement .

A Participant who reaches his Normal Retirement Date and who shall retire at that time shall thereupon be entitled to retirement benefits based on the value of his Account, payable pursuant to the provisions of Section 9.1.  A Participant who remains in Service after his Normal Retirement Date shall not be entitled to any retirement benefits until his actual termination of Service thereafter (except as provided in Section 9.4), and he shall meanwhile continue to participate in this Plan.

6.2            Early Retirement .

There is no early retirement under this Plan.

6.3            Disability Retirement .

In the event a Participant incurs a Disability before his Retirement or other termination of Service, he may retire on his Disability Retirement Date and shall thereupon be entitled to retirement benefits based on the value of his Account, payable pursuant to the provisions of Section 9.1.

6.4            Death Benefits .

(a)           Upon the death of a Participant before his Retirement or other termination of Service, the value of his Account shall be payable pursuant to the provisions of Section 9.1.  The Administrator shall direct the Trustee to distribute his Account to any surviving Beneficiary designated by the Participant or, if none, to such persons specified in Section 6.5(b).  Survivors of a Participant who dies while performing Qualified Military Service shall be entitled to any additional benefits provided under the Plan as if the Participant resumed service with the Employer and then terminated employment on account of death. The additional benefits shall not include benefit accruals relating to the period of Qualified Military Service.

(b)           Upon the death of a Former Participant, the Administrator shall direct the Trustee to distribute any undistributed balance of his Account to any surviving Beneficiary designated by him or, if none, to such persons specified in Section 6.5(b).

(c)           The Administrator may require such proper proof of death and such evidence of the right of any person to receive the balance credited to the Account of a deceased Participant or Former Participant as the Administrator may deem desirable.  The Administrator’s determination of death and of the right of any person to receive payment shall be conclusive.

6.5            Designation of Beneficiary and Manner of Payment .

(a)           Each Participant shall have the right to designate a Beneficiary to receive the sum or sums to which he may be entitled upon his death.  The Participant may also designate the manner in which any death benefits under this Plan shall be payable to his Beneficiary, provided that such designation is in accordance with Section 9.5.  Such designation of Beneficiary and manner of payment shall be in writing and delivered to the Administrator, and shall be effective when received by the Administrator while the Participant is alive.  The Participant shall have the right to change such designation by notice in writing to the Administrator while the Participant is alive.  Such change of Beneficiary or the manner of payment shall become effective upon its receipt by the Administrator while the Participant is alive.  Any such change shall be deemed to revoke all prior designations.
 
 
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(b)           If a Participant shall fail to designate validly a Beneficiary, or if no designated Beneficiary survives the Participant, the balance credited to his Account shall be paid to the person or persons in the first of the following classes of successive preference Beneficiaries surviving at the death of the Participant:  the Participant’s (1) widow or widower, (2) natural-born or adopted children, (3) natural-born or adoptive parents, and (4) estate.  The Administrator shall determine which Beneficiary, if any, shall have been validly designated or entitled to receive the balance credited to the Participant’s Account in accordance with the foregoing order of preference, and its decision shall be binding and conclusive on all persons.

(c)           Notwithstanding the foregoing, if a Participant is married on the date of his death, the sum or sums to which he may be entitled under this Plan upon his death shall be paid to his spouse, unless the Participant’s spouse shall have consented to the election of another Beneficiary.  Such a spousal consent shall be in writing and shall be witnessed either by a representative of the Administrator or by a notary public.  Any designation by an unmarried Participant shall be rendered ineffective by any subsequent marriage, and any consent of a spouse shall be effective only as to that spouse.  If it is established to the satisfaction of the Administrator that spousal consent cannot be obtained because there is no spouse, because the spouse cannot be located, or other reasons prescribed by governmental regulations, the consent of the spouse may be waived, and the Participant may designate a Beneficiary or Beneficiaries other than his spouse.

(d)           Automatic revocation of spousal designation.   A divorce decree, or a decree of legal separation, shall automatically revoke the Participant’s prior designation, if any, of his or her spouse or former spouse as his or her Beneficiary under the Plan unless a qualified domestic relations order or other written agreement specifically provides otherwise.

 
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ARTICLE VII
VESTING AND FORFEITURES

7.1            Vesting on Death, Disability and Normal Retirement .

Unless his participation in this Plan shall have terminated prior thereto, upon a Participant’s death, Disability or Normal Retirement Date (whether or not he actually retires at that time) while he is still employed by the Employer, the Participant’s entire Account shall be fully vested and nonforfeitable.

7.2            Vesting on Termination of Participation .

(a)           Upon termination of his participation in this Plan for any reason other than death, Disability, or Normal Retirement, a Participant shall be vested in a percentage of his Employee Stock Ownership Account, such vested percentage to be determined under the following table (“Vesting Schedule”), based on the Years of Vesting Service (including Years of Vesting Service prior to the Effective Date) credited to him at the time of his termination of participation:
 
  Years of Vesting Service    Percentage Vested  
 
Less than 1
 
0%
 
  1  
25%
 
  2  
50%
 
  3  
75%
 
 
4 or more
 
100%
 
 
Notwithstanding the foregoing, a Participant shall at all times have a nonforfeitable interest in Employer Securities acquired with dividends received pursuant to Section 8.4(c).

(b)           Any portion of the Participant’s Employee Stock Ownership Account which is not vested at the time he incurs a Break shall thereupon be forfeited and disposed of pursuant to Section 7.3.  In such event, Employer Securities shall be forfeited only after other assets. Distribution of the vested portion of a terminated Participant’s interest in the Plan shall be payable in any manner permitted under Section 9.1.

(c)           If a portion of a Participant’s Account is forfeited, Employer Securities allocated from an Exempt Loan must be forfeited only after other assets.   If interests in more than one class of Employer Securities have been allocated to the Participant’s Account, the Participant must forfeit the same proportion of each such class.

7.3            Forfeitures .

(a)           Subject to the provisions of this Section 7.3, a Participant shall forfeit the nonvested portion of his Employee Stock Ownership Account upon the earlier of the date (1) the Participant receives a complete distribution of his Employee Stock Ownership Account (or is deemed to receive, in the case of a Participant who terminates employment with a zero percent vested interest in his Employee Stock Ownership Account), or (2) the Participant incurs 5 consecutive Breaks.
 
(b)           In the event an Employee is rehired by the Employer, the following rules shall apply in determining the vested portion of the Employee’s interest in the Plan:
 
(1)           If the Employee has a Break, Years of Vesting Service before such Break shall not be taken into account until after he is credited with a Year of Vesting Service after his return.
 
 
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(2)           If the Employee has five or more consecutive Breaks upon his return, then his Years of Vesting Service after such Breaks shall not be taken into account in determining the vested portion of his Employee Stock Ownership Account that accrued before such Breaks.
 
(3)           If the Employee was not vested in his Employee Stock Ownership Account at the time of his termination, then Years of Vesting Service before a consecutive period of Breaks shall not be required to be taken into account if the number consecutive Breaks exceeds the greater of (A) five, or (B) the aggregate number of Years of Vesting Service before such period.
 
(c)           If the Plan operates under a graded vesting schedule and a Participant receives a distribution of his entire vested Account balance because of the termination of his participation in the Plan, the Plan shall disregard the Participant’s Service with respect to which such cash-out distribution shall have been made, in computing his Account balance in the event that a Former Participant shall again become an Employee and become eligible to participate in the Plan. Such a distribution shall be deemed to be made on termination of participation in the Plan if it is made not later than the close of the second Plan Year following the Plan Year in which such termination occurs.  The forfeitable portion of a Participant’s Account balance shall be restored upon repayment to the Plan by such Former Participant of the full amount of the cash-out distribution, provided that the Former Participant again becomes an Employee.  Such repayment must be made by the Employee not later than the end of the 5-year period beginning with the date the Participant is reemployed by the Employer or a Related Employer, or the close of the first period of 5 consecutive Breaks commencing after the distribution to the Employee.  Forfeitures required to be restored by virtue of such repayment shall be restored from the following sources in the following order of preference: (1) current forfeitures; (2) an additional Employer contribution, as appropriate, and as subject to Section 5.6; and (3) investment earnings of the Fund.  In the event that a Participant’s Account balance is totally forfeitable, a Participant shall be deemed to have received a distribution of zero upon his termination of Service, and in the event of a return to Service within 5 years of the date of his deemed distribution, the Participant shall be deemed to have repaid his distribution as of the date of his return to Service.

(d)           Vesting Following Payment in Installments.  If a distribution is made at a time when a Participant has a nonforfeitable right to less than 100 percent of his Account and the Participant may increase the nonforfeitable percentage in the Account:

(1)           A separate account will be established for the Participant’s interest in the Plan as of the time of the distribution, and

(2)           At any relevant time the Participant’s nonforfeitable portion of the separate account will be equal to an amount (“X”) determined by the formula:

X = P(AB + (R x D)) - (R x D)

For purposes of applying the formula: P is the nonforfeitable percentage at the relevant time, AB is the Account balance at the relevant time, D is the amount of the distribution, and R is the ratio of the Account balance at the relevant time to the Account balance after distribution.
 
 
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ARTICLE VIII
EMPLOYEE STOCK OWNERSHIP PROVISIONS

8.1            Right to Demand Employer Securities .

A Participant entitled to a distribution from his Account shall be entitled to demand that his interest in the Account be distributed to him in the form of Employer Securities, all subject to Section 9.9.  The Administrator shall notify the Participant of his right to demand distribution of his vested Account balance entirely in whole shares of Employer Securities (with the value of any fractional share paid in cash).  However, if the charter or by-laws of the Employer restrict ownership of substantially all of the outstanding Employer Securities to Employees and the Trust, then the distribution of a Participant’s vested Account shall be made entirely in the form of cash or other property, and the Participant is not entitled to a distribution in the form of Employer Securities.

8.2            Voting Rights; Tendering Shares .

(a)           Each Participant with an Employee Stock Ownership Account shall be entitled to direct the Trustee as to the manner in which the Employer Securities in such account are to be voted.  Employer Securities held in the Employee Stock Ownership Suspense Account or the Exempt Loan Suspense Account shall be voted by the Trustee on each issue with respect to which shareholders are entitled to vote in the same proportion as the Participants who timely directed the Trustee as to the manner of voting their shares in the Employee Stock Ownership Accounts with respect to such issue (that is, affirmatively, negatively or with an abstention).  In the event that a Participant fails to give timely voting instructions to the Trustee with respect to the voting of Employer Securities that are allocated to his Employee Stock Ownership Account, the Trustee shall vote such shares in the same proportion as those shares on which the Trustee has received timely direction from the Participants with respect to such issue (that is, affirmatively, negatively or with an abstention).

(b)           Tender rights or exchange offers for Employer Securities will be passed through to Participants.  As soon as practicable after the commencement of a tender or exchange offer for Employer Securities, the Employer shall cause each person with power to control the response to such tender or exchange offer to be advised in writing the terms of the offer and, if applicable, to be provided with a form for instructing the Trustee, or for revoking such instruction, to tender or exchange shares of Employer Securities, to the extent permitted under the terms of such offer.  In advising such persons of the terms of the offer, the Employer may include statements from the board of directors setting forth its position with respect to the offer.  To the extent some or all of the Participants have not directed or have not timely directed the Trustee on how to respond to such tender or exchange, then the Trustee shall tender or exchange such Employer Securities on which no direction was received as directed by the Plan Administrator.  In addition, shares attributable to Employer Securities held unallocated in the Exempt Loan Suspense Account as a result of an Exempt Loan shall be tendered or exchanged (or not tendered or exchanged) in the same proportion as those tendered by Participants.  If the tender or exchange offer is limited so that all of the shares that the Trustee has been directed to tender or exchange cannot be sold or exchanged, the shares that each Participant directed to be tendered or exchanged shall be deemed to have been sold or exchanged in the same ratio that the number of shares actually sold or exchanged bears to the total number of shares that the Trustee was directed to tender or exchange. The Trustee shall hold the Participant’s individual directions with respect to voting rights or tender decisions in confidence and, except as required by law, shall not divulge or release such individual directions to anyone associated with the Employer. The Employer may require verification of the Trustee’s compliance with the directions received from Participants by any independent auditor selected by the Employer, provided that such auditor agrees to maintain the confidentiality of such individual directions. The Employer may develop procedures to facilitate the exercise of votes or tender rights, such as the use of facsimile transmissions for the Participants located in physically remote areas.
 
 
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8.3            Nondiscrimination in Employee Stock Ownership Contribution .

In the event that the amount of the Employee Stock Ownership Contribution that would be required in any Plan Year to make the scheduled payments on an Exempt Loan would exceed the amount that would otherwise be deductible by the Employer for such Plan Year under Code Section 404, then no more than one-third of the Employee Stock Ownership Contribution for the Plan Year, which is also the Employer’s taxable year, shall be allocated to the group of Employees who:

(a)           Was at any time during the Plan Year or the preceding Plan Year a 5 percent owner of the Employer (within the meaning of Code Section 416(i)(1)); or

(b)           Received Statutory Compensation from the Employer for the preceding Plan Year in excess of $80,000, as adjusted under Code Section 414(q) with respect to the current year.

A former Employee shall be included in the group of Employees described above if either such former Employee was included in such group when such Employee separated from Service, or such former Employee was included in such group at any time after attaining age 55.

The determination of who is included in the group of Employees described above, including the determination of the number and identity of Employees in the “top-paid group,” will be made in accordance with Code Section 414(q) and the regulations thereunder. Amounts not allocable on account of this Section 8.3 shall be allocated among the Accounts of Participants who are not highly compensated employees, as defined herein, in accordance with Sections 5.5 and 5.6.

8.4            Dividends .

(a)           Dividends paid with respect to Employer Securities credited to a Participant’s Employee Stock Ownership Account as of the record date for the dividend payment may be allocated to the Participant’s Employee Stock Ownership Account, paid in cash to the Participant, or used by the Trustee to make payments on an Exempt Loan, pursuant to the direction of the Administrator.

(b)           If the Administrator shall direct that the aforesaid dividends shall be paid directly to Participants, the dividends paid with respect to such Employer Securities shall be paid to the Plan, from which dividend distributions in cash shall be made to the Participants with respect to the Employer Securities in their Employee Stock Ownership Accounts within 90 days of the close of the Plan Year in which the dividends were paid.

(c)           If the Administrator permits, then Participants shall be able to elect, in accordance with regulations or other guidance, to have the dividends paid and allocable to the Participant’s Account either (i) distributed to the Participant (or his Beneficiary) no later than 90 days after close of the Plan Year in which the dividend is paid (reduced by any investment losses occurring from when the dividend is paid to the Plan to when it is distributed to the Participant), or (ii) retained in the Participant’s Account under the Plan to be invested in Employer Securities.  Such election procedure shall be consistent with the requirements of Section 404(k) of the Code. If the Participant fails to make the election, he shall be deemed to have elected payment to the Plan and reinvestment in Employer Securities.  All elections shall be irrevocable upon the later of (i) the date of the Participant’s election, or (ii) the end of the applicable election period.
 
 
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(d)           If dividends on Employer Securities already allocated to Participants’ Employee Stock Ownership Accounts are used to make payments on an Exempt Loan, the Employer Securities which are released from the Exempt Loan Suspense Account shall first be allocated to each Employee Stock Ownership Account in an amount equal to the amount of dividends that would have been allocated to such Account if the dividends had not been used to make payments on an Exempt Loan, and the remaining Employer Securities (if any) which are released shall be allocated in the proportion that the value of each Employee Stock Ownership Account bears to the value of all such Accounts, all in accordance with Section 404(k) of the Code.

(e)           Dividends on Employer Securities obtained pursuant to an Exempt Loan and still held in the Exempt Loan Suspense Account may be used to make payments on an Exempt Loan, as described in Section 8.6.

8.5            Exempt Loans .

(a)           The Sponsor may direct the Trustee to obtain Exempt Loans.  The Exempt Loan shall be primarily for the benefit of the Plan participants and their beneficiaries. The Exempt Loan may take the form of (i) a loan from a bank or other commercial lender to purchase Employer Securities (ii) a loan from the Employer to the Plan; or (iii) an installment sale of Employer Securities to the Plan.  The proceeds of any such Exempt Loan shall be used, within a reasonable time after the Exempt Loan is obtained, only to purchase Employer Securities, repay the Exempt Loan, or repay any prior Exempt Loan.  Any such Exempt Loan shall provide for no more than a reasonable rate of interest and shall be without recourse against the Plan.  The number of years to maturity under the Exempt Loan must be definitely ascertainable at all times.  At the time the Exempt Loan is entered into, the interest rate on the Exempt Loan and the price of the Employer Securities acquired with the proceeds of the Exempt Loan shall not be such that Plan assets might be drained off.  The only assets of the Plan that may be given as collateral for an Exempt Loan are Financed Shares acquired with the proceeds of the Exempt Loan and Financed Shares that were used as collateral for a prior Exempt Loan repaid with the proceeds of the current Exempt Loan.  Such Financed Shares so pledged shall be placed in an Exempt Loan Suspense Account.  No person or institution entitled to payment under an Exempt Loan shall have recourse against Trust assets other than the Financed Shares, the Employer Stock Ownership Contribution (other than contributions of Employer Securities) that is available under the Plan to meet obligations under the Exempt Loan, and earnings attributable to such Financed Shares and the investment of such contribution.  Any Employee Stock Ownership Contribution paid during the Plan Year in which an Exempt Loan is made (whether before or after the date the proceeds of the Exempt Loan are received), any Employee Stock Ownership Contribution paid thereafter until the Exempt Loan has been repaid in full, and all earnings from investment of such Employee Stock Ownership Contribution, without regard to whether any such Employee Stock Ownership Contribution and earnings have been allocated to Participants’ Employee Stock Ownership Accounts, shall be available to meet obligations under the Exempt Loan as such obligations accrue, or prior to the time such obligations accrue, unless otherwise provided by the Employer at the time any such contribution is made.  Any pledge of Employer Securities shall provide for the release of Financed Shares upon the payment of any portion of the Exempt Loan.  The Exempt Loan shall not be payable at the demand of any person, except in the event of default. In the event of a default regarding the repayment of an Exempt Loan, the amounts transferred in satisfaction of the Exempt Loan must not exceed the amount of default.  If the lender of the Exempt Loan is a disqualified person (within the meaning of Code Section 4975(e)(2)), then the transfer of assets in connection with an Exempt Loan shall be permitted only upon and to the extent of the failure of the Plan to meet the payment schedule of the Exempt Loan.  For purposes of the preceding two sentences, the making of a guarantee shall not make a person a lender.
 
 
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(b)           For each Plan Year during the duration of the Exempt Loan, the number of Financed Shares released from such pledge shall equal the number of Financed Shares held immediately before release for the current Plan Year multiplied by a fraction.  The numerator of the fraction is the sum of principal and interest paid in such Plan Year.  The denominator of the fraction is the sum of the numerator plus the principal and interest to be paid for all future years.  Such years will be determined without taking into account any possible extension or renewal periods.  If interest on any Exempt Loan is variable, the interest to be paid in future years under the Exempt Loan shall be computed by using the interest rate applicable as of the end of the Plan Year.

(c)           Notwithstanding the foregoing, the Trustee may, in accordance with the direction of the Administrator, obtain an Exempt Loan pursuant to the terms of which the number of Financed Shares to be released from encumbrance shall be determined with reference to principal payments only.  In the event that such an Exempt Loan is obtained, annual payments of principal and interest shall be at a cumulative rate that is not less rapid at any time than level payments of such amounts for not more than 10 years.  The amount of interest in any such annual loan repayment shall be disregarded only to the extent that it would be determined to be interest under standard loan amortization tables.  The requirement set forth in the preceding sentence shall not be applicable from the time that, by reason of a renewal, extension, or refinancing, the sum of the expired duration of the Exempt Loan, the renewal period, the extension period, and the duration of a new Exempt Loan exceeds 10 years.

8.6            Exempt Loan Payments .

(a)           Payments of principal and interest on any Exempt Loan during a Plan Year shall be made by the Trustee (as directed by the Administrator) only from (1) the Employee Stock Ownership Contribution to the Trust made to meet the Plan’s obligation under an Exempt Loan (other than contributions of Employer Securities) and from any earnings attributable to Financed Shares and investments of such contributions (both received during or prior to the Plan Year); (2) the proceeds of a subsequent Exempt Loan made to repay a prior Exempt Loan; and (3) the proceeds of the sale of any Financed Shares.  Such contribution and earnings shall be accounted for separately by the Plan until the Exempt Loan is repaid.  Payments made with respect to an Exempt Loan during a Plan Year shall not exceed an amount equal to the sum of such contributions and earnings received during or prior to the year, less such payment in prior years.  The Exempt Loan shall not be paid off prematurely with Plan assets.

(b)           Employer Securities released from the Exempt Loan Suspense Account by reason of the payment of principal or interest on an Exempt Loan from amounts allocated to Participants’ Employee Stock Ownership Accounts shall immediately upon release be allocated as set forth in Section 5.5.

(c)           The Employer shall contribute to the Trust sufficient amounts to enable the Trust to pay principal and interest on any such Exempt Loans as they are due, provided, however, that no such contribution shall exceed the limitations in Section 5.6.  In the event that such contributions by reason of the limitations in Section 5.6 are insufficient to enable the Trust to pay principal and interest on such Exempt Loan as it is due, then upon the Administrator’s direction the Employer shall:

(1)           Make an Exempt Loan to the Trust in sufficient amounts to meet such principal and interest payments.  Such new Exempt Loan shall be subordinated to the prior Exempt Loan.  Employer Securities released from the pledge of the prior Exempt Loan shall be pledged as collateral to secure the new Exempt Loan.  Such Employer Securities will be released from this new pledge and allocated to the Employee Stock Ownership Accounts of the Participants in accordance with the applicable provisions of the Plan;

(2)           Purchase any Financed Shares in an amount necessary to provide the Trustee with sufficient funds to meet the principal and interest repayments.  Any such sale by the Plan shall meet the requirements of Section 408(e) of the Act; or
 
 
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(3)           Any combination of the foregoing.

However, the Employer shall not, pursuant to the provisions of this subsection, do, fail to do or cause to be done any act or thing which would result in a disqualification of the Plan as an employee stock ownership plan under Section 4975(e)(7) of the Code.

(d)           Except as provided in Section 8.1 above and notwithstanding any amendment to or termination of the Plan which causes it to cease to qualify as an employee stock ownership plan within the meaning of Section 4975(e)(7) of the Code, or any repayment of an Exempt Loan, no shares of Employer Securities acquired with the proceeds of an Exempt Loan obtained by the Trust to purchase Employer Securities may be subject to a put, call or other option, or buy-sell or similar arrangement, while such shares are held by the Plan or when such shares are distributed from the Plan.  The provisions of this Section 8.6(d) shall continue to be applicable to Employer Securities held by the Trustee, whether or not allocated to Participants’ and Former Participants’ Accounts, even if the Plan ceases to be an employee stock ownership plan, as defined in Section 4975(e)(7) of the Code.  The Plan shall not obligate itself to acquire Employer Securities from a particular security at an indefinite time upon the happening of an event, such as the death of the security holder.

8.7            Put Option .

In the event that the Employer Securities distributed to a Participant are not readily tradable on an established market, the Participant shall be entitled to require that the Employer repurchase the Employer Securities under a fair valuation formula, as provided by governmental regulations.  The Participant or Beneficiary shall be entitled to exercise the put option described in the preceding sentence for a period of not more than 60 days following the date of distribution of Employer Securities to him.  If the put option is not exercised within such 60-day period, the Participant or Beneficiary may exercise the put option during an additional period of not more than 60 days after the beginning of the first day of the first Plan Year following the Plan Year in which the first put option period occurred, all as provided in regulations promulgated by the Secretary of the Treasury.

If a Participant exercises the foregoing put option with respect to Employer Securities that were distributed as part of a total distribution pursuant to which a Participant’s Employee Stock Ownership Account is distributed to him in a single taxable year, the Employer or the Plan may elect to pay the purchase price of the Employer Securities over a period not to exceed 5 years.  Such payments shall be made in substantially equal installments not less frequently than annually over a period beginning not later than 30 days after the exercise of the put option.  Reasonable interest shall be paid to the Participant with respect to the unpaid balance of the purchase price, and adequate security shall be provided with respect thereto.  In the event that a Participant exercises a put option with respect to Employer Securities that are distributed as part of an installment distribution, if permissible under Section 9.5, the amount to be paid for such securities shall be paid not later than 30 days after the exercise of the put option.
 
 
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8.8            Diversification Requirements .

Each Participant who has completed at least 10 years of participation in the Plan and has attained age 55 may elect within 90 days after the close of each Plan Year during his “qualified election period” to direct the Plan as to the investment of at least 25 percent of his Employee Stock Ownership Account (reduced by the amount of any distributions made pursuant to a prior election under this Section 8.8).  For purposes of this Section 8.8, the term “qualified election period” shall mean the five Plan Year period beginning with the Plan Year after the Plan Year in which the Participant attains age 55 (or, if later, beginning with the Plan Year after the first Plan Year in which the Employee first completes at least 10 years of participation in the Plan).  In the case of an Employee who has attained age 60 and completed 10 years of participation in the prior Plan Year and in the case of the election year in which any other Participant who has met the minimum age and service requirements for diversification can make his last election hereunder, he shall be entitled to direct the Plan as to the investment of at least 50 percent of his Employee Stock Ownership Account (reduced by the amount of any distributions made pursuant to a prior election under this Section 8.8).  The Plan shall make available at least 3 investment options (chosen by the Administrator in accordance with Treasury Regulations) to each Participant making an election hereunder.  The Plan shall be deemed to have met the requirements of this Section 8.8 if the portion of the Participant’s Employee Stock Ownership Account covered by the election hereunder is distributed to the Participant or his designated Beneficiary within 90 days after the period during which the election may be made.  In the absence of such a distribution, the Trustee shall implement the Participant’s election within 90 days following the expiration of the qualified election period.  Notwithstanding the foregoing, if the fair market value of the Employer Securities allocated to the Employee Stock Ownership Account of a Participant otherwise entitled to diversify hereunder is $500 or less as of the Valuation Date immediately preceding the first day of any election period, then such Participant shall not be entitled to an election under this Section 8.8 for that qualified election period.

8.9            Independent Appraiser .

An independent appraiser meeting the requirements of the regulations promulgated under Code Section 170(a)(1) shall value the Employer Securities in those Plan Years when such securities are not readily tradable on an established securities market.
 
 
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ARTICLE IX
PAYMENTS AND DISTRIBUTIONS

9.1            Payments on Termination of Service - In General .

All benefits provided under this Plan shall be funded by the value of a Participant’s vested Account in the Plan.  As soon as practicable after a Participant’s Retirement, Disability, death or other termination of Service, the Administrator shall ascertain the value of his vested Account, as provided in Article V, and the Administrator shall hold or dispose of the same in accordance with the following provisions of this Article IX.

9.2            Commencement of Payments .

(a)            Distributions upon Retirement, Disability or Death .  Upon a Participant’s Retirement, Disability or death, payment of benefits under this Plan shall, unless the Participant otherwise elects (in accordance with Section 9.3), commence as soon as practicable after the Valuation Date next following the date of the Participant’s Retirement, Disability or death.

(b)            Distribution following Termination of Service .  Unless a Participant elects otherwise, if a Participant terminates Service prior to Retirement, Disability or death, he shall be accorded an opportunity to commence receipt of benefits as soon as practicable after the Valuation Date next following the date of the Participant’s termination of Service.  A Participant who terminates Service with a vested Account balance shall be entitled to receive from the Administrator a statement of his benefits.  If a Participant’s vested Account balance does not exceed $1,000, the Plan Administrator shall distribute the vested Account balance as soon as practicable after the Valuation Date next following the date the Participant terminates Service without the consent of the Participant or his spouse.

(c)            Distribution of Larger Accounts .  If the value of a Participant’s vested Account balance exceeds $1,000, and the vested Account balance is immediately distributable (i.e., is distributable prior to the date the Participant attains age 65), the Participant must consent to any distribution of such vested Account balance.  The Administrator shall notify the Participant of the right to defer any distribution until the Participant’s vested Account balance is no longer immediately distributable.  Such notification shall be provided no less than 30 days, nor more than 180 days, prior to the account distribution date.  The Administrator must clearly inform the Participant: (1) that the Participant has a right to a period of at least 30 days after receiving the notice to decide whether or not to elect a distribution (and, if applicable, a particular distribution option); (2) that there are consequences for failing to defer receipt of a distribution; (3) that the Participant must affirmatively elect a distribution after receiving the 30-day notice, and (4) any other information required under Code Section 411(a)(11) and Treasury Regulations. The consent of the Participant shall be obtained in writing within the 180-day period ending on the date the distribution is to be made. If a distribution is one to which Code Sections 401(a)(11) and 417 do not apply, such distribution may commence less than 30 days after the notice required under Section 1.411(a)-11(c) of the Income Tax Regulations is given, provided that: (1) the Administrator clearly informs the Participant that the Participant has a right to a period of at least 30 days after receiving the notice to consider the decision of whether or not to elect a distribution (and, if applicable, a particular distribution option), and (2) the Participant, after receiving the notice, affirmatively elects a distribution.
 
 
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9.3            Mandatory Commencement of Benefits .
 
(a)           Unless a Participant elects otherwise, in writing, distribution of benefits will begin no later than the 60th day after the latest to occur of the close of the Plan Year in which (i) the Participant attains age 65, (ii) the tenth anniversary of the Plan Year in which the Participant commenced participation, or (iii) the Participant terminates Service with the Employer and all Related Employers.

(b)           In the event that the Plan shall be subsequently amended to provide for a form of distribution other than a lump sum, if the Participant’s interest is to be distributed in other than a lump sum, the following minimum distribution rules shall apply on or after the required beginning date:

(1)           All distributions required under this Section 9.3(b) shall be determined and made in accordance with the Treasury Regulation under Code Section 401(a)(9).

(2)           Time and Manner of Distribution.

(A)           The Participant’s entire interest will be distributed, or begin to be distributed, to the Participant no later than the Participant’s Required Beginning Date.

(B)           If the Participant dies before distributions begin, the Participant ‘s entire interest will be distributed, or begin to be distributed, no later than as follows:

(i)             If the Participant’s surviving spouse is the Participant’s sole designated beneficiary, then distributions to the surviving spouse will begin by December 31 of the calendar year immediately following the calendar year in which the Participant died, or by December 31 of the calendar year in which the Participant would have attained age 70½, if later.

(ii)            If the Participant’s surviving spouse is not the Participant’s sole designated beneficiary, then distributions to the designated beneficiary will begin by December 31 of the calendar year immediately following the calendar year in which the Participant died.

(iii)           If there is no designated beneficiary as of September 30 of the year following the year of the Participant’s death, the Participant’s entire interest will be distributed by December 31 of the calendar year containing the fifth anniversary of the Participant’s death.

(iv)           If the participant’s surviving spouse is the participant’s sole designated beneficiary and the surviving spouse dies after the participant but before distributions to the surviving spouse begin, this Section 9.3(b)(2)(B), other than Section 9.3(b)(2)(B)(i), will apply as if the surviving spouse were the participant.

For purposes of this Section 9.3(b)(2)(B) and Section 9.3(b)(4) ,unless Section 9.3(b)(2)(B)(iv) applies, distributions are considered to begin on the Participant’s required beginning date. If Section 9.3(b)(2)(B)(iv) applies, distributions are considered to begin on the date distributions are required to begin to the surviving spouse under Section 9.3(b)(2)(B)(i).

(3)           Required Minimum Distributions During Participant’s Lifetime.  During the Participant’s lifetime, the minimum amount that will be distributed for each distribution calendar year is the lesser of:

(A)           the quotient obtained by dividing the Participant’s account balance by the distribution period in the Uniform Lifetime Table set forth in section 1.401(a)(9)-9 of the Treasury Regulations, using the Participant’s age as of the Participant’s birthday in the distribution calendar year; or

(B)           if the Participant’s sole designated beneficiary for the distribution calendar year is the Participant’s spouse, the quotient obtained by dividing the Participant’s account balance by the number in the Joint and Last Survivor Table set forth in section 1.401(a)(9)-9 of the Treasury Regulations, using the Participant’s and spouse’s attained ages as of the Participant’s and spouse’s birthdays in the distribution calendar year.
 
 
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Required minimum distributions will be determined under this Section 9.3(b)(2) beginning with the first distribution calendar year and up to and including the distribution calendar year that includes the participant’s date of death.

 
(4)
Required Minimum Distributions After Participant’s Death.

(A)           Participant Survived by Designated Beneficiary. If the Participant dies on or after the date distributions begin and there is a designated beneficiary, the minimum amount that will be distributed for each distribution calendar year after the year of the Participant’s death is the quotient obtained by dividing the Participant’s account balance by the longer of the remaining life expectancy of the Participant or the remaining life expectancy of the Participant’s designated beneficiary, determined as follows:

(i)           The Participant’s remaining life expectancy is calculated using the age of the participant in the year of death, reduced by one for each subsequent year.

(ii)           If the Participant’s surviving spouse is the Participant’s sole designated beneficiary, the remaining life expectancy of the surviving spouse is calculated for each distribution calendar year after the year of the Participant’s death using the surviving spouse’s age as of the spouse’s birthday in that year. For distribution calendar years after the year of the surviving spouse’s death, the remaining life expectancy of the surviving spouse is calculated using the age of the surviving spouse as of the spouse’s birthday in the calendar year of the spouse’s death, reduced by one for each subsequent calendar year.

(iii)           If the Participant’s surviving spouse is not the Participant’s sole designated beneficiary, the designated beneficiary’s remaining life expectancy is calculated using the age of the beneficiary in the year following the year of the participant’s death, reduced by one for each subsequent year.

(B)           If the Participant dies on or after the date distributions begin and there is no designated beneficiary as of September 30 of the year after the year of the Participant’s death, the minimum amount that will be distributed for each distribution calendar year after the year of the Participant’s death is the quotient obtained by dividing the Participant’s  account balance by the Participant’s remaining life expectancy calculated using the age of the Participant in the year of death, reduced by one for each subsequent year.

 
(5)
Death Before Date Distributions Begin.

(A)           Participant Survived by Designated Beneficiary. If the Participant dies before the date distributions begin and there is a designated beneficiary, the minimum amount that will be distributed for each distribution calendar year after the year of the Participant’s death is the quotient obtained by dividing the Participant’s account balance by the remaining life expectancy of the Participant’s designated beneficiary, determined as provided in (4) above.

(B)           No Designated Beneficiary. If the Participant dies before the date distributions begin and there is no designated beneficiary as of September 30 of the year following the year of the Participant’s death, distribution of the Participant’s entire interest will be completed by December 31 of the calendar year containing the fifth anniversary of the Participant’s  death.
 
 
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(C)           Death of Surviving Spouse Before Distributions to Surviving Spouse Are Required to Begin. If the Participant dies before the date distributions begin, the Participant’s surviving spouse is the Participant’s sole designated beneficiary, and the surviving spouse dies before distributions are required to begin to the surviving spouse, this paragraph (5) will apply as if the surviving spouse were the Participant.

 
(6)
Definitions.

(A)           Designated beneficiary. The individual who is designated as the beneficiary under the Plan and is the designated beneficiary under Code Section 401(a)(9) of and section 1.401(a)(9)-1, Q&A-4, of the Treasury Regulations.

(B)           Distribution calendar year. A calendar year for which a minimum distribution is required. For distributions beginning before the Participant’s death, the first distribution calendar year is the calendar year immediately preceding the calendar year which contains the Participant’s required beginning date. For distributions beginning after the Participant’s death, the first distribution calendar year is the calendar year in which distributions are required to begin under Section 9.3(b)(2).  The required minimum distribution for the Participant’s first distribution calendar year will be made on or before the Participant’s required beginning date. The required minimum distribution for other distribution calendar years, including the required minimum distribution for the distribution calendar year in which the Participant’s  required beginning date occurs, will be made on or before December 31 of that distribution calendar year.

(C)           Life expectancy. Life expectancy as computed by use of the Single Life Table in section 1.401(a)(9)-9 of the Treasury Regulations.

(D)           Participant’s account balance. The account balance as of the last Valuation Date in the calendar year immediately preceding the distribution calendar year (valuation calendar year) increased by the amount of any contributions made and allocated or forfeitures allocated to the account balance as of dates in the valuation calendar year after the valuation date and decreased by distributions made in the valuation calendar year after the valuation date. The account balance for the valuation calendar year includes any amounts rolled over or transferred to the Plan either in the valuation calendar year or in the distribution calendar year if distributed or transferred in the valuation calendar year.

 
(E)
Required beginning date. The date specified in Section 9.4.

9.4            Required Beginning Dates.

(a)            General Rule . The required beginning date of a Participant who is a 5-percent owner of the Employer is the first day of April of the calendar year following the calendar year in which the Participant attains age 70-1/2.  The required beginning date of a Participant who is not a 5-percent owner shall be April 1 of the calendar year following the later of either:  (i) the calendar year in which the Participant attains age 70-1/2, or (ii) the calendar year in which the Participant retires.

(b)            5-percent owner .  A Participant is treated as a 5-percent owner for purposes of this section if such Participant is a 5-percent owner as defined in section 416(i) of the Code (determined in accordance with section 416 but without regard to whether the plan is top-heavy) at any time during the Plan Year ending with or within the calendar year in which such owner attains age 66-1/2 or any subsequent Plan Year.  Once distributions have begun to a 5-percent owner under this section, they must continue to be distributed, even if the Participant ceases to be a 5-percent owner in a subsequent year.
 
 
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9.5            Form of Payment .

Each Participant’s vested Account balance shall be distributed in a lump sum payment.  This form of payment shall be the normal form of distribution.  However, in the event that the Administrator must commence distributions, as required by Section 9.4 herein, with respect to an Employee who has attained age 70 ½ and is still employed by the Employer, if the Employee does not elect a lump sum distribution, payments shall be made in installments in such amounts as shall satisfy the minimum distribution rules of Section 9.3.

9.6            Payments Upon Termination of Plan .

Upon termination of this Plan pursuant to Sections 13.2, 13.4, 13.5 or 13.6, the Administrator shall continue to perform its duties and the Trustee as directed by the Administrator, and shall make all payments upon the following terms, conditions and provisions:  The Account balance of each affected Participant and Former Participant shall immediately become fully vested and nonforfeitable; the Account balance of all Participants and Former Participants shall be determined within 60 days after such termination, and the Administrator shall have the same powers to direct the Trustee in making payments as contained in Sections 9.1 and 13.5.

9.7            Distributions Pursuant to Qualified Domestic Relations Orders .

Nothing contained in this Plan prevents the Trustee, in accordance with the direction of the Retirement and Benefits Committee, from complying with the provisions of a Qualified Domestic Relations Order. This Plan specifically permits distribution to an alternate payee under a Qualified Domestic Relations Order at any time, irrespective of whether the Participant has attained his earliest retirement age (as defined under Code §414(p)) under the Plan. A distribution to an alternate payee prior to the Participant’s attainment of earliest retirement age is available only if: (1) the order specifies distribution at that time or permits an agreement between the Plan and the alternate payee to authorize an earlier distribution; and (2) if the present value of the alternate payee’s benefits under the Plan exceeds $5,000, and the order requires, the alternate payee consents to any distribution occurring prior to the Participant’s attainment of earliest retirement age. Nothing in this Section 9.7 gives a Participant a right to receive distribution at a time otherwise not permitted under the Plan nor does it permit the alternate payee to receive a form of payment not otherwise permitted under the Plan.

The Committee must establish reasonable procedures to determine the qualified status of a domestic relations order. Upon receiving a domestic relations order, the Committee promptly will notify the Participant and any alternate payee named in the order, in writing, of the receipt of the order and the Plan’s procedures for determining the qualified status of the order. Within a reasonable period of time after receiving the domestic relations order, the Committee must determine the qualified status of the order and must notify the Participant and each alternate payee, in writing, of its determination. The Committee must provide notice under this paragraph by mailing to the individual’s address specified in the domestic relations order, or in a manner consistent with Department of Labor regulations.
 
 
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If any portion of the Participant’s Account is payable during the period the Committee is making its determination of the qualified status of the domestic relations order, the Committee must make a separate accounting of the amounts payable. If the Committee determines the order is a Qualified Domestic Relations Order within 18 months of the date amounts first are payable following receipt of the order, the Committee will direct the Trustee to distribute the payable amounts in accordance with the order. If the Committee does not make its determination of the qualified status of the order within the 18 month determination period, the Committee will direct the Trustee to distribute the payable amounts in the manner the Plan would distribute if the order did not exist and will apply the order prospectively if the Committee later determines the order is a Qualified Domestic Relations Order. To the extent it is not inconsistent with the provisions of the Qualified Domestic Relations Order, the Committee may direct the Trustee to invest any partitioned amount in a segregated sub-account or separate account and to invest the account in Federally insured, interest-bearing savings account(s) or time deposit(s) (or a combination of both), or in other fixed income investments. A segregated sub-account remains a part of the Trust, but it alone shares in any income it earns, and it alone bears any expense or loss it incurs. The Trustee will make any payments or distributions required under this Section 9.7 by separate benefit checks or other separate distribution to the alternate payee(s).

9.8            ESOP Distribution Rules .

Notwithstanding any provision of this Article IX to the contrary, the distribution of a Participant’s Employee Stock Ownership Account (unless the Participant elects otherwise in writing) shall commence as soon as administratively feasible as of the first Valuation Date coincident with or next following his death, Disability or termination of Service, but not later than 1 year after the close of the Plan Year in which the Participant separates from Service by reason of the attainment of his Normal Retirement Date, Disability, death or separation from Service.  In addition, all distributions hereunder shall, to the extent that the Participant’s Account is invested in Employer Securities, be made in the form of Employer Securities or cash, or a combination of Employer Securities and cash, in the discretion of the Administrator, subject to the Participant’s right to demand Employer Securities in accordance with Section 8.1.  Fractional shares, however, may be distributed in the form of cash.   If Employer Securities acquired with the proceeds of an Exempt Loan available for distribution consist of more than one class of Employer Securities, the Participant receiving a distribution of Employer Securities shall receive substantially the same proportion of each such class.

9.9            Direct Rollover .

(a)           Notwithstanding any provision of the Plan to the contrary that would otherwise limit a distributee’s election under this Article IX, a distributee may elect, at the time and in the manner prescribed by the Administrator, to have any portion of an “eligible rollover distribution” paid directly to an “eligible retirement plan” specified by the distributee in a “direct rollover.”

(b)           An “eligible rollover distribution” is any distribution of all or any portion of the balance to the credit of the distributee, except that an “eligible rollover distribution” does not include:  any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or the joint lives (or joint life expectancies) of the distributee and the distributee’s designated Beneficiary, or for a specified period of ten years or more; any distribution to the extent such distribution is required under Code Section 401(a)(9); the portion of any distribution that is not includable in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to Employer Securities); and any hardship distribution made on behalf of the Participant.
 
 
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(c)           An “eligible retirement plan” is an individual retirement account described in Code Section 408(a), an individual retirement annuity described in Code Section 408(b), an annuity plan described in Code Section 403(a), or a qualified trust described in Code Section 401(a), that accepts the distributee’s eligible rollover distribution.  However, in the case of an “eligible rollover distribution” to the surviving spouse or a non-spouse designated beneficiary, an “eligible retirement plan” is an individual retirement account or individual retirement annuity (and in the case of a non-spouse designated beneficiary an inherited individual retirement account or individual retirement annuity).  An eligible retirement plan shall also mean an annuity contract described in Code Section 403(b) and an eligible plan under Code Section 457(b) which is maintained by a state, political subdivision of a state, or any agency or instrumentality of a state or political subdivision of a state and which agrees to separately account for amounts transferred into such plan from this plan.  The definition of eligible retirement plan shall also apply in the case of a distribution to a surviving spouse or a non-spouse designated beneficiary, or to a spouse or former spouse who is the alternate payee under a qualified domestic relation order, as defined in Code Section 414(p).

(d)           A “distributee” includes a Participant or Former Participant.  In addition, the Participant’s or Former Participant’s surviving spouse and the Participant’s or Former Participant’s spouse or former spouse who is the alternate payee under a Qualified Domestic Relations Order are “distributees” with regard to the interest of the spouse or former spouse.  Pursuant to Code Section 402(c)(11), a “distributee” may also be a designated beneficiary of the Participant (determined in accordance with Code Section 401(a)(9)(E)).

(e)           A “direct rollover” is a payment by the Plan to the “eligible retirement plan” specified by the distributee.

(f)           The Plan shall allow a direct trustee-to-trustee transfer of an eligible rollover distribution to a Roth IRA (within the meaning of Code Section 408A).
 
9.10          Share Legend .

Employer Securities held or distributed by the Trustee may include such legend restrictions on transferability as the Employer may reasonably require in order to assure compliance with applicable Federal and State securities and other laws.
 
9.11.         Power to Reduce Benefit .
 
Notwithstanding Section 14.4, effective for judgments, orders, and decrees issued, and settlement agreements entered into, on or after August 5, 1997, a Participant’s Plan benefit may be reduced to satisfy liabilities of the Participant to the Plan due to:

(a)           The Participant’s being convicted of committing a crime involving the Plan;

(b)           A civil judgment (or consent order or decree) entered by a court in an action brought in connection with a violation of the fiduciary provisions of the Act; or

(c)           A settlement agreement between the Department of Labor and the Participant in connection with a violation of the fiduciary provisions of the Act.

The court order establishing such liability must require that the Participant’s benefit in the Plan be applied to satisfy the liability.
 
 
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ARTICLE X
PROVISIONS RELATING TO TOP-HEAVY PLANS

10.1          Top-Heavy Rules to Control .

Anything contained in this Plan to the contrary notwithstanding, if for any Plan Year the Plan is a top-heavy plan, as determined pursuant to Code Section 416, then the Plan must meet the requirements of this Article X for such Plan Year.

10.2          Top-Heavy Plan Definitions .

Unless a different meaning is plainly implied by the context, the following terms as used in this Article X shall have the following meanings:

(a)            “Accrued Benefit” shall mean the account balances or accrued benefits of an Employee, calculated pursuant to Section 10.3.

(b)            “Determination Date” shall mean, with respect to any particular Plan Year of this Plan, the last day of the preceding Plan Year (or, in the case of the first Plan Year of the Plan, the last day of the first Plan Year).  In addition, the term “Determination Date” shall mean, with respect to any particular plan year of any plan (other than this Plan) in a Required Aggregation Group or a Permissive Aggregation Group, the last day of the plan year of such plan which falls within the same calendar year as the Determination Date for this Plan.

(c)            “Employer” shall mean the Employer (as defined in Section 1.1(q)) and any entity which is (1) a member of a controlled group including such Employer, while it is a member of such controlled group (within the meaning of Code Section 414(b)), (2) in a group of trades or businesses under common control with such Employer, while it is under common control (within the meaning of Code Section 414(c)), and (3) a member of an affiliated service group including such Employer, while it is a member of such affiliated service group (within the meaning of Code Section 414(m)).

(d)            “Key Employee” shall mean any Employee or former Employee (including any deceased  Employee) who at any time during the Plan Year that includes the Determination Date was an officer of the Employer having Statutory Compensation greater than $130,000 (as adjusted under Code Section 416(i)(1)), a 5-percent owner of the Employer, or a 1-percent owner of the Employer having Statutory Compensation of more than $150,000.  The determination of who is a key employee will be made in accordance with Code Section 416(i)(1) and the applicable regulations and other guidance of general applicability issued thereunder.

(e)            “Non-Key Employee” shall mean any Employee or former Employee (or any Beneficiary of such Employee or former Employee, as the case may be) who is not considered to be a Key Employee with respect to this Plan.

(f)             “Permissive Aggregation Group” shall mean all plans in the Required Aggregation Group and any other plans maintained by the Employer which satisfy Code Sections 401(a)(4) and 410 when considered together with the Required Aggregation Group.

(g)            “Required Aggregation Group” shall mean each plan (including any terminated plan) of the Employer in which a Key Employee is (or in the case of a terminated plan, had been) a Participant in the Plan Year containing the Determination Date or any of the 4 preceding Plan Years, and each other plan of the Employer which enables any plan of the Employer in which a Key Employee is a Participant to meet the requirements of Code Sections 401(a)(4) or 410.
 
 
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10.3          Calculation of Accrued Benefits .

(a)           An Employee’s Accrued Benefit shall be equal to:

(1)           With respect to this Plan or any other defined contribution plan (other than a defined contribution pension plan) in a Required Aggregation Group or a Permissive Aggregation Group, the Employee’s account balances under the respective plan, determined as of the most recent plan valuation date within a 12-month period ending on the Determination Date, including contributions actually made after the valuation date but before the Determination Date (and, in the first plan year of a plan, also including any contributions made after the Determination Date which are allocated as of a date in the first plan year).

(2)           With respect to any defined contribution pension plan in a Required Aggregation Group or a Permissive Aggregation Group, the Employee’s account balances under the plan, determined as of the most recent plan valuation date within a 12-month period ending on the Determination Date, including contributions which have not actually been made, but which are due to be made as of the Determination Date.

(3)           With respect to any defined benefit plan in a Required Aggregation Group or a Permissive Aggregation Group, the present value of the Employee’s accrued benefits under the plan, determined as of the most recent plan valuation date within a 12-month period ending on the Determination Date, pursuant to the actuarial assumptions used by such plan, and calculated as if the Employee terminated Service under such plan as of the valuation date (except that, in the first plan year of a plan, a current Participant’s estimated Accrued Benefit as of the Determination Date shall be taken into account).

(4)           The present values of accrued benefits and the amounts of account balances of an employee as of the Determination Date shall be increased by the distributions made with respect to the employee under the Plan and any plan aggregated with the Plan under Code Section 416(g)(2) during the 1-year period ending on the Determination Date.  The preceding sentence shall also apply to distributions under a terminated plan which, had it not been terminated, would have been aggregated with the Plan under Code Section 416(g)(2)(A)(i).  In the case of a distribution made for a reason other than severance from employment, death, or disability, this provision shall be applied by substituting “5-year period” for “1-year period.”

(5)           The accrued benefits and accounts of any individual who has not performed services for the Employer during the 1-year period ending on the Determination Date shall not be taken into account.

(6)           The Accrued Benefit shall be calculated to include all amounts attributable to both Employer and Employee contributions, but shall exclude amounts attributable to voluntary deductible Employee contributions, if any.

(7)           Rollover and direct plan-to-plan transfers shall be taken into account as follows:

(A)           If the transfer is initiated by the Employee and made from a plan maintained by one employer to a plan maintained by another unrelated employer, the transferring plan shall continue to count the amount transferred; the receiving plan shall not count the amount transferred.
 
 
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(B)           If the transfer is not initiated by the Employee or is made between plans maintained by related employers, the transferring plan shall no longer count the amount transferred; the receiving plan shall count the amount transferred.

10.4          Determination of Top-Heavy Status .

This Plan shall be considered to be a top-heavy plan for any Plan Year if, as of the Determination Date, the value of the Accrued Benefits of Key Employees exceeds 60% of the value of the Accrued Benefits of all eligible Employees under the Plan.  Notwithstanding the foregoing, if the Employer maintains any other qualified plan, the determination of whether this Plan is top-heavy shall be made after aggregating all other plans of the Employer in the Required Aggregation Group and, if desired by the Employer as a means of avoiding top-heavy status, after aggregating any other plan of the Employer in the Permissive Aggregation Group.  If the required Aggregation Group is top-heavy, then each plan contained in such group shall be deemed to be top-heavy, notwithstanding that any particular plan in such group would not otherwise be deemed to be top-heavy.  Conversely, if the Permissive Aggregation Group is not top-heavy, then no plan contained in such group shall be deemed to be top-heavy, notwithstanding that any particular plan in such group would otherwise be deemed to be top-heavy.  In no event shall a plan included in a top-heavy Permissive Aggregation Group be deemed a top-heavy plan unless such plan is also included in a top-heavy Required Aggregation Group.

10.5          Minimum Contribution .

(a)           For any Plan Year in which the Plan is top-heavy, each Non-Key Employee who has met the age and service requirements, if any, contained in the Plan, shall be entitled to a minimum contribution (which may include forfeitures otherwise allocable) equal to a percentage of such Non-Key Employee’s Statutory Compensation as follows:

(1)           If the Non-Key Employee is not covered by a defined benefit plan maintained by the Employer, then the minimum contribution under this Plan shall be 3% of such Non-Key Employee’s Statutory Compensation.

(2)           If the Non-Key Employee is covered by a defined benefit plan maintained by the Employer, then the minimum contribution under this Plan shall be 5% of such Non-Key Employee’s Statutory Compensation.

(b)           Notwithstanding the foregoing, the minimum contribution otherwise allocable to a Non-Key Employee under this Plan shall be reduced in the following circumstances:

(1)           The percentage minimum contribution required under this Plan shall in no event exceed the percentage contribution made for the Key Employee for whom such percentage is the highest for the Plan Year after taking into account contributions under other defined contribution plans in this Plan’s Required Aggregation Group; provided, however, that this Section 10.5(b)(1) shall not apply if this Plan is included in a Required Aggregation Group and this Plan enables a defined benefit plan in such Required Aggregation Group to meet the requirements of Code Section 401(a)(4) or 410.

(2)           No minimum contribution shall be required (or the minimum contribution shall be reduced, as the case may be) for a Non-Key Employee under this Plan for any Plan Year if the Employer maintains another qualified plan under which a minimum benefit or contribution is being accrued or made on account of such Plan Year, in whole or in part, on behalf of the Non-Key Employee, in accordance with Code Section 416(c).
 
 
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(c)           For purposes of this Section 10.5, there shall be disregarded (1) any Employer contributions attributable to a salary reduction or similar arrangement, or (2) any Employer contributions to or any benefits under Chapter 21 of the Code (relating to the Federal Insurance Contributions Act), Title II of the Social Security Act, or any other federal or state law.

(d)           For purposes of this Section 10.5, minimum contributions shall be required to be made on behalf of only those Non-Key Employees, as described in Section 10.6(a), who have not terminated Service as of the last day of the Plan Year.  If a Non-Key Employee is otherwise entitled to receive a minimum contribution pursuant to this Section 10.5(d), the fact that such Non-Key Employee failed to complete 1,000 Hours of Service or failed to make any mandatory or elective contributions under this Plan, if any are so required, shall not preclude him from receiving such minimum contribution.

(e)           Matching contributions shall be taken into account for purposes of satisfying the minimum contribution requirements of Code Section 416(c)(2) and the Plan.  The preceding sentence shall apply with respect to matching contributions under the Plan or, if the plan provides that the minimum contribution requirement shall be met in another plan, such other plan.  Matching contributions that are used to satisfy the minimum contribution requirements shall be treated as matching contributions for purposes of the actual contribution percentage test and other requirements of Code Section 401(m).
 
 
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ARTICLE XI
ADMINISTRATION

11.1          Appointment of Administrator .

This Plan shall be administered by a committee consisting of up to 7 persons, whether or not Employees or Participants, who shall be appointed from time to time by the Board of Directors to serve at its pleasure.  Such Committee may, at the Board’s discretion, be one and the same as the Committee or Retirement and Benefits Committee which administers the Sponsor’s other employee benefit plans.  The Sponsor may require that each person appointed as an Administrator shall signify his acceptance by filing an acceptance with the Sponsor.  The term “Administrator” as used in this Plan shall refer to the members of the committee, either individually or collectively, as appropriate.  The authority to control and manage the operation and administration of the Plan is vested in the Administrator appointed by the Board of Directors. The Administrator shall have the rights, duties and obligations of an “administrator,” as that term is defined in section 3(16)(A) of the Act, and of a “plan administrator,” as that term is defined in Code Section 414(g).  In the event that the Sponsor shall elect not to appoint any individuals to constitute a committee to administer the Plan, the Sponsor shall serve as the Administrator hereunder.

11.2          Resignation or Removal of Administrator .

An Administrator shall have the right to resign at any time by giving notice in writing, mailed or delivered to the Sponsor and to the Trustee.  Any Administrator who was an employee of the Employer at the time of his appointment shall be deemed to have resigned as an Administrator upon his termination of Service.  The Board of Directors may, in its discretion, remove any Administrator with or without cause, by giving notice in writing, mailed or delivered to the Administrator and to the Trustee.

11.3          Appointment of Successors:  Terms of Office, Etc.

Upon the death, resignation or removal of an Administrator, the Sponsor may appoint, by Board of Directors’ resolution, a successor or successors.  Notice of termination of an Administrator and notice of appointment of a successor shall be made by the Sponsor in writing, with copies mailed or delivered to the Trustee, and the successor shall have all the rights and privileges and all of the duties and obligations of the predecessor.

11.4          Powers and Duties of Administrator .

The Administrator shall have the following duties and responsibilities in connection with the administration of this Plan:

(a)           To promulgate and enforce such rules, regulations and procedures as shall be proper for the efficient administration of the Plan, such rules, regulations and procedures to apply uniformly to all Employees, Participants and Beneficiaries;

(b)           To exercise discretion in determining all questions arising in the administration, interpretation and application of the Plan, including questions of eligibility and of the status and rights of Participants, Beneficiaries and any other persons hereunder;

(c)           To decide any dispute arising hereunder strictly in accordance with the terms of the Plan; provided, however, that no Administrator shall participate in any matter involving any questions relating solely to his own participation or benefits under this Plan;
 
 
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(d)           To advise the Employer and direct the Trustee regarding the known future needs for funds to be available for distribution in order that the Trustee may establish investments accordingly;

(e)           To correct defects, supply omissions and reconcile inconsistencies to the extent necessary to effectuate the Plan;
 
(f)            To advise the Employer of the maximum deductible contribution to the Plan for each fiscal year;

(g)           To direct the Trustee concerning all matters requiring the Administrator’s direction pursuant to the provisions of this Plan and the Trust Agreement;

(h)           To advise the Trustee on all terminations of Service by Participants, unless the Employer has so notified the Trustee;

(i)            To confer with the Trustee on the settling of any claims against the Fund;

(j)            To make recommendations to the Board of Directors with respect to proposed amendments to the Plan and the Trust Agreement;

(k)           To file all reports with government agencies, Employees and other parties as may be required by law, whether such reports are initially the obligation of the Employer, the Plan or the Trustee;

(l)            To have all such other powers as may be necessary to discharge its duties hereunder; and

(m)          To direct the Trustee to pay all expenses of administering this Plan, except to the extent that the Employer pays such expenses.

Full discretion is granted to the Administrator to interpret the Plan and to determine the benefits, rights and privileges of Participants, Beneficiaries or other persons affected by this Plan.  The Administrator shall exercise its discretion under the terms of this Plan and shall administer the Plan in accordance with its terms, such administration to be exercised uniformly so that all persons similarly situated shall be similarly treated.

11.5          Action by Administrator .

The Administrator may elect a Chairman and Secretary from among its members and may adopt rules for the conduct of its business.  A majority of the members then serving shall constitute a quorum for the transaction of business.  All resolutions or other action taken by the Administrator shall be by vote of a majority of those present at such meeting and entitled to vote.  Resolutions may be adopted or other action taken without a meeting upon written consent signed by at least a majority of the members.  All documents, instruments, orders, requests, directions, instructions and other papers shall be executed on behalf of the Administrator by either the Chairman or the Secretary of the Administrator, if any, or by any member or agent of the Administrator duly authorized to act on the Administrator’s behalf.

11.6          Participation by Administrator .

No member of the committee constituting the Administrator shall be precluded from becoming a Participant in the Plan if he would be otherwise eligible, but he shall not be entitled to vote or act upon matters or to sign any documents relating specifically to his own participation under the Plan, except when such matters or documents relate to benefits generally.  If this disqualification results in the lack of a quorum, then the Board of Directors shall appoint a sufficient number of temporary members of the committee constituting the Administrator who shall serve for the sole purpose of determining such a question.
 
 
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11.7          Agents .

The Administrator may employ agents and provide for such clerical, legal, actuarial, accounting, medical, advisory or other services as it deems necessary to perform its duties under this Plan.  The cost of such services and all other expenses incurred by the Administrator in connection with the administration of the Plan shall be paid from the Fund, unless paid by the Employer.

11.8          Allocation of Duties .

The duties, powers and responsibilities reserved to the Administrator may be allocated among its members so long as such allocation is pursuant to written procedures adopted by the Administrator, in which case, except as may be required by the Act, no Administrator shall have any liability, with respect to any duties, powers or responsibilities not allocated to him, for the acts of omissions of any other Administrator.

11.9          Delegation of Duties .

The Administrator may delegate any of its duties to any Employees of the Employer, or to any other person or firm, provided that the Administrator shall prudently choose such agents and rely in good faith on their actions.

11.10        Administrator’s Action Conclusive .

Any action on matters within the authority of the Administrator shall be final and conclusive except as provided in Article XII.

11.11        Compensation and Expenses of Administrator .

No Administrator who is receiving compensation from the Employer as a full-time employee, as a director or agent, shall be entitled to receive any compensation or fee for his services hereunder.  Any other Administrator shall be entitled to receive such reasonable compensation for his services as an Administrator hereunder as may be mutually agreed upon between the Employer and such Administrator.  Any such compensation shall be paid from the Fund, unless paid by the Employer.  Each Administrator shall be entitled to reimbursement by the Employer for any reasonable and necessary expenditures incurred in the discharge of his duties.

11.12        Records and Reports .

The Administrator shall maintain adequate records of its actions and proceedings in administering this Plan and shall file all reports and take all other actions as it deems appropriate in order to comply with the Act, the Code and governmental regulations issued thereunder.

11.13        Reports of Fund Open to Participants .

The Administrator shall keep on file, in such form as it shall deem convenient and proper, all annual reports of the Fund received by the Administrator from the Trustee, and a statement of each Participant’s interest in the Fund as from time to time determined.  The annual reports of the Fund and the statement of his Account balance, as well as a complete copy of the Plan and the Trust Agreement and copies of annual reports to the Internal Revenue Service, shall be made available by the Administrator to the Employer for examination by each Participant during reasonable hours at the office of the Employer, provided, however, that the statement of a Participant’s Account balance shall not be made available for examination by any other Participant.
 
 
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11.14        Named Fiduciary .

The Administrator is the named fiduciary for purposes of Section 402 of the Act and shall be the designated agent for receipt of service of process on behalf of the Plan.  It shall use the care and diligence in the performance of its duties under this Plan that are required of fiduciaries under the Act.  Nothing in this Plan shall preclude the Employer from purchasing liability insurance to protect the Administrator with respect to its duties under this Plan.

11.15        Information from Employer .

The Employer shall promptly furnish all necessary information to the Administrator to permit it to perform its duties under this Plan.  The Administrator shall be entitled to rely upon the accuracy and completeness of all information furnished to it by the Employer, unless it knows or should have known that such information is erroneous.

11.16        Responsibilities of Directors .

Subject to the rights reserved to the Board of Directors acting on behalf of the Employer as set forth in this Plan, no member of the Board of Directors shall have any duties or responsibilities under this Plan, except to the extent he shall be acting in the capacity of an Administrator or Trustee.

11.17        Liability and Indemnification .

(a)           To the extent not prohibited by the Act, the Administrator shall not be responsible in any way for any action or omission of the Employer, the Trustee or any other person in the performance of their duties and obligations set forth in this Plan and in the Trust Agreement.  To the extent not prohibited by the Act, the Administrator shall also not be responsible for any act or omission of any of its agents, or with respect to reliance upon advice of its counsel (whether or not such counsel is also counsel to the Employer or the Trustee), provided that such agents or counsel were prudently chosen by the Administrator and that the Administrator relied in good faith upon the action of such agent or the advice of such counsel.

(b)           The Administrator shall not be relieved from responsibility or liability for any responsibility, obligation or duty imposed upon it under this Plan or under the Act.  Except for its own gross negligence, willful misconduct or willful breach of the terms of this Plan, the Administrator shall be indemnified and held harmless by the Employer against liability or losses occurring by reason of any act or omission of the Administrator to the extent that such indemnification does not violate the Act or any other federal or state laws.

 
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ARTICLE XII
CLAIMS PROCEDURE

12.1          Notice of Denial .

If a Participant or his Beneficiary is denied any benefits under this Plan, either in whole or in part, the Administrator shall advise the claimant in writing of the amount of his benefit, if any, and the specific reasons for the denial.  The Administrator shall also furnish the claimant at that time with a written notice containing:

(a)           A specific reference to pertinent Plan provisions;

(b)           A description of any additional material or information necessary for the claimant to perfect his claim, if possible, and an explanation of why such material or information is needed; and

(c)           An explanation of the Plan’s claim review procedure.

12.2          Right to Reconsideration .

Within 60 days of receipt of the information described in 12.1 above, the claimant shall, if he desires further review, file a written request for reconsideration with the Administrator.

12.3          Review of Documents .

So long as the claimant’s request for review is pending (including the 60-day period described in Section 12.2 above), the claimant or his duly authorized representative may review pertinent Plan documents and the Trust Agreement (and any pertinent related documents) and may submit issues and comments in writing to the Administrator.

12.4          Decision by Administrator .

A final and binding decision shall be made by the Administrator within 60 days of the filing by the claimant of his request for reconsideration; provided, however, that if the Administrator feels that a hearing with the claimant or his representative present is necessary or desirable, this period shall be extended an additional 60 days.

12.5          Notice by Administrator .

The Administrator’s decision shall be conveyed to the claimant in writing and shall include specific reasons for the decision, written in a manner calculated to be understood by the claimant, with specific references to the pertinent Plan provisions on which the decision is based.  The Administrator’s decision shall be binding and conclusive with respect to all persons interested therein unless the Administrator has no reasonable basis for its decision.

12.6          Special Claims Procedures .

The following changes to the claims procedures set forth above shall apply to all claims for disability benefits under the Plan.  A disability benefit is any benefit, the availability of which is conditioned upon a showing of a disability.  Unless a change to the normal claims procedures set forth above is indicated, the normal procedures will also apply to claims for disability benefits.
 
 
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(a)           In the case of a claim for disability benefits, the Administrator shall advise the claimant of any adverse determination not later than 45 days after receipt of the claim.  Should it be necessary, that period may be extended by 30 days provided the Plan notifies the claimant of the circumstances prior to the expiration of the initial 45 day period.  In addition to the disclosure requirements of Section 12.1, a notice of denial of disability benefits must include:  (a) any internal rule or guideline relied upon by the Plan in making its determination and; (b) if the adverse determination is based on a medical necessity or experimental treatment, a statement explaining the specific clinical judgment for the determination, or a statement that such an explanation will be provided upon request.

(b)           Within 180 days of receipt of a notice of denial of a disability claim, the claimant may file a written claim for review with the Administrator.

(c)           Within 45 days, the Administrator must provide the claimant with a written notification of the benefit determination on review.  Should an extension of time be required, the initial period may be extended by up to 45 additional days.  The notice of the review determination shall include all of the disclosures required to be made by Section 12.1 and this Section 12.6.
 
 
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ARTICLE XIII
AMENDMENTS, TERMINATION AND MERGER

13.1          Amendments .

The Sponsor reserves the right at any time and from time to time, for any reason and retroactively if deemed necessary or appropriate by it, to the extent permissible under law, to conform with governmental regulations or other policies, to amend in whole or in part any or all of the provisions of this Plan, provided that:

(a)           No amendment shall make it possible for any part of the Fund to be used for, or diverted to, purposes other than for the exclusive benefit of Participants or their Beneficiaries under the Trust Agreement, except to the extent provided in Section 4.4;

(b)           No amendment may, directly or indirectly, reduce the vested portion of any Participant’s Account balance as of the effective date of the amendment or change the vesting schedule with respect to the future accrual of Employer contributions for any Participants unless each Participant with 3 or more Years of Vesting Service is permitted to elect to have the vesting schedule in effect before the amendment used to determine his vested benefit;

(c)           No amendment may eliminate an optional form of benefit; and.

(d)           No amendment may increase or change the duties or liabilities of the Trustee without its consent.

Amendments may be made in the form of resolutions or separate written document adopted by the Board of Directors or its delegate.  Copies of all amendments shall be delivered to the Trustee.

13.2          Effect of Change In Control .

(a)           In the event of a “change in control” of the Sponsor, as defined in paragraph (d) below, this Plan shall terminate at the effective time of such change in control.  Nothing in this Plan shall prevent the Sponsor from becoming a party to such a change in control.

(b)           Upon the effective time of a change in control, the Account balances of all affected Participants and Former Participants shall become fully vested and nonforfeitable, and the Trustee shall make payments to each Participant and Beneficiary in accordance with Section 9.5.

(c)           Notwithstanding any provision of the Plan to the contrary, at and after the effective time of a change in control, each of the following provisions shall become applicable; provided, however, that any such provision shall not apply if the Board of Directors determines that such provision would adversely affect the tax-qualified status of the Plan pursuant to Code Section 401(a), or should not apply for any other reason:

(1)           The Plan shall be interpreted, maintained and operated exclusively for the benefit of those individuals who are participating in the Plan as of the effective time of the change in control and their Beneficiaries.  Notwithstanding the provisions of Section 2.1(a), no Employee shall become a Participant for the first time at or after the effective time of a change in control.
 
 
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(2)           After a Participant’s Retirement, Disability or other termination of Service, such Participant’s Account, regardless of its value, shall not be distributed and shall share in the allocation of the Employee Stock Ownership Contribution and Investment Adjustments until such time as either (A) the Fund is liquidated in connection with the termination of the Plan, or (B) the Participant (or his Beneficiary) receives a full distribution of his Account either upon his election in accordance with Section 9.2(c) or as required in accordance with Section 8.8, 9.3 or 9.4.

(3)           Upon the termination of the Plan, Employer Securities that are allocated to the Exempt Loan Suspense Account and that are not used to repay an Exempt Loan shall be allocated as Investment Adjustments in accordance with Section 5.3.

(4)           Employer Securities that are released from the Exempt Loan Suspense Account in accordance with Section 8.5 shall be allocated to the Employee Stock Ownership Account of each Participant regardless of whether he completed a Year of Vesting Service during the Plan Year or was an Employee on the last day of such Plan Year.

(5)           The Administrator shall consist of a committee selected by the Board of Directors, and such committee shall have the exclusive authority (i) to remove the Trustee and to appoint a successor trustee, (ii) to adopt amendments to the Plan or the Trust Agreement to effectuate the provisions and intent of this Section 13.2, and (iii) to perform any or all of the functions and to exercise all of the discretion that are delegated to the Administrator pursuant to Article XI.

(6)           Any application for a favorable determination letter with respect to the tax-qualified status of the Plan under Code Section 401(a) with respect to its termination shall be subject to the prior review, comment and approval (which approval shall not be unreasonably withheld) of the Administrator, as defined in paragraph (5) above.

(d)           For purposes of this Section 13.2, the term “change in control” means the occurrence of any one or more of the events specified in the following clauses (i) through (iii): (i)any third person, including a “group” as defined in Section 13(d)(3) of the Securities Exchange Act of 1934, shall become the beneficial owner of shares of the Sponsor with respect to which 25% or more of the total number of votes for the election of the Board of Directors may be cast, (ii) as a result of, or in connection with, any cash tender offer, merger or other business combination, sale of assets or contested election, or combination of the foregoing, the persons who were directors of the Sponsor shall cease to constitute a majority of the Board of Directors, or (iii) the effective time of a transaction that is approved by the stockholders of the Sponsor and that provides either for the Sponsor to cease to be an independent publicly-owned corporation or for a sale or other disposition of all or substantially all of the assets of the Sponsor.

13.3          Consolidation or Merger of Trust .

In the event of any merger or consolidation of the Fund with, or transfer in whole or in part of the assets and liabilities of the Fund to, another trust fund held under any other plan of deferred compensation maintained or to be established for the benefit of all or some of the Participants of this Plan, the assets of the Fund applicable to such Participants shall be transferred to the other trust fund only if:

(a)           Each Participant would receive a benefit under such successor trust fund immediately after the merger, consolidation or transfer which is equal to or greater than the benefit he would have been entitled to receive immediately before the merger, consolidation or transfer (determined as if this Plan and such transferee trust fund had then terminated);
 
 
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(b)           Resolutions of the Board of Directors, or of any new or successor employer of the affected Participants, shall authorize such transfer of assets, and, in the case of the new or successor employer of the affected Participants, its resolutions shall include an assumption of liabilities imposed under this Plan with respect to such Participants’ inclusion in the new employer’s plan; and

(c)           Such other plan and trust are qualified under Code Sections 401(a) and 501(a).

13.4          Bankruptcy or Insolvency of Employer .

In the event of (a) the Employer’s legal dissolution or liquidation by any procedure other than a consolidation or merger, (b) the Employer’s receivership, insolvency, or cessation of its business as a going concern, or (c) the commencement of any proceeding by or against the Employer under the federal bankruptcy laws, or similar federal or state statute, or any federal or state statute or rule providing for the relief of debtors, compensation of creditors, arrangement, receivership, liquidation or any similar event which is not dismissed within 30 days, this Plan shall terminate automatically with respect to such entity on such date (provided, however, that if a proceeding is brought against the Employer for reorganization under Chapter 11 of the United States Bankruptcy Code or any similar federal or state statute, then this Plan shall terminate automatically if and when said proceeding results in a liquidation of the Employer, or the approval of any Plan providing therefor, or the proceeding is converted to a case under Chapter 7 of the Bankruptcy Code or any similar conversion to a liquidation proceeding under federal or state law including, but not limited to, a receivership proceeding).  In the event of any such termination as provided in the foregoing sentence, the Trustee shall make payments to the persons entitled thereto in accordance with Section 9.6 hereof.

13.5          Voluntary Termination .

The Board of Directors reserves the right to terminate this Plan at any time by giving to the Trustee and the Administrator notice in writing of such desire to terminate.  The Plan shall terminate upon the date of receipt of such notice, the Account balances of all affected Participants and Former Participants shall become fully vested and nonforfeitable, and the Trustee shall make payments to each Participant or Beneficiary in accordance with Section 9.6.  Alternatively, the Sponsor, in its discretion, may determine to continue the Trust Agreement and to continue the maintenance of the Fund, in which event distributions shall be made upon the contingencies and in all the circumstances under which such distributions would have been made, on a fully vested basis, had there been no termination of the Plan.  In addition, an entity other than the Sponsor that is participating in this Plan may terminate its participation in the Plan on a prospective basis by action of its board of directors.  Upon such termination of participation, Participants who are employees of such entity shall be entitled to distributions from this Plan in accordance with Article IX and this Article XIII.

13.6          Partial Termination of Plan or Permanent Discontinuance of Contributions .

In the event that a partial termination of the Plan shall be deemed to have occurred, or if the Employer shall discontinue permanently its contributions hereunder, the right of each affected Participant and Former Participant in his Account balance shall be fully vested and nonforfeitable.  The Sponsor, in its discretion, shall decide whether to direct the Trustee to make immediate distribution of such portion of the Fund assets to the persons entitled thereto or to make distribution in the circumstances and contingencies which would have controlled such distributions if there had been no partial termination or permanent discontinuance of contributions.  Determining whether a partial termination of the Plan pursuant to Code Section 411(d)(3) has occurred depends on the facts and circumstances including the extent to which participating Employees have had a severance from employment. If the turnover rate is at least 20 percent, there is a presumption that a partial termination of the Plan has occurred.
 
 
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ARTICLE XIV
MISCELLANEOUS

14.1          No Diversion of Funds .

It is the intention of the Employer that it shall be impossible for any part of the corpus or income of the Fund to be used for, or diverted to, purposes other than for the exclusive benefit of the Participants or their Beneficiaries, except to the extent that a return of the Employer’s contribution is permitted under Section 4.4.

14.2          Liability Limited .

Neither the Employer nor the Administrator, nor any agents, employees, officers, directors or shareholders of any of them, nor the Trustee, nor any other person, shall have any liability or responsibility with respect to this Plan, except as expressly provided herein.

14.3          Facility of Payment .

If the Administrator shall receive evidence satisfactory to it that a Participant or Beneficiary entitled to receive any benefit under the Plan is, at the time when such benefit becomes payable, a minor, or is physically or mentally incompetent to receive such benefit and to give a valid release therefor, and that another person or an institution is then maintaining or has custody of such Participant or Beneficiary and that no guardian, committee or other representative of the estate of such Participant or Beneficiary shall have been duly appointed, the Administrator may direct the Trustee to make payment of such benefit otherwise payable to such Participant or Beneficiary, to such other person or institution, including a custodian under a Uniform Gifts to Minors Act, or corresponding legislation (who shall be an adult, a guardian of the minor or a trust company), and the release of such other person or institution shall be a valid and complete discharge for the payment of such benefit.

14.4          Spendthrift Clause .

Except as permitted by the Act or the Code, including in the case of certain judgments and settlements described in subparagraph (C) of Section 401(a)(13) of the Code, no benefits or other amounts payable under the Plan shall be subject in any manner to anticipation, sale, transfer, assignment, pledge, encumbrance, charge or alienation.  If the Administrator determines that any person entitled to any payments under the Plan has become insolvent or bankrupt or has attempted to anticipate, sell, transfer, assign, pledge, encumber, charge or otherwise in any manner alienate any benefit or other amount payable to him under the Plan or that there is any danger of any levy or attachment or other court process or encumbrance on the part of any creditor of such person entitled to payments under the Plan against any benefit or other accounts payable to such person, the Administrator may, at any time, in its discretion, and in accordance with applicable law, direct the Trustee to withhold any or all payments to such person under the Plan and apply the same for the benefit of such person, in such manner and in such proportion as the Administrator may deem proper.

14.5          Benefits Limited to Fund .

All contributions by the Employer to the Fund shall be voluntary, and the Employer shall be under no legal liability to make any such contributions, except as otherwise provided herein.  The benefits of this Plan shall be provided solely by the assets of the Fund, and no liability for the payment of benefits under the Plan or for any loss of assets due to any action or inaction of the Trustee shall be imposed upon the Employer.
 
 
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14.6          Cooperation of Parties .

All parties to this Plan and any party claiming interest hereunder agree to perform any and all acts and execute any and all documents and papers which are necessary and desirable for carrying out this Plan or any of its provisions.

14.7          Payments Due Missing Persons .

The Administrator shall direct the Trustee to make a reasonable effort to locate all persons entitled to benefits under the Plan; however, notwithstanding any provision in the Plan to the contrary, if, after a period of 5 years from the date such benefit shall be due, any such persons entitled to benefits have not been located, their rights under the Plan shall stand suspended.  Before this provision becomes operative, the Trustee shall send a certified letter to all such persons at their last known address advising them that their interest in benefits under the Plan shall be suspended.  Any such suspended amounts shall be held by the Trustee for a period of 3 additional years (or a total of 8 years from the time the benefits first became payable), and thereafter such amounts shall be reallocated among current Participants in the same manner that a current contribution would be allocated.  However, if a person subsequently makes a valid claim with respect to such reallocated amounts and any earnings thereon, the Plan earnings or the Employer’s contribution to be allocated for the year in which the claim shall be paid shall be reduced by the amount of such payment.  Any such suspended amounts shall be handled in a manner not inconsistent with regulations issued by the Internal Revenue Service and Department of Labor.

14.8          Governing Law .

This Plan has been executed in the State of Washington, and all questions pertaining to its validity, construction and administration shall be determined in accordance with the laws of that State, except to the extent superseded by the Act.

14.9          Nonguarantee of Employment .

Nothing contained in this Plan shall be construed as a contract of employment between the Employer and any Employee, or as a right of any Employee to be continued in the employment of the Employer, or as a limitation of the right of the Employer to discharge any of its Employees, with or without cause.

14.10        Counsel .

The Trustee and the Administrator may consult with legal counsel, who may be counsel for the Employer and for the Administrator or the Trustee (as the case may be), with respect to the meaning or construction of this Plan and the Trust Agreement, their respective obligations or duties hereunder, or with respect to any action or proceeding or any question of law, and they shall be fully protected to the extent allowable by law with respect to any action taken or omitted by them in good faith pursuant to the advice of legal counsel.

14.11        Purposes .

This Plan is intended to satisfy the Federal Tax Qualification Requirements for stock bonus plans which are intended to operate and serve as employee stock ownership plans as described in Code Section 4975(e)(7).  This Plan has been implemented so that Participants may be provided with an opportunity to accumulate capital for their future economic security by being provided an equity interest in their employer.  This Plan, as an employee stock ownership plan, is intended to invest primarily in “qualifying employer securities” as defined in Code Section 4975(e)(8) of the Code.
 
 
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14.12        Invalidity .

Subject to the requirements of the Code and the Act, in the event any provision of the Agreement, as between the Sponsor and the Trustee, shall be held illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining provisions hereof, and this Agreement shall thereafter be construed and enforced as if said illegal or invalid provisions had never been included herein.
 
IN WITNESS WHEREOF, the Sponsor has caused these presents to be executed by its duly authorized officers and its corporate seal to be affixed on this _____ day of _______, 20__.
 
ATTEST:
  First Northwest Bancorp  
         
    By    
Secretary
   
President and Chief Executive Officer
 
         
[Corporate Seal]         
         
ATTEST:
  First Federal Savings and Loan Association of Port Angeles  
         
    By    
Secretary
   
President and Chief Executive Officer
 
         
[Corporate Seal]        
 
 
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ESOP TRUST AGREEMENT
 
BETWEEN
 
PENTEGRA TRUST COMPANY
 
AND
 
FIRST NORTHWEST BANCORP
 
THIS AGREEMENT OF TRUST (the “Agreement”) is effective as of ___________________, 20___, by and between First Northwest Bancorp, a ___________________ chartered corporation (the “Company”) and PENTEGRA TRUST COMPANY, a non-depository trust company incorporated under the laws of the State of Maine (the “Trustee”);
 
WITNESSETH
 
WHEREAS , the Company has adopted the First Northwest Bancorp Employee Stock Ownership Plan (the “Plan”), effective as of _____________________, 20___, for the exclusive purpose of providing benefits under the Plan to participants and their beneficiaries of the Company and related entities of the Company, if any; and
 
WHEREAS , the Company desires to establish a trust (the “Trust”) for the Plan and to appoint the Trustee to serve as trustee for the Trust, effective as of __________________, 20__; and
 
WHEREAS , the Trustee wishes to accept its appointment as trustee for the Plan;
 
NOW, THEREFORE , in consideration of the mutual covenants contained herein, the parties hereto, intending to be legally bound, hereby agree and declare as follows:
 
ARTICLE I
 
ESTABLISHMENT OF TRUST
 
Section 1.1.         The Company and the Trustee hereby agree to the establishment of a trust consisting of such sums as shall from time to time be paid to the Trustee under the Plan and such earnings, income and appreciation as may accrue thereon which, less payments made by the Trustee to carry out the purposes of the Plan, are referred to herein as the “Fund”.  The Trustee shall carry out the duties and responsibilities herein specified, but shall be under no duty to determine whether the amount of any contribution by the Company or any affiliated entity or by any participant under the Plan is in accordance with the terms of the Plan, nor shall the Trustee be responsible for the collection of any contributions required under the Plan.
 
Section 1.2.         The Fund shall be held, invested, reinvested and administered by the Trustee in accordance with the terms of the Plan and this Agreement solely in the interest of participants and their beneficiaries under the Plan and for the exclusive purpose of providing benefits to participants and their beneficiaries and defraying the reasonable expenses of administering the Plan.  Except as provided in Section 4.2, no assets of the Plan shall inure to the benefit of the Company or any affiliated entity.
 
 
 
 
 
Section 1.3.         The Trustee shall pay benefits and expenses from the Fund only upon the written direction of the Plan Administrator, the individual specified in the Plan as the fiduciary responsible for the day-to-day operation and administration of the Plan.  The Trustee shall be fully entitled to rely on such directions furnished by the Plan Administrator and shall be under no duty to ascertain whether the directions are in accordance with the provisions of the Plan.
 
ARTICLE II
INVESTMENT OF THE FUND
 
Section 2.1.         In accordance with the provisions of the Plan, the Trustee shall invest and reinvest the Fund without distinction between principal and income in the Company’s common stock (herein “Company Stock”) in accordance with the terms of the Plan and this Agreement as directed by the Company.  To the extent that contributions are made in Company Stock, the Trustee will be expected to retain such Company Stock.  To the extent contributions are made in cash or other amounts are received in cash and are not needed to pay principal or interest on an ESOP loan, to pay distributions to participants and their beneficiaries or to pay expenses of the Trust, the Trustee will be expected to acquire Company Stock either from other shareholders or directly from the Company as directed by the Plan Administrator.  If at the time Company Stock is to be purchased, the Company has outstanding more than one class of Company Stock, the Plan Administrator shall direct the Trustee as to which class of Company Stock shall be purchased.
 
Section 2.2.         In accordance with the provisions of the Plan and except as provided in Section 2.1 herein or the Plan, all assets of the Fund shall be invested by the Trustee solely in Company Stock, with the exception that if the Trustee is notified by the Plan Administrator that a participant is eligible to make a diversification election, if provided for under the Plan, whereby the participant may transfer a specified portion of the participant’s account to other investment options available under the Plan, the Trustee shall invest such specified portion of the participant’s account in accordance with the participant’s investment directions as provided for in the Plan and Section 2.3 hereof.  The Plan Administrator shall notify the Trustee of any such investment options currently available under the Plan and any other plan sponsored by the Company which accepts such amounts and of any changes thereto, which changes shall be effective no earlier than 60 days after delivery of written notice to the Trustee (unless otherwise agreed to by the Trustee).   The Plan Administrator may also notify the Trustee that all or a portion of the Plan assets shall be invested in assets other than Company Stock, in which case the Plan Administrator shall direct the Trustee regarding how such Plan assets shall be invested; provided, however, that the Plan Administrator may not cause the Trust to be invested in a manner that would result in the Plan not being invested primarily in Company Stock, within the meaning of Section 4975(e)(7) of the Internal Revenue Code of 1986, as amended (“Code”).
 
 
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In accordance with the provisions of the Plan, the Named Fiduciary of the Plan is authorized to appoint an “investment manager” as defined in Section 3(38) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), to be responsible for managing one or more of the designated investment options available under the Plan and selecting the specific investments that comprise any such investment option.  In such case, the Named Fiduciary shall establish the investment policies and guidelines that the investment manager shall follow when managing the investment option for the Plan, but the Named Fiduciary shall not be responsible for the selection of the specific investments that comprise any such investment option.  The Trustee shall follow the directions of the investment manager regarding the designated investment option(s) for which the investment manager is assigned responsibility.
 
Section 2.3.         In accordance with the provisions of the Plan, each participant who is eligible to make the diversification election described in Section 2.2 shall direct the Trustee as to the investment of that portion of his or her account subject to such election.  All investment directions by participants shall be timely furnished to the Trustee by the Plan Administrator, except to the extent such directions are transmitted telephonically or otherwise by participants and beneficiaries directly to the Trustee in accordance with rules and procedures established and approved by the Plan Administrator and the Trustee.  A participant’s diversification election shall be effected in the manner (i.e., reinvestment in the Plan in other assets, or transfer to another tax-qualified plan sponsored by the Company, or directly to an individual retirement account for the benefit of the participant) determined by the Plan Administrator and conveyed to the Trustee by the Plan Administrator in writing.  In making any such investment or transfer of the assets of the Fund, the Trustee shall be fully entitled to rely on the directions from participants and/or the Plan Administrator that are properly furnished to the Trustee, and the Trustee shall be under no duty to make any inquiry or investigation with respect thereto.
 
Section 2.4.         Subject to the provisions of Section 2.1, 2.2, and 2.3, the Trustee shall have the authority, in addition to any authority given by law, to exercise the following powers in the administration of the Fund:
 
(a)         in accordance with Section 2.2 above, to invest and reinvest all or a part of the assets of the Fund in the available investment options under the Plan without restriction to investments authorized for fiduciaries, including, without limitation on the amount that may be invested therein, any common, collective or commingled trust fund maintained by the Trustee, investment company, mutual fund, or other security or investment option offered by the Trustee.  Any investment in, and any terms and conditions of, any common, collective or commingled trust fund available only to employee trusts which meet the requirements of the Code or corresponding provisions of subsequent income tax laws of the United States, shall constitute an integral part of this Agreement and the Plan;
 
(b)         to dispose of all or any part of the investments, securities, or other property which may from time to time or at any time constitute the Fund and to make, execute and deliver to the purchasers thereof good and sufficient deeds of conveyance thereof, and all assignments, transfers and other legal instruments, either necessary or convenient for passing the title and ownership thereto, free and discharged of all trusts and without liability on the part of such purchasers to see to the application of the purchase money;
 
 
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(c)         to cause any investment of the Fund to be registered in the name of the Trustee or the name of its nominee or nominees or to retain such investment unregistered or in a form permitting transfer by delivery; provided that the books and records of the Trustee shall at all times show that all such investments are part of the Fund;
 
(d)         to consult and employ any suitable agent to act on behalf of the Trustee and to contract for legal, accounting, clerical and other services deemed necessary by the Trustee to manage and administer the Fund according to the terms of the Plan and this Agreement;
 
(e)         to pay from the Fund all taxes imposed or levied with respect to the Fund or any part thereof under existing or future laws, and to contest the validity or amount of any tax, assessment, claim or demand respecting the Fund or any part thereof;  and
 
(f)          generally to exercise any of the powers of an owner with respect to all or any part of the Fund.
 
Section 2.5.         Each participant or beneficiary to whose account shares of Company Stock have been allocated shall, as a named fiduciary within the meaning of Section 403(a)(1) of ERISA, direct the Trustee with respect to the voting and, if applicable, tendering of shares of Company Stock allocated to his or her account, and the Trustee shall follow the directions of those participants and beneficiaries who provide timely instructions to the Trustee.  The Trustee shall vote the shares of Company Stock allocated to the accounts of participants for whom no timely instructions have been received in the same proportion as those shares of Company Stock for which instructions were timely received, provided that the Plan requires that participants and beneficiaries be given advance notice as to the consequences of any failure to instruct the Trustee as to the voting of allocated shares of Company Stock.  Allocated shares of Company Stock will not be tendered, unless directed by a participant or beneficiary to whose account shares of Company Stock have been allocated.  The Company or an independent fiduciary (approved of by the Trustee, which approval shall not be unreasonably withheld) shall direct the Trustee with respect to the voting and, if applicable, tendering of shares of Company Stock which have not been allocated to the accounts of participants or beneficiaries; provided, however, that the Trustee may require, in its sole discretion, that an independent fiduciary (approved of by the Trustee, which approval shall not be unreasonably withheld) shall direct the Trustee with respect to the voting, and, if applicable, tendering of shares of Company Stock which have not been allocated with respect to any corporate matter which involves the voting of Company Stock with respect to the approval or disapproval of any corporate merger or consolidation, recapitalization, reclassification, liquidation, dissolution, a sale of substantially all assets of the business, or any similar transaction.
 
Section 2.6.         Except as may be authorized by regulations promulgated by the Secretary of Labor, the Trustee shall not maintain the indicia of ownership in any assets of the Fund outside of the jurisdiction of the district courts of the United States.
 
 
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ARTICLE III
DUTIES AND RESPONSIBILITIES
 
Section 3.1.         The Trustee, Company, Named Fiduciary and Plan Administrator shall each discharge their assigned fiduciary duties and responsibilities under this Agreement and the Plan solely in the interest of participants and their beneficiaries in the following manner:
 
(a)         for the exclusive purpose of providing benefits to participants and their beneficiaries and defraying reasonable expenses of administering the Plan;
 
(b)         with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims;
 
(c)         except as permitted by ERISA Section 404(a)(2), by diversifying the Plan investments so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so, including selecting a range of available investment options under the Plan referenced in Section 2.2 so as to permit participants and beneficiaries to diversify their investments pursuant to Section 2.3; and
 
(d)         in accordance with the provisions of the Plan and this Trust Agreement insofar as they are consistent with the provisions of ERISA.
 
Section 3.2.         The Trustee shall keep full and accurate accounts of all receipts, investments, disbursements and other transactions hereunder, including such specific records as may be agreed upon in writing between the Company and Trustee.  All such accounts, books and records shall be open to inspection and audit at all reasonable times by any authorized representative of the Company, the Named Fiduciary or the Plan Administrator.  Any participant or beneficiary under the Plan may examine only those individual account records pertaining directly to that participant or beneficiary.
 
Section 3.3.         The Trustee shall determine the value of the Fund at such times as are mutually agreed upon by the Trustee and the Company but in no case less frequently than annually or as required under the terms of the Plan, the Code or ERISA.  The value of shares of Company Stock held in the Fund shall be determined at their fair market value defined as their closing market price on the relevant valuation date; provided, however, that in the event such shares of Company Stock have no readily-ascertainable fair market value because they are thinly-traded, at their fair value as determined in good faith and pursuant to written procedures recommended by the Plan Administrator and approved by the Trustee as of such times as the Trustee determines to be appropriate, and from such financial publications, pricing services, or other services or sources as the Trustee reasonably believes appropriate.  All other securities and the value of other assets held in the Fund shall be valued by the Trustee at their market values on the relevant valuation date under procedures established by the Trustee.  For purposes of this Section, Company Stock shall be considered “thinly traded” if it is publicly traded on a national exchange or other generally recognized market, but not in sufficient volume and/or with sufficient frequency to assure prompt execution of buy and sell orders.  In making this determination, Internal Revenue Service Notice 2011-19 shall be taken into account.  The Trustee may seek an opinion from an independent investment advisor or legal counsel as to whether a given stock is “thinly traded.”
 
 
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Section 3.4.         Within 120 days after the end of each plan year for the Plan, or within 120 days after its removal or resignation, the Trustee shall file with the Named Fiduciary a written account of the administration of the Fund showing all transactions effected by the Trustee with respect to the assets of the Plan subsequent to the period covered by the last preceding account to the end of such plan year or date of removal or resignation and all property held at its fair market value at the end of the accounting period.  Such accounting shall show the net value of the Plan’s interest in each investment option maintained by the Trustee for the Fund and shall include financial information necessary for the completion of the annual reports required for the Plan under ERISA.  The Named Fiduciary may approve such accounting by written notice of approval delivered to the Trustee or by failure to express objection to such accounting in writing delivered to the Trustee within 120 days from the date on which the accounting is delivered to the Named Fiduciary.
 
Section 3.5.         In accordance with the terms of the Plan, the Trustee shall establish and maintain separate accounts in the name of each participant in order to record all contributions by or on behalf of the participant to the Plan and any earnings, losses and expenses attributable thereto.  The Plan Administrator shall furnish the Trustee with participant enrollment data in a format acceptable to the Trustee identifying the name, address, social security number, and current investment directions of each participant for whom one or more separate accounts are to be established by the Trustee under this Agreement.  With respect to all contributions to the Plan and other amounts that are transmitted to the Trustee, the Plan Administrator shall furnish the Trustee with participant allocation data in a format acceptable to the Trustee identifying each participant on whose behalf an amount is being transmitted to the Trustee and the dollar amount to be allocated to each of the participant’s separate account under the Plan.  In allocating amounts to participants’ separate accounts under the Plan, the Trustee shall be fully entitled to rely on the participant enrollment and allocation data furnished to it by the Plan Administrator and shall be under no duty to make any inquiry or investigation with respect thereto.
 
Section 3.6.         The Trustee shall, at least annually, or more frequently as required by the Code or ERISA, furnish each participant in the Plan with statements reflecting the current fair market value of the participant’s separate accounts under the Plan and all activities occurring within such accounts during the most recent reporting period, including Plan contributions, earnings, investment exchanges, distributions, and withdrawals.
 
Section 3.7.         The Trustee shall not be required to determine the facts concerning the eligibility of any participant to participate in the Plan, the amount of benefits payable to any participant or beneficiary under the Plan, or the date or method of payment or disbursement.  The Trustee shall be fully entitled to rely solely upon the written advice and directions of the Plan Administrator as to any such question of fact.
 
Section 3.8.         Unless resulting from the Trustee’s gross negligence, willful misconduct, lack of good faith, or breach of its fiduciary duties under this Agreement or ERISA, the Company shall indemnify and save harmless the Trustee from, against, for and in respect of any and all damages, losses, obligations, liabilities, liens, deficiencies, costs and expenses, including without limitation, reasonable attorney’s fees incident to any suit, action, investigation, claim or proceedings suffered, sustained, incurred or required to be paid by the Trustee in connection with the Plan or this Agreement.
 
 
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ARTICLE IV
PROHIBITION OF DIVERSION
 
Section 4.1.         Except as provided in Section 4.2, at no time prior to the satisfaction of all liabilities with respect to participants and their beneficiaries under the Plan shall any part of the corpus or income of the Fund be used for, or diverted to, purposes other than for the exclusive benefit of participants or their beneficiaries, or for defraying reasonable expenses of administering the Plan.
 
Section 4.2.         The provisions of Section 4.1 notwithstanding, contributions made by the Company or any affiliated entity under the Plan will be returned to the Company or affiliated entity under the following conditions:
 
(a)         If a contribution is made by mistake of fact, such contributions may be returned within one year of the payment of such contribution upon demand of the Company or affiliated entity; and
 
(b)         Contributions to the Plan are specifically conditioned upon their deductibility under the Code.  To the extent a deduction is disallowed for any such contribution, it will be returned within one year after the disallowance of the deduction upon demand of the Company or affiliated entity.  Contributions which are not deductible in the taxable year in which made but are deductible in subsequent taxable years shall not be considered to be disallowed for purposes of this subsection; and
 
(c)         Contributions to the Plan are specifically conditioned on initial qualification of the Plan under the Code.  If a Plan is determined by the Internal Revenue Service to not be initially qualified, upon demand of the Company, any employer contributions made incident to that initial qualification will be returned within one year after the date the initial qualification is denied, provided that the determination of the Internal Revenue Service is made pursuant to an application for determination made by the time prescribed by law for filing the return of the Company for the taxable year in which the Plan is adopted or such later date as is prescribed by the Secretary of the Treasury.
 
ARTICLE V
COMMUNICATION WITH FIDUCIARIES
 
Section 5.1.         Whenever the Trustee is permitted or required to act upon the directions or instructions of the Company, any named fiduciary, any investment manager or the Plan Administrator, the Trustee shall be entitled to rely upon any written communication signed by any person or agent designated to act as or on behalf of any such fiduciary.  Such person or agent shall be so designated either under the provisions of the Plan or in writing by the Company and such authority shall continue until revoked in writing.  The Trustee shall incur no liability for failure to act on such person’s or agent’s instructions or orders without written communication, and the Trustee shall be fully protected in all actions taken in good faith in reliance upon any instructions, directions, certifications and communications believed to be genuine and to have been signed or communicated by the proper person.
 
 
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Section 5.2.         The Company shall notify the Trustee in writing of the appointment, removal or resignation of any person designated to act as or on behalf of the Company, the Named Fiduciary, any investment manager, or the Plan Administrator.  After such notification, the Trustee shall be fully protected in acting upon the directions of any person designated to act as or on behalf of any such fiduciary until the Trustee receives notice from the Company to the contrary.  The Trustee shall have no duty to inquire into the qualifications of any person designated to act as or on behalf of the Company, the Named Fiduciary, any investment manager or the Plan Administrator.
 
ARTICLE VI
TRUSTEE’S COMPENSATION
 
Section 6.1.         The Trustee shall be entitled to reasonable compensation for its services as is agreed upon with the Company.  The Trustee shall also be entitled to reimbursement for all direct expenses properly and actually incurred on behalf of the Plan.  Such compensation or reimbursement shall be paid to the Trustee out of the Fund unless paid directly by the Company.  Trustee compensation is set forth in Schedule A, attached to and forming part of this Agreement.
 
ARTICLE VII
RESIGNATION AND REMOVAL OF TRUSTEE
 
Section 7.1.         The Trustee may resign at any time by written notice to the Company which shall be effective 60 days after delivery unless prior thereto a successor trustee shall have been appointed.
 
Section 7.2.         The Trustee may be removed by the Company at any time upon 60 days written notice to the Trustee; such notice, however, may be waived by the Trustee.
 
Section 7.3.         The appointment of a successor trustee hereunder shall be accomplished by and take effect upon the delivery to the Trustee of written notice of the Company appointing such successor trustee, and an acceptance in writing of the successor trustee hereunder executed by the successor so appointed.  A successor trustee may be either a corporation authorized and empowered to exercise trust powers or one or more individuals.  All of the provisions set forth herein with respect to the Trustee shall relate to each successor trustee so appointed with the same force and effect as if such successor trustee had been originally named herein as the trustee hereunder.  If within 60 days after notice of resignation or removal shall have been given under the provisions of this Article VII, a successor trustee shall not have been appointed, the Trustee or Company may apply to any court of competent jurisdiction for the appointment of a successor trustee.
 
Section 7.4.         Upon the appointment of a successor trustee, the Trustee shall transfer and deliver the Fund to such successor trustee, after reserving such reasonable amount as it shall deem necessary to provide for its expenses in the settlement of its account, the amount of any compensation due to it and any sums chargeable against the Fund for which it may be liable.  If the sums so reserved are not sufficient for such purposes, the resigning or removed Trustee shall be entitled to reimbursement for any deficiency from the successor trustee and the Company who shall be jointly and severally liable therefor.
 
 
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ARTICLE VIII
AMENDMENT AND TERMINATION OF THE TRUST AND PLAN
 
Section 8.1.         The Company may, by delivery to the Trustee of an instrument in writing, terminate this Agreement at any time.
 
Section 8.2.         The Company may partially terminate this Agreement, at any time, by delivering to the Trustee a written direction to transfer such part of the Fund as may be specified in such direction to any other trust established for the purpose of funding benefits under the Plan or under any other plan qualifying under Section 401 of the Code, established for the benefit of participants in the Plan or their beneficiaries by the Company or any affiliated entity or any successor transferee of the Company or any affiliated entity; provided such transfer shall be in conformity with the requirements of Federal law.
 
Section 8.3.         This Agreement may be amended from time to time by the Company; provided, however, that no amendment shall increase the duties or liabilities of the Trustee without the Trustee’s consent; and, provided further, that no amendment shall divert any part of the Fund to any purpose other than providing benefits to participants and their beneficiaries under the Plan or defraying the reasonable expenses of administering the Plan.
 
Section 8.4.         If the Plan is terminated in whole or in part, the Trustee shall distribute the Fund or any part thereof in such manner and at such times as the Plan Administrator shall direct in writing in accordance with the provisions of the Plan; provided, however, that the Trustee may delay distribution of the Fund until it has received from the Company a copy of an Internal Revenue Service determination letter addressing the Plan’s tax-qualified status upon termination, or, in lieu thereof at the Trustee’s sole discretion, an opinion from the Company’s legal counsel that the Plan met all qualification requirements at the date of termination.
 
ARTICLE IX
MISCELLANEOUS PROVISIONS
 
Section 9.1.         Unless the context of this Agreement clearly indicates otherwise, the terms defined in the Plan shall, when used herein, have the same meaning as in the Plan.
 
Section 9.2.         Except as otherwise required by law in the case of any qualified domestic relations order within the meaning of Section 414(p) of the Code, to the extent of any offset of a Participant’s benefits as a result of any judgment, order, decree or settlement agreement provided in Section 401(a)(13)(C) of the Code, or any federal tax levy made pursuant to Section 6331 of the Code, or except as otherwise provided in the Plan with respect to any loan to a leveraged ESOP described in Section 4975(d)(3) of the Code or loan from the Fund to a participant in accordance with the provisions of the Plan, the benefits or proceeds of any allocated or unallocated portion of the assets of the Fund and any interest of any participant or beneficiary arising out of or created by the Plan either before or after the participant’s retirement shall not be subject to execution, attachment, garnishment or other legal or judicial process whatsoever by any person, whether creditor or otherwise, claiming against such participant or beneficiary.  Except as otherwise provided in the Plan with respect to any loan from the Fund to a participant in accordance with the provisions of the Plan, no participant or beneficiary shall have the right to alienate, encumber or assign any of the payments or proceeds or any other interest arising out of or created by the Plan and any action purporting to do so shall be void.  The provisions of this Section shall apply to all participants and beneficiaries, regardless of their citizenship or place of residence.
 
 
9
 
 
Section 9.3.         Any person dealing with the Trustee may rely upon a copy of this Agreement and any amendments thereto certified to be true and correct by the Trustee.
 
Section 9.4.         The Trustee hereby acknowledges receipt of a copy of the Plan.  The Company will cause a copy of any amendment to the Plan to be delivered to the Trustee.
 
Section 9.5.         The construction, validity and administration of this Agreement shall be governed by ERISA and, to the extent not preempted by ERISA, the laws of the State of Maine without regard to its rules regarding conflict of laws.
 
IN WITNESS WHEREOF , the parties hereto have caused this Agreement to be executed in their respective names by their duly authorized officers as of the day and year first above written.
 
  FIRST NORTHWEST BANCORP  
       
  BY:    
       
       
    PRINT NAME   
       
       
    TITLE  
 
  PENTEGRA TRUST COMPANY  
       
  BY:    
       
    Stephen P. Pollak  
    PRINT NAME   
       
    Executive Vice President  
    TITLE  

 
10
 
 
STATE OF WASHINGTON )  
  :  ss.:  
COUNTY OF )  
 
On this         day of                          , in the year 2012, before me, the undersigned, a Notary Public in and for the said state, personally appeared                                                            , personally known to me or proved to me on the basis of satisfactory evidence to be the person(s) whose name(s) is (are) subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their capacity(ies) and that by his/her/their signature(s) on the instrument, the person(s) or the entity upon behalf of which the person(s) acted, executed the instrument.
 
SEAL:    
  Notary Public of    
  My Commission expires     

STATE OF NEW YORK )  
  :  ss.:  
COUNTY OF WESTCHESTER )  
 
On this         day of                                   , in the year 2012, before me, the undersigned, a Notary Public in and for the said state, personally appeared Stephen P. Pollak, personally known to me or proved to me on the basis of satisfactory evidence to be the person whose name is subscribed to the within instrument and acknowledged to me that he executed the same in his capacity(ies) and that by his signature on the instrument, the person or the entity upon behalf of which the person acted, executed the instrument.
 
SEAL:    
  Notary Public of    
  My Commission expires     
 
 
11
 
 
Schedule A
 
Fee Schedule Prepared for
  First Northwest Bancorp Employee Stock Ownership Plan
 
Directed Trustee Services

Annual Asset Fee

$1,500 plus 0.050% (5 basis points)
 
Assumptions and Comments:
 
Client acknowledges and agrees that Pentegra Services, Inc., of which Pentegra Trust Company is an affiliate, will provide administrative services for the Plan, which are detailed in a separate service agreement.
 
 
12
Exhibit 10.2
 
FORM OF
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF PORT ANGELES
EMPLOYEE SEVERANCE COMPENSATION PLAN
 
PLAN PURPOSE
 
The purpose of the First Federal Savings and Loan Association of Port Angeles Employee Severance Compensation Plan (the “Plan”) is to assure for First Federal Savings and Loan Association of Port Angeles (the “Bank”) the services of the Employees in the event of a Change in Control of First Northwest Bancorp (the “Holding Company”) or the Bank. The benefits contemplated by the Plan recognize the value to the Bank of the services and contributions of the eligible Employees and the effect upon the Bank resulting from uncertainties relating to continued employment, reduced employee benefits, management changes and employee relations that may arise if a Change in Control occurs or is threatened. The Bank’s and the Holding Company’s Boards of Directors believe that it is in the best interests of the Bank and the Holding Company to provide eligible Employees with such benefits in order to defray the costs and changes in employee status that could follow a Change in Control. The Boards of Directors believe that the Plan will also aid the Bank in attracting and retaining highly qualified individuals who are essential to its success and that the Plan’s assurance of fair treatment of the Bank’s employees will reduce the distractions and other adverse effects on Employees’ performance if a Change in Control occurs or is threatened.

ARTICLE I
ESTABLISHMENT OF PLAN
 
 
1.1
Establishment of Plan
 
As of the Effective Date, the Bank hereby establishes a severance compensation plan to be known as the “First Federal Savings and Loan Association of Port Angeles Employee Severance Compensation Plan.”  The purposes of the Plan are as set forth above.
 
 
1.2
Applicability   of Plan
 
The benefits provided by this Plan shall be available to all Employees, who, at or after the Effective Date, meet the eligibility requirements of Article III. The Plan shall not apply to any Employee whose employment was terminated prior to the Effective Date.
 
 
1.3
Contractual Ri g ht to Ben e fits
 
This Plan establishes and vests in each Participant a contractual right to the benefits to which each Participant is entitled hereunder, enforceable by the Participant against the Employer.
 
 
 
 
 
ARTICLE II
DEFINITIONS AND CONSTRUCTION
 
 
2.1
De f initions
 
Whenever used in the Plan, the following terms shall have the meanings set forth below.
 
(a)           “Annual Compensation” of a Participant means and includes all wages, salary, bonus, and incentive compensation (other than stock based compensation), paid (including accrued amounts) by the Employer as consideration for the Participant’s services during the twelve (12) complete months ending on the date as of which Annual Compensation is to be determined, which are or would (but for an election by the Participant to defer compensation) be includable in the gross income of the Participant receiving the same for federal income tax purposes.
 
(b)           “Bank” means First Federal Savings and Loan Association of Port Angeles or any successor as provided for in Article VII hereof.
 
(c)           “Change in Control” means (1) an offeror other than the Holding Company purchases shares of stock of the Holding Company or the Bank pursuant to a tender or exchange offer for such shares (2) an event of a nature that results in the acquisition of control of the Holding Company or the Bank within the meaning of the Bank Holding Company Act of 1956, as amended, under 12 U.S.C. Section 1841 (or any successor statute or regulation) or requires the filing of a notice with the Federal Deposit Insurance Corporation (“FDIC”) under 12 U.S.C. Section 1817(j) (or any successor statute or regulation); (3) any person (as the term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (“Exchange Act”)) is or becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act) directly or indirectly of securities of the Holding Company or the Bank representing 25% or more of the combined voting power of the Holding Company’s or the Bank’s outstanding securities; (4) individuals who are members of the board of directors of the Holding Company immediately following the Effective Date or who are members of the board of directors of the Bank immediately following the Effective Date (in each case, the “Incumbent Board”) cease for any reason to constitute at least a majority thereof, provided   that   any person becoming a director subsequently whose election was approved by a vote of at least three- quarters of the directors comprising the Incumbent Board, or whose nomination for election by the Holding Company’s or the Bank’s stockholders was approved by the nominating committee serving under an Incumbent Board, shall be considered a member of the Incumbent Board; or (5) consummation of a plan of reorganization, merger, acquisition, consolidation, sale of all or substantially all of the assets of the Holding Company or a similar transaction in which the Holding Company is not the resulting entity, provided   that   the term “Change in Control” shall not include an acquisition of securities by an employee benefit plan of the Bank or the Holding Company.
 
 
(d)           “Continuous Employment” means the absence of any interruption or termination of service as an Employee of the Bank or an affiliate. Service shall not be considered interrupted in the case of sick leave, military leave or any other leave of absence approved by the Bank or in the case of transfers between payroll locations of the Bank or between the Bank, its Parent, its Subsidiary or its successor.
 
 
2
 
 
(e)           “Effective Date,” as to Employees of an Employer, means the date the Plan is approved by the Board of Directors of the Bank, or such other date as the Board shall designate in its resolution approving the Plan.
 
(f)           “Employee” means an individual employed by the Employer on a full-time basis, (as determined by reference to the employment records of the Employer), excluding any executive officer of the Employer who is covered by an employment contract or a change in control severance agreement with the Employer.
 
(g)           “Employer” means the Bank or a Subsidiary or a Parent which has adopted the Plan pursuant to Article VI hereof.
 
(h)           “Expiration Date” means the date fifteen (15) years from the Effective Date unless earlier terminated pursuant to Section 8.2 or extended pursuant to Section 8.1.
 
(i)             “Holding Company” means First Northwest Bancorp, the Parent of the Bank.
 
(j)           “Just Cause,” with respect to termination of employment, will be determined by the Employer, and means an act or acts of personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, or regulation (other than traffic violations or similar offenses) or final cease-and-desist order. In determining incompetence, acts or omissions shall be measured against standards generally prevailing in the financial services industry.
 
(k)           “Parent” means any corporation which holds a majority of the voting power of the outstanding shares of the Bank’s common stock.
 
(l)            “Participant” means an Employee who meets the eligibility requirements of Article III.
 
(m)          “Payment” means the payment of severance compensation as provided in Article IV hereof.
 
(n)           “Plan” means the First Federal Savings and Loan Association of Port Angeles Employee Severance Compensation Plan.
 
(o)           “Subsidiary” means any corporation in which the Bank, directly or indirectly, holds a majority of the voting power of its outstanding shares of capital stock.
 
 
3
 
 
 
2.2
Applicable L aw
 
To the extent not preempted by the laws of the United States as now or hereafter in effect, the laws of the State of Washington shall be the controlling law in all matters relating to the Plan.
 
The Plan neither requires nor establishes an ongoing administrative system for its effect or operation. Payments under the Plan are precipitated by a single event, a Change in Control, which event is the sole focus of the Plan. Consequently, it is intended that the Plan shall not be covered by or be subject to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”).
 
 
2.3
Sever a bility
 
If a provision of this Plan shall be held illegal or invalid, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included.
 
ARTICLE III
ELIGIBILITY
 
 
3.1
Participation
 
Each Employee who has completed at least one (1) year of Continuous Employment as of the Effective Date shall become a Participant on the Effective Date. Thereafter, each Employee shall become a Participant on the day on which he or she completes one (1) year of Continuous Employment. Notwithstanding the foregoing, persons who have entered into and continue to be covered by an employment or change in control severance agreement with the Employer shall not be entitled to participate in the Plan.
 
 
3.2
Dur a tion of Participation
 
A Participant shall cease to be a Participant in the Plan when the Participant ceases to be an Employee of the Employer unless such Participant is entitled to a Payment as provided in the Plan. Furthermore, an Employee shall cease to be a Participant upon entering into an employment or change in control severance agreement with the Employer. A Participant entitled to receipt of a Payment shall remain a Participant in this Plan until the full amount of such Payment has been paid to the Participant.
 
 
4
 
 
ARTICLE IV
PAYMENTS
 
 
4.1
Right to Pa y ment
 
A Participant shall be entitled to receive from his or her respective Employer a Payment in the amount provided in Section 4.3 if there has been a Change in Control of the Bank or the Holding Company and if, within one (1) year thereafter, the Participant’s employment by an Employer shall terminate for any reason specified in Section 4.2, whether the termination is voluntary or involuntary. A Participant shall not be entitled to a Payment if termination occurs by reason of death, voluntary retirement, voluntary termination other than for reasons specified in Section 4.2, total and permanent disability, or for Just Cause.
 
 
4.2
Reasons for   Termination
 
Following a Change in Control, a Participant shall be entitled to a Payment if his or her employment with an Employer is terminated, voluntarily or involuntarily, within one (1) year following such Change in Control, for any one or more of the following reasons:
 
(a)           The Employer reduces the Participant’s base salary or rate of base compensation as in effect immediately prior to the Change in Control, or as the same may have been increased thereafter.
 
(b)           The Employer requires the Participant to change the location of the Participant’s job or office, so that such Participant will be based at a location more than thirty-five (35) miles from the location of the Participant’s job or office immediately prior to the Change in Control, provided that such new location is not closer to Participant’s home.
 
(c)           A successor bank or company fails or refuses to assume the Bank’s obligations under this Plan, as required by Article VII.
 
(d)           The Bank or any successor company breaches any other provisions of the Plan.
 
(e)           The Employer terminates the employment of a Participant at or after a Change in Control other than for Just Cause.
 
 
 
5
 
 
 
4.3
Amount of Pa y ment
 
(a)           Each Participant entitled to a Payment under this Plan shall receive from the Employer a lump sum cash payment equal to:
 
Participant’s
Years of Continuous Employment
   
Amount of Monthly Compensation
Payment to be Paid to the Participant
     
0 to 1 year
 
0
Over 1 year to 2 years
 
3 months
Over 2 years to 3 years
 
6 months
Over 3 years
 
6 months plus one month for each year of Continuous Employment over three years
 
For purposes of this Section 4.3(a): (i) the Participant’s years of service (including partial years rounded up to the nearest full month) are computed from the Employee’s date of hire through the date of termination and (ii) “Monthly Compensation” of a Participant means such Participant’s Annual Compensation (determined on the date of his or her termination of employment) divided by twelve (12).
 
Notwithstanding anything herein to the contrary, the following rules shall apply to the determination of any Payment due a Participant under this Plan: (i) a Participant entitled to a Payment under this Plan who was a vice president and above of the Bank immediately prior to the effective date of a Change in Control shall receive a minimum Payment equal to one (1) times the Participant’s Annual Compensation; (ii) a Participant entitled to a Payment under this Plan who was an assistant vice president immediately prior to the effective date of a Change in Control shall receive a minimum Payment equal to one-half (½) the Participant’s Annual Compensation; and (iii) the maximum Payment to any Participant under the Plan shall not exceed one and one-half (1-1/2) times the Participant’s Annual Compensation.
 
(b)           Notwithstanding the provisions of (a) above, if a Payment to a Participant who is a “disqualified individual” shall be of an amount which includes an “excess parachute payment,” the payment hereunder to that Participant shall be reduced to the maximum amount which does not include an “excess parachute payment.” The terms “disqualified individual” and “excess parachute payment” shall have the same meaning as defined in Section 280G of the Internal Revenue Code of 1986, as amended, or any successor section of similar import.
 
 
(c)           The Participant shall not be required to mitigate damages on the amount of the Payment by seeking other employment or otherwise, nor shall the amount of such Payment be reduced by any compensation earned by the Participant as a result of employment after termination of employment with an Employer.
 
 
6
 
 
(d)           Notwithstanding the foregoing, payments under Section 4.3(a) that are not considered short-term deferrals within the meaning of Section 409A of the Internal Revenue Coda and the regulations thereunder (“Section 409A”):
 
(1)           shall be considered made under a “separation pay plan” (within the meaning of Section 409A to the extent permitted by Section 409A. Any additional amounts due the Employee under Section 4.3(a) shall be considered deferred compensation for purposes of Section 409A, and subject to Section 4.3(d)(2) below.
 
(2)           that are considered to be deferred compensation under Section 409A shall not be paid earlier than six months after the Employee’s separation from service (as defined in Section 409A, taking into account all rules and presumptions under the Section 409A regulations), if the Employee is a “specified employee” (within the meaning of Section 409A). Payment(s) delayed on account of the preceding sentence shall be paid on the 185 t h   day following the Employee’s separation from service (as herein defined) or his or her death, if earlier.
 
The purpose of this Section 4.3(d) is to cause this Plan to comply with Section 409A, and these provisions (and the Plan) shall be administered and interpreted accordingly.
 
 
4.4
Time of Pa y ment
 
The Payment to which a Participant is entitled shall be paid to the Participant by the Employer or the successor to the Employer, in cash and in full, not later than twenty-five (25) business days after the termination of the Participant’s employment. If any Participant should die after termination of employment but before all amounts have been paid, such unpaid amounts shall be paid to the Participant’s surviving spouse, or if none, to the Participant’s estate.
 
ARTICLE V
OTHER RIGHTS AND BENEFITS NOT AFFECTED
 
 
5.1
Other B ene f its
 
Neither the provisions of the Plan nor the Payment provided for hereunder shall reduce any amounts otherwise payable, or in any way diminish the Participant’s rights as an Employee of the Employer, whether existing now or hereafter, under any benefit, incentive, retirement, stock option, stock bonus, stock ownership or any employment agreement or other plan or arrangement.
 
 
5.2
Emplo y ment Status
 
This Plan does not constitute a contract of employment or impose on the Participant or the Participant’s Employer any obligation to retain the Participant as an Employee, to change the status of the Participant’s employment, or to change the Employer’s policies regarding termination of employment.
 
 
7
 
 
ARTICLE VI
PARTICIPATING EMPLOYERS
 
Upon approval by the Board of Directors of the Bank, this Plan may be adopted by any Subsidiary or Parent of the Bank. Upon such adoption, the Subsidiary or Parent shall become an Employer hereunder and the provisions of the Plan shall be fully applicable to the Employees of that Subsidiary or Parent.
 
ARTICLE VII
SUCCESSOR TO THE BANK
 
The Bank shall require any successor to or assignee of, whether direct or indirect, by purchase, merger, consolidation or otherwise, all or substantially all the business or assets of the Bank, expressly and unconditionally to assume and agree to perform the Bank’s obligations under the Plan.
 
ARTICLE VIII
DURATION, AMENDMENT AND TERMINATION
 
 
8.1
Dur a tion
 
If a Change in Control has not occurred, the Plan shall expire fifteen (15) years from the Effective Date, unless sooner terminated as provided in Section 8.2, or unless extended for an additional period or periods by resolution adopted by the Board of Directors of the Bank.
 
Notwithstanding the foregoing, if a Change in Control occurs, the Plan shall continue in full force and effect, and shall not terminate or expire until such date as all Participants who become entitled to Payments hereunder shall have received such Payments in full.
 
 
8.2
Amendment and T ermination
 
The Plan may be terminated or amended in any respect by resolution adopted by a majority of the Board of Directors of the Bank, unless (i) a Change in Control has previously occurred, (ii) the Bank shall have in the previous year received a bona fide written offer, which was not subsequently withdrawn, from a third party to engage in a transaction which would involve a Change in Control or (iii) a third party shall have disclosed in a filing with the Securities and Exchange Commission (“SEC”) its intent to engage in a transaction which would result in a Change in Control and has not subsequently indicated in another SEC filing that it no longer had such intention. For so long as any of the events listed in paragraphs (i), (ii) and (iii) persist, the Plan shall not be subject to amendment, change, substitution, deletion, revocation or termination in any respect whatsoever unless any acquiror of the Bank shall agree in writing to provide benefits to covered employees which are at least as substantial as those set forth herein if such employees are terminated without cause within one year of a Change in Control of the Bank.
 
 
8
 
 
 
8.3
Fo r m of Amendment
 
The form of any proper amendment or termination of the Plan shall be a written instrument signed by the duly authorized officer or officers of the Bank, certifying that the amendment or termination has been approved by the Board of Directors. A proper amendment of the Plan automatically shall effect a corresponding amendment to all Participant’s rights hereunder, regardless of whether the Participants receive notice of such action. A proper termination of the Plan automatically shall effect a termination of all Participants’ rights and benefits hereunder, regardless of whether the Participants receive notice of such action.
 
ARTICLE IX
ARBITRATION
 
9.1         Any dispute or controversy arising under or in connection with the Plan shall be settled exclusively by arbitration, conducted before a panel of three arbitrators sitting in a location selected by the Participant within fifty (50) miles from the principal office of the Bank, in accordance with rules of the American Arbitration Association then in effect. Judgment may be entered on the award of the arbitrator in any court having jurisdiction.
 
 
*******
 
 
9
 
 
Having been adopted by its Board of Directors on______________, 2012, the Plan is executed by its duly authorized officers as of the ___________ day of ___________________, 2012.
 
 Attest   FIRST NORTHWEST BANCORP  
         
 
 
By
   
 Joyce L. Ruiz     Levon Mathews  
 Secretary       President and Chief Executive Officer  
 
Having been adopted by its Board of Directors on_____________, 2012, the Plan is executed by its duly authorized officers this ____________ day of_________________, 2012.
 
Attest  
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF PORT ANGELES
 
         
 
 
By
   
Joyce L. Ruiz      Levon Mathews   
Secretary      President and Chief Executive Officer  
 
 
10
Exhibit 10.3
 
EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (the “Agreement”) is made and entered into as of this ___ day of _____________, 2012, by and between First Northwest Bancorp (the “Company”) and its wholly-owned subsidiary, First Federal Savings and Loan Association of Port Angeles (“First Federal”), and Levon Mathews(the “Employee”).

WHEREAS, First Federal desires to employ the Employee, and the Employee desires to be employed by First Federal;

WHEREAS, it is anticipated that the Employee will make a major contribution to the success of the Company and First Federal in the position of president of First Federal & Chief Executive Officer of the Company;

WHEREAS, the board of directors of the Company and the board of directors of First Federal (collectively, the “Board of Directors”, and separately the “Company Board of Directors” and the “First Federal Board of Directors”, respectively) recognize the possibility of a change in control of the Company or First Federal may occur and that such possibility, and the uncertainty and questions which may arise among management, may result in the departure or distraction of key management to the detriment of the Company, First Federal and their respective shareholders;

WHEREAS, the Board of Directors believes that it is in the best interests of the Company and First Federal to enter into this Agreement with the Employee in order to assure high quality management of the Company, First Federal, and its subsidiaries;

WHEREAS, the Board of Directors has approved and authorized the execution of this Agreement with the Employee.

NOW, THEREFORE, in consideration of the foregoing and of the respective covenants and agreements of the parties herein, it is AGREED as follows:

1.   Definitions .

“Change in Control” means (1) an offeror other than the Company (as defined below) purchases shares of stock of the Company or First Federal pursuant to a tender or exchange offer for such shares; (2) an event of a nature that results in the acquisition of control of the Company or First Federal within the meaning of the Savings and Loan Holding Company Act under 12 U.S.C. Section 1467a and 12 C.F.R. Part 238 (or any successor statute or regulation) or requires the filing of a change of control notice with the Federal Reserve Board (“Federal Reserve”) or the Federal Deposit Insurance Corporation (“FDIC”); (3) any person (as the term is used in Sections 13(d) and 14(d) of the Securities  Exchange Act of 1934 (“Exchange Act”)) that is or becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act) directly or indirectly of securities of the Company or First Federal representing 25% or more of the combined voting power of the Company’s or First Federal’s outstanding securities; (4) individuals who are members of the Company Board of Directors immediately following the Effective Date or who are members of the First Federal Board of Directors immediately following the Effective Date (in each case, the “ Incumbent Board”) cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequently whose election was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board, or whose nomination for election by the Company’s or First Federal’s stockholders was approved by the nominating committee serving under an Incumbent Board, shall be considered a member of the Incumbent Board; or (5) consummation of a plan of reorganization, merger, acquisition, consolidation, sale of all or substantially all of the assets of the Company or a similar
 
 
 
 
 
transaction in which the Company is not the resulting entity, provided that the term “Change in Control” shall not include an acquisition of securities by an employee benefit plan of First Federal or the Company.

“Code” means the Internal Revenue Code of 1986, as amended from time to time.

“Committee” means a committee of the Board of Directors which has been delegated authority to act on such matters by the Board of Directors.

“Company” means First Northwest Bancorp.

“Consolidated Subsidiaries” means any subsidiary or subsidiaries of the Company (or its successors) that are part of the affiliated group (as defined in Code Section 1504) without regard to subsection (b) thereof), specifically including First Federal.”Date of Termination” means the date upon which the Employee experiences a Separation from Service from the Company or First Federal or both, as specified in a notice of termination pursuant to Section 8 of this Agreement or the date a succession becomes effective under Section 11.

“Effective Date” means the date of this Agreement.

“Involuntary Termination” means the Employee’s Separation from Service (i) by either the Company or First Federal or both without the Employee’s express written consent; or (ii) by the Employee for “good reason”:  “Good reason” means any of the following actions unless consented to in writing by the Employee: (1) a requirement that the Employee be based at any place other than Port Angles, Washington, or within a radius of 35 miles from the location of First Federal’s administrative offices as of the Effective Date, except for reasonable travel on Company or First Federal business; (2) a material demotion of the Employee; (3) a material reduction in the number or seniority of personnel reporting to the Employee, other than as part of a Company-wide or First Federal-wide reduction in staff; (4) a twenty percent (20%) or more reduction in the Employee’s then base salary, other than as part of an overall program applied uniformly and with equitable effect to all members of the senior management of First Federal or the Company; (5) a material permanent increase in the required hours of work or the workload of the Employee; (6) the failure of the First Federal Board of Directors to elect the Employee as President of First Federal (or a successor of First Federal) or any action by the First Federal Board of Directors (or its successors) removing the Employee from such office; or (7) the failure of the Company Board of Directors to elect the Employee as Chief Executive Officer of the Company (or a successor of the Company) or any action by the Company Board of Directors (or its successors) removing the Employee from such office. The term “Involuntary Termination” does not include Termination for Cause, Separation from Service due to death or permanent disability pursuant to Section 7(f) of this Agreement, retirement or suspension or temporary or permanent prohibition from participation in the conduct of First Federal’s affairs under Section 8 of the Federal Deposit Insurance Act (“FDIA”).

“Section 409A” shall mean Section 409A of the Code and the regulations and guidance of general applicability issued thereunder.

“Separation from Service” shall have the same meaning as in Section 409A.  Notwithstanding the foregoing, for purposes of determining whether the Employee is entitled to a payment under Section 7(a) or Section 7(d) of this Agreement, the term “Separation from Service” shall require the complete cessation of services to First Federal, the Company and all Consolidated Subsidiaries.

“Termination for Cause” and “Terminated For Cause” mean Employee’s Separation from Service with either the Company or First Federal or both, because of the Employee’s personal dishonesty, willful
 
 
2
 
 
misconduct, breach of a fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, or regulation (other than traffic violations or similar offenses) or final cease-and-desist order, acting or failing to act in a manner that adversely affects First Federal or the Company, including but not limited to increasing adverse regulatory or reputational risk,or (except as provided below) material breach of any provision of this Agreement.  No act or failure to act by the Employee shall be considered willful unless the Employee acted or failed to act with an absence of good faith and without a reasonable belief that the Employee’s action or failure to act was in the best interest of First Federal. The Employee shall not be deemed to have been Terminated for Cause unless and until there shall have been delivered to the Employee a copy of a resolution, duly adopted by the affirmative vote of not less than a majority of the entire membership of the Board of Directors at a meeting of the Board of Directors duly called and held for such purpose, stating that in the good faith opinion of the Board of Directors the Employee has engaged in conduct described herein and specifying the particulars thereof in detail.

2.   Term .  The term of this Agreement shall be a period of three years commencing on the Effective Date, subject to earlier termination as provided herein. Beginning on the first anniversary of the Effective Date, and on each anniversary thereafter, the term of this Agreement shall be extended for a period of one year in addition to the then-remaining term, provided that: (i) neither the Employee, nor the Company or First Federal,has given notice to the other in writing at least 90 days prior to such anniversary that the term of this Agreement shall not be extended further; and (ii) prior to such anniversary, the Board of Directors or the Committee explicitly reviews and approves the extension.  Reference herein to the term of this Agreement shall refer to both such initial term and such extended terms.

3.   Employment; Appointment as Director .
 
(a)           The Employee shall be employed as President of First Federal and Chief Executive Officer  of the Company.  As such, the Employee shall render all services and possess the powers as are customarily performed by persons situated in similar executive capacities, and shall have such other powers and duties as the Board of Directors may prescribe from time to time.The Employee shall also render services to any subsidiary or subsidiaries of the Company (or First Federal) as requested by the Board of Directors from time to time consistent with the Employee’s executive position.  The Employee shall devote the Employee’s best efforts and reasonable time and attention to the business and affairs of the Company and First Federal to the extent necessary to discharge the Employee’s responsibilities hereunder. The Employee may (i) serve on charitable or civic boards or committees and, in addition, on such corporate boards as are approved in a resolution adopted by a majority of the Board of Directors or the Committee, which approval shall not be unreasonably withheld and (ii) manage personal investments, so long as such activities do not interfere materially with performance of the Employee’s responsibilities hereunder or give rise to violations of applicable securities laws.
 
[(b)           Upon the Employee’s Date of Termination, the Employee shall resign from the Company’s and First Federal’s Board of Directors (and any other board of directors and committees to which the Employee has been appointed), effective immediately, and the Employee’s Separation from Service shall constitute such resignation.

4.  Cash Compensation; Bonuses; Expenses; Restricted Stock; Stock Options .

(a)            Salary .  The Company and First Federal jointly agree to pay the Employee during the term of this Agreement a base salary (the “Salary”) in the annualized amount of $________.  The Employee’s Salary shall be paid in accordance with the Company and First Federal’s routine payroll practices and shall be subject to customary tax and other applicable with holdings.  The Employee’s Salary
 
 
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 shall be adjusted from time to time to reflect amounts approved by the Board of Directors or the Committee.  The first performance and salary review shall occur during December 2012, with subsequent reviews being held in December of following years while this Agreement is in effect.

(b)          Incentives/ Bonuses .   The Employee shall be eligible for incentive opportunities as a percentage of the Employee’s Salary and as authorized and declared by the Board of Directors or the Committee for executive officers Performance metrics related to such incentives shall be developed to the mutual satisfaction of the Employee and the Board of Directors. Incentive payments provided for under this Agreement shall be paid no later than 2½ months after the end of the year in which the Employee obtains a legally binding right to such payments (or such other time that still qualifies the payment as a “short-term deferral” under Section 409A).  The Employee also shall be entitled to participate in an equitable manner with all other executive officers of the Company and First Federal in such performance-based and discretionary bonuses, if any, as are authorized and declared by the Board of Directors or the Committee for executive officers.

(c)            Expenses . The Employee shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Employee in performing services under this Agreement in accordance with the policies and procedures applicable to the executive officers of the Company and First Federal, provided that the Employee accounts for such expenses as required under such policies and procedures.

5.  Benefits .

(a)            Participation in Benefit Plans .  The Employee shall be entitled to participate, to the same extent as executive officers of the Company and First Federal generally, in all plans of the Company and First Federal relating to pension, retirement, thrift, profit-sharing, savings, group or other life insurance, hospitalization, medical and dental coverage, travel and accident insurance, education, cash bonuses, and other retirement or employee benefits or combinations thereof.

(b)            Fringe Benefits .  The Employee shall be eligible to participate in, and receive benefits under, any other fringe benefit plans or perquisites which are or may become generally available to the Company’s or First Federal’s executive officers, including but not limited to supplemental retirement, deferred compensation program, supplemental medical or life insurance plans, company cars, club dues, physical examinations, financial planning and tax preparation services.

6.  Vacations; Sick Leave .  The Employee shall be entitled (i) to annual paid vacation in accordance with the policies established by the Board of Directors or the Committee for executive officers and (ii) to voluntary leaves of absence, with or without pay, from time to time at such times and upon such conditions as the Board of Directors or the Committee may determine in its discretion.Upon separation from employment, the Employee shall be paid for all accrued unused vacation. In addition, the Employee shall be entitled to six days of annual sick leave. Unused sick leave shall be accumulated until retirement or separation (without limitation).  Upon Separation from Service and after five full years of service, the Employee shall be paid for one-half of their unused sick leave, not to exceed 240 hours per First Federal’s Sick Leave Policy. Upon the Employee’s Date of Termination, the Employee shall not be entitled to receive any additional compensation from First Federal for unused sick leave, except to the extent authorized by the Board of Directors or the Committee. Payments of accrued vacation pay or unused sick leave shall be paid within 15 days of the Employee’s Date of Termination.
 
 
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7.  Termination of Employment .

(a)            Involuntary Termination .  The Board of Directors may terminate the Employee’s employment at any time, but, except in the case of Termination for Cause, termination of employment shall not prejudice the Employee’s right to compensation or other benefits under this Agreement.  In the event of Involuntary Termination other than after a Change in Control which occurs during the term of this Agreement, the Company and First Federal jointly shall: (i) pay to the Employee over the one-year period commencing on the Employee’s Date of Termination (the “One-Year Period”) the Employee’s Salary at the rate in effect immediately prior to the Date of Termination, including the pro rata portion of any incentive award or bonus, payable pro rata over the One Year Period, and (ii) provide to the Employee during the One-Year Period substantially the same group life insurance, hospitalization, medical, dental, prescription drug and other health benefits, and long-term disability insurance (if any) for the benefit of the Employee and the Employee’s dependents and beneficiaries who would have been eligible for such benefits if the Employee had not suffered Involuntary Termination, on terms substantially as favorable to the Employee, including amounts of coverage and deductibles and other costs to him or her, as if he or she had not suffered Involuntary Termination. To the extent payments under this Paragraph 7(a) are subject to Section 409A, Section 20 shall apply. No payment shall be made under this Paragraph 7(a) unless the Employee timely executes a release substantially in the form attached as Exhibit A hereto.
 
(b)            Termination for Cause .    In the event of Termination for Cause, the Company and First Federal shall jointly pay to the Employee the Salary and provide benefits under this Agreement only through the Date of Termination, and shall have no further obligation to the Employee under this Agreement.

(c)            Voluntary Termination .  The Employee’s employment may be voluntarily terminated by the Employee at any time upon at least 90 days’ written notice to the Company and First Federal or such shorter period as may be agreed upon between the Employee and the Board of Directors.  In the event of such voluntary termination, the Company and First Federal shall be jointly obligated to continue to pay to the Employee the Salary and provide benefits under this Agreement only through the Date of Termination, at the time such payments are due, and shall have no further obligation to the Employee under this Agreement.

(d)            Change in Control .  In the event of Employee’s Involuntary Termination during the 12-month period ending on the first anniversary of the effective time of a Change in Control,the Company and First Federal jointly shall: (i) pay to the Employee in a lump sum in cash within 25 business days after the Date of Termination an amount equal 2.75 times the average of Employee’s five prior years’annual Salary and (ii) provide to the Employee during the One-Year Period (as defined in Paragraph 7(a)) substantially the same group life insurance, hospitalization, medical, dental, prescription drug and other health benefits, and long-term disability insurance (if any) for the benefit of the Employee and the Employee’s dependents and beneficiaries who would have been eligible for such benefits if the Employee had not suffered Involuntary Termination, on terms substantially as favorable to the Employee, including amounts of coverage and deductibles and other costs to him or her, as if the Employee had not suffered Involuntary Termination.  To the extent payments under this Paragraph 7(d) are subject to Section 409A, Section 20 shall apply. No payment shall be made under this Paragraph 7(d) unless the Employees timely executes a release substantially in the form attached as Exhibit A hereto.

(e)            Death .  In the event of the death of the Employee while employed under this Agreement and prior to any termination of employment, the Company and First Federal jointly shall pay to the Employee’s estate, or such person as the Employee may have previously designated in writing, the Salary which was not previously paid to the Employee and which the Employee would have earned if the
 
 
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Employee had continued to be employed under this Agreement through the last day of the calendar month in which the Employee died, together with the benefits provided hereunder through such date.

(f)            Disability .  If the Employee becomes entitled to benefits under the terms of the then-current disability plan, if any, of the Company and First Federal (the “Disability Plan”) or becomes otherwise unable to fulfill the Employee’s duties under this Agreement, the Employee shall be entitled to receive such group and other disability benefits as provided for in the Company/First Federal Long Term Disability Plan, if any, as are then provided by the Company or First Federal for executive employees.  In the event of such disability, this Agreement shall not be suspended, except that: (i) the obligation to pay the Salary to the Employee shall be reduced in accordance with the amount of disability income benefits received by the Employee, if any, pursuant to this paragraph such that, on an after-tax basis, the Employee shall realize from the sum of disability income benefits and the Salary the same amount as the Employee would realize on an after-tax basis from the Salary if the obligation to pay the Salary were not reduced pursuant to this Section 7(f); and (ii) upon a resolution adopted by a majority of the disinterested members of the Board of Directors or the Committee, the Company and First Federal may discontinue payment of the Salary beginning six months following a determination that the Employee has become entitled to benefits under the Disability Plan or otherwise unable to fulfill the Employee’s duties under this Agreement.
 
(g)            Temporary Suspension or Prohibition .  If the Employee is suspended and/or temporarily prohibited from participating in the conduct of First Federal’s affairs by a notice served under Section 8(e)(3) or (g)(1) of the FDIA, 12 U.S.C. Section 1818(e)(3) and (g)(1), or pursuant to Section 32.16.090 of the Revised Code of Washington (“R.C.W.”),  First Federal’s obligations under this Agreement shall be suspended as of the date of service, unless stayed by appropriate proceedings.  If the charges in the notice are dismissed, First Federal may in its discretion (i) pay the Employee all or part of the compensation withheld while its obligations under this Agreement were suspended and (ii) reinstate in whole or in part any of its obligations which were suspended.

(h)            Permanent Suspension or Prohibition .  If the Employee is removed and/or permanently prohibited from participating in the conduct of First Federal’s affairs by an order issued under Section 8(e)(4) or (g)(1) of the FDIA, 12 U.S.C. Section 1818(e)(4) and (g)(1), or pursuant to R.C.W. 32.16.090, all obligations of First Federal under this Agreement shall terminate as of the effective date of the order, but vested rights of the contracting parties shall not be affected.

(i)            Default of First Federal .  If First Federal is in default (as defined in Section 3(x)(1) of the FDIA), all obligations under this Agreement shall terminate as of the date of default, but this provision shall not affect any vested rights of the contracting parties.

(j)            Termination by Regulators .  All obligations under this Agreement shall be terminated, except to the extent determined that continuation of this Agreement is necessary for the continued operation of First Federal: (i) at the time the FDIC enters into an agreement to provide assistance to or on behalf of First Federal under the authority contained in Section 13(c) of the FDIA; or (ii) by the FDIC or the Federal Reserve, at the time either agency approves a supervisory merger to resolve problems related to operation of First Federal or the Company, respectively.  Any rights of the parties that have already vested, however, shall not be affected by any such action.

(k)            Reductions of Benefits .   Notwithstanding any other provision of this Agreement, if payments and the value of benefits received or to be received under this Agreement, together with any other amounts and the value of benefits received or to be received by the Employee, would cause any amount to be nondeductible for federal income tax purposes pursuant to or by reason of Code Section 280G, then payments and benefits under this Agreement shall be reduced (not less than zero) to the extent
 
 
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necessary so as to maximize amounts and the value of benefits to be received by the Employee without causing any amount to become nondeductible pursuant to or by reason of Code Section 280G.  The Employee shall determine the allocation of such reduction among payments and benefits to the Employee.

(l)            Further Reductions .  Any payments made to the Employee pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with 12 U.S.C. Section 1828(k) and any regulations promulgated thereunder.

8.  Notice of Termination .  In the event that the Company or First Federal desires to terminate the employment of the Employee during the term of this Agreement, the Company or First Federal or both shall deliver to the Employee a written notice of termination, stating whether such termination constitutes Termination for Cause or Involuntary Termination, setting forth in reasonable detail the facts and circumstances that are the basis for the termination, and specifying the date upon which employment shall terminate.In the event that the Employee determines in good faith that the Employee has experienced an Involuntary Termination of the Employee’s employment, the Employee the Employee shall send a written notice to the Company and First Federal stating the circumstances that constitute such Involuntary Termination and the date upon which the Employee’s employment shall have ceased due to such Involuntary Termination. In the event that the Employee desires to effect a Voluntary Termination, the Employee shall deliver a written notice to the Company and First Federal, stating the date upon which employment shall terminate, which date shall be at least 90 days after the date upon which the notice is delivered, unless the parties agree to a date sooner.

9. Loyalty; Noncompetition; Nondisclosure .

(a)           The Employee shall devote the Employee’s full time and best efforts to the performance of the Employee’s employment under this Agreement.  During the term of this Agreement, the Employee shall not, at any time or place, either directly or indirectly, engage in any business or activity in competition with the business affairs or interests of the Company or First Federal or be a director, officer or executive of or consultant to any bank, savings bank, savings and loan association, credit union or similar financial institution or holding company of any such entity.

(b)           Upon termination of this Agreement for any reason other than the reasons set forth in Paragraph 7(a) and (d) of this Agreement, for a period of one (1) year from the termination of this Agreement, the Employee shall not be a director, officer or employee of or consultant to any bank, savings bank, savings and loan association, credit union or similar financial institution or holding company of any such entity in any county in which First Federal or any other affiliate of First Federal operates a full service branch office or lending center on the date of termination of this Agreement.

(c)           Nothing in Paragraphs 9(a) and 9(b) shall limit the right of the Employee to invest in the capital stock or other securities of any business dissimilar from that of Company or First Federal, or solely as a passive investor in any business.

(d)           Directly or indirectly engaging in any business or activity in competition with the business affairs or interests of First Federal shall include (but not be limited to) engaging in business as owner, partner, agent or employee of any person, firm or corporation engaged in such business individually or as beneficiary by interest in any partnership, corporation or other business entity or in being interested directly or indirectly in any such business conducted by any person, firm or corporation. The preceding sentence shall not apply with respect to the mere ownership by the Employee of less than one percent of a publicly traded entity.
 
 
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(e)           In the course of employment, the Employee may have access to confidential information and trade secrets relating to the business of First Federal or the Company. Except as required in the course of employment by First Federal, the Employee shall not, without the prior written consent of the Board of Directors, directly or indirectly before or after termination of this agreement, disclose to anyone any confidential information relating to First Federal, the Company or any financial information, trade secrets or “know-how” that is germane to First Federal’s or the Company’s business and operations. The Employee recognizes and acknowledges that any financial information concerning any of the customers of First Federal, the Company or any affiliated entity, as may exist from time to time, is strictly confidential and is a valuable, special and unique asset of their businesses.  The Employee shall not, either before or after termination of this Agreement, disclose to anyone said financial information, or any part thereof, for any reason or purposes whatsoever.

(f)           In the event of violation by the Employee of any provision in this Section 9, the Employee will be subject to damages and because of the relationship of employer and employee, it is hereby agreed injunctive relief is necessary for the Company and First Federal to enforce these provisions of the Agreement to protect its business and good will.
 
10.   No Assignments .

(a)           This Agreement is personal to each of the parties hereto, and no party may assign or delegate any of its rights or obligations hereunder without first obtaining the written consent of the other parties; provided, however, that the Company and First Federal shall require any successor or assign (whether direct or indirect, by purchase, merger, consolidation or otherwise) by an assumption agreement in form and substance satisfactory to the Employee, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company and/or First Federal would be required to perform it, if no such succession or assignment had taken place. Failure to obtain such an assumption agreement prior to the effectiveness of any such succession or assignment shall be a breach of this Agreement and shall entitle the Employee to compensation and benefits from the Company and First Federal in the same amount and on the same terms as the compensation pursuant to Section 7(d) of this Agreement.  For purposes of implementing the provisions of this Section 11(a), the date on which any such succession becomes effective shall be deemed the Date of Termination.

(b)           This Agreement and all rights of the Employee hereunder shall inure to the benefit of and be enforceable by the Employee’s personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees.

11.   Notice .  For the purposes of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or sent by certified mail, return receipt requested, postage prepaid, to the Company and First Federal at their home offices, to the attention of the Board of Directors with a copy to the Secretary of the Company and the Secretary of First Federal, or, if to the Employee, to such home or other address as the Employee has most recently provided in writing to the Company or First Federal.

12.   Amendments .  No amendments or additions to this Agreement shall be binding unless in writing and signed by both parties, except as herein otherwise provided.

13.   Headings .  The headings used in this Agreement are included solely for convenience and shall not affect, or be used in connection with, the interpretation of this Agreement.
 
 
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14.   Severability . The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof.

15.   Governing Law . This Agreement shall be governed by the laws of the State of Washington.

16.   Arbitration .  Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator’s award in any court having jurisdiction. Notwithstanding the foregoing, the Company, First Federal or both may resort to the Superior Court of Clallam County, Washington for injunctive and such other relief as may be available in the event that the Employee engages in conduct, after termination of the Agreement that amounts to a violation of section 9 hereof or violation of the Washington Trade Secrets Act or amounts to unlawful interference with the business expectancies of the Company or First Federal.

17.   Deferral of Non-Deductible Compensation . In the event that the Employee’s aggregate compensation (including compensatory benefits which are deemed remuneration for purposes of Code Section 162(m)) from Company and the Consolidated Subsidiaries for any calendar year exceeds the maximum amount of compensation deductible by First Federal, the Company and the Consolidated Subsidiaries in any calendar year under Code Section 162(m) (the “maximum allowable amount”), then any such amount in excess of the maximum allowable amount shall be mandatorily deferred with interest thereon at three percent per annum to a calendar year such that the amount to be paid to the Employee in such calendar year, including deferred amounts and interest thereon, does not exceed the maximum allowable amount.  Subject to the foregoing, deferred amounts including interest thereon shall be payable at the earliest time permissible, and in no event later than required by Section 409A.

18.   Knowing and Voluntary Agreement.   Employee represents and agrees that the Employee has read this Agreement, understands its terms, and that the Employee has the right to consult counsel of choice and has either done so or knowingly waives the right to do so. Employee also represents that the Employee has had ample time to read and understand the Agreement before executing it and that the Employee enters into this Agreement without duress or coercion from any source.

19.   Compliance with Section 409A .

(a)          The Company, First Federal and the Employee agree that, notwithstanding anything herein to the contrary, this Agreement is intended to be interpreted and operated so that the payment of the benefits set forth herein either shall either be exempt from the requirements of Section 409A or shall comply with the requirements of such provision. The Employee hereby acknowledges that they have been advised to seek and has sought the advice of a tax advisor with respect to the tax consequences to the Employee of all payments pursuant to this Agreement, including any adverse tax consequences or penalty taxes under Section 409A and applicable State tax law. The Employee hereby agrees to bear the entire risk of any such adverse federal and State tax consequences and penalty taxes in the event any payment pursuant to this Agreement is deemed to be subject to Section 409A, that no representations have been made to the Employee relating to the tax treatment of any payment pursuant to this Agreement under Section 409A and the corresponding provisions of any applicable State income tax laws, and that in no event shall First Federal, the Company nor any affiliate thereof  be liable to the Employee for or with respect to any taxes, penalties or interest which may be imposed upon the Employee pursuant to Section 409A.

(b)           If, on the date of the Employee’s Separation from Service, the Employee is a “specified employee,” as defined in Section 409A, and if any payments or benefits under this Agreement payable
 
 
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upon the Employee’s Separation from Service will result in additional tax or interest to the Employee because of Section 409A, then despite any provision of this Agreement to the contrary the Employee will not be entitled to the payments or benefits until the earlier of (1) the date that is six months and one day after Employee’s Separation from Service for reasons other than the Employee’s death, and (2) the date of the Employee’s death. After the end of the period during which payments or benefits are delayed under this provision, the entire amount of the delayed payments and benefits shall be paid to the Employee in a single lump sum, without interest.

(c)           With respect to reimbursements and in-kind benefits made to the Employee hereunder, if any, which are not otherwise excludible from the Employee’s gross income, to the extent required to comply with the provisions of Section 409A, no reimbursement of such expenses incurred by the Employee during any taxable year of the Employee shall be made after the last day of the following taxable year, the amount of expenses eligible for reimbursement, or in-kind benefits provided, during a taxable year may not affect the expenses eligible for reimbursement, or in-kind benefits to be provided, in any other taxable year, and the right to reimbursement of such expenses or such in-kind benefits shall not be subject to liquidation or exchange for another benefit.
 
 
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written.

THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE ENFORCED BY THE PARTIES.

 
 Attest:              
FIRST NORTHWEST BANCORP
 
   
 
 
   
         
 ________,  Secretary    By:     
     Its:      
 
Attest:              
FIRST FEDERAL SAVINGS AND LOAN
 ASSOCIATION OF PORT ANGELES
 
   
 
 
   
         
 ________,  Secretary    By:     
     Its:      
         
      EMPLOYEE  
       
 
 
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EXHIBIT A
General Release

This General Release, dated as of ____________, 201_, is delivered by _______________ (the “Employee”) to and for the benefit of the Released Parties (as defined below). The Employee acknowledges that this General Release is being executed in accordance with Section 7(a) or 7(d) of the Employment Agreement dated _________, 2012 (the “Agreement”).

1.            General Release.

a.           The Employee, for himself and for the Employee’s heirs, dependents, assigns, agents, executors, administrators, trustees and legal representatives (collectively, the “Releasors”) hereby forever releases, waives and discharges the Released Parties (as defined below) from each and every claim, demand, cause of action, fee, liability or right of any sort (based upon legal or equitable theory, whether contractual, common-law, statutory, federal, state, local or otherwise), known or unknown, which Releasors ever had, now have, or hereafter may have against the Released Parties by reason of any actual or alleged act, omission, transaction, practice, policy, procedure, conduct, occurrence, or other matter, at any time up to and including the Effective Date (as defined below), including without limitation, those in connection with, or in any way related to or arising out of, the Employee’s employment or termination of employment or any other agreement, understanding, relationship, arrangement, act, omission or occurrence, with the Released Parties.

b.           Without limiting the generality of the previous paragraph, this General Release is intended to and shall release the Released Parties from any and all claims, whether known or unknown, which Releasors ever had, now have, or may hereafter have against the Released Parties including, but not limited to: (1) any claim of discrimination or retaliation under the Age Discrimination in Employment Act, Title VII of the Civil Rights Act, the Americans with Disabilities Act, the Fair Labor Standards Act, the Employee Retirement Income Security Act of 1974, as amended (excluding claims for accrued, vested benefits under any employee benefit or pension plan of the Released Parties subject to the terms and conditions of such plan and applicable law), the Family and Medical Leave Act, the Reconstruction Era Civil Rights Act, and the Rehabilitation Act of 1973; (2) any other claim (whether based on federal, state or local law or ordinance, statutory or decisional) relating to or arising out of the Employee’s employment, the terms and conditions of such employment, the termination of such employment and/or any of the events relating directly or indirectly to or surrounding the termination of such employment, including, but not limited to, breach of contract (express or implied), tort, wrongful discharge, detrimental reliance, defamation, emotional distress or compensatory or punitive damages; (3) any claim relating to or arising from a violation of Section 409A of the Internal Revenue Code of 1986, as amended; and (4) any claim for attorney’s fees, costs, disbursements and the like.

c.           The foregoing release does not in any way affect: (1) the Employee’s rights of indemnification to which the Employee was entitled immediately prior to the Resignation Date (as an employee or director of any of the Released Parties); (2) any rights the Employee may have as a stockholder of the Employer; (3) the Employee’s vested rights under any tax-qualified retirement plan or stock compensation plan maintained by a Released Party; (4) any right the Employee may have to obtain contribution in the event of an entry of judgment against the Employee as a result of any act or failure to act for which the Employee and any of the Released Parties are jointly responsible; and (5) the right of the Employee to take whatever steps may be necessary to enforce the terms of the Agreement.
 
 
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d.           For purposes of this General Release, the “Released Parties”means First Northwest Bancorp, First Federal Savings and Loan Association of Port Angeles, all current and former parents, subsidiaries, related companies,partnerships, joint ventures and employee benefit programs (and the trustees, administrators, fiduciaries and insurers of such programs), and, with respect to each of them, their predecessors and successors, and, with respect to each such entity, all of its past, present, and future employees, officers, directors, members, stockholders, owners, representatives, assigns, attorneys, agents, insurers, and any other person acting by, through, under or in concert with any of the persons or entities listed in this paragraph, and their successors (whether acting as agents for such entities or in their individual capacities).

2.            No Existing Suit . The Employee represents and warrants that, as of the Effective Date (as defined below), the Employee has not filed or commenced any suit, claim, charge, complaint, action, arbitration, or legal proceeding of any kind against of the Released Parties.

3.            Knowing and Voluntary Waiver . By signing this General Release, the Employee expressly acknowledges and agrees that: (a) the Employee has carefully read it and fully understands what it means; (b) the Employee has discussed this General Release with an attorney of the Employee’s choosing before signing it; (c) the Employee has been given at least 21 calendar days to consider this General Release; (d) the Employee has agreed to this General Release knowingly and voluntarily and was not subjected to any undue influence or duress; (e) the consideration provided him or her under Agreement is sufficient to support the releases provided by him or her under this General Release; (f) the Employee may revoke the Employee’s execution of this General Release within seven days after the Employee signs it by sending written notice of revocation as set forth below; and (g) on the eighth day after the Employee executes this General Release (the “Effective Date”), this General Release becomes effective and enforceable, provided that the Employee does not revoke it during the revocation period. Any revocation of the Employee’s execution of this General Release must be submitted, in writing, to First Federal Savings and Loan Association of Port Angeles, at its main office, to the attention of the Chairman of the Board, stating “I hereby revoke my execution of the General Release.” The revocation must be personally delivered to the Chairman of the Board of First Federal Savings and Loan Association of Port Angeles or mailed to the Chairman of the Board of First Federal Savings and Loan Association of Port Angeles and post marked within seven days of the Employee’s execution of this General Release. If the last day of the revocation period is a Saturday, Sunday or legal holiday, then the revocation period will be extended to the following day which is not a Saturday, Sunday or legal holiday. The Employee agrees that if the Employee does not execute this General Release or, in the event of revocation, the Employee will not be entitled to receive any of the payments or benefits under Section 7(a) or 7(d) of the Agreement. The Employee must execute this General Release on or before the date that is 21 days after the effective date of the Employee’s termination of employment.

This General Release is final and binding and may not be changed or modified, except as provided in a signed and dated agreement in writing between the Employee and First Federal Savings and Loan Association of Port Angeles.
 
  EMPLOYEE  
       
 Date:               
 
 
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Exhibit 10.4 
   
EMPLOYMENT AGREEMENT
 
THIS EMPLOYMENT AGREEMENT (the “Agreement”) is made and entered into as of this ___ day of _____________, 2012, by and between First Northwest Bancorp (the “Company”) and its wholly-owned subsidiary, First Federal Savings and Loan Association of Port Angeles (“First Federal”), and_________________(the “Employee”).
 
WHEREAS, First Federal desires to employ the Employee, and the Employee desires to be employed by First Federal;
 
WHEREAS, it is anticipated that the Employee will make a major contribution to the success of the Company and First Federal in the position of _____________________________;
 
WHEREAS, the board of directors of the Company and the board of directors of First Federal (collectively, the “Board of Directors”, and separately the “Company Board of Directors” and the “First Federal Board of Directors”, respectively) recognize the possibility of a change in control of the Company or First Federal may occur and that such possibility, and the uncertainty and questions which may arise among management, may result in the departure or distraction of key management to the detriment of the Company, First Federal and their respective shareholders;
 
WHEREAS, the Board of Directors believes that it is in the best interests of the Company and First Federal to enter into this Agreement with the Employee in order to assure high quality management of the Company, First Federal, and its subsidiaries;
 
WHEREAS, the Board of Directors has approved and authorized the execution of this Agreement with the Employee.
 
NOW, THEREFORE, in consideration of the foregoing and of the respective covenants and agreements of the parties herein, it is AGREED as follows:
 
1.   Definitions .
 
“Change in Control” means (1) an offeror other than the Company (as defined below) purchases shares of stock of the Company or First Federal pursuant to a tender or exchange offer for such shares; (2) an event of a nature that results in the acquisition of control of the Company or First Federal within the meaning of the Savings and Loan Holding Company Act under 12 U.S.A. Section 1467a and 12 C.F.R. Part 238 (or any successor statute or regulation) or requires the filing of a change of control notice with the Federal Reserve Board (“Federal Reserve”) or the Federal Deposit Insurance Corporation (“FDIC”); (3) any person (as the term is used in Sections 13(d) and 14(d) of the Securities  Exchange Act of 1934 (“Exchange Act”)) that is or becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act) directly or indirectly of securities of the Company or First Federal representing 25% or more of the combined voting power of the Company’s or First Federal’s outstanding securities; (4) individuals who are members of the Company Board of Directors immediately following the Effective Date or who are members of the First Federal Board of Directors immediately following the Effective Date (in each case, the “ Incumbent Board”) cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequently whose election was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board, or whose nomination for election by the Company’s or First Federal’s stockholders was approved by the nominating committee serving under an Incumbent Board, shall be considered a member of the Incumbent Board; or (5) consummation of a plan of reorganization, merger, acquisition, consolidation, sale of all or substantially all of the assets of the Company or a similar transaction in which the Company is not the resulting entity, provided that the term “Change in Control” shall not include an acquisition of securities by an employee benefit plan of First Federal or the Company.
 
 
 
 
 
“Code” means the Internal Revenue Code of 1986, as amended from time to time.
 
“Committee” means a committee of the Board of Directors which has been delegated authority to act on such matters by the Board of Directors.
 
“Company” means First Northwest Bancorp.
 
“Consolidated Subsidiaries” means any subsidiary or subsidiaries of the Company (or its successors) that are part of the affiliated group (as defined in Code Section 1504) without regard to subsection (b) thereof), specifically including First Federal.
 
“Continuous Employment” means the absence of any interruption or termination of service as an Employee of First Federal.  Service shall not be considered interrupted in the case of sick leave, military leave or any other leave of absence approved by First Federal.
 
“Date of Termination” means the date upon which the Employee experiences a Separation from Service from the Company or First Federal or both, as specified in a notice of termination pursuant to Section 8 of this Agreement or the date a succession becomes effective under Section 11.
 
“Effective Date” means the date of this Agreement.
 
“Involuntary Termination” means the Employee’s Separation from Service (i) by either the Company or First Federal or both without the Employee’s express written consent; or (ii) by the Employee for “good reason”:  “Good reason” means any of the following actions unless consented to in writing by the Employee: (1) a requirement that the Employee be based at any place other than Port Angles, Washington, or within a radius of 35 miles from the location of First Federal’s administrative offices as of the Effective Date, except for reasonable travel on Company or First Federal business; (2) a material demotion of the Employee; (3) a material reduction in the number or seniority of personnel reporting to the Employee, other than as part of a Company-wide or First Federal-wide reduction in staff; (4) a twenty percent (20%) or more reduction in the Employee’s then base salary, other than as part of an overall program applied uniformly and with equitable effect to all members of the senior management of First Federal or the Company; (5) a material permanent increase in the required hours of work or the workload of the Employee; (6) the failure of the First Federal Board of Directors to elect the Employee as _______________, _______________ of First Federal(or a successor of First Federal) or any action by the First Federal Board of Directors (or its successors) removing the Employee from such office; or (7) the failure of the Company Board of Directors to elect the Employee as ___________________ of the Company (or a successor of the Company) or any action by the Company Board of Directors (or its successors) removing the Employee from such office. The term “Involuntary Termination” does not include Termination for Cause, Separation from Service due to death or permanent disability pursuant to Section 7(f) of this Agreement, retirement or suspension or temporary or permanent prohibition from participation in the conduct of First Federal’s affairs under Section 8 of the Federal Deposit Insurance Act (“FDIA”).
 
“Section 409A” shall mean Section 409A of the Code and the regulations and guidance of general applicability issued thereunder.
 
“Separation from Service” shall have the same meaning as in Section 409A.  Notwithstanding the foregoing, for purposes of determining whether the Employee is entitled to a payment under Section 7(a) or Section 7(d) of this Agreement, the term “Separation from Service” shall require the complete cessation of services to First Federal, the Company and all Consolidated Subsidiaries.
 
 
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“Termination for Cause” and “Terminated For Cause” mean Employee’s Separation from Service with either the Company or First Federal or both, because of the Employee’s personal dishonesty, willful misconduct, breach of a fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, or regulation (other than traffic violations or similar offenses) or final cease-and-desist order, acting or failing to act in a manner that adversely affects First Federal or the Company, including but not limited to increasing adverse regulatory or reputational risk,or (except as provided below) material breach of any provision of this Agreement.  No act or failure to act by the Employee shall be considered willful unless the Employee acted or failed to act with an absence of good faith and without a reasonable belief that the Employee’s action or failure to act was in the best interest of First Federal.
 
2.   Term .  The term of this Agreement shall be a period of three years commencing on the Effective Date, subject to earlier termination as provided herein. Beginning on the first anniversary of the Effective Date, and on each anniversary thereafter, the term of this Agreement shall be extended for a period of one year in addition to the then-remaining term, provided that: (i) neither the Employee, nor the Company or First Federal, has given notice to the other in writing at least 90 days prior to such anniversary that the term of this Agreement shall not be extended further; and (ii) prior to such anniversary, the Board of Directors or the Committee explicitly reviews and approves the extension.  Reference herein to the term of this Agreement shall refer to both such initial term and such extended terms.
 
3.   Employment;
 
(a)           The Employee shall be employed as ________________ and ______________of First Federal and _______________________of the Company.  As such, the Employee shall render all services and possess the powers as are customarily performed by persons situated in similar executive capacities, and shall have such other powers and duties as the Board of Directors may prescribe from time to time.The Employee shall also render services to any subsidiary or subsidiaries of the Company (or First Federal) as requested by the Board of Directors from time to time consistent with the Employee’s executive position.  The Employee shall devote the Employee’s best efforts and reasonable time and attention to the business and affairs of the Company and First Federal to the extent necessary to discharge the Employee’s responsibilities hereunder. The Employee may (i) serve on charitable or civic boards or committees and, in addition, on such corporate boards as are approved in a resolution adopted by a majority of the Board of Directors or the Committee, which approval shall not be unreasonably withheld and (ii) manage personal investments, so long as such activities do not interfere materially with performance of the Employee’s responsibilities hereunder or give rise to violations of applicable securities laws.
 
[(b)           Upon the Employee’s Date of Termination, the Employee shall resign from the Company’s and First Federal’s Board of Directors (and any other board of directors and committees to which the Employee has been appointed), effective immediately, and the Employee’s Separation from Service shall constitute such resignation.
 
4.   Cash Compensation; Bonuses; Expenses; Restricted Stock; Stock Options .
 
(a)             Salary .  The Company and First Federal jointly agree to pay the Employee during the term of this Agreement a base salary (the “Salary”) in the annualized amount of  $_________.  The Employee’s Salary shall be paid in accordance with the Company and First Federal’s routine payroll practices and shall be subject to customary tax and other applicable withholdings.  The Employee’s Salary shall be adjusted from time to time to reflect amounts approved by the Board of Directors or the Committee.  
 
 
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The first performance and salary review shall occur during December 2012, with subsequent reviews being held in December of following years while this Agreement is in effect.
 
(b)          Incentives/ Bonuses .   The Employee shall be eligible for incentive opportunities as a percentage of the Employee’s Salary and as authorized and declared by the Board of Directors or the Committee for executive officers Performance metrics related to such incentives shall be developed to the mutual satisfaction of the Employee and the Board of Directors. Incentive payments provided for under this Agreement shall be paid no later than 2½ months after the end of the year in which the Employee obtains a legally binding right to such payments (or such other time that still qualifies the payment as a “short-term deferral” under Section 409A).  The Employee also shall be entitled to participate in an equitable manner with all other executive officers of the Company and First Federal in such performance-based and discretionary bonuses, if any, as are authorized and declared by the Board of Directors or the Committee for executive officers.
 
(c)            Expenses . The Employee shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Employee in performing services under this Agreement in accordance with the policies and procedures applicable to the executive officers of the Company and First Federal, provided that the Employee accounts for such expenses as required under such policies and procedures.
 
5.  Benefits .
 
(a)            Participation in Benefit Plans .  The Employee shall be entitled to participate, to the same extent as executive officers of the Company and First Federal generally, in all plans of the Company and First Federal relating to pension, retirement, thrift, profit-sharing, savings, group or other life insurance, hospitalization, medical and dental coverage, travel and accident insurance, education, cash bonuses, and other retirement or employee benefits or combinations thereof.
 
(b)            Fringe Benefits .  The Employee shall be eligible to participate in, and receive benefits under, any other fringe benefit plans or perquisites which are or may become generally available to the Company’s or First Federal’s executive officers, including but not limited to supplemental retirement, deferred compensation program, supplemental medical or life insurance plans, company cars, club dues, physical examinations, financial planning and tax preparation services.
 
6.           Vacations; Sick Leave .  The Employee shall be entitled (i) to annual paid vacation in accordance with the policies established by the Board of Directors or the Committee for executive officers and (ii) to voluntary leaves of absence, with or without pay, from time to time at such times and upon such conditions as the Board of Directors or the Committee may determine in its discretion.Upon separation from employment, the Employee shall be paid for all accrued unused vacation. In addition, the Employee shall be entitled to six days of annual sick leave. Unused sick leave shall be accumulated until retirement or separation (without limitation).  Upon Separation from Service and after five full years of service, the Employeeshall be paid for one-half of their unused sick leave, not to exceed 240 hours per First Federal’s Sick Leave Policy. Upon the Employee’s Date of Termination, the Employee shall not be entitled to receive any additional compensation from First Federal for unused sick leave, except to the extent authorized by the Board of Directors or the Committee. Payments of accrued vacation pay or unused sick leave shall be paid within 15 days of the Employee’s Date of Termination.
 
 
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7.    Termination of Employment .
 
(a)            Involuntary Termination .  The President and Chief Executive Officer may terminate the Employee’s employment at any time, but, except in the case of Termination for Cause, termination of employment shall not prejudice the Employee’s right to compensation or other benefits under this Agreement.  In the event of Involuntary Termination other than after a Change in Control which occurs during the term of this Agreement, the Company and First Federal jointly shall: (i) pay to the Employee over the one-year period commencing on the Employee’s Date of Termination (the “One-Year Period”) the Employee’s Salary at the rate in effect immediately prior to the Date of Termination.  The amount of the Employee’s Salary paid pursuant to this Section 7(a), upon an Involuntary Termination other than after a Change in Control, shall be pro-rated based on the Employee’s number of years of Continuous Employment, with the Employee receiving 20% of Employee’s Salary for each completed year of Continuous Employment.  Therefore, the Employee will receive 100% of Salary after the completion of five years of Continuous Employment. In addition, the Employee shall also receive the pro rata portion of any incentive award or bonus, payable pro rata over the One Year Period, and (ii) provide to the Employee during the One-Year Period substantially the same group life insurance, hospitalization, medical, dental, prescription drug and other health benefits, and long-term disability insurance (if any) for the benefit of the Employee and the Employee’s dependents and beneficiaries who would have been eligible for such benefits if the Employee had not suffered Involuntary Termination, on terms substantially as favorable to the Employee, including amounts of coverage and deductibles and other costs to him or her, as if he or she had not suffered Involuntary Termination. To the extent payments under this Paragraph 7(a) are subject to Section 409A, Section 20 shall apply. No payment shall be made under this Paragraph 7(a) unless the Employee timely executes a release substantially in the form attached as Exhibit A hereto.
 
(b)            Termination for Cause .    In the event of Termination for Cause, the Company and First Federal shall jointly pay to the Employee the Salary and provide benefits under this Agreement only through the Date of Termination, and shall have no further obligation to the Employee under this Agreement.
 
(c)            Voluntary Termination .  The Employee’s employment may be voluntarily terminated by the Employee at any time upon at least 90 days’ written notice to the Company and First Federal or such shorter period as may be agreed upon between the Employee and the Board of Directors.  In the event of such voluntary termination, the Company and First Federal shall be jointly obligated to continue to pay to the Employee the Salary and provide benefits under this Agreement only through the Date of Termination, at the time such payments are due, and shall have no further obligation to the Employee under this Agreement.
 
(d)            Change in Control .  In the event of Employee’s Involuntary Termination during the 12-month period ending on the first anniversary of the effective time of a Change in Control, the Company and First Federal jointly shall: (i) pay to the Employee in a lump sum in cash within 25 business days after the Date of Termination an amount equal to 2.0 times the average of Employee’s five prior years’ annual Salary; and (ii) provide to the Employee during the One-Year Period (as defined in Paragraph 7(a)) substantially the same group life insurance, hospitalization, medical, dental, prescription drug and other health benefits, and long-term disability insurance (if any) for the benefit of the Employee and the Employee’s dependents and beneficiaries who would have been eligible for such benefits if the Employee had not suffered Involuntary Termination, on terms substantially as favorable to the Employee, including amounts of coverage and deductibles and other costs to him or her, as if the Employee had not suffered Involuntary Termination.  To the extent payments under this Paragraph 7(d) are subject to Section 409A, Section 20 shall apply. No payment shall be made under this Paragraph 7(d) unless the Employees timely executes a release substantially in the form attached as Exhibit A hereto.
 
 
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(e)           Death .  In the event of the death of the Employee while employed under this Agreement and prior to any termination of employment, the Company and First Federal jointly shall pay to the Employee’s estate, or such person as the Employee may have previously designated in writing, the Salary which was not previously paid to the Employee and which the Employee would have earned if the Employee had continued to be employed under this Agreement through the last day of the calendar month in which the Employee died, together with the benefits provided hereunder through such date.
 
(f)            Disability .  If the Employee becomes entitled to benefits under the terms of the then-current disability plan, if any, of the Company and First Federal (the “Disability Plan”) or becomes otherwise unable to fulfill the Employee’s duties under this Agreement, the Employee shall be entitled to receive such group and other disability benefits as provided for in the Company/First Federal Long Term Disability Plan, if any, as are then provided by the Company or First Federal for executive employees.  In the event of such disability, this Agreement shall not be suspended, except that: (i) the obligation to pay the Salary to the Employee shall be reduced in accordance with the amount of disability income benefits received by the Employee, if any, pursuant to this paragraph such that, on an after-tax basis, the Employee shall realize from the sum of disability income benefits and the Salary the same amount as the Employee would realize on an after-tax basis from the Salary if the obligation to pay the Salary were not reduced pursuant to this Section 7(f); and (ii) upon a resolution adopted by a majority of the disinterested members of the Board of Directors or the Committee, the Company and First Federal may discontinue payment of the Salary beginning six months following a determination that the Employee has become entitled to benefits under the Disability Plan or otherwise unable to fulfill the Employee’s duties under this Agreement.
 
(g)           Temporary Suspension or Prohibition .  If the Employee is suspended and/or temporarily prohibited from participating in the conduct of First Federal’s affairs by a notice served under Section 8(e)(3) or (g)(1) of the FDIA, 12 U.S.C. Section 1818(e)(3) and (g)(1), or pursuant to Section 32.16.090 of the Revised Code of Washington (“R.C.W.”),  First Federal’s obligations under this Agreement shall be suspended as of the date of service, unless stayed by appropriate proceedings.  If the charges in the notice are dismissed, First Federal may in its discretion (i) pay the Employee all or part of the compensation withheld while its obligations under this Agreement were suspended and (ii) reinstate in whole or in part any of its obligations which were suspended.
 
(h)           Permanent Suspension or Prohibition .  If the Employee is removed and/or permanently prohibited from participating in the conduct of First Federal’s affairs by an order issued under Section 8(e)(4) or (g)(1) of the FDIA, 12 U.S.C. Section 1818(e)(4) and (g)(1), or pursuant to R.C.W. 32.16.090, all obligations of First Federal under this Agreement shall terminate as of the effective date of the order, but vested rights of the contracting parties shall not be affected.
 
(i)            Default of First Federal .  If First Federal is in default (as defined in Section 3(x)(1) of the FDIA), all obligations under this Agreement shall terminate as of the date of default, but this provision shall not affect any vested rights of the contracting parties.
 
(j)            Termination by Regulators .  All obligations under this Agreement shall be terminated, except to the extent determined that continuation of this Agreement is necessary for the continued operation of First Federal: (i) at the time the FDIC enters into an agreement to provide assistance to or on behalf of First Federal under the authority contained in Section 13(c) of the FDIA; or (ii) by the FDIC or the Federal Reserve, at the time either agency approves a supervisory merger to resolve problems related to operation of First Federal or the Company, respectively.  Any rights of the parties that have already vested, however, shall not be affected by any such action.
 
 
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(k)           Reductions of Benefits .   Notwithstanding any other provision of this Agreement, if payments and the value of benefits received or to be received under this Agreement, together with any other amounts and the value of benefits received or to be received by the Employee, would cause any amount to be nondeductible for federal income tax purposes pursuant to or by reason of Code Section 280G, then payments and benefits under this Agreement shall be reduced (not less than zero) to the extent necessary so as to maximize amounts and the value of benefits to be received by the Employee without causing any amount to become nondeductible pursuant to or by reason of Code Section 280G.  The Employee shall determine the allocation of such reduction among payments and benefits to the Employee.
 
(l)            Further Reductions .  Any payments made to the Employee pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with 12 U.S.C. Section 1828(k) and any regulations promulgated thereunder.
 
8.  Notice of Termination .  In the event that the Company or First Federal desires to terminate the employment of the Employee during the term of this Agreement, the Company or First Federal or both shall deliver to the Employee a written notice of termination, stating whether such termination constitutes Termination for Cause or Involuntary Termination, setting forth in reasonable detail the facts and circumstances that are the basis for the termination, and specifying the date upon which employment shall terminate.In the event that the Employee determines in good faith that the Employee has experienced an Involuntary Termination of the Employee’s employment, the Employee shall send a written notice to the Company and First Federal stating the circumstances that constitute such Involuntary Termination and the date upon which the Employee’s employment shall have ceased due to such Involuntary Termination. In the event that the Employee desires to effect a Voluntary Termination, the Employee shall deliver a written notice to the Company and First Federal, stating the date upon which employment shall terminate, which date shall be at least 90 days after the date upon which the notice is delivered, unless the parties agree to a date sooner.
 
9.  Loyalty; Noncompetition; Nondisclosure .
 
(a)         The Employee shall devote the Employee’s full time and best efforts to the performance of the Employee’s employment under this Agreement.  During the term of this Agreement, the Employee shall not, at any time or place, either directly or indirectly, engage in any business or activity in competition with the business affairs or interests of the Company or First Federal or be a director, officer or executive of or consultant to any bank, savings bank, savings and loan association, credit union or similar financial institution or holding company of any such entity.
 
(b)        Upon termination of this Agreement for any reason other than the reasons set forth in Paragraph 7(a) and (d) of this Agreement, for a period of one (1) year from the termination of this Agreement, the Employee shall not be a director, officer or employee of or consultant to any bank, savings bank, savings and loan association, credit union or similar financial institution or holding company of any such entity in any county in which First Federal or any other affiliate of First Federal operates a full service branch office or lending center on the date of termination of this Agreement.
 
(c)         Nothing in Paragraphs 9(a) and 9(b) shall limit the right of the Employee to invest in the capital stock or other securities of any business dissimilar from that of Company or First Federal, or solely as a passive investor in any business.
 
(d)         Directly or indirectly engaging in any business or activity in competition with the business affairs or interests of First Federal shall include (but not be limited to) engaging in business as owner, partner, agent or employee of any person, firm or corporation engaged in such business individually
 
 
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or as beneficiary by interest in any partnership, corporation or other business entity or in being interested directly or indirectly in any such business conducted by any person, firm or corporation. The preceding sentence shall not apply with respect to the mere ownership by the Employee of less than one percent of a publicly traded entity.
 
(e)          In the course of employment, the Employee may have access to confidential information and trade secrets relating to the business of First Federal or the Company. Except as required in the course of employment by First Federal, the Employee shall not, without the prior written consent of the Board of Directors, directly or indirectly before or after termination of this agreement, disclose to anyone any confidential information relating to First Federal, the Company or any financial information, trade secrets or “know-how” that is germane to First Federal’s or the Company’s business and operations. The Employee recognizes and acknowledges that any financial information concerning any of the customers of First Federal, the Company or any affiliated entity, as may exist from time to time, is strictly confidential and is a valuable, special and unique asset of their businesses.  The Employee shall not, either before or after termination of this Agreement, disclose to anyone said financial information, or any part thereof, for any reason or purposes whatsoever.
 
(f)          In the event of violation by the Employee of any provision in this Section 9, the Employee will be subject to damages and because of the relationship of employer and employee, it is hereby agreed injunctive relief is necessary for the Company and First Federal to enforce these provisions of the Agreement to protect its business and good will.
 
10.   No Assignments .
 
(a)          This Agreement is personal to each of the parties hereto, and no party may assign or delegate any of its rights or obligations hereunder without first obtaining the written consent of the other parties; provided, however, that the Company and First Federal shall require any successor or assign (whether direct or indirect, by purchase, merger, consolidation or otherwise) by an assumption agreement in form and substance satisfactory to the Employee, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company and/or First Federal would be required to perform it, if no such succession or assignment had taken place. Failure to obtain such an assumption agreement prior to the effectiveness of any such succession or assignment shall be a breach of this Agreement and shall entitle the Employee to compensation and benefits from the Company and First Federal in the same amount and on the same terms as the compensation pursuant to Section 7(d) of this Agreement.  For purposes of implementing the provisions of this Section 11(a), the date on which any such succession becomes effective shall be deemed the Date of Termination.
 
(b)          This Agreement and all rights of the Employee hereunder shall inure to the benefit of and be enforceable by the Employee’s personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees.
 
11.   Notice .  For the purposes of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or sent by certified mail, return receipt requested, postage prepaid, to the Company and First Federal at their home offices, to the attention of the Board of Directors with a copy to the Secretary of the Company and the Secretary of First Federal, or, if to the Employee, to such home or other address as the Employee has most recently provided in writing to the Company or First Federal.
 
12.   Amendments .  No amendments or additions to this Agreement shall be binding unless in writing and signed by both parties, except as herein otherwise provided.
 
 
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13.   Headings .  The headings used in this Agreement are included solely for convenience and shall not affect, or be used in connection with, the interpretation of this Agreement.
 
14.   Severability . The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof.
 
15.   Governing Law . This Agreement shall be governed by the laws of the State of Washington.
 
16.  Arbitration .  Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator’s award in any court having jurisdiction. Notwithstanding the foregoing, the Company, First Federal or both may resort to the Superior Court of Clallam County, Washington for injunctive and such other relief as may be available in the event that the Employee engages in conduct, after termination of the Agreement that amounts to a violation of Section 9 hereof or violation of the Washington Trade Secrets Act or amounts to unlawful interference with the business expectancies of the Company or First Federal.
 
17.   Deferral of Non-Deductible Compensation . In the event that the Employee’s aggregate compensation (including compensatory benefits which are deemed remuneration for purposes of Code Section 162(m)) from Company and the Consolidated Subsidiaries for any calendar year exceeds the maximum amount of compensation deductible by First Federal, the Company and the Consolidated Subsidiaries in any calendar year under Code Section 162(m) (the “maximum allowable amount”), then any such amount in excess of the maximum allowable amount shall be mandatorily deferred with interest thereon at three percent per annum to a calendar year such that the amount to be paid to the Employee in such calendar year, including deferred amounts and interest thereon, does not exceed the maximum allowable amount.  Subject to the foregoing, deferred amounts including interest thereon shall be payable at the earliest time permissible, and in no event later than required by Section 409A.
 
18   Knowing and Voluntary Agreement.   Employee represents and agrees that the Employee has read this Agreement, understands its terms, and that the Employee has the right to consult counsel of choice and has either done so or knowingly waives the right to do so. Employee also represents that the Employee has had ample time to read and understand the Agreement before executing it and that the Employee enters into this Agreement without duress or coercion from any source.
 
19.   Compliance with Section 409A .
 
(a)           The Company, First Federal and the Employee agree that, notwithstanding anything herein to the contrary, this Agreement is intended to be interpreted and operated so that the payment of the benefits set forth herein either shall either be exempt from the requirements of Section 409A or shall comply with the requirements of such provision. The Employee hereby acknowledges that they have been advised to seek and has sought the advice of a tax advisor with respect to the tax consequences to the Employee of all payments pursuant to this Agreement, including any adverse tax consequences or penalty taxes under Section 409A and applicable State tax law. The Employee hereby agrees to bear the entire risk of any such adverse federal and State tax consequences and penalty taxes in the event any payment pursuant to this Agreement is deemed to be subject to Section 409A, that no representations have been made to the Employee relating to the tax treatment of any payment pursuant to this Agreement under Section 409A and the corresponding provisions of any applicable State income tax laws, and that in no event shall First Federal, the Company nor any affiliate thereof  be liable to the Employee for or with respect to any taxes, penalties or interest which may be imposed upon the Employee
 
 
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pursuant to Section 409A.
 
(b)           If, on the date of the Employee’s Separation from Service, the Employee is a “specified employee,” as defined in Section 409A, and if any payments or benefits under this Agreement payable upon the Employee’s Separation from Service will result in additional tax or interest to the Employee because of Section 409A, then despite any provision of this Agreement to the contrary the Employee will not be entitled to the payments or benefits until the earlier of (1) the date that is six months and one day after Employee’s Separation from Service for reasons other than the Employee’s death, and (2) the date of the Employee’s death. After the end of the period during which payments or benefits are delayed under this provision, the entire amount of the delayed payments and benefits shall be paid to the Employee in a single lump sum, without interest.
 
(c)           With respect to reimbursements and in-kind benefits made to the Employee hereunder, if any, which are not otherwise excludible from the Employee’s gross income, to the extent required to comply with the provisions of Section 409A, no reimbursement of such expenses incurred by the Employee during any taxable year of the Employee shall be made after the last day of the following taxable year, the amount of expenses eligible for reimbursement, or in-kind benefits provided, during a taxable year may not affect the expenses eligible for reimbursement, or in-kind benefits to be provided, in any other taxable year, and the right to reimbursement of such expenses or such in-kind benefits shall not be subject to liquidation or exchange for another benefit.
 
 
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written.
 
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE ENFORCED BY THE PARTIES.
 
 Attest:              
FIRST NORTHWEST BANCORP
 
         
         
 ________,  Secretary    By:    
     Its:    
         
 
Attest:              
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF PORT ANGELES
 
         
       
 ________,  Secretary    By:    
     Its:    
         
     EMPLOYEE  
       
 
 
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EXHIBIT A
General Release
 
This General Release, dated as of ____________, 201_, is delivered by _______________ (the “Employee”) to and for the benefit of the Released Parties (as defined below). The Employee acknowledges that this General Release is being executed in accordance with Section 7(a) or 7(d) of the Employment Agreement dated _________, 2012 (the “Agreement”).
 
1.            General Release.
 
a.           The Employee, for himself and for the Employee’s heirs, dependents, assigns, agents, executors, administrators, trustees and legal representatives (collectively, the “Releasors”) hereby forever releases, waives and discharges the Released Parties (as defined below) from each and every claim, demand, cause of action, fee, liability or right of any sort (based upon legal or equitable theory, whether contractual, common-law, statutory, federal, state, local or otherwise), known or unknown, which Releasors ever had, now have, or hereafter may have against the Released Parties by reason of any actual or alleged act, omission, transaction, practice, policy, procedure, conduct, occurrence, or other matter, at any time up to and including the Effective Date (as defined below), including without limitation, those in connection with, or in any way related to or arising out of, the Employee’s employment or termination of employment or any other agreement, understanding, relationship, arrangement, act, omission or occurrence, with the Released Parties.
 
b.          Without limiting the generality of the previous paragraph, this General Release is intended to and shall release the Released Parties from any and all claims, whether known or unknown, which Releasors ever had, now have, or may hereafter have against the Released Parties including, but not limited to: (1) any claim of discrimination or retaliation under the Age Discrimination in Employment Act, Title VII of the Civil Rights Act, the Americans with Disabilities Act, the Fair Labor Standards Act, the Employee Retirement Income Security Act of 1974, as amended (excluding claims for accrued, vested benefits under any employee benefit or pension plan of the Released Parties subject to the terms and conditions of such plan and applicable law), the Family and Medical Leave Act, the Reconstruction Era Civil Rights Act, and the Rehabilitation Act of 1973; (2) any other claim (whether based on federal, state or local law or ordinance, statutory or decisional) relating to or arising out of the Employee’s employment, the terms and conditions of such employment, the termination of such employment and/or any of the events relating directly or indirectly to or surrounding the termination of such employment, including, but not limited to, breach of contract (express or implied), tort, wrongful discharge, detrimental reliance, defamation, emotional distress or compensatory or punitive damages; (3) any claim relating to or arising from a violation of Section 409A of the Internal Revenue Code of 1986, as amended; and (4) any claim for attorney’s fees, costs, disbursements and the like.
 
c.           The foregoing release does not in any way affect: (1) the Employee’s rights of indemnification to which the Employee was entitled immediately prior to the Resignation Date (as an employee or director of any of the Released Parties); (2) any rights the Employee may have as a stockholder of the Employer; (3) the Employee’s vested rights under any tax-qualified retirement plan or stock compensation plan maintained by a Released Party; (4) any right the Employee may have to obtain contribution in the event of an entry of judgment against the Employee as a result of any act or failure to act for which the Employee and any of the Released Parties are jointly responsible; and (5) the right of the Employee to take whatever steps may be necessary to enforce the terms of the Agreement.
 
 
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d.          For purposes of this General Release, the “Released Parties”means First Northwest Bancorp, First Federal Savings and Loan Association of Port Angeles, all current and former parents, subsidiaries, related companies, partnerships, joint ventures and employee benefit programs (and the trustees, administrators, fiduciaries and insurers of such programs), and, with respect to each of them, their predecessors and successors, and, with respect to each such entity, all of its past, present, and future employees, officers, directors, members, stockholders, owners, representatives, assigns, attorneys, agents, insurers, and any other person acting by, through, under or in concert with any of the persons or entities listed in this paragraph, and their successors (whether acting as agents for such entities or in their individual capacities).
 
2.            No Existing Suit . The Employee represents and warrants that, as of the Effective Date (as defined below), the Employee has not filed or commenced any suit, claim, charge, complaint, action, arbitration, or legal proceeding of any kind against of the Released Parties.
 
3.            Knowing and Voluntary Waiver . By signing this General Release, the Employee expressly acknowledges and agrees that: (a) the Employee has carefully read it and fully understands what it means; (b) the Employee has discussed this General Release with an attorney of the Employee’s choosing before signing it; (c) the Employee has been given at least 21 calendar days to consider this General Release; (d) the Employee has agreed to this General Release knowingly and voluntarily and was not subjected to any undue influence or duress; (e) the consideration provided him or her under Agreement is sufficient to support the releases provided by him or her under this General Release; (f) the Employee may revoke the Employee’s execution of this General Release within seven days after the Employee signs it by sending written notice of revocation as set forth below; and (g) on the eighth day after the Employee executes this General Release (the “Effective Date”), this General Release becomes effective and enforceable, provided that the Employee does not revoke it during the revocation period. Any revocation of the Employee’s execution of this General Release must be submitted, in writing, to First Federal Savings and Loan Association of Port Angeles, at its main office, to the attention of the Chairman of the Board, stating “I hereby revoke my execution of the General Release.” The revocation must be personally delivered to the Chairman of the Board of First Federal Savings and Loan Association of Port Angeles or mailed to the Chairman of the Board of First Federal Savings and Loan Association of Port Angeles and postmarked within seven days of the Employee’s execution of this General Release. If the last day of the revocation period is a Saturday, Sunday or legal holiday, then the revocation period will be extended to the following day which is not a Saturday, Sunday or legal holiday. The Employee agrees that if the Employee does not execute this General Release or, in the event of revocation, the Employee will not be entitled to receive any of the payments or benefits under Section 7(a) or 7(d) of the Agreement. The Employee must execute this General Release on or before the date that is 21 days after the effective date of the Employee’s termination of employment.
 
This General Release is final and binding and may not be changed or modified, except as provided in a signed and dated agreement in writing between the Employee and First Federal Savings and Loan Association of Port Angeles.
 
  EMPLOYEE  
       
 Date:               
 
 
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Exhibit 10.5
 
EMPLOYMENT AGREEMENT
 
THIS EMPLOYMENT AGREEMENT (the “Agreement”) is made and entered into as of this ___ day of _____________, 2012, by and between First Northwest Bancorp (the “Company”) and its wholly-owned subsidiary, First Federal Savings and Loan Association of Port Angeles (“First Federal”), and___________________(the “Employee”).
 
WHEREAS, First Federal desires to employ the Employee, and the Employee desires to be employed by First Federal;
 
WHEREAS, it is anticipated that the Employee will make a major contribution to the success of the Company and First Federal in the position of ______________;
 
WHEREAS, the board of directors of the Company and the board of directors of First Federal (collectively, the “Board of Directors”, and separately the “Company Board of Directors” and the “First Federal Board of Directors”, respectively) recognize the possibility of a change in control of the Company or First Federal may occur and that such possibility, and the uncertainty and questions which may arise among management, may result in the departure or distraction of key management to the detriment of the Company, First Federal and their respective shareholders;
 
WHEREAS, the Board of Directors believes that it is in the best interests of the Company and First Federal to enter into this Agreement with the Employee in order to assure high quality management of the Company, First Federal, and its subsidiaries;
 
WHEREAS, the Board of Directors has approved and authorized the execution of this Agreement with the Employee.
 
NOW, THEREFORE, in consideration of the foregoing and of the respective covenants and agreements of the parties herein, it is AGREED as follows:
 
1.   Definitions .
 
“Change in Control” means (1) an offeror other than the Company (as defined below) purchases shares of stock of the Company or First Federal pursuant to a tender or exchange offer for such shares; (2) an event of a nature that results in the acquisition of control of the Company or First Federal within the meaning of the Savings and Loan Holding Company Act under 12 U.S.C. Section 1467a and 12 C.F.R. Part 238 (or any successor statute or regulation) or requires the filing of a change of control notice with the Federal Reserve Board (“Federal Reserve”) or the Federal Deposit Insurance Corporation (“FDIC”); (3) any person (as the term is used in Sections 13(d) and 14(d) of the Securities  Exchange Act of 1934 (“Exchange Act”)) that is or becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act) directly or indirectly of securities of the Company or First Federal representing 25% or more of the combined voting power of the Company’s or First Federal’s outstanding securities; (4) individuals who are members of the Company Board of Directors immediately following the Effective Date or who are members of the First Federal Board of Directors immediately following the Effective Date (in each case, the   “ Incumbent Board”) cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequently whose election was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board, or whose nomination for election by the Company’s or First Federal’s stockholders was approved by the nominating committee serving under an Incumbent Board, shall be considered a member of the Incumbent Board; or (5) consummation of a plan of reorganization, merger, acquisition, consolidation, sale of all or substantially all of the assets of the Company or a similar transaction in which the Company is not the resulting entity, provided that the term “Change in Control” shall not include an acquisition of securities by an employee benefit plan of First Federal or the Company.
 
 
 
 
 
“Code” means the Internal Revenue Code of 1986, as amended from time to time.
 
“Committee” means a committee of the Board of Directors which has been delegated authority to act on such matters by the Board of Directors.
 
“Company” means First Northwest Bancorp.
 
“Consolidated Subsidiaries” means any subsidiary or subsidiaries of the Company (or its successors) that are part of the affiliated group (as defined in Code Section 1504) without regard to subsection (b) thereof), specifically including First Federal.
 
“Continuous Employment” means the absence of any interruption or termination of service as an Employee of First Federal.  Service shall not be considered interrupted in the case of sick leave, military leave or any other leave of absence approved by First Federal.
 
“Date of Termination” means the date upon which the Employee experiences a Separation from Service from the Company or First Federal or both, as specified in a notice of termination pursuant to Section 8 of this Agreement or the date a succession becomes effective under Section 11.
 
“Effective Date” means the date of this Agreement.
 
“Involuntary Termination” means the Employee’s Separation from Service (i) by either the Company or First Federal or both without the Employee’s express written consent; or (ii) by the Employee for “good reason”:  “Good reason” means any of the following actions unless consented to in writing by the Employee: (1) a requirement that the Employee be based at any place other than Port Angles, Washington, or within a radius of 35 miles from the location of First Federal’s administrative offices as of the Effective Date, except for reasonable travel on Company or First Federal business; (2) a material demotion of the Employee; (3) a material reduction in the number or seniority of personnel reporting to the Employee, other than as part of a Company-wide or First Federal-wide reduction in staff; (4) a twenty percent (20%) or more reduction in the Employee’s then base salary, other than as part of an overall program applied uniformly and with equitable effect to all members of the senior management of First Federal or the Company; (5) a material permanent increase in the required hours of work or the workload of the Employee; (6) the failure of the First Federal Board of Directors to elect the Employee as_______________of First Federal (or a successor of First Federal) or any action by the First Federal Board of Directors (or its successors) removing the Employee from such office; or (7) the failure of the Company Board of Directors to elect the Employee as_________________ of the Company (or a successor of the Company) or any action by the Company Board of Directors (or its successors) removing the Employee from such office. The term “Involuntary Termination” does not include Termination for Cause, Separation from Service due to death or permanent disability pursuant to Section 7(f) of this Agreement, retirement or suspension or temporary or permanent prohibition from participation in the conduct of First Federal’s affairs under Section 8 of the Federal Deposit Insurance Act (“FDIA”).
 
“Section 409A” shall mean Section 409A of the Code and the regulations and guidance of general applicability issued thereunder.
 
“Separation from Service” shall have the same meaning as in Section 409A.  Notwithstanding the foregoing, for purposes of determining whether the Employee is entitled to a payment under Section 7(a) or Section 7(d) of this Agreement, the term “Separation from Service” shall require the complete cessation of services to First Federal, the Company and all Consolidated Subsidiaries.
 
 
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“Termination for Cause” and “Terminated For Cause” mean Employee’s Separation from Service with either the Company or First Federal or both, because of the Employee’s personal dishonesty, willful misconduct, breach of a fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, or regulation (other than traffic violations or similar offenses) or final cease-and-desist order, acting or failing to act in a manner that adversely affects First Federal or the Company, including but not limited to increasing adverse regulatory or reputational risk,or (except as provided below) material breach of any provision of this Agreement.  No act or failure to act by the Employee shall be considered willful unless the Employee acted or failed to act with an absence of good faith and without a reasonable belief that the Employee’s action or failure to act was in the best interest of First Federal.
 
2.   Term .  The term of this Agreement shall be a period of three years commencing on the Effective Date, subject to earlier termination as provided herein. Beginning on the first anniversary of the Effective Date, and on each anniversary thereafter, the term of this Agreement shall be extended for a period of one year in addition to the then-remaining term, provided that: (i) neither the Employee, nor the Company or First Federal,has given notice to the other in writing at least 90 days prior to such anniversary that the term of this Agreement shall not be extended further; and (ii) prior to such anniversary, the Board of Directors or the Committee explicitly reviews and approves the extension.  Reference herein to the term of this Agreement shall refer to both such initial term and such extended terms.
 
3.   Employment;
 
(a)           The Employee shall be employed as _________________ of First Federal and ______________ of the Company.  As such, the Employee shall render all services and possess the powers as are customarily performed by persons situated in similar executive capacities, and shall have such other powers and duties as the Board of Directors may prescribe from time to time.The Employee shall also render services to any subsidiary or subsidiaries of the Company (or First Federal) as requested by the Board of Directors from time to time consistent with the Employee’s executive position.  The Employee shall devote the Employee’s best efforts and reasonable time and attention to the business and affairs of the Company and First Federal to the extent necessary to discharge the Employee’s responsibilities hereunder. The Employee may (i) serve on charitable or civic boards or committees and, in addition, on such corporate boards as are approved in a resolution adopted by a majority of the Board of Directors or the Committee, which approval shall not be unreasonably withheld and (ii) manage personal investments, so long as such activities do not interfere materially with performance of the Employee’s responsibilities hereunder or give rise to violations of applicable securities laws.
 
[(b)           Upon the Employee’s Date of Termination, the Employee shall resign from the Company’s and First Federal’s Board of Directors (and any other board of directors and committees to which the Employee has been appointed), effective immediately, and the Employee’s Separation from Service shall constitute such resignation.
 
4.             Cash Compensation; Bonuses; Expenses; Restricted Stock; Stock Options .
 
(a)             Salary .  The Company and First Federal jointly agree to pay the Employee during the term of this Agreement a base salary (the “Salary”) in the annualized amount of $_______. The Employee’s Salary shall be paid in accordance with the Company and First Federal’s routine payroll practices and shall be subject to customary tax and other applicable with holdings.  The Employee’s Salary shall be adjusted from time to time to reflect amounts approved by the Board of Directors or the Committee.  The first performance and salary review shall occur during December 2012, with subsequent reviews being held in December of following years while this Agreement is in effect.
 
 
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(b)            Incentives/ Bonuses .   The Employee shall be eligible for incentive opportunities as a percentage of the Employee’s Salary and as authorized and declared by the Board of Directors or the Committee for executive officers Performance metrics related to such incentives shall be developed to the mutual satisfaction of the Employee and the Board of Directors. Incentive payments provided for under this Agreement shall be paid no later than 2½ months after the end of the year in which the Employee obtains a legally binding right to such payments (or such other time that still qualifies the payment as a “short-term deferral” under Section 409A).  The Employee also shall be entitled to participate in an equitable manner with all other executive officers of the Company and First Federal in such performance-based and discretionary bonuses, if any, as are authorized and declared by the Board of Directors or the Committee for executive officers.
 
(c)            Expenses . The Employee shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Employee in performing services under this Agreement in accordance with the policies and procedures applicable to the executive officers of the Company and First Federal, provided that the Employee accounts for such expenses as required under such policies and procedures.
 
5.  Benefits .
 
(a)            Participation in Benefit Plans .  The Employee shall be entitled to participate, to the same extent as executive officers of the Company and First Federal generally, in all plans of the Company and First Federal relating to pension, retirement, thrift, profit-sharing, savings, group or other life insurance, hospitalization, medical and dental coverage, travel and accident insurance, education, cash bonuses, and other retirement or employee benefits or combinations thereof.
 
(b)            Fringe Benefits .  The Employee shall be eligible to participate in, and receive benefits under, any other fringe benefit plans or perquisites which are or may become generally available to the Company’s or First Federal’s executive officers, including but not limited to supplemental retirement, deferred compensation program, supplemental medical or life insurance plans, company cars, club dues, physical examinations, financial planning and tax preparation services.
 
6.             Vacations; Sick Leave .  The Employee shall be entitled (i) to annual paid vacation in accordance with the policies established by the Board of Directors or the Committee for executive officers and (ii) to voluntary leaves of absence, with or without pay, from time to time at such times and upon such conditions as the Board of Directors or the Committee may determine in its discretion.Upon separation from employment, the Employee shall be paid for all accrued unused vacation. In addition, the Employee shall be entitled to six days of annual sick leave. Unused sick leave shall be accumulated until retirement or separation (without limitation).  Upon Separation from Service and after five full years of service, the Employee shall be paid for one-half of their unused sick leave, not to exceed 240 hours per First Federal’s Sick Leave Policy. Upon the Employee’s Date of Termination, the Employee shall not be entitled to receive any additional compensation from First Federal for unused sick leave, except to the extent authorized by the Board of Directors or the Committee. Payments of accrued vacation pay or unused sick leave shall be paid within 15 days of the Employee’s Date of Termination.
 
7.    Termination of Employment .
 
(a)            Involuntary Termination .  The President and Chief Executive Officer may terminate the Employee’s employment at any time, but, except in the case of Termination for Cause, termination of employment shall not prejudice the Employee’s right to compensation or other benefits under this Agreement.  In the event of Involuntary Termination other than after a Change in Control which occurs during the term of this Agreement, the Company and First Federal jointly shall: (i) pay to the
 
 
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Employee over the one-year period commencing on the Employee’s Date of Termination (the “One-Year Period”) the Employee’s Salary at the rate in effect immediately prior to the Date of Termination.  The amount of the Employee’s Salary paid pursuant to this Section 7(a), upon an Involuntary Termination other than after a Change in Control, shall be pro-rated based on the Employee’s number of years of Continuous Employment, with the Employee receiving 20% of Employee’s Salary for each completed year of Continuous Employment.  Therefore, the Employee will receive 100% of Salary after the completion of five years of Continuous Employment. In addition, the Employee shall also receive the pro rata portion of any incentive award or bonus, payable pro rata over the One Year Period, and (ii) provide to the Employee during the One-Year Period substantially the same group life insurance, hospitalization, medical, dental, prescription drug and other health benefits, and long-term disability insurance (if any) for the benefit of the Employee and the Employee’s dependents and beneficiaries who would have been eligible for such benefits if the Employee had not suffered Involuntary Termination, on terms substantially as favorable to the Employee, including amounts of coverage and deductibles and other costs to him or her, as if he or she had not suffered Involuntary Termination. To the extent payments under this Paragraph 7(a) are subject to Section 409A, Section 20 shall apply. No payment shall be made under this Paragraph 7(a) unless the Employee timely executes a release substantially in the form attached as Exhibit A hereto.
 
(b)            Termination for Cause .    In the event of Termination for Cause, the Company and First Federal shall jointly pay to the Employee the Salary and provide benefits under this Agreement only through the Date of Termination, and shall have no further obligation to the Employee under this Agreement.
 
(c)            Voluntary Termination .  The Employee’s employment may be voluntarily terminated by the Employee at any time upon at least 90 days’ written notice to the Company and First Federal or such shorter period as may be agreed upon between the Employee and the Board of Directors.  In the event of such voluntary termination, the Company and First Federal shall be jointly obligated to continue to pay to the Employee the Salary and provide benefits under this Agreement only through the Date of Termination, at the time such payments are due, and shall have no further obligation to the Employee under this Agreement.
 
(d)            Change in Control .  In the event of Employee’s Involuntary Termination during the 12-month period ending on the first anniversary of the effective time of a Change in Control, the Company and First Federal jointly shall: (i) pay to the Employee in a lump sum in cash within 25 business days after the Date of Termination an amount equal to 1.5 times the average of Employee’s five prior years’ annual Salary; and (ii) provide to the Employee during the One-Year Period (as defined in Paragraph 7(a)) substantially the same group life insurance, hospitalization, medical, dental, prescription drug and other health benefits, and long-term disability insurance (if any) for the benefit of the Employee and the Employee’s dependents and beneficiaries who would have been eligible for such benefits if the Employee had not suffered Involuntary Termination, on terms substantially as favorable to the Employee, including amounts of coverage and deductibles and other costs to him or her, as if the Employee had not suffered Involuntary Termination.  To the extent payments under this Paragraph 7(d) are subject to Section 409A, Section 20 shall apply. No payment shall be made under this Paragraph 7(d) unless the Employees timely executes a release substantially in the form attached as Exhibit A hereto.
 
(e)            Death .  In the event of the death of the Employee while employed under this Agreement and prior to any termination of employment, the Company and First Federal jointly shall pay to the Employee’s estate, or such person as the Employee may have previously designated in writing, the Salary which was not previously paid to the Employee and which the Employee would have earned if the Employee had continued to be employed under this Agreement through the last day of the calendar month in which the Employee died, together with the benefits provided hereunder through such date.
 
 
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(f)            Disability .  If the Employee becomes entitled to benefits under the terms of the then-current disability plan, if any, of the Company and First Federal (the “Disability Plan”) or becomes otherwise unable to fulfill the Employee’s duties under this Agreement, the Employee shall be entitled to receive such group and other disability benefits as provided for in the Company/First Federal Long Term Disability Plan, if any, as are then provided by the Company or First Federal for executive employees.  In the event of such disability, this Agreement shall not be suspended, except that: (i) the obligation to pay the Salary to the Employee shall be reduced in accordance with the amount of disability income benefits received by the Employee, if any, pursuant to this paragraph such that, on an after-tax basis, the Employee shall realize from the sum of disability income benefits and the Salary the same amount as the Employee would realize on an after-tax basis from the Salary if the obligation to pay the Salary were not reduced pursuant to this Section 7(f); and (ii) upon a resolution adopted by a majority of the disinterested members of the Board of Directors or the Committee, the Company and First Federal may discontinue payment of the Salary beginning six months following a determination that the Employee has become entitled to benefits under the Disability Plan or otherwise unable to fulfill the Employee’s duties under this Agreement.
 
(g)            Temporary Suspension or Prohibition .  If the Employee is suspended and/or temporarily prohibited from participating in the conduct of First Federal’s affairs by a notice served under Section 8(e)(3) or (g)(1) of the FDIA, 12 U.S.C. Section 1818(e)(3) and (g)(1), or pursuant to Section 32.16.090 of the Revised Code of Washington (“R.C.W.”),  First Federal’s obligations under this Agreement shall be suspended as of the date of service, unless stayed by appropriate proceedings.  If the charges in the notice are dismissed, First Federal may in its discretion (i) pay the Employee all or part of the compensation withheld while its obligations under this Agreement were suspended and (ii) reinstate in whole or in part any of its obligations which were suspended.
 
(h)            Permanent Suspension or Prohibition .  If the Employee is removed and/or permanently prohibited from participating in the conduct of First Federal’s affairs by an order issued under Section 8(e)(4) or (g)(1) of the FDIA, 12 U.S.C. Section 1818(e)(4) and (g)(1), or pursuant to R.C.W. 32.16.090, all obligations of First Federal under this Agreement shall terminate as of the effective date of the order, but vested rights of the contracting parties shall not be affected.
 
(i)            Default of First Federal .  If First Federal is in default (as defined in Section 3(x)(1) of the FDIA), all obligations under this Agreement shall terminate as of the date of default, but this provision shall not affect any vested rights of the contracting parties.
 
(j)            Termination by Regulators .  All obligations under this Agreement shall be terminated, except to the extent determined that continuation of this Agreement is necessary for the continued operation of First Federal: (i) at the time the FDIC enters into an agreement to provide assistance to or on behalf of First Federal under the authority contained in Section 13(c) of the FDIA; or (ii) by the FDIC or the Federal Reserve, at the time either agency approves a supervisory merger to resolve problems related to operation of First Federal or the Company, respectively.  Any rights of the parties that have already vested, however, shall not be affected by any such action.
 
(k)            Reductions of Benefits .   Notwithstanding any other provision of this Agreement, if payments and the value of benefits received or to be received under this Agreement, together with any other amounts and the value of benefits received or to be received by the Employee, would cause any amount to be nondeductible for federal income tax purposes pursuant to or by reason of Code Section 280G, then payments and benefits under this Agreement shall be reduced (not less than zero) to the extent necessary so as to maximize amounts and the value of benefits to be received by the Employee without
 
 
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causing any amount to become nondeductible pursuant to or by reason of Code Section 280G.  The Employee shall determine the allocation of such reduction among payments and benefits to the Employee.
 
(l)              Further Reductions .  Any payments made to the Employee pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with 12 U.S.C. Section 1828(k) and any regulations promulgated thereunder.
 
8.  Notice of Termination .  In the event that the Company or First Federal desires to terminate the employment of the Employee during the term of this Agreement, the Company or First Federal or both shall deliver to the Employee a written notice of termination, stating whether such termination constitutes Termination for Cause or Involuntary Termination, setting forth in reasonable detail the facts and circumstances that are the basis for the termination, and specifying the date upon which employment shall terminate.In the event that the Employee determines in good faith that the Employee has experienced an Involuntary Termination of the Employee’s employment, the Employee shall send a written notice to the Company and First Federal stating the circumstances that constitute such Involuntary Termination and the date upon which the Employee’s employment shall have ceased due to such Involuntary Termination. In the event that the Employee desires to effect a Voluntary Termination, the Employee shall deliver a written notice to the Company and First Federal, stating the date upon which employment shall terminate, which date shall be at least 90 days after the date upon which the notice is delivered, unless the parties agree to a date sooner.
 
9.  Loyalty; Noncompetition; Nondisclosure .
 
(a)           The Employee shall devote the Employee’s full time and best efforts to the performance of the Employee’s employment under this Agreement.  During the term of this Agreement, the Employee shall not, at any time or place, either directly or indirectly, engage in any business or activity in competition with the business affairs or interests of the Company or First Federal or be a director, officer or executive of or consultant to any bank, savings bank, savings and loan association, credit union or similar financial institution or holding company of any such entity.
 
(b)           Upon termination of this Agreement for any reason other than the reasons set forth in Paragraph 7(a) and (d) of this Agreement, for a period of one (1) year from the termination of this Agreement, the Employee shall not be a director, officer or employee of or consultant to any bank, savings bank, savings and loan association, credit union or similar financial institution or holding company of any such entity in any county in which First Federal or any other affiliate of First Federal operates a full service branch office or lending center on the date of termination of this Agreement.
 
(c)           Nothing in Paragraphs 9(a) and 9(b) shall limit the right of the Employee to invest in the capital stock or other securities of any business dissimilar from that of Company or First Federal, or solely as a passive investor in any business.
 
(d)           Directly or indirectly engaging in any business or activity in competition with the business affairs or interests of First Federal shall include (but not be limited to) engaging in business as owner, partner, agent or employee of any person, firm or corporation engaged in such business individually or as beneficiary by interest in any partnership, corporation or other business entity or in being interested directly or indirectly in any such business conducted by any person, firm or corporation. The preceding sentence shall not apply with respect to the mere ownership by the Employee of less than one percent of a publicly traded entity.
 
 
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(e)           In the course of employment, the Employee may have access to confidential information and trade secrets relating to the business of First Federal or the Company. Except as required in the course of employment by First Federal, the Employee shall not, without the prior written consent of the Board of Directors, directly or indirectly before or after termination of this agreement, disclose to anyone any confidential information relating to First Federal, the Company or any financial information, trade secrets or “know-how” that is germane to First Federal’s or the Company’s business and operations. The Employee recognizes and acknowledges that any financial information concerning any of the customers of First Federal, the Company or any affiliated entity, as may exist from time to time, is strictly confidential and is a valuable, special and unique asset of their businesses.  The Employee shall not, either before or after termination of this Agreement, disclose to anyone said financial information, or any part thereof, for any reason or purposes whatsoever.
 
(f)           In the event of violation by the Employee of any provision in this Section 9, the Employee will be subject to damages and because of the relationship of employer and employee, it is hereby agreed injunctive relief is necessary for the Company and First Federal to enforce these provisions of the Agreement to protect its business and good will.
 
 
10.   No Assignments .
 
(a)           This Agreement is personal to each of the parties hereto, and no party may assign or delegate any of its rights or obligations hereunder without first obtaining the written consent of the other parties; provided, however, that the Company and First Federal shall require any successor or assign (whether direct or indirect, by purchase, merger, consolidation or otherwise) by an assumption agreement in form and substance satisfactory to the Employee, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company and/or First Federal would be required to perform it, if no such succession or assignment had taken place. Failure to obtain such an assumption agreement prior to the effectiveness of any such succession or assignment shall be a breach of this Agreement and shall entitle the Employee to compensation and benefits from the Company and First Federal in the same amount and on the same terms as the compensation pursuant to Section 7(d) of this Agreement.  For purposes of implementing the provisions of this Section 11(a), the date on which any such succession becomes effective shall be deemed the Date of Termination.
 
(b)           This Agreement and all rights of the Employee hereunder shall inure to the benefit of and be enforceable by the Employee’s personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees.
 
11.   Notice .  For the purposes of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or sent by certified mail, return receipt requested, postage prepaid, to the Company and First Federal at their home offices, to the attention of the Board of Directors with a copy to the Secretary of the Company and the Secretary of First Federal, or, if to the Employee, to such home or other address as the Employee has most recently provided in writing to the Company or First Federal.
 
12.   Amendments .  No amendments or additions to this Agreement shall be binding unless in writing and signed by both parties, except as herein otherwise provided.
 
13.   Headings .  The headings used in this Agreement are included solely for convenience and shall not affect, or be used in connection with, the interpretation of this Agreement.
 
 
8
 
 
14.   Severability . The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof.
 
15.   Governing Law . This Agreement shall be governed by the laws of the State of Washington.
 
16.   Arbitration .  Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator’s award in any court having jurisdiction. Notwithstanding the foregoing, the Company, First Federal or both may resort to the Superior Court of Clallam County, Washington for injunctive and such other relief as may be available in the event that the Employee engages in conduct, after termination of the Agreement that amounts to a violation of section 9 hereof or violation of the Washington Trade Secrets Act or amounts to unlawful interference with the business expectancies of the Company or First Federal.
 
17.   Deferral of Non-Deductible Compensation . In the event that the Employee’s aggregate compensation (including compensatory benefits which are deemed remuneration for purposes of Code Section 162(m)) from Company and the Consolidated Subsidiaries for any calendar year exceeds the maximum amount of compensation deductible by First Federal, the Company and the Consolidated Subsidiaries in any calendar year under Code Section 162(m) (the “maximum allowable amount”), then any such amount in excess of the maximum allowable amount shall be mandatorily deferred with interest thereon at three percent per annum to a calendar year such that the amount to be paid to the Employee in such calendar year, including deferred amounts and interest thereon, does not exceed the maximum allowable amount.  Subject to the foregoing, deferred amounts including interest thereon shall be payable at the earliest time permissible, and in no event later than required by Section 409A.
 
18    Knowing and Voluntary Agreement.   Employee represents and agrees that the Employee has read this Agreement, understands its terms, and that the Employee has the right to consult counsel of choice and has either done so or knowingly waives the right to do so. Employee also represents that the Employee has had ample time to read and understand the Agreement before executing it and that the Employee enters into this Agreement without duress or coercion from any source.
 
19.   Compliance with Section 409A .
 
(a)           The Company, First Federal and the Employee agree that, notwithstanding anything herein to the contrary, this Agreement is intended to be interpreted and operated so that the payment of the benefits set forth herein either shall either be exempt from the requirements of Section 409A or shall comply with the requirements of such provision. The Employee hereby acknowledges that they have been advised to seek and has sought the advice of a tax advisor with respect to the tax consequences to the Employee of all payments pursuant to this Agreement, including any adverse tax consequences or penalty taxes under Section 409A and applicable State tax law. The Employee hereby agrees to bear the entire risk of any such adverse federal and State tax consequences and penalty taxes in the event any payment pursuant to this Agreement is deemed to be subject to Section 409A, that no representations have been made to the Employee relating to the tax treatment of any payment pursuant to this Agreement under Section 409A and the corresponding provisions of any applicable State income tax laws, and that in no event shall First Federal, the Company nor any affiliate thereof  be liable to the Employee for or with respect to any taxes, penalties or interest which may be imposed upon the Employee pursuant to Section 409A.
 
(b)           If, on the date of the Employee’s Separation from Service, the Employee is a “specified employee,” as defined in Section 409A, and if any payments or benefits under this Agreement payable
 
 
9
 
 
upon the Employee’s Separation from Service will result in additional tax or interest to the Employee because of Section 409A, then despite any provision of this Agreement to the contrary the Employee will not be entitled to the payments or benefits until the earlier of (1) the date that is six months and one day after Employee’s Separation from Service for reasons other than the Employee’s death, and (2) the date of the Employee’s death. After the end of the period during which payments or benefits are delayed under this provision, the entire amount of the delayed payments and benefits shall be paid to the Employee in a single lump sum, without interest.
 
(c)           With respect to reimbursements and in-kind benefits made to the Employee hereunder, if any, which are not otherwise excludible from the Employee’s gross income, to the extent required to comply with the provisions of Section 409A, no reimbursement of such expenses incurred by the Employee during any taxable year of the Employee shall be made after the last day of the following taxable year, the amount of expenses eligible for reimbursement, or in-kind benefits provided, during a taxable year may not affect the expenses eligible for reimbursement, or in-kind benefits to be provided, in any other taxable year, and the right to reimbursement of such expenses or such in-kind benefits shall not be subject to liquidation or exchange for another benefit.
 
 
10
 
 
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written.
 
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE ENFORCED BY THE PARTIES.
 
Attest:              
FIRST NORTHWEST BANCORP
 
         
         
 ________,  Secretary   By:    
    Its:      
         
 
Attest:              
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF PORT ANGELES
 
         
         
 ________,  Secretary   By:    
    Its:      
         
    EMPLOYEE  
       
 
 
11
 
 
EXHIBIT A
General Release
 
This General Release, dated as of ____________, 201_, is delivered by _______________ (the “Employee”) to and for the benefit of the Released Parties (as defined below). The Employee acknowledges that this General Release is being executed in accordance with Section 7(a) or 7(d) of the Employment Agreement dated _________, 2012 (the “Agreement”).
 
1.            General Release.
 
a.           The Employee, for himself and for the Employee’s heirs, dependents, assigns, agents, executors, administrators, trustees and legal representatives (collectively, the “Releasors”) hereby forever releases, waives and discharges the Released Parties (as defined below) from each and every claim, demand, cause of action, fee, liability or right of any sort (based upon legal or equitable theory, whether contractual, common-law, statutory, federal, state, local or otherwise), known or unknown, which Releasors ever had, now have, or hereafter may have against the Released Parties by reason of any actual or alleged act, omission, transaction, practice, policy, procedure, conduct, occurrence, or other matter, at any time up to and including the Effective Date (as defined below), including without limitation, those in connection with, or in any way related to or arising out of, the Employee’s employment or termination of employment or any other agreement, understanding, relationship, arrangement, act, omission or occurrence, with the Released Parties.
 
b.           Without limiting the generality of the previous paragraph, this General Release is intended to and shall release the Released Parties from any and all claims, whether known or unknown, which Releasors ever had, now have, or may hereafter have against the Released Parties including, but not limited to: (1) any claim of discrimination or retaliation under the Age Discrimination in Employment Act, Title VII of the Civil Rights Act, the Americans with Disabilities Act, the Fair Labor Standards Act, the Employee Retirement Income Security Act of 1974, as amended (excluding claims for accrued, vested benefits under any employee benefit or pension plan of the Released Parties subject to the terms and conditions of such plan and applicable law), the Family and Medical Leave Act, the Reconstruction Era Civil Rights Act, and the Rehabilitation Act of 1973; (2) any other claim (whether based on federal, state or local law or ordinance, statutory or decisional) relating to or arising out of the Employee’s employment, the terms and conditions of such employment, the termination of such employment and/or any of the events relating directly or indirectly to or surrounding the termination of such employment, including, but not limited to, breach of contract (express or implied), tort, wrongful discharge, detrimental reliance, defamation, emotional distress or compensatory or punitive damages; (3) any claim relating to or arising from a violation of Section 409A of the Internal Revenue Code of 1986, as amended; and (4) any claim for attorney’s fees, costs, disbursements and the like.
 
c.           The foregoing release does not in any way affect: (1) the Employee’s rights of indemnification to which the Employee was entitled immediately prior to the Resignation Date (as an employee or director of any of the Released Parties); (2) any rights the Employee may have as a stockholder of the Employer; (3) the Employee’s vested rights under any tax-qualified retirement plan or stock compensation plan maintained by a Released Party; (4) any right the Employee may have to obtain contribution in the event of an entry of judgment against the Employee as a result of any act or failure to act for which the Employee and any of the Released Parties are jointly responsible; and (5) the right of the Employee to take whatever steps may be necessary to enforce the terms of the Agreement.
 
 
12
 
 
d.           For purposes of this General Release, the “Released Parties”means First Northwest Bancorp, First Federal Savings and Loan Association of Port Angeles, all current and former parents, subsidiaries, related companies,partnerships, joint ventures and employee benefit programs (and the trustees, administrators, fiduciaries and insurers of such programs), and, with respect to each of them, their predecessors and successors, and, with respect to each such entity, all of its past, present, and future employees, officers, directors, members, stockholders, owners, representatives, assigns, attorneys, agents, insurers, and any other person acting by, through, under or in concert with any of the persons or entities listed in this paragraph, and their successors (whether acting as agents for such entities or in their individual capacities).
 
2.            No Existing Suit . The Employee represents and warrants that, as of the Effective Date (as defined below), the Employee has not filed or commenced any suit, claim, charge, complaint, action, arbitration, or legal proceeding of any kind against of the Released Parties.
 
3.            Knowing and Voluntary Waiver . By signing this General Release, the Employee expressly acknowledges and agrees that: (a) the Employee has carefully read it and fully understands what it means; (b) the Employee has discussed this General Release with an attorney of the Employee’s choosing before signing it; (c) the Employee has been given at least 21 calendar days to consider this General Release; (d) the Employee has agreed to this General Release knowingly and voluntarily and was not subjected to any undue influence or duress; (e) the consideration provided him or her under Agreement is sufficient to support the releases provided by him or her under this General Release; (f) the Employee may revoke the Employee’s execution of this General Release within seven days after the Employee signs it by sending written notice of revocation as set forth below; and (g) on the eighth day after the Employee executes this General Release (the “Effective Date”), this General Release becomes effective and enforceable, provided that the Employee does not revoke it during the revocation period. Any revocation of the Employee’s execution of this General Release must be submitted, in writing, to First Federal Savings and Loan Association of Port Angeles, at its main office, to the attention of the Chairman of the Board, stating “I hereby revoke my execution of the General Release.” The revocation must be personally delivered to the Chairman of the Board of First Federal Savings and Loan Association of Port Angeles or mailed to the Chairman of the Board of First Federal Savings and Loan Association of Port Angeles and postmarked within seven days of the Employee’s execution of this General Release. If the last day of the revocation period is a Saturday, Sunday or legal holiday, then the revocation period will be extended to the following day which is not a Saturday, Sunday or legal holiday. The Employee agrees that if the Employee does not execute this General Release or, in the event of revocation, the Employee will not be entitled to receive any of the payments or benefits under Section 7(a) or 7(d) of the Agreement. The Employee must execute this General Release on or before the date that is 21 days after the effective date of the Employee’s termination of employment.
 
This General Release is final and binding and may not be changed or modified, except as provided in a signed and dated agreement in writing between the Employee and First Federal Savings and Loan Association of Port Angeles.
 
  EMPLOYEE  
       
 Date:               
 
 
13
 
Exhibit 10.6
 
NONSTANDARDIZED ADOPTION AGREEMENT
PROTOTYPE CASH OR DEFERRED PROFIT-SHARING PLAN
 
Sponsored by
 
Pentegra Retirement Services
 
The Employer named below hereby establishes a Cash or Deferred Profit-Sharing Plan for eligible Employees as provided in this Adoption Agreement and the accompanying Basic Plan Document #01.
 
I.              EMPLOYER INFORMATION
 
 
If more than one Employer is adopting the Plan, complete this section based on the lead Employer. Additional Employers who are members of the same controlled group or affiliated service group may adopt this Plan by completing and executing a Participation Agreement that, once executed, will become part of this Adoption Agreement.
 
A.            Name And Address :
 
First Federal Savings & Loan Association of Port Angeles
105 West 8th Street
Port Angeles, WA 98362
 
B.            Telephone Number: 360-457-0461
 
C.            Employer’s Tax ID Number: 91-0369590
 
 
D.
Form Of Business:
 
o            1.           Sole Proprietor                             o            5.           Limited Liability Company
 
o            2.           Partnership                                   o            6.           Limited Liability Partnership
 
x            3.           Corporation                                 o            7.           _______________________________                                     
 
o            4.           S Corporation
 
E.              Is The Employer Part Of A Controlled Group?                   x   YES                o   NO
Part Of An Affiliated Service Group?                                   o   YES                 x   NO
 
F.             Name Of Plan: First Federal Savings & Loan Association of Port Angeles 401(k) Plan
 
G.             Three Digit Plan Number: 002
 
H.            Employer’s Tax Year End: June 30
 
                I.                Employer’s Business Code:  ______________________________________________________________________________  
 
II.            EFFECTIVE DATE
 
                A.              New Plan:
 
 
This is a new Plan having an Effective Date of December 1, 2012 . The Effective Date may be no earlier than the Plan Year beginning after December 31, 2001 or if later, the first day of the Plan Year in which it is adopted.
 
 
 1  401(k) NS AA #010
 
 
               B.               Amended and Restated Plans:
 
This is an amendment and/or restatement of an existing Plan. The initial Effective Date of the Plan was ________________________________ . The Effective Date of this amendment and/or restatement is ______________________ . The Effective Date of the restated Plan may be no earlier than for Plan Years beginning after December 31, 2001.
 
               C.              Amended or Restated Plans for EGTRRA :
 
This is an amendment and/or restatement of an existing Plan to comply with the Economic Growth and Tax Relief Reconciliation Act of 2001, Pub. L. 107-17 (EGTRRA)]. The initial Effective Date of the Plan was ________________________________________ . Except as provided for in the Plan, the Effective Date of this amendment and/or restatement is __________________________ . (The restatement date should be no earlier than the first day of the current Plan Year. The Plan contains appropriate retroactive Effective Dates with respect to provisions of EGTRRA.)
 
Except to the extent permitted under Code Section 411(d)(6) and the Regulations issued thereunder, an Employer cannot reduce, eliminate or make subject to Employer discretion any Code Section 411(d)(6) protected benefit. Where this Plan document is being adopted to amend another plan that contains a protected benefit not provided for in the Basic Plan Document #01, the Employer may complete Schedule A as an addendum to this Adoption Agreement. Schedule A describes such protected benefits and shall become part of this Plan. If a prior plan document contains a plan feature not provided for in the Basic Plan Document #01, the Employer may attach Schedule B describing such feature. Provisions listed on Schedule B may not be covered by the IRS Opinion Letter issued with respect to the Basic Plan Document #01.
 
               D.              Effective Date for Elective Deferrals:
 
If different from above, the Elective Deferral provisions shall be effective __________________________ .
 
               E.               Effective Date for Safe Harbor 401(k) Contributions:
 
If different from above, this provision shall be effective __________________________ . This provision must be adopted prior to the first day of the Plan Year and remain in effect for an entire twelve (12) month period.
 
        F.                 Effective Date for Roth Elective Deferrals:
 
If different from above, Roth Elective Deferral provisions shall be effective __________________________ . The Effective Date of this provision cannot be earlier than January 1, 2006.
 
               G.              Frozen Plan:
 
This Plan was frozen effective __________________________ . For any period following this Effective Date, neither the Employer nor any Participant may contribute to this Plan, and no otherwise eligible Employee shall become a Participant in this Plan. All existing account balances will become fully vested as of the date specified above.
 
 
 2  401(k) NS AA #010
 
 
III.            DEFINITIONS
 
 
A.
“Compensation”
 
 
Select the definition of Compensation, the Compensation Computation Period, any Compensation Dollar Limitation and Exclusions from Compensation for each contribution type from the options listed below. Enter the letter of the option selected on the lines provided below. Leave the line blank if no election needs to be made. The Compensation Computation Period must be the same as the Limitation Year defined at Section III(F).
 
 
  Employer
  Contribution Type
 
  Compensation
  Definition
 Compensation
 Computation
 Period
 
  Compensation
  Dollar Limitation
  Exclusions
  From
  Compensation
  All Contributions
d
b
  $
b, c, g, j
  Elective Deferrals (including
  Roth Elective Deferrals, if applicable)
   
  $
 
  Voluntary After-tax
   
  $
 
  Required After-tax
   
  $
 
  Matching Contribution
  (Formula 1)
   
  $
 
  Matching Contribution
  (Formula 2)
   
  $
 
  Non-Elective Contribution
  (Formula 1)
   
  $
 
  Non-Elective Contribution
  (Formula 2)
   
  $
 
  Safe Harbor Contribution
   
  N/A
N/A
  QNEC
   
  $
 
  QMAC
   
  $
 
  ADP/ACP Tests
d
b
  N/A
N/A
 
                               1.          Compensation Definition:
 
                                              a.             Code Section 3401(a) - W-2 Compensation subject to income tax withholding at the source, with all pre-tax contributions excluded.
 
                                              b.            Code Section 3401(a) - W-2 Compensation subject to income tax withholding at the source, with all pre-tax contributions included [Plan defaults to  this election].
 
                                              c.            Code Section 6041/6051 - Income reportable on Form W-2, with all pre-tax contributions excluded.
 
                                              d.           Code Section 6041/6051 - Income reportable on Form W-2, with all pre-tax contributions included.
 
                                              e.          Code Section 415 - All income received for services performed for the Employer, with all pre-tax contributions excluded.
 
                                               f.           Code Section 415 - All income received for services performed for the Employer, with all pre-tax contributions included.
 
                                             The selection of any of the above definitions of Compensation meets the Code Section 414(s) definition of Compensation. The Code Section 415 definition shall always apply with respect to sole proprietors and partners.
 
  o
2.
Deemed Compensation from permitted waiver of group health coverage under a Cafeteria Plan Arrangement: The Employer elects to include deemed Code Section 125 Compensation not available to a Participant in cash in lieu of group health coverage in the Plan’s definition of Compensation.
 
 
3.
Compensation Computation Period:
 
                                               a.            Compensation paid during a Plan Year while a Participant [Plan defaults to this election].
 
                                               b.           Compensation paid during the entire Plan Year.
     
                                               c.           Compensation paid during the Employer’s fiscal year.
               
                                               d.          Compensation paid during the calendar year.
 
 
4.
Compensation Dollar Limitation: The dollar limitation section does not need to be completed unless Compensation of less than the Code Section 401(a)(17) limit of $200,000 is to be used. When an integrated allocation formula in Section VI is selected, Compensation cannot be limited to an amount less than the maximum amount under Code Section 401(a)(17).
 
 
 3  401(k) NS AA #010
 
 
5.           Exclusions from Compensation (non-integrated plans only) :
 
 
a.
There will be no exclusions from Compensation under the Plan [Plan defaults to this safe harbor election].
 
 
b.
Overtime
 
 
c.
Bonuses
 
 
d.
Commissions
                
 
e.
Exclusion applies only to Participants who are Highly Compensated Employees [safe harbor].
  
 
f.
Holiday and vacation pay
 
 
g.
Reimbursements or other expense allowances, fringe benefits (cash and non-cash), moving expenses, deferred compensation, and welfare benefits [safe harbor].
 
 
h. 
Post-severance payments, as described in paragraph 1.17(c)(6) of Basic Plan Document #01. (This exclusion may apply no earlier than the 2005 Limitation Year.)
 
 
i.
Compensation in excess of $ __________________________ for Highly Compensated Employees [safe harbor].
 
 
j.
Other: Commissions in excess of $50,000
 
 
Any exclusion of Compensation except (a), (e), (g), (h) and (i) must satisfy the requirements of Section 1.401(a)(4) of the Income Tax Regulations and Code    Section 414(s) and the Regulations thereunder. These exclusions do not fall under the “safe harbor” modifications to Compensation and therefore must be  tested to determine if the modified definition of Compensation satisfies Code Section 414(s).
 
 
B.
“Disability”
 
 
x
1.
As defined in the Basic Plan Document #01 [Plan defaults to this election].
 
 
o
2.
As defined in the Employer’s Disability Insurance Plan.
 
 
o
3.
An individual will be considered to be disabled if he or she is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long, continued and indefinite duration. An individual shall not be considered to be disabled unless he or she furnishes proof of the existence thereof in such form and manner as the Secretary of the Treasury may prescribe.
 
 
C.
“Highly Compensated Employees – Top-Paid Group Election”
 
 
1.
Top-Paid Group Election: In determining who is a Highly Compensated Employee, the Employer may make the Top-Paid Group election. The effect of this election is that an Employee (who is not a 5% owner at any time during the determination year or the look-back year) who earned more than $95,000, as indexed for the look-back year, is a Highly Compensated Employee if the Employee was in the Top-Paid Group for the look-back year. This election is applicable for the Plan Year in which this Plan is effective.
                
 
x
a. 
The Employer does not make the Top-Paid Group election.
 
 
o
b.
The Employer makes the Top-Paid Group election [Plan defaults to this election].
 
 
o
2.
Calendar Year Data Election: If the Plan Year is not the calendar year, the prior year computation period for purposes of determining if an Employee earned more than $95,000, as indexed, is the calendar year beginning in the prior Plan Year. This election is applicable for the Plan Year in which this Plan is effective.
 
 
 4  401(k) NS AA #010
 
 
 
D.
“Hours Of Service”
 
Hours shall be determined by the method selected below. The method selected shall be applied to all Employees:
 
 
o
1.
Not applicable. A Year of Service (Period of Service) is defined using the Elapsed Time method.
 
 
x
2.
On the basis of actual hours for which an Employee is paid or entitled to payment [Plan defaults to this election].
 
 
o
3.
On the basis of days worked. An Employee shall be credited with ten (10) Hours of Service if the Employee would be credited with at least one (1) Hour of Service during the day.
 
 
o
4.
On the basis of weeks worked. An Employee shall be credited with forty-five (45) Hours of Service if the Employee would be credited with at least one (1) Hour of Service during the week.
 
 
o
5.
On the basis of semi-monthly payroll periods. An Employee shall be credited with ninety-five (95) Hours of Service if the Employee would be credited with at least one (1) Hour of Service during the semi-monthly payroll period.
 
 
o
6.
On the basis of months worked. An Employee shall be credited with one-hundred-ninety (190) Hours of Service if the Employee would be credited with at least one (1) Hour of Service during the month.
 
 
E.
“Integration Level”
 
 
x
1.
Not applicable. Either the Plan’s allocation formula is not integrated with Social Security or there are no Non-Elective Employer Contributions being made to the Plan [Plan defaults to this election].
 
 
o
2.
 The Taxable Wage Base.
 
 
o
3.
 ________ % (not more than 100%) of the Taxable Wage Base.
 
 
o
4.
  $ ________ , provided that such amount is not in excess of the amount determined under paragraph (E)(2) above.
 
 
o
5.
  One dollar over 80% of the Taxable Wage Base.
 
 
o
6.
  20% of the Taxable Wage Base.
 
 
F.  
“Limitation Year”
        
 
Unless elected otherwise below, the Limitation Year shall be the Plan Year.
 
 
The twelve (12) consecutive month period commencing on July 1 and ending on June 30 .
 
 
 
If applicable, there will be a short Limitation Year commencing on December 1, 2012 and ending on June 30, 2013 . Thereafter, the Limitation Year shall end on the date specified above.
 
 
 5  401(k) NS AA #010
 
 
 
G.
“Net Profit”
 
 
x
1.
Not applicable. Employer contributions to the Plan are not conditioned on profits [Plan defaults to this election].
 
 
o
2.
Net Profits are required for making Employer contributions and are defined as follows:
 
 
o
a.
As defined in the Basic Plan Document #01.
 
 
o
b.
Net Profits will be defined in a uniform and nondiscriminatory manner which will not result in a deprivation of an eligible Participant of any Employer Contribution.
 
 
c.
Net Profits are required for the following types of contributions:
 
 
o  
i. 
Employer Matching Contributions (Formula 1).
 
 
o   
ii.  
Employer Matching Contributions (Formula 2).
                    
 
o   
iii.
Employer QNEC and QMAC Contributions.
                
 
o   
iv. 
Non-Elective Employer Contributions (Formula 1).
           
 
o   
v. 
Non-Elective Employer Contributions (Formula 2).
           
Elective Deferrals, Top-Heavy minimums (if required), and Safe Harbor Contributions (if applicable) must be contributed regardless of profits.
 
 
H.
“Plan Year”
 
 
The 12-consecutive month period commencing on July 1 and ending on June 30 .
 
                              If applicable, there will be a short Plan Year commencing on December 1, 2012 and ending on June 30, 2013 . Thereafter, the Plan Year shall end on the date specified above.
 
 
I.
“QDRO Payment Date”
           
 
x
1.
The date the QDRO is determined to be qualified [Plan defaults to this election].
 
 
o
2.
The statutory age fifty (50) requirement applies for purposes of making distribution to an alternate payee under the provisions of a QDRO.
 
 
J.
“Qualified Joint and Survivor Annuity”
 
 
x
1.
Not applicable. The Plan is not subject to Qualified Joint and Survivor Annuity rules. The safe harbor provisions of paragraph 8.7 of the Basic Plan Document #01 apply. The normal form of payment is a lump sum. No annuities are offered under the Plan [Plan defaults to this election].
 
 
o
2.
The normal form of payment is a lump sum. The Plan does provide for annuities as an optional form of payment at Section XVI(D) of the Adoption Agreement. The Plan’s Joint and Survivor Annuity rules are avoided and the safe harbor provisions of paragraph 8.7 of the Basic Plan Document #01 will apply, unless the Participant elects to receive his or her distribution in the form of an annuity. If this option is selected, Section III(K) below must also be completed.
 
 
o
3.
The Joint and Survivor Annuity rules are applicable and the survivor annuity will be ________ % (50%, 66-2/3%, 75% or 100%) of the annuity payable during the lives of the Participant and his or her Spouse. If no selection is specified, 50% shall be deemed elected.
 
 
K. 
“Qualified Pre-Retirement Survivor Annuity”
 
                             Do not complete this section if paragraph (J)(1) was elected.
 
 
o
1.
The Qualified Pre-Retirement Survivor Annuity shall be 100% of the Participant’s Vested Account Balance in the Plan as of the date of the Participant’s death.
 
 
o
2.
The Qualified Pre-Retirement Survivor Annuity shall be 50% of the Participant’s Vested Account Balance in the Plan as of the date of the Participant’s death.
 
                             If this provision applies but no selection is made, the Qualified Pre-Retirement Survivor Annuity shall be 50%.
 
 
 6  401(k) NS AA #010
 
 
L.            “Valuation of Plan Assets”
 
 
The assets of the Plan shall be valued on the last day of the Plan Year and on the following Valuation Date(s):
 
o           1.           There are no other mandatory Valuation Dates.
 
x          2.           The Valuation Dates are applicable for the contribution type specified below:
 
 
Contribution Type
 
Valuation Date
  All Contributions
a
  Elective Deferrals (including Roth Elective Deferrals, if applicable)
 
  Voluntary After-tax Contributions
 
  Required After-tax Contributions
 
  Deemed IRA Contribution
 
  Matching Contributions (Formula 1)
 
  Matching Contributions (Formula 2)
 
  Non-Elective Contributions (Formula 1)
 
  Non-Elective Contributions (Formula 2)
 
  Safe Harbor Contributions
 
  QNEC
 
  QMAC
 
 
                                            a.            Daily valued.
 
                                           b.           The last day of each month.
 
                                           c.           The last day of each quarter in the Plan Year.
 
                                           d.           The last day of each semi-annual period in the Plan Year.
 
                                             e.             Other: __________________________________________
                                                         __________________.
                                                         (Note: Date must be at least once during the Plan Year.)
.
IV.            ELIGIBILITY REQUIREMENTS
 
Complete the following using the eligibility requirements as specified for each contribution type. To become a Participant in the Plan, the Employee must satisfy the following eligibility requirements.
 
 
 
  Contribution Type
 
  Minimum
  Age
 
  Service
  Requirement
 
  Class
  Exclusions
  Eligibility
  Computation
  Period
 
 
  Entry Date
  All Contributions
         
  Elective Deferrals (including Roth Elective
  Deferrals, if applicable)
21
1
N/A
1
2
  Voluntary After-tax Contributions
         
  Required After-tax Contributions
         
  Matching Contributions
  (Formula 1)
21
5
N/A
3
2
 
  Matching Contributions
  (Formula 2)
         
  Non-Elective Contributions (Formula 1)
         
  Non-Elective Contributions (Formula 2)
         
  Safe Harbor Contributions*
         
  QNECs
         
  QMACs
         
 
 
7  401(k) NS AA #010
 
 
 
* If any age or Service requirement selected is more restrictive than that which is imposed on any Employee contribution, that group of Employees will be subject to the ADP and/or ACP testing as prescribed under applicable IRS Regulations
 
A.            Age:
 
1.            No age requirement.
 
 
2.
Insert the applicable age in the chart above. The age may not be more than twenty-one (21).
 
               B.              Service:
 
The maximum Service requirement for Elective Deferrals is one (1) year. For all other contributions, the maximum is two (2) years. If a Service requirement greater than one (1) year is selected, Participants must be 100% vested in that contribution.
 
 
1.
No Service requirement.
 
 
2.
Completion of _______ Days of Service. [No more than 730 Days of Service may be required; if more than 365 days are entered here, Participants must be 100% vested upon entering the Plan.]
 
 
3.
Completion of _______ months of Service [No more than twenty-four (24) months of Service may be required; if more than twelve (12) months are entered here, Participants must be 100% vested upon entering the Plan.]
 
 
4.
Completion of _______ months of Service [No more than twenty-four (24) months of Service may be required; if more than twelve (12) months are entered here, Participants must be 100% vested upon entering the Plan.]
 
 
5.
One (1) Year of Service or Period of Service.
 
 
6.
Two (2) Years of Service or Periods of Service.
 
 
7.
One (1) Expected Year of Service. An Employee whose position is required as a condition of employment to work a Year of Service may enter after six (6) months of actual Service.
 
 
8.
One (1) Expected Year of Service. An Employee whose position is required as a condition of employment to work a Year of Service may enter after __________ months of actual Service [must be twelve (12) months or less].
 
 
9.
One (1) Expected Year of Service. An Employee whose position is required as a condition of employment to work a Year of Service may enter after __________ months of actual Service [must be twelve (12) months or less].
 
 
10.
Completion of ___________ Hours of Service (1,000 hours or less) within the ___________ month(s) time period [the monthly period must be a pro-ration of twelve (12) months or less] following an Employee’s commencement of employment. An Employee who is otherwise eligible who meets the statutory one (1) Year of Service requirement and any age requirement if applicable, shall participate in the Plan not later than the earlier of the first day of the first Plan Year after the Employee has met the statutory requirements or six (6) months after the day such requirements are met.
 
 
8  401(k) NS AA #010
 
11.           Completion of ___________ Hours of Service (may not be more than 1,000 Hours).
 
 
C.
Method for Measuring Service Eligibility Period ( do not enter this method in the table above ):
 
 
 
A Year of Service for eligibility purposes is defined as follows (choose one) :
 
 
o
1.
Not applicable.
 
 
x
2.
Hours of Service method.  A Year of Service will be credited upon completion of 1000 Hours of Service.  A Year of Service for eligibility purposes may not be less than one (1) Hour of Service nor greater than 1,000 hours by operation of law.  If left blank, the Plan will use 1,000 hours.
 
 
o
3.
Elapsed Time method
 
 
D.
Employee Class Exclusions:
 
The exclusion of any classification may cause the Plan to fail the ratio percentage test under Code Section 410(b)(1)(A) or (B) which may require the Plan to be tested under the average benefits test of Code Section 410(b)(1)(C).
 
 
1.
Employees included in a unit of Employees covered by a collective bargaining agreement between the Employer and Employee Representatives, if benefits were the subject of good faith bargaining and if two percent or less of the Employees are covered pursuant to the agreement are professionals as defined in Regulations Section 1.410(b)-9, unless participation in this Plan is specifically provided for in the collective bargaining agreement.  For this purpose, the term “employee representative” does not include any organization more than half of whose members are owners, officers, or executives of the Employer.
 
 
2.
Employees who are non-resident aliens [within the meaning of Code Section 7701(b)(1)(B)] who receive no Earned Income [within the meaning of Code Section 911(d)(2)] from the Employer which constitutes income from sources within the United States [within the meaning of Code Section 861(a)(3)].
 
 
3.
Employees compensated on an hourly basis.
 
 
4.
Employees compensated on a salaried basis.
 
 
5.
Employees compensated on a commission basis.
 
 
6.
Leased Employees.
 
 
7.
Highly Compensated Employees.
 
 
8.
Key Employees.
 
 
9.
Employees of any member of the controlled and/or affiliated service group Employer whose Employer does not affirmatively adopt this Plan.
 
 
10.
The Plan shall exclude from participation any nondiscriminatory classification of Employees determined as follows (any exclusion must pass coverage and nondiscrimination testing):
 
 
 
 
 
 
 
 
E.
Eligibility Computation Period:
 
 
The initial eligibility computation period shall commence on the date on which an Employee first performs an Hour of Service and end with the first anniversary thereof.  Each subsequent computation period shall commence on:
 
 
1.
Not applicable.  The Plan has a Service requirement of less than one (1) year or uses the Elapsed Time method to determine eligibility.
 
 
9  401(k) NS AA #010
 
 
 
2.
The anniversary of the Employee’s employment commencement date and each subsequent twelve (12) consecutive month period thereafter.
 
 
3.
The first day of the Plan Year which commences prior to the first anniversary date of the Employee’s employment commencement date and each subsequent Plan Year thereafter.
 
 
F.
Entry Date:
 
 
1.
The Employee’s date of hire.
 
 
2.
The first day of the month coinciding with or next following the date on which an Employee meets the eligibility requirements.
 
 
3.
The first day of the payroll period coinciding with or next following the date on which an Employee meets the eligibility requirements, or as soon as administratively feasible thereafter.
 
 
4.
When the Days of Service method is selected at Section IV(B)(2), the Entry Date shall be the day the Employee meets the eligibility requirements, or as soon as administratively feasible thereafter.
 
 
5.
The earlier of the first day of the Plan Year, or the first day of the fourth, seventh or tenth month of the Plan Year coinciding with or next following the date on which an Employee meets the eligibility requirements.
 
 
6.
The earlier of the first day of the Plan Year or the first day of the seventh month of the Plan Year coinciding with or next following the date on which an Employee meets the eligibility requirements.
 
 
7.
The first day of the Plan Year following the date on which the Employee meets the eligibility requirements.  If this election is made, the Service waiting period cannot be greater than one-half year and the minimum age requirement may not be greater than age twenty and one-half (20½).
 
 
8.
The first day of the Plan Year nearest the date on which an Employee meets the eligibility requirements.   This option can only be selected for Employer related contributions.
 
 
9.
The first day of the Plan Year during which the Employee meets the eligibility requirements.   This option can only be selected for Employer related contributions.
 
 
10.
Other: ________________________ .
This option may not require an entry date more than two (2) months following the date on which an Employee meets the eligibility requirements.
 
 
G.
Employees on Effective Date:
 
If option (1) is selected, options (2) and (3) should not be selected.  Options (2) and (3) can be selected or just option (2) or (3).
 
 
x
1.
All Employees will be required to satisfy both the age and Service requirements specified above.
 
 
o
2.
Employees employed on the Plan’s Effective Date do not have to satisfy the age requirement specified above.
 
 
o
3.
Employees employed on the Plan’s Effective Date do not have to satisfy the Service requirement specified above.
 
 
 10  401(k) NS AA #010
 
 
 
H.
Special Waiver of Eligibility Requirements:
 
 
 
The age and/or Service eligibility requirements specified above shall be waived for the eligible Employees specified below who are employed on the specified date for the contribution type(s) specified.  This waiver applies to either the age or Service requirement or both as elected below.
 
 
Waiver Date
Waiver of Age
Requirement
Waiver of Service
Requirement
 
Contribution Type
     
All Contributions
     
Elective Deferrals (including Roth Elective Deferrals, if applicable)
     
Matching Contribution (Formula 1)
     
Matching Contribution (Formula 2)
     
Non-Elective Contribution (Formula 1)
     
Non-Elective Contribution (Formula 2)
     
Safe Harbor Contribution
     
QNEC
     
QMAC
 
The waiver above applies to:
 
o            1.           All eligible Employees employed on the specified date.
 
o            2.           The indicated class of Employees employed on the specified date.
   
   
Note:  Any selection here may cause the Plan to be discriminatory in operation and therefore would have to be tested for nondiscrimination.
 
V.
RETIREMENT AGES
 
 
A.
Normal Retirement:
 
Select option (1) or (2) and either (3)(a) or (3)(b).
 
 
x
1.
Normal Retirement Age shall be age 65 [not to exceed sixty-five (65)].
 
 
o
2.
Normal Retirement Age shall be the later of attaining age ________ [not to exceed age sixty-five (65)] or the ________ (not to exceed the fifth) anniversary of the first day of the first Plan Year in which the Participant commenced participation in the Plan.
 
 
3.
The Normal Retirement Date shall be:
 
 
o
a.
as of the date the Participant attains Normal Retirement Age [Plan defaults to this election].
 
 
x
b.
the first day of the month next following the Participant’s attainment of Normal Retirement Age.
 
B.            Early Retirement:
 
x            1.           Not applicable.
 
 
o
2.
The Plan shall have an Early Retirement Age of ________ [not less than age fifty-five (55)] and completion of ________ Years of Service.
 
 
3.
The Early Retirement Date shall be:
 
 
o
a.
as of the date the Participant attains Early Retirement Age [Plan defaults to this election].
 
 
o
b.
the first day of the month next following the Participant’s attainment of Early Retirement Age.
 
 
 11  401(k) NS AA #010
 
 
VI.            CONTRIBUTIONS TO THE PLAN
 
The Employer shall make contributions to the Plan in accordance with the formula or formulas selected below.  The Employer’s contribution shall be subject to the limitations contained in Articles III and X of the Basic Plan Document #01.  For this purpose, a contribution for a Plan Year shall be limited by Compensation earned in the Limitation Year that ends with or within such Plan Year. For Limitation Years beginning on or after January 1, 2002, except to the extent permitted under paragraph 4.6(h) of the Basic Plan Document #01 and under Code Section 414(v), the Annual Addition that may be contributed or allocated to a Participant’s account under the Plan for any Limitation Year beginning after December 31, 2001 shall not exceed the lesser of (a) $40,000, as adjusted for increases in the cost-of-living under Code Section 415(d), or (b) 100% of the Participant’s Compensation within the meaning of Code Section 415(c)(3), for the Limitation Year.
 
 
A.
Elective Deferrals:
 
1.           Participants shall be permitted to make Elective Deferrals:
 
 
x
a.
in any amount up to 20 % (may be no more than 100%) of Compensation.
 
 
o
b.
in any amount from a minimum of _______ % (may be no less than 1%) to a maximum of _______ % (may be no more than 100%) of their Compensation not to exceed $ __________   [may be no more than the Code Section 402(g) limit and Code Section 414(v) limit, if applicable].
 
 
o
c.
in a flat dollar amount from a minimum of $ ______________ (may be no less than $500) to a maximum of $ _____________ , [may be no more than the Code Section 402(g) limit and Code Section 414(v) limit, if applicable] not to exceed ______ % (no more than 100%) of their Compensation.
 
 
o
d.
in any amount up to the maximum percentage of Compensation and dollar amount permissible under Code Section 402(g) and 414(v) not to exceed the limits of Code Section 401(k), 404 and 415.
 
 
o
e.
Highly Compensated Employees may defer any amount up to ____% (may be no more than 100%) of Compensation or $__________ [may be no more than the Code Section 402(g) limit and Code Section 414(v) limit, if applicable].
 
 
x
f.
Catch-up Contributions may be made by eligible Participants.
 
 
2.
Participants shall be permitted to terminate their Elective Deferrals (including Roth Elective Deferrals, if any) at any time upon proper and timely notice to the Employer.  Modifications and reinstatement of Participants’ Elective Deferrals will become effective as soon as administratively feasible on a prospective basis as provided for below:
 
 
Modifications
 
Reinstatement
 
Method
 
 
  o
 
  o
 
On a daily basis.
 
  o
 
  o
 
On the first day of each quarter.
 
  o
 
  o
 
On the first day of the next month.
 
  x
 
  x
 
The beginning of the next payroll period.
 
  o
 
  o
 
On the first day of the next semi-annual period.
 
  o
 
n/a
 
Upon _____ days notice to the Plan Administrator.
 
n/a
 
  o
 
Upon _____ days notice to the Plan Administrator.
 
o
B.
Roth Elective Deferrals:
 
If Participants are permitted to make Elective Deferrals, they shall also be permitted to make Roth Elective Deferrals.  Roth Elective Deferrals may be treated as Catch-Up Contributions.
 
 
 12  401(k) NS AA #010
 
 
 
C.
Bonus Option:
 
 
o
1.
Not applicable. The Plan’s definition of Compensation excludes bonuses from deferrable Compensation for both Elective Deferrals and Roth Elective Deferrals.
 
 
x
2.
Not applicable.  Participants are not permitted to make a separate deferral election and the Participant’s deferral amount elected on their Salary Deferral Agreement will also apply to any bonus received by the Participant for any Plan Year.
 
 
o
3.
The Employer permits a Participant to amend his or her deferral election to defer to the Plan an amount not to exceed __________ % (may be no more than 100%) or $ _________ [may be no more than the Code Section 402(g) limit and Code Section 414(v) limit, if applicable] of any bonus received by the Participant for any Plan Year.
 
o
D.
Automatic Enrollment:
 
The Employer elects the automatic enrollment provisions for Elective Deferrals as follows. Automatic enrollment in Roth Elective Deferrals is not permitted under the Plan.  The automatic enrollment provisions apply to all eligible Employees.  Employees and Participants shall have the right to amend the stated automatic Elective Deferral percentage or receive cash in lieu of deferral into the Plan.
        
 
1.
RESERVED
 
 o
2.
Automatic Deferrals:
 
 
a.
New Employees:   Employees who have not met the eligibility requirements shall have Elective Deferrals withheld in the amount of ________ % (not more than 10%) of Compensation or $ ________ [may be no more than the Code Section 402(g) limit and Code Section 414(v) limit, if applicable] upon entering the Plan.
 
 
 
o
i.
On an annual basis the Elective Deferral rate under the Plan shall be increased up to a maximum amount determined by the Employer.
 
 
o
ii.
After _____ Years of Service, the amount specified above shall increase to ____ % (no more than 10%) or $ ______ [may be no more than the Code Section 402(g) limit and Code Section 414(v) limit, if applicable].
 
 
o
This requirement is effective for Employees hired on or after ______________________.
 
 
o
b.
Current Employees:   Employees who are eligible to participate but not deferring shall have Elective Deferrals withheld in the amount of ______ % (not more than 10%) of Compensation or $ _________ [may be no more than the Code Section 402(g) limit and Code Section 414(v) limit, if applicable].
 
 
o
i.
On an annual basis the Elective Deferral rate under the Plan shall be increased up to a maximum amount determined by the Employer.
 
 
o
ii.
After _____ Years of Service, the amount specified above shall increase to _____% (no more than 10%) or $_______ [may be no more than the Code Section 402(g) limit and Code Section 414(v) limit, if applicable].
 
 
o
c.
Current Participants:   Current Participants who are deferring at a percentage less than the amount selected herein shall have Elective Deferrals withheld in the amount of   ________ % (not more than 10%) of Compensation or $ ________ [may be no more than the Code Section 402(g) limit and Code Section 414(v) limit, if applicable].
 
 
o
i.
On an annual basis the Elective Deferral rate under the Plan shall be increased up to a maximum amount determined by the Employer.
 
 
o
ii.
After _____ Years of Service, the amount specified above shall increase to _____% (no more than 10%) or $_______ [may be no more than the Code Section 402(g) limit and Code Section 414(v) limit, if applicable].
 
 
 13  401(k) NS AA #010
 
 
Employees and Participants shall have the right to amend the stated automatic Elective Deferral provisions or receive cash in lieu of deferral into the Plan.  For purposes of this provision, Employees returning an election form indicating a “zero” deferral amount shall be deemed “Current Participants”.
 
 
E.
Voluntary After-tax Contributions:
 
If the Employer wishes to reserve the right to recharacterize Elective Deferrals as Voluntary After-tax Contributions in order to pass the ADP/ACP Test, this section must be completed.
 
 
x
1.
The Plan does not permit Voluntary After-tax Contributions.
 
 
o
2.
Participants may make Voluntary After-tax Contributions   in any amount from a minimum of ________ % (may not be less than 1%) to a maximum of ______ % (may be no more than 100%) of their Compensation or a flat dollar amount from a minimum of $ ____________ (may not be less than $1,000) to a maximum of $ ______________   [may be no more than the Code Section 402(g) limit and Code Section 414(v) limit, if applicable].
 
 
o
3.
Participants may make Voluntary After-tax Contributions in any amount up to the maximum permitted by law.
 
 
o
4.
The maximum combined limit of Elective Deferrals, Roth Elective Deferrals, and Voluntary After-tax Contributions will not exceed ______% (may be no more than 100%) of Compensation or $_______ [may be no more than the Code Section 402(g) limit and Code Section 414(v) limit, if applicable].
 
 
F.
Required After-tax Contributions (for Thrift Savings Plans only) :
 
 
x
1.
The Plan does not permit Required After-tax Contributions.
 
 
o
2.
Participants shall be required to make Required After-tax Contributions as follows:
 
o             a.              ________ % (may be no more than 100%) of Compensation.
 
o             b.             A percentage determined by the Employee.
 
o              c.              A flat dollar amount of $________ [may be no more than the Code Section 402(g) limit and Code Section 414(v) limit, if applicable].
 
o             d.               The maximum combined limit of Elective Deferrals, Roth Elective Deferrals and Required After-tax Contributions will not exceed ______% (may be no   more than 100%) of Compensation or $_______  [may be no more than the Code Section 402(g) limit and Code Section 414(v) limit, if applicable].
 
 
G.
Rollover Contributions:
 
 
o
1.
The Plan does not accept Rollover Contributions.
 
 
x
2.
Rollover Contributions may be made:
 
 
o
a.
after meeting the eligibility requirements for participation in the Plan.
 
 
x
b.
prior to meeting the eligibility requirements for participation in the Plan.
 
 
3.
The Plan will accept a Participant Rollover Contribution of an Eligible Rollover Distribution from ( check only those that apply ):
 
 
x
a.
A Qualified Plan described in Code Section 401(a) or 403(a).
 
 
x
b.
An annuity contract described in Code Section 403(b).
 
 
x
c.
An eligible plan under Code Section 457(b) which is maintained by a state, political subdivision of a state, or any agency or instrumentality of a state or political subdivision of a state.
 
 
 14  401(k) NS AA #010
 
 
    x
d.
An Individual Retirement Account (which was not used as a conduit from a Qualified Plan) or Annuity described in Code Section 408(a) or 408(b) that is eligible to be rolled over and would otherwise be includable in gross income.
       
   
4.
The Plan will accept a Direct Rollover of an Eligible Rollover Distribution from (check only those that apply):
       
   
x
a.
A Qualified Plan described in Code Section 401(a) or 403(a), excluding Voluntary After-tax Contributions.
         
   
o
b.
A Qualified Plan described in Code Section 401(a) or 403(a), including Voluntary After-tax Contributions.
         
   
x
c.
An annuity contract described in Code Section 403(b), excluding Voluntary After-tax Contributions.
         
   
o
d.
An annuity contract described in Code Section 403(b), including Voluntary After-tax Contributions.
         
   
x
e.
An eligible plan under Code Section 457(b) which is maintained by a state, political subdivision of a state, or an agency or instrumentality of a state or political subdivision of a state.
         
   
o
f.
A Roth Elective Deferral Account if it is a Direct Rollover from another Roth Elective Deferral Account under a Qualified Plan described in Code Section 402A(e)(1) and only to the extent the rollover is permitted under Code Section 402(c).
         
 
H.
Deemed IRA Contributions/Reserved:
 
 
x
1.
The Plan does not accept any Deemed IRA contributions.
       
 
o
2.
Deemed IRA contributions may be made to this Plan for Plan Years beginning ___________ (may be no earlier than January 1, 2003):
       
   
o
a.
In accordance with the Traditional IRA rules as described in the Basic Plan Document #01. An Individual must meet the eligibility requirements for participation in the Plan in order to make a “Deemed IRA” contribution.
         
   
o
b.
In accordance with the Roth IRA rules as described in the Basic Plan Document #01. An Individual must meet the eligibility requirements for participation in the Plan in order to make a “Deemed IRA” contribution.
         
o
I.
Safe Harbor Plan Provisions:
         
   
If the Safe Harbor Plan provisions are elected, the nondiscrimination tests at Article XI of the Basic Plan Document #01 are not applicable. Safe Harbor Contributions made are subject to the withdrawal restrictions of Code Section 401(k)(2)(B) and Treasury Regulation Section 1.401(k)-1(d); such contributions (and earnings thereon) must not be distributable earlier than severance from employment, death, Disability, an event described in Code Section 401(k)(10), or in the case of a profit-sharing or stock bonus plan, the attainment of age 59½. Safe Harbor Contributions are NOT available for Hardship withdrawals.
     
   
The ACP Test Safe Harbor is automatically satisfied if the only Matching Contribution to the Plan is either a Basic Matching Contribution or an Enhanced Matching Contribution that does not provide a match on Elective Deferrals in excess of 6% of Compensation. For Plans that allow Voluntary or Required After-tax Contributions, the ACP Test is applicable with regard to such contributions.
     
   
Employees eligible to make Elective Deferrals to this Plan must be eligible to receive the Safe Harbor Contribution in the Plan listed below, to the extent required by applicable IRS Regulations.
     
   
The Employer elects to comply with the Safe Harbor Cash or Deferred Arrangement provisions of Article XI of the Basic Plan Document #01 and elects one of the following contribution formulas:
 
 
 15  401(k) NS AA #010
 
 
   
1.
Safe Harbor Tests:
         
   
o
a.
Only the ADP Test Safe Harbor provisions are applicable. A formula in paragraphs (3), (4) or (5) below has been selected and the ADP Safe Harbor has been satisfied.
         
   
o
b.
Only the ACP Test Safe Harbor provisions are applicable. No additional Matching Contributions would be needed in order to satisfy the ACP Safe Harbor if the Plans satisfies the Basic or Enhanced Match.
         
   
o
c.
Both the ADP and ACP Test Safe Harbor provisions are applicable. If both ADP and ACP provisions are applicable:
         
     
o
i.
No additional Matching Contributions will be made in any Plan Year in which the Safe Harbor provisions are used.
           
     
o
ii.
The Employer may make Matching Contributions in addition to any Safe Harbor Matching Contributions elected below. [Complete provisions in Section VI(J) regarding Matching Contributions that will be made in addition to those Safe Harbor Matching Contributions made below.]
         
     
Safe Harbor Contributions cannot be subject to an Hours of Service or employment on the last day of the Plan Year requirement.
         
 
o
2.
Designation of Alternate Plan to Receive Safe Harbor Contribution: If the Safe Harbor Contribution as elected below is not being made to this Plan, the name of the other plan that will receive the Safe Harbor Contribution is: ___________________.
         
 
o
3.
Basic Matching Contribution Formula: Matching Contributions will be made on behalf of Participants in an amount equal to 100% of the amount of the Eligible Participant’s Elective Deferrals that do not exceed 3% of the Participant’s Compensation and 50% of the amount of the Participant’s Elective Deferrals that exceed 3% of the Participant’s Compensation but that do not exceed 5% of the Participant’s Compensation.
         
 
o
4.
Enhanced Matching Contribution Formula: Matching Contributions will be made in an amount equal to the sum of:
         
     
a.
_________ % of the Participant’s Elective Deferrals that do not exceed _________ % of the Participant’s Compensation [insert a number that is three (3) or greater but not greater than six (6); if a number greater than six (6) is inserted or if left blank, this will not qualify as an Enhanced Matching Contribution Formula and the ADP test will apply], plus
         
   
o
b.
_________ % of the Participant’s Elective Deferrals that exceed _________ % of the Participant’s Compensation but do not exceed _________ % of the Participant’s Compensation [insert a number that is three (3) or greater but not greater than six (6) in the second blank. Both blanks should be completed so that at any rate of Elective Deferrals, the Matching Contribution is at least equal to the Matching Contribution receivable if the Employer were making a Basic Matching Contribution. The rate of match cannot increase as Elective Deferrals increase. If a number greater than six (6) is inserted or if left blank, this will not qualify as an Enhanced Matching Contribution Formula and the ACP Test will apply.]
         
       
If an additional discretionary Matching Contribution is made, the dollar amount of that contribution may not exceed 4% of eligible Plan Compensation.
         
 
o
5.
Guaranteed Non-Elective Contribution Formula: The Employer shall make a Non-Elective Contribution equal to _________ % (not less than 3%) of the Compensation of each Eligible Participant.
 
 
 16  401(k) NS AA #010
 
 
 
o
6.
Flexible Non-Elective Contribution Formula: This provision provides the Employer with the ability to amend the Plan to comply with the Safe Harbor provisions during the Plan Year. To provide such option, the Employer must amend the Plan and indicate on Schedule C that the Safe Harbor Non-Elective Contribution (not less than 3%) will be made for the specified Plan Year. Such election must comply with all the applicable notice requirements.
           
   
Additional non-Safe Harbor Contributions may be made to the Plan pursuant to Section VI(J) hereof. Any additional contributions may be subject to nondiscrimination testing.
           
   
7.
Limitations on Safe Harbor Matching Contributions: If a Safe Harbor Matching Contribution is made to the Plan:
           
   
o
a.
The Employer elects to match Safe Harbor Matching Contributions on an annual basis.
           
   
o
b.
The Employer elects to match actual Elective Deferrals made:
           
     
o
i.
on a payroll basis [Plan defaults to this election].
           
     
o
ii.
on a monthly basis.
           
     
o
iii.
on a Plan Year quarterly basis.
           
     
o
iv.
The Employer elects to true up Safe Harbor Matching Contributions made to the Plan on the above basis.
           
       
If one of the Matching Contribution calculation periods at paragraph (7)(b) above is selected, Matching Contributions must be deposited to the Plan not later than the last day of the calendar quarter next following the quarter to which they relate.
           
   
o
c.
The Employer will only contribute the Safe Harbor Contribution to Non-Highly Compensated Employees.
           
x
J.
Matching Employer Contribution:
           
   
Do not complete this section of the Adoption Agreement if the Plan only offers a Safe Harbor Contribution. A Plan that offers both a Safe Harbor Contribution as well as an additional Employer Contribution that is specified below, must complete both Sections VI(I) and VI(J) of this Adoption Agreement.
           
   
Select the Matching Contribution Formula, Computation Period and special Limitations for each contribution type from the options listed below. Enter the letter of the option(s) selected on the lines provided. Leave the line blank if no election is required.
           
 
o
The Matching Contribution(s) selected below will be deemed an additional discretionary ACP Test Safe Harbor Matching Contribution in accordance with the selection made at Section VI(I). The allocation of any additional Matching Contribution made by the Employer will not exceed 4% of eligible Compensation.
           
 
o
The Matching Contribution(s) selected below will be deemed a discretionary contribution that will be subject to nondiscrimination testing.
 
 
 
Type of
Contribution
 
Matching
Contribution
(Formula 1)
 
Matching
Computation
Period
 
 
 
Limitations
 
Matching
Contribution
(Formula 2)
 
Matching
Computation
Period
 
 
 
Limitations
Elective Deferrals (including Roth Elective Deferrals, if applicable)
a
a
       
Voluntary After-tax
           
Required
After-tax
           
403(b) Deferrals
           
 
 
 17  401(k) NS AA #010
 
 
 
If any election is made with respect to “403(b) Deferrals” above, and if this Plan is used to fund any Employer Contributions, Employer Contributions will be based on the Elective Deferrals made to an existing 403(b) plan sponsored by the Employer.
     
 
Name of corresponding 403(b) plan, as applicable: __________________________________________________________________
     
 
If the Matching Contribution formula selected by the Employer is 100% vested and may not be distributed to the Participant before the earlier of the date the Participant has a severance from employment, retires, becomes disabled, attains 59½, or dies, it may be treated as a Qualified Matching Contribution.
     
 
Matching Contribution Formulas may be subject to a minimum or maximum dollar or percentage limit.
     
 
1.
Matching Contribution Formulas:
     
   
Matching Contribution Formulas for Elective Deferrals and Roth Elective Deferrals:
     
 
 
a.
Percentage of Deferral Match : The Employer shall contribute to each eligible Participant’s account an amount equal to 50 % (no more than 500%) of the Participant’s Elective Deferrals up to a maximum of 6 % (no more than the Annual Addition limit for the Plan Year) of Compensation or $ _________ [no more than the Annual Addition limit for the Plan Year].
     
 
 
b.
Uniform Dollar Match : The Employer shall contribute to each eligible Participant’s account $ ________ (no more than the Annual Addition limit for the Plan Year) if the Participant contributes at least ________ % (no more than 100%) of Compensation or $ __________ [may be no more than the Code Section 402(g) limit and Code Section 414(v) limit, if applicable]. The Employer’s contribution will be made up to a maximum of _____ % (no more than the Annual Addition limit for the Plan Year) of Compensation.
     
 
 
c.
Discretionary Match: The Employer shall have the right to make a Discretionary Matching Contribution. The Employer’s Matching Contribution shall be determined by the Employer with respect to each Plan Year’s eligible Participants. Such contribution shall be in the amount specified and allocated as follows:  ________________________________________________________________
     
       
       
       
 
 
d.
Tiered Match : The Employer shall contribute to each eligible Participant’s account an amount equal to:
     
     
________ % of the first ________ % (no more than 500%) of the Participant’s Compensation contributed, and
     
     
________ % of the next ________ % (no more than 400%) of the Participant’s Compensation contributed, and
     
     
________ % of the next ________ % (no more than 300%) of the Participant’s Compensation contributed.
     
     
The Employer’s contribution will be made up to the [   ] greater of (may be no more than 500%) [   ] lesser of (may be no less than 1%) _________ % of Compensation, or $ __________ (no more than the Annual Addition limit for the Plan Year).
 
 
18  401(k) NS AA #010
 
 
 
The percentages specified above may not increase as the rate of Elective Deferrals or Employee Contributions increase.  This formula must meet Code Section 401(a)(4) and the ACP Test.

 
e.
Percentage of Compensation Match:   The Employer shall contribute to each eligible Participant’s account ________ % (no less than 1%) of Compensation if the eligible Participant contributes at least ________ % (no more than 100%)  of Compensation.

The Employer’s contribution will be made up to the [   ] greater of (may be no more than 500%) [  ] lesser of  (may be no less than 1%) _________ % of Compensation or $ __________   (no more than the Annual Addition limit for the Plan Year).

This formula must meet Code Section 401(a)(4) and the ACP Test.

 
f.
Proportionate Compensation Match:   The Employer shall contribute to each eligible Participant who defers at least ________ % (may be no more than 100%) of Compensation, an amount determined by multiplying such Employer Matching Contribution by a fraction, the numerator of which is the Participant’s Compensation and the denominator of which is the Compensation of all Participants eligible to receive such an allocation.

The Employer’s contribution will be made up to the [   ] greater of (may be no more than 500%) [   ] lesser of  (may be no less than 1%) _________ % of Compensation or $ __________   (no more than the Annual Addition limit for the Plan Year).

This formula must meet Code Section 401(a)(4) and the ACP Test.
 
 
x
g.
Catch-Up Contributions:   The Employer elects to match Catch-Up Contributions under the same formula or formulas as elected above.

 
In the event that an Excess Contribution is recharacterized as a Catch-up Contribution, any Matching Contribution made thereon may remain in the Plan if the Matching Contribution Formula is not otherwise exceeded.

 
Additional Matching Contribution Formulas for Voluntary After-tax Contributions:

 
h.
Percentage of Deferral Match : The Employer shall contribute to each eligible Participant’s account an amount equal to ______ % (no less than 1%) of the Participant’s Contribution up to a maximum of ______ % (may be no more than 500%) of Compensation or $ __________ [may be no more than the Code Section 402(g) limit and Code Section 414(v) limit, if applicable].

 
i.
Uniform Dollar Match: The Employer shall contribute to each eligible Participant’s account $ ________ (no more than the Annual Addition limit for the Plan Year) if the Participant contributes at least ________ % (may be no more than 100%) of Compensation or $ ________ [may be no more than the Code Section 402(g) limit and Code Section 414(v) limit, if applicable].  The Employer’s contribution will be made up to the maximum of _____ % (may be no more than 500%) of Compensation.

 
j.
Discretionary Match: The Employer shall have the right to make a Discretionary Matching Contribution. The Employer’s Matching Contribution shall be determined by the Employer with respect to each Plan Year’s eligible Participants.  Such contribution shall be in the amount specified and allocated as follows:

 
 
 
 
 
 
 
 
Additional Matching Contribution Formulas for Required After-tax Contributions:

 
k.
Percentage of Deferral Match : The Employer shall contribute to each eligible Participant’s account an amount equal to ________ % no less than 1%) of the Participant’s Contribution up to a maximum of ________ % (may be no more than 500%) of Compensation or $ __________ [may be no more than the Code Section 402(g) limit and Code Section 414(v) limit, if applicable].
 
 
  19  401(k) NS AA #010
 
 
 
l.
Uniform Dollar Match: The Employer shall contribute to each eligible Participant’s account $ ________ (no more than the Annual Addition limit for the Plan Year) if the Participant contributes at least _______ % (may be no more than 100%) of Compensation or $ __________ [may be no more than the Code Section 402(g) limit and Code Section 414(v) limit, if applicable].  The Employer’s contribution will be made up to the maximum of ______ % (may be no more than 500%) of Compensation.

 
m.
Discretionary Match: The Employer shall have the right to make a Discretionary Matching Contribution.  The Employer’s Matching Contribution shall be determined by the Employer with respect to each Plan Year’s eligible Participants.  Such contribution shall be in the amount specified and allocated as follows:
 
 
 
 
 
 
 
 
 
 
Additional Matching Contribution Formulas for 403(b) Deferrals:

 
n.
Percentage of Deferral Match : The Employer shall contribute to each eligible Participant’s account an amount equal to ________ % (no less than 1%) of the Participant’s deferral up to a maximum of ________ % (may be no more than 500%) of Compensation or $ __________ [may be no more than the Code Section 402(g) limit and Code Section 414(v) limit, if applicable].

 
o.
Uniform Dollar Match: The Employer shall contribute to each eligible Participant’s account $ ________ (no more than the Annual Addition limit for the Plan Year) if the Participant contributes at least ______ % (may be no more than 100%) of Compensation or $ ___________ [may be no more than the Code Section 402(g) limit and Code Section 414(v) limit, if applicable].  The Employer’s contribution will be made up to the maximum of ______ % (may be no more than 500%) of Compensation.

 
p.
Discretionary Match: The Employer shall have the right to make a Discretionary Matching Contribution. The Employer’s Matching Contribution shall be determined by the Employer with respect to each Plan Year’s eligible Participants.  Such contribution shall be in the amount specified and allocated as follows:
 
 
 
 
 
 
2.
Matching Contribution Computation Period: The Compensation   or any dollar limitation imposed in calculating the Matching Contribution will be based on the period selected below. Matching Contributions will be calculated on the following basis:
 
 
 
a.
b.
c.
d. 		Payroll Based
Weekly
Bi-weekly
Semi-monthly 		e.
f.
g.
h.
Monthly
Quarterly
Semi-annually
Annually
 
The calculation of Matching Contributions based on the Computation Period selected above has no applicability as to when the Employer remits Matching Contributions to the Trust.

 
3.
Limitations on Matching Formulas:
 
 
a.
Contributions to Participants who are not Highly Compensated Employees: Contribution of the Employer’s Matching Contribution will be made only to eligible Participants who are Non-Highly Compensated Employees.
 
 
b.
Deferrals withdrawn prior to the end of the Matching Computation Period:   Matching Contributions (whether or not Qualified) will not be made on Employee contributions withdrawn prior to the end of the [  ] Matching Computation Period, or [  ] Plan Year.
 
 
  20  401(k) NS AA #010
 

 
o
If elected, this requirement shall apply in the event of a withdrawal occurring as the result of a termination of employment for reasons of retirement, Disability or death.
 
 
c.
Maximum Plan Limit for Matching Contributions: In no event will Matching Contributions exceed ______ % (no more than 500%) of Compensation, or $ _______ (no more than the Annual Addition limit for the Plan Year).

 
o
If elected, this limitation applies to the total of all Elective Deferrals, Roth Elective Deferrals, Catch-Up Contributions, Voluntary After-tax Contributions,  Required After-tax Contributions and 403(b) Deferrals made to the Plan for the Plan Year.

 
d.
True Up of Matching Contributions:   The Employer elects to true up Matching Contributions made to the Plan.

o
K.
Non-Elective Employer Contributions:

The Employer shall have the right to make a discretionary contribution.  If a discretionary contribution is made, the Employer’s contribution for the Plan Year shall be allocated to the accounts of eligible Participants as follows (enter the number of the allocation method being used by the Plan) :

Type of Contribution
Allocation Method
Non-Elective Formula 1
 
Non-Elective Formula 2
 

 
1.
Pro-Rata Formula:   The Employer’s contribution for the Plan Year shall be allocated to each eligible Participant on a pro-rata basis based on the Compensation of the Participant to the total Compensation of all Participants.

 
2.
Uniform Percentage Formula: The Employer’s contribution shall be allocated to each eligible Participant as a uniform percentage of the Employer’s Net Profit.

 
3.
Percentage of Compensation Formula: The Employer’s contribution shall be ______ % of each Participant’s Compensation allocated on a pro-rata basis based on the Compensation of the Participant to the total Compensation of all Participants.
 
 
4.
Hours of Service Formula:   The Employer’s contribution shall be a discretionary amount allocated in the same dollar amount to each eligible Participant based on each Hour of Service performed or each day that the Participant is entitled to Compensation.
 
 
5.
Uniform Dollar Amount Formula:   The Employer shall contribute and allocate to the account of each eligible Participant an equal dollar amount.
 
 
6.
Excess Integrated Contribution Formula:   The Employer’s contribution shall be allocated   as an amount taking into consideration amounts contributed to Social Security using the four-step Excess Integrated Allocation Formula as described in the Basic Plan Document #01; the Integration Level is defined at Section III(E) of this Adoption Agreement.

 
7.
Base Integrated Contribution Formula:   The Employer’s contribution shall be allocated   as an amount taking into consideration amounts contributed to Social Security using the two-step Base Integrated Allocation Formula as described in the Basic Plan Document #01; Employer Contributions shall be allocated as follows: _____ % of each eligible Participant’s Compensation, plus _____ % of Compensation in excess of the Integration Level defined at Section III(E) hereof.  If the Integration Level selected in Section III(E) is other than the Taxable Wage Base, the maximum disparity rate will be adjusted as follows: (a) if the Integration Level selected is greater than zero (0) but not more than the greater of $10,000 or 20% of the Taxable Wage Base, the maximum disparity rate will be 5.7%; (b) if the Integration Level selected is more than the greater of $10,000 or 20% but not more than 80% of the Taxable Wage Base, the maximum disparity rate will be 4.3%; (c) if the Integration Level selected is more than 80% of the Taxable Wage Base, but not more than any amount more than 80% of the Taxable Wage Base, but less than 100% of the Taxable Wage Base, the maximum disparity rate will be 5.4%.
 
 
  21  401(k) NS AA #010
 
 
Only one Plan maintained by the Employer may be integrated with Social Security.  Any Plan utilizing a Safe Harbor formula as provided in Section VI(I) of this Adoption Agreement may not apply the Safe Harbor Contributions to the integrated allocation formula.

 
8.
Uniform Points Contribution Formula: The allocation for each eligible Participant will be determined by a uniform points method. Each eligible Participant’s allocation shall bear the same relationship to the Employer contribution as the Participant’s total points bears to all points awarded.  The Employer must grant points for at least age or Service.  Each eligible Participant will receive _____ points for each of the following:

 
o
a.
_____ year(s) of age.

 
o
b.
_____ Year(s) of Service determined:

 
o
i.
In the same manner as determined for eligibility.

 
o
ii.
In the same manner as determined for vesting.
 
 
o
iii.
Points will not be awarded with respect to Year(s) of Service in excess of _____ .
 
 
o
c.
$ _________ (not to exceed $200) of Compensation.

 
The contribution formulas must satisfy the design-based safe harbors described in the Regulations under Code Section 401(a)(4).

 
L.
Qualified Matching (QMAC) and Qualified Non-Elective (QNEC) Employer Contribution Formulas:

 
o
1.
QMAC Contribution Formula:   The Employer may contribute to each eligible Participant’s Qualified Matching Contribution account an amount equal to (select one or more of the following) :

 
o             a.
$ _________ or ______ % of the Participant’s Elective Deferrals (including Roth Elective Deferrals, if applicable).
 
 
o             b.
$ _________ or ______ % of the Participant’s Elective Deferrals (including Roth Elective Deferrals, if applicable) not to exceed ______ % of Compensation.
 
 
o             c.
$ _________ or ______ % of the Participant’s Voluntary After-tax Contributions.
 
 
o             d.
$ _________ or ______ % of the Participant’s Required After-tax Contributions.

 
o
 2.
Discretionary QMAC Contribution Formula:   The Employer shall have the right to make a discretionary QMAC contribution.  The Employer’s Matching Contribution shall be determined by the Employer with respect to each Plan Year’s eligible Participants.  Such contribution shall be in the amount specified and allocated as follows:                                                                                                                                                    
 
 
This part of the Employer’s contribution shall be fully vested when made.

 
o
 3.
QNEC Contribution Formula: The Employer may contribute to each eligible Participant’s Qualified Non-Elective Contribution account an amount equal to (select one or more of the following):
 
 
o             a.
_____ % of Compensation of all eligible Participants. This part of the Employer’s contributions shall be fully vested when made.
 
 
o             b.
$ __________ not to exceed ___ % of Compensation. This part of the Employer’s contribution shall be fully vested when made and subject to the limitations specified in the Basic Plan Document #01.
 
 
  22  401(k) NS AA #010
 
 
 
o
 4.
Discretionary Percentage QNEC Contribution Formula:   The Employer shall have the right to make a discretionary QNEC contribution which shall be allocated to each eligible Participant’s account in proportion to his or her Compensation as a percentage of the Compensation of all eligible Participants.  This part of the Employer’s contribution shall be fully vested when made.  This contribution will be made to:
 
 
o
a.
All eligible Participants.
 
 
o
b.
Only eligible Participants who are Non-Highly Compensated Employees.

 
o
 5.
Discretionary Uniform Dollar QNEC Contribution Formula: The Employer shall have the right to make a discretionary QNEC contribution which shall be allocated to each eligible Participant’s account in a uniform dollar amount to be determined by the Employer and allocated in a nondiscriminatory manner.  This part of the Employer’s contribution shall be fully vested when made. This contribution will be made to:
 
 
o
a.
All eligible Participants.
 
 
o
b.
Only eligible Participants who are Non-Highly Compensated Employees.

 
o
 6.
Corrective QNEC Contribution Formula:   The Employer shall have the right to make a QNEC contribution in the amount necessary to pass the ADP/ACP Test or the maximum permitted under Code Section 415. This contribution will be allocated to some or all Non-Highly Compensated Participants designated by the Plan Administrator. The allocation will be the lesser of the amount required to pass the ADP/ACP Test, or the maximum permitted under Code Section 415. This part of the Employer’s contribution shall be fully vested when made.
 
 
o
 7.
Qualified Matching Contributions (QMAC):
 
 
o
a.
For purposes of the ADP and ACP Tests, all Matching Contributions made to the Plan will be deemed “Qualified” for purposes of calculating the Actual Deferral Percentage and/or Actual Contribution Percentage.  All Matching Contributions must be fully vested when made.
 
 
o
b.
For purposes of the ADP and ACP Tests, only Matching Contributions made to the Plan that are needed to meet the Actual Deferral Percentage or Actual Contribution Percentage Test will be deemed “Qualified” for purposes of calculating the Actual Deferral Percentage and/or Actual Contribution Percentage.   All such Matching Contributions used must be fully vested when made.
 
 
o
 8.
Qualified Non-Elective Contributions (QNEC):
 
 
o
a.
For purposes of the ADP and  ACP Tests, all Non-Elective Contributions made to the Plan will be deemed “Qualified” for purposes of calculating the Actual Deferral Percentage and/or Actual Contribution Percentage.   All Non-Elective Contributions must be fully vested when made.
 
 
o
b.
For purposes of the ADP and ACP Tests, only the Non-Elective Contributions made to the Plan that are needed to meet the Actual Deferral Percentage or Actual Contribution Percentage Test will  be deemed “Qualified” for purposes of calculating the Actual Deferral Percentage and/or Actual Contribution Percentage.   All such Non-Elective Contributions used must be fully vested when made.
 
x
M.
Additional Adopting Employers:
 
 
x
1.
All participating Employers’ contributions and forfeitures, if applicable, attributable to each specific contribution source made by such Employer shall be pooled together and allocated uniformly among all eligible Participants.

 
o
2.
Each participating Employer’s contribution and forfeitures, if applicable, attributable to each specific contribution source made by such Employer shall be allocated only to eligible Participants of the participating Employer.
 
 
 
23
 401(k) NS AA #010
 
         
 
Where contributions and forfeitures are to be allocated to eligible Participants by participating Employers, each such Employer must maintain data demonstrating that the allocations by group satisfy the nondiscrimination rules under Code Section 401(a)(4).
         
VII.
ALLOCATIONS TO PARTICIPANTS
         
 
A.
Allocation Accrual Requirements:
         
   
No Hours of Service or last day requirement may be imposed on any Employer contribution that is subject to the Safe Harbor Plan rules.
         
 
x
1.
There are no allocation requirements for Participants to receive any contribution made to the Plan; however, a Participant must have received Compensation from the Employer to be entitled to an allocation of contributions.
         
 
o
2.
Employer contributions will be allocated to all Participants employed on the last day of the Plan Year regardless of hours worked.
         
 
o
3.
The Plan is using the Elapsed Time method; contributions will be allocated to all Participants who have completed _____ [not more than twelve (12)] months of Service regardless of the hours credited. If left blank, the Plan will use twelve (12) months.
         
 
o
4.
Employer contributions for a Plan Year will be allocated to all Participants upon completion of the hours and/or employment requirements below.
         
     
a.
A Year of Service for allocation accrual purposes cannot be less than one (1) Hour of Service nor greater than 1,000 hours by operation of law. If left blank, the Plan will use 1,000 hours. Enter whole digit numbers only.
 
 
Contribution Type
Hours
 
All contributions
 
 
Matching Contribution (Formula 1)
 
 
Matching Contribution (Formula 2)
 
 
Non-Elective Contribution (Formula 1)
 
 
Non-Elective Contribution (Formula 2)
 
 
QNEC
 
 
QMAC
 
 
 
b.
Participants must be employed on the last day of each quarter of the Plan Year in order to receive the following contribution(s):
     
 
o
All contributions
 
o
Matching Contribution (Formula 1)
 
o
Matching Contribution (Formula 2)
 
o
Non-Elective Contribution (Formula 1)
 
o
Non-Elective Contribution (Formula 2)
 
o
QNEC
 
o
QMAC
     
   
Note: Use of this subsection (b) requires that no more than one (1) Hour of Service be required in subsection (a) above for the contribution types selected.
     
 
c.
Participants must be employed on the last day of the Plan Year in order to receive the following contribution(s):
     
 
o
All contributions
 
o
Matching Contribution (Formula 1)
 
o
Matching Contribution (Formula 2)
 
o
Non-Elective Contribution (Formula 1)
 
o
Non-Elective Contribution (Formula 2)
 
o
QNEC
 
o
QMAC
 
 
24  401(k) NS AA #010
 
 
o
d.
Participants must complete the Hours of Service indicated above or be employed on the last day of the Plan Year to receive the Employer Contribution(s) selected above.
       
 
5.
Employer Contributions for a Plan Year will be allocated to terminated Participants who have met the following allocation accrual requirements (check all applicable boxes) :
 
                    Non-Elective    Non-Elective        
       
All
Contributions
 
Match
Formula 1
 
Match
Formula 2
 
Formula 1
 
Formula 2
 
QNEC
 
QMAC
                                 
   
a.
The Hours of Service or Period of
Service requirement above will be
waived if termination is due to:
                         
                               
 
i.
Retirement
o
 
o
 
o
 
o
 
o
 
o
 
o
 
ii.
Disability
o
 
o
 
o
 
o
 
o
 
o
 
o
 
iii.
Death
o
 
o
 
o
 
o
 
o
 
o
 
o
 
iv.
Other (must be non-Discriminatory in operation):
                         
   
—
o
 
o
 
o
 
o
 
o
 
o
 
o
                               
   
b.
The last day of employment
requirement above will be
waived if termination is due to:
                         
                               
 
i.
Retirement
o
 
o
 
o
 
o
 
o
 
o
 
o
 
ii.
Disability
o
 
o
 
o
 
o
 
o
 
o
 
o
 
iii.
Death
o
 
o
 
o
 
o
 
o
 
o
 
o
 
iv.
Other (must be non-Discriminatory in operation):
                         
     
o
 
o
 
o
 
o
 
o
 
o
 
o
 
o
B.
Contributions to Disabled Participants:
       
     
The Employer will make contributions on behalf of a Participant who is permanently and totally disabled. These contributions will be based on the Compensation each such Participant would have received for the Limitation Year if the Participant had been paid at the rate of Compensation paid immediately before becoming permanently and totally disabled. Such imputed Compensation for the disabled Participant may be taken into account only if the Participant is not a Highly Compensated Employee. These contributions will be 100% vested when made.
       
VIII.
DISPOSITION OF FORFEITURES
       
 
A.
Forfeiture Allocation Alternatives:
       
 
o
1.
Not applicable; all contributions are fully vested.
       
 
x
2.
Select one or more methods in which forfeitures associated with the contribution type will be allocated ( number each item in order of use ):
 
 
25  401(k) NS AA #010
 
 
                       
       
Employer Contribution Type
             
 
Disposition Method
   
All Non-Safe Harbor
Matching Contributions
 
All Other
Contributions
                     
 
a.
Restoration of Participant’s forfeitures.
               
                     
 
b.
Used to offset Plan expenses.
   
1
         
                     
 
c.
Used to reduce the Employer’s Non-Elective Contribution.
               
                     
 
d.
Used to reduce the Employer’s Matching Contribution.
   
2
         
                     
 
e.
Added to the Employer’s contribution (other than Matching Contributions or Base Integration Formula) under the Plan.
               
                     
 
f.
Added to the Employer’s Matching Contribution under the Plan (these contributions will be subject to ACP Testing).
               
                     
 
g.
Allocate to all Participants eligible to share in the allocations in the same proportion that each Participant’s Compensation for the year bears to the Compensation of all other Participant’s for such year.
   
N/A
         
                     
 
h.
Allocate to all NHCEs eligible to share in the allocations in proportion to each such Participant’s Compensation for the year.
   
N/A
         
                     
 
i.
Allocate to all NHCEs eligible to share in the allocations in proportion to each such Participant’s Elective Deferrals for the year.
           
N/A
 
                     
 
j.
Allocate to all Participants eligible to share in the allocations in the same proportion that each Participant’s Elective Deferrals for the year bears to the Elective Deferrals of all Participants for such year.
   
3
     
N/A
 
 
   
Participants eligible to share in the allocation of other Employer contributions under Section VI shall be eligible to share in the allocation of forfeitures. The selection of (i) or (j) may require that the Plan be tested for nondiscrimination using a general test described in Regulations Section 1.410(b).
       
 
B.
Timing of Allocation of Forfeitures:
       
   
If no timely distribution or deemed distribution [pursuant to paragraph 6.5(c) of the Basic Plan Document #01] has been made to a former Participant, non-vested portions shall be forfeited at the end of the Plan Year during which the former Participant incurs his or her fifth consecutive one (1) year Break in Service or Period of Severance for Plans that use the Elapsed Time Method.
       
   
If a former Participant has received the full amount of his or her Vested Account Balance, the non-vested portion of his or her account shall be forfeited and be disposed of:
       
 
o
1.
during the Plan Year following the Plan Year in which the forfeiture arose.
       
 
x
2.
as of any Valuation or Allocation Date during the Plan Year (or as soon as administratively feasible following the close of the Plan Year) in which the former Participant receives full payment of his or her vested benefit.
       
 
o
3.
as of the end of the Plan Year during which the former Participant receives full payment of his or her vested benefit.
       
 
o
4.
as of the earlier of the first day of the Plan Year, or the first day of the seventh month of the Plan Year following the date on which the former Participant has received full payment of his or her vested benefit.
       
 
o
5.
as of the next Valuation or Allocation Date following the date on which the former Participant receives full payment of his or her vested benefit.
 
 
26  401(k) NS AA #010
 
 
 
IX.
MULTIPLE PLANS MAINTAINED BY THE EMPLOYER AND TOP-HEAVY CONTRIBUTIONS
       
o
A.
Plans Maintained By The Employer:
       
   
The Employer does maintain another Plan [including a Welfare Benefit Fund or an individual medical account as defined in Code Section 415(l)(2)], under which amounts are treated as Annual Additions and has completed the proper sections below. If the Participant is covered under another qualified Defined Contribution Plan maintained by the Employer, other than a Master or Prototype Plan [option (1) below shall automatically apply if the other plan is a Master or Prototype Plan]:
       
 
o
1.
The provisions of Article X of the Basic Plan Document #01 will apply as if the other plan were a Master or Prototype Plan.
       
 
o
2.
The Employer has specified below the method under which the plans will limit total Annual Additions to the Maximum Permissible Amount, and will properly reduce any Excess Amounts in a manner that precludes Employer discretion:
       
       
 
B.
Top-Heavy Provisions:
       
   
In the event the Plan is or becomes Top-Heavy, the minimum contribution or benefit required under Code Section 416 and paragraph 14.3 of the Basic Plan Document #01 relating to Top-Heavy Plans shall be satisfied in the elected manner:
       
 
x
1.
The minimum contribution will be satisfied by this Plan.
       
 
o
2.
The minimum contribution will be satisfied by (name of other Qualified Plan): ________
       
     
Minimum contribution or benefit to be provided (specify interest rates and mortality table, if applicable): ______________
       
   
3.
For any Plan Year during which the Plan is Top-Heavy, the sum of the contributions (excluding Elective Deferrals) allocated to non-Key Employees shall not be less than the amount required under the Basic Plan Document #01. Top-Heavy minimums will be allocated to:
       
   
o
a.
all eligible Participants [Plan defaults to this election].
         
   
x
b.
only eligible non-Key Employees who are Participants.
       
 
o
4.
Matching Contributions shall not be included when satisfying Top-Heavy minimum contributions.
       
X.
NONDISCRIMINATION TESTING
       
 
A Plan may use different testing methods for the ADP and ACP Tests provided the Plan does not permit recharacterization of Excess Contributions, Elective Deferrals to be used in the ACP Test, or Qualified Matching Contributions to be used in the ADP Test.
       
 
If no election is made, the Plan will use the Current Year testing method for both the ADP and ACP Tests.
       
 
A.
Testing Elections:
       
 
o
1.
The Plan is not subject to ADP or ACP testing. The Plan does not offer Voluntary After-tax or Required After-tax Contributions and it either meets the Safe Harbor provisions of Section VI(I) of this Adoption Agreement, or it does not benefit any Highly Compensated Employees.
       
 
o
2.
This Plan is using the Current Year testing method for purposes of the ADP Test.
       
 
o
3.
This Plan is using the Current Year testing method for purposes of the ACP Test.
       
 
x
4.
This Plan is using the Prior Year testing method for purposes of the ADP Test.
       
 
x
5.
This Plan is using the Prior Year testing method for purposes of the ACP Test.
 
 
27  401(k) NS AA #010
 
 
 
B.
Testing Elections for the First Plan Year:
       
   
Complete only when Prior Year testing method election is made and the Employer is not using the “deemed 3%” rule.
       
 
o
1.
If this is not a successor Plan, then for the first Plan Year this Plan permits any Participant to make Elective Deferrals, the ADP used in the ADP Test for Participants who are Non-Highly Compensated Employees shall be such first Plan Year’s ADP.
       
 
o
2.
If this is not a successor Plan, then for the first Plan Year this Plan permits (a) any Participant to make Employee contributions, (b) provides for Matching Contributions or (c) both, the ACP used in the ACP Test for Participants who are Non-Highly Compensated Employees shall be such first Plan Year’s ACP.
       
o
C.
Recharacterization:
       
   
Elective Deferrals may be recharacterized as Voluntary After-tax Contributions to the extent so provided by this Plan, to satisfy the ADP Test. The Employer must have elected to permit Voluntary After-tax Contributions in the Plan for this election to be operable.
       
o
D.
Forfeitures of Vested Excess Aggregate Contributions Resulting from ADP Test Failure:
       
   
Forfeitures of Excess Aggregate Contributions resulting from failure of the ADP Test and the inability to distribute corresponding Matching Contributions will be allocated to the Matching Contribution accounts of Non-Highly Compensated Employees instead of being used to reduce Employer Contributions for the Plan Year in which the failure occurred.
       
XI.
VESTING
       
 
Participants shall always have a fully vested and nonforfeitable interest in their Employee contributions (including Elective Deferrals, Catch-Up Contributions, Roth Elective Deferrals, Deemed IRA Contributions, Required After-tax Contributions, and Voluntary After-tax Contributions), Qualified Matching Contributions (“QMACs”), Qualified Non-Elective Contributions (“QNECs”) or Safe Harbor Contributions, and their investment earnings.
       
 
Each Participant shall acquire a vested and nonforfeitable percentage in his or her account balance attributable to Employer contributions and their earnings under the schedule(s) selected below.
       
 
A.
Vesting Computation Period:
       
   
A Year of Service for vesting will be determined on the basis of the (choose one):
       
 
o
1.
Not applicable. All contributions are fully vested.
       
 
x
2.
Elapsed Time method.
       
 
o
3.
Hours of Service method. A Year of Service will be credited upon completion of __________ Hours of Service. A Year of Service for vesting purposes will not be less than one (1) Hour of Service nor greater than 1,000 hours by operation of law. [If left blank, the Plan will use 1,000 hours.]
       
     
The computation period for purposes of determining Years of Service and Breaks in Service for purposes of computing a Participant’s nonforfeitable right to his or her account balance derived from Employer contributions:
       
   
o
a.
shall commence on the date on which an Employee first performs an Hour of Service for the Employer and each subsequent twelve (12) consecutive month period shall commence on the anniversary thereof.
         
   
o
b.
shall commence on the first day of the Plan Year during which an Employee first performs an Hour of Service for the Employer and each subsequent twelve (12) consecutive month period shall commence on the anniversary thereof.
 
 
28  401(k) NS AA #010
 
 
       
     
A Participant shall receive credit for a Year of Service if he or she completes the number of hours specified above at any time during the twelve (12) consecutive month computation period. A Year of Service may be earned prior to the end of the twelve (12) consecutive month computation period and the Participant need not be employed at the end of the twelve (12) consecutive month computation period to receive credit for a Year of Service.
     
 
B.
Vesting Schedules:
     
   
The Employer must select either the two-twenty vesting schedule option [(B)(4)] or the three-year cliff vesting schedule [(B)(3)] to apply in any Plan Year in which the Plan is Top-Heavy. The percentages selected for option (B)(5) may not be less for any year than the percentages shown at option (B)(4). Any switch to a Top-Heavy schedule will remain in effect even if the Plan later falls out of Top-Heavy status unless the Employer executes an amendment to this Adoption Agreement. If a Participant has at least three (3) Years of Service for vesting purposes at the time of the amendment, the Plan must provide that Participant the option of remaining on the vesting schedule in effect prior to such amendment.
     
   
Select the appropriate schedule for each contribution type and complete the blank vesting percentages from the list below and insert the option number in the vesting schedule chart below. Employer Contributions that are not Safe Harbor Contributions may only choose option (3) or (4) or a schedule where amounts vest faster than at option (4).
 
   
Years of Service
 
        
1
2
3
4
5
6
 
               
 
1.
Full and immediate Vesting
               
 
2.
__%
100%
       
               
 
3.
__%
__%
100%
     
               
 
4.
__%
20%
40%
60%
80%
100%
               
 
5.
25 %
50 %
75 %
100 %
100 %
100%

 
Vesting Schedule Chart
   
Employer Contribution Type
 
       
     
All Employer Contributions
 
5
 
Matching Contribution (Formula 1)
     
Matching Contribution (Formula 2)
     
Match on Voluntary After-tax Contributions
     
Match on Required After-tax Contributions
     
Match on 403(b) Deferrals
     
Non-Elective Contribution (Formula 1)
     
Non-Elective Contribution (Formula 2)
 
5
 
Top-Heavy Minimum Contribution
 
   
If a different Vesting Schedule than that entered above applies to Employer Contributions made prior to the first day of the Plan’s 2007 Plan Year, it should be entered in Schedule B of this Adoption Agreement.
       
 
C.
Service Disregarded for Vesting:
       
 
x
1.
Not applicable. All Service is recognized.
       
 
o
2.
Service prior to the Effective Date of this Plan or a predecessor plan is disregarded when computing a Participant’s vested and nonforfeitable interest.
       
 
o
3.
Service prior to a Participant having attained age eighteen (18) is disregarded when computing a Participant’s vested and nonforfeitable interest.
 
 
29  401(k) NS AA #010
 
 
o
D.
Full Vesting of Employer Contributions for Current Participants:
       
   
Notwithstanding the elections above, all Employer contributions made to a Participant’s account shall be 100% fully vested if the Participant is employed on the Effective Date of the Plan (or such other date as entered herein): _________________. The operation of this provision may not result in the discrimination in favor of Highly Compensated Employees.
       
XII.
SERVICE WITH PREDECESSOR ORGANIZATION
       
 
This option only applies in the situation where the Employer does not or did not maintain the plan of a Predecessor Organization.
       
x
A.
Not applicable. The Employer does not maintain the plan of a Predecessor Organization.
       
o
B.
The Plan will recognize Service with all Predecessor Organizations.
       
o
C.
Service with the following organization(s) will be recognized for the Plan purpose indicated:

     
Eligibility
 
Allocation
Accrual
 
Vesting
               
     
o
 
o
 
o
     
o
 
o
 
o
     
o
 
o
 
o
     
o
 
o
 
o
     
o
 
o
 
o
 
Attach additional pages as necessary.
           
 
o
D.
The Plan shall recognize _____ Years of Service with the Employer(s) named in Section XII(C) above.
       
XIII.
IN-SERVICE WITHDRAWALS
       
 
Distribution restrictions apply in the case of Elective Deferrals (including Roth Elective Deferrals, if applicable), Safe Harbor Contributions, Qualified Matching Contributions and Qualified Non-Elective Contributions, including the withdrawal restrictions prior to attainment of age 59½.
       
 
If the Participant could withdraw his or her account in the past, this right may not be taken away.
       
 
A.
In-Service Withdrawals:
       
 
o
1.
In-service withdrawals are not permitted in the Plan.
       
 
x
2.
In-service withdrawals are permitted in the Plan. Participants may withdraw the following contribution types after meeting the following requirements (select one or more of the following options) :
 
       
Withdrawal Restrictions
 
Contribution Types
   
A
B
C
D
E
F
G
H
                       
 
a.
All Contributions
 
n/a
n/a
n/a
o
o
n/a
n/a
n/a
                       
 
b.
Elective Deferrals
 
o
n/a
n/a
o
x
n/a
n/a
n/a
                       
 
c.
Roth Elective Deferrals
 
o
n/a
n/a
o
o
n/a
n/a
n/a
                       
 
d.
Voluntary After-tax Contributions
 
o
o
o
o
o
n/a
n/a
n/a
                       
 
e.
Required After-tax Contributions
 
o
o
o
o
o
n/a
n/a
n/a
                       
 
f.
Rollover Contributions
 
o
x
o
o
o
n/a
n/a
n/a
                       
 
g.
Vested Matching (Formula 1)
 
o
n/a
x
o
x
x
o
o
                       
 
h.
Vested Matching (Formula 2)
 
o
n/a
o
o
o
o
o
o
                       
 
i.
Vested Non-Elective (Formula 1)
 
o
n/a
o
o
o
o
o
o
                       
 
j.
Vested Non-Elective (Formula 2)
 
o
n/a
o
o
o
o
o
o
                       
 
k.
Safe Harbor Matching
 
o
n/a
n/a
o
o
n/a
n/a
n/a
             
o
o
     
 
l.
Safe Harbor Non-Elective
 
o
n/a
n/a
o
o
n/a
n/a
n/a
             
o
o
     
 
m.
Qualified Non-Elective
 
o
n/a
n/a
o
o
n/a
n/a
n/a
             
o
o
     
 
n.
Qualified Matching
 
o
n/a
n/a
o
o
n/a
n/a
n/a
 
 
30  401(k) NS AA #010
 
 
         
   
Withdrawal Restriction Key
         
   
A.
Not available for in-service withdrawals.
         
   
B.
Available for in-service withdrawals without restrictions.
         
   
C.
Participants having completed five (5) years of Plan participation may elect to withdraw all or any part of their Vested Account Balance.
         
   
D.
Participants may withdraw all or any part of their Account Balance after having attained the Plan’s Normal Retirement Age (Normal Retirement Age cannot be less than age 59½ for in-service withdrawal of Elective Deferrals, Roth Elective Deferrals, Safe Harbor Contributions, QMACs or QNECs).
         
   
E.
Participants may withdraw all or any part of their Vested Account Balance after having attained age 59.5 (not less than age 59½).
         
   
F.
Participants may elect to withdraw all or any part of their Vested Account Balance which has been credited to their account for a period in excess of two (2) years.
         
   
G.
Available for withdrawal only if the Participant is 100% vested (an election at (C), (D), (E) or (F) must also be made).
         
   
H.
All requirements selected in (C) through (G) above must be satisfied prior to a distribution being made from the Plan.
         
 
o
3.
In-service withdrawals may be made to Participants who have attained age 70½.
         
 
B.
Hardship Withdrawals:
         
   
Prior to age 59½, a Participant may withdraw balances attributable to Elective Deferrals (including Roth Elective Deferrals, if applicable) for reason of Hardship only. Safe Harbor Contributions, Qualified Matching Contributions, and Qualified Non-Elective Contributions are not available for Hardship distributions.
         
 
o
1.
Hardship withdrawals are not permitted in the Plan.
         
 
x
2.
Hardship withdrawals are permitted in the Plan and will be taken from the Participant’s account as follows (select one or more of these options):
         
   
o
a.
Participants may withdraw Elective Deferrals.
         
   
x
b.
Participants may withdraw Elective Deferrals and any earnings credited as of December 31, 1988 (or if later, the end of the last Plan Year ending before July 1, 1989).
         
   
o
c.
Participants may withdraw Roth Elective Deferrals.
 
 
31  401(k) NS AA #010
 
 
         
 
 
x
d.
Participants may withdraw Rollover Contributions plus their earnings.
         
 
 
o
e.
Participants may withdraw vested Non-Elective Contributions (Formula 1) plus their earnings.
         
 
 
o
f.
Participants may withdraw vested Non-Elective Contributions (Formula 2) plus their earnings.
         
 
 
o
g.
Participants may withdraw fully vested Non-Elective Contributions (Formula 1) plus their earnings.
         
 
 
o
h.
Participants may withdraw fully vested Non-Elective Contributions (Formula 2) plus their earnings.
         
 
 
x
i.
Participants may withdraw vested Employer Matching Contributions (Formula 1) plus their earnings.
         
 
 
o
j.
Participants may withdraw vested Employer Matching Contributions (Formula 2) plus their earnings.
         
 
 
o
k.
Participants may withdraw Qualified Matching Contributions and Qualified Non-Elective Contributions plus their earnings, and the earnings on Elective Deferrals which have been credited to the Participant’s account as of December 31, 1988 (or if later, the end of the last Plan Year ending before July 1, 1989).
         
XIV.
LOAN PROVISIONS
         
o
A.
Participant loans are not available from the Plan.
         
x
B.
Participant loans are permitted in accordance with the Employer’s established loan procedures.
         
x
C.
Loan payments will be suspended under the Plan as permitted under Code Section 414(u) in compliance with the Uniformed Services Employment and Reemployment Rights Act of 1994.
         
XV.
INVESTMENT MANAGEMENT
         
 
A.
Investment Management Responsibility:
         
 
o
1. The Employer shall appoint a discretionary Trustee to manage the assets of the Plan.
         
 
o
2.
The Employer shall retain investment management responsibility and/or authority. Unless otherwise appointed, the Trustee shall act in a nondiscretionary capacity.
         
 
x
3.
The party designated below shall be responsible for the investment of the Participant’s account. By selecting a box, the Employer is making a designation as to who will have authority to issue investment directives with respect to the specified contribution type (check all applicable boxes ):
 
       
Trustee
 
Employer
 
Participant
                 
 
a.
All Contributions
 
n/a
 
n/a
 
[x]
                 
 
b.
Elective Deferrals/Roth Elective Deferrals
 
o
 
o
 
o
                 
 
c.
Voluntary After-tax Contributions
 
o
 
o
 
o
                 
 
d.
Required After-tax Contributions
 
o
 
o
 
o
                 
 
e.
Safe Harbor Contributions
 
o
 
o
 
o
                 
 
f.
Matching Contributions (Formula 1)
 
o
 
o
 
o
                 
 
g.
Matching Contributions (Formula 2)
 
o
 
o
 
o
                 
 
h.
QMACs
 
o
 
o
 
o
                 
 
i.
QNECs
 
o
 
o
 
o
                 
 
j.
Non-Elective Contributions (Formula 1)
 
o
 
o
 
o
                 
 
k.
Non-Elective Contributions (Formula 2)
 
o
 
o
 
o
                 
 
l.
Rollover Contributions
 
o
 
o
 
o
                 
 
m.
Deemed IRA Contributions
 
o
 
o
 
o
 
 
32  401(k) NS AA #010
 
 
         
       
To the extent that Participant self-direction was previously permitted, the Employer shall have the right to either make the assets part of the general fund, or leave them as self-directed subject to the provisions of the Basic Plan Document #01.
         
 
B.
Limitations on Participant Directed Investments:
         
 
x
1.
Participants are permitted to invest among only those investment alternatives made available by the Employer under the Plan.
         
 
o
2.
Participants are permitted to invest in any investment alternative permitted under the Basic Plan Document #01
         
o
C.
Insurance:
         
   
The Plan permits life insurance as an investment alternative.
         
XVI.
DISTRIBUTION OPTIONS
         
 
A.
Timing of Distributions [both (1) and (2) must be completed] :
         
   
1.
Distributions payable as a result of termination for reasons other than death, Disability or retirement shall be paid c [select from the list at (A)(3) below] .
         
   
2.
Distributions payable as a result of termination for death, Disability or retirement shall be paid c [select from the list at (A)(3) below].
         
   
3.
Distribution Options:
         
     
a.
As soon as administratively feasible on or after the Valuation Date following the date on which a distribution is requested or is otherwise payable.
         
     
b.
As soon as administratively feasible following the close of the Plan Year during which a distribution is requested or is otherwise payable.
         
     
c.
As soon as administratively feasible following the date on which a distribution is requested or is otherwise payable. (This option is recommended for daily valuation plans.)
         
     
d.
As soon as administratively feasible after the close of the Plan Year during which the Participant incurs ___________ [cannot be more than five (5)] consecutive one (1) year Breaks in Service.
         
     
e.
Only after the Participant has attained the Plan’s Normal Retirement Age or Early Retirement Age, if applicable.
 
 
33  401(k) NS AA #010
 


 
B.
Required Beginning Date:
     
   
The Required Beginning Date of a Participant with respect to the Plan is (select one from below):
     
 
o
1.
The April 1 of the calendar year following the calendar year in which the Participant attains age 70½
       
 
x
2.
The April 1 of the calendar year following the calendar year in which the Participant attains age 70½ except that distributions to a Participant (other than a 5% owner) with respect to benefits accrued after the later of the adoption of this Plan or Effective Date of the amendment of this Plan must commence no later than the April 1 of the calendar year following the later of the calendar year in which the Participant attains age 70½ or the calendar year in which the Participant retires.
       
 
o
3.
The later of the April 1 of the calendar year following the calendar year in which the Participant attains age 70½ or retires except that distributions to a 5% owner must commence by the April 1 of the calendar year following the calendar year in which the Participant attains age 70½.
       
   
Option (3) may only be elected if (i) it corresponds to an amendment previously made to the Plan pursuant to Regulations Section 1.411(d)-4, Q&A-10(b), or (ii) it does not eliminate an age 70½ distribution option as described in the preceding Regulations because either (A) the Plan is a new Plan or (B) Section XIII(A)(3) is checked or the Plan already offers a pre-retirement distribution at least as generous as Section XIII(A)(3).
       
 
C.
Minimum Distribution Requirements:
       
 
o
1.
Election to Apply Five (5) Year Rule to Distributions to Designated Beneficiaries: If the Participant dies before distributions begin and there is a Designated Beneficiary, distribution to the Designated Beneficiary is not required to begin by the date specified in the Basic Plan Document #01 but the Participant’s entire interest will be distributed to the Designated Beneficiary by December 31 of the calendar year containing the fifth anniversary of the Participant’s death.
       
 
o
2.
Election to Allow Participants or Beneficiaries to Elect Five (5) Year Rule: Participants or Beneficiaries may elect on an individual basis whether the five (5) year rule or the life expectancy rule described in the Basic Plan Document #01 applies to distributions after the death of a Participant who has a Designated Beneficiary. The election must be made no later than the earlier of September 30 of the calendar year in which distribution would be required to begin under the Plan, or by September 30 of the calendar year which contains the fifth anniversary of the Participant’s (or, if applicable, surviving Spouse’s) death. If neither the Participant nor Beneficiary makes an election under this paragraph, distributions will be made in accordance with Article VII of the Basic Plan Document #01 and, if applicable, the elections in Section XVI(C)(1) above.
       
 
D.
Forms of Payment (select all that apply) :
       
   
The normal form of payment is determined at Section III(J) of this Adoption Agreement. If option (1) or no selection is made in Section III(J), then options (4), (5) and (6) in this section cannot be selected.
       
 
x
1.
Lump sum.
       
 
x
2.
Installment payments.
       
 
x
3.
Partial payments; the minimum amount will be $ 1000 .
       
 
o
4.
Life annuity.
       
 
o
5.
Term certain annuity with payments guaranteed for ________ years [not to exceed twenty (20)].
       
 
o
6.
Joint and [   ] 50%, [   ] 66-2/3%, [   ] 75% or [   ] 100% survivor annuity.
 
 
 
34  401(k) NS AA #010
 
 
 
E.
Type of Payment (select all that apply) :
       
 
x
1.
Cash.
           
 
x
2.
Employer securities.
       
 
o
3.
Other marketable securities.
       
 
o
4.
Other: _____________________________________________________________ (fill in the blank with the type of other in-kind distributions allowed under the Plan).
           
 
F.
Application of Involuntary Cash-out Provisions:
           
 
o
1.
The Plan shall not make involuntary cash-outs to any terminated vested Participant. Distributions will only be made with the consent of the Participant.
           
 
x
2.
The Plan shall make involuntary cash-outs to a terminated vested Participant as follows:
           
   
o
a.
The Plan shall make involuntary cash-out distributions of Vested Account Balances of less than $200. Distribution of amounts $200 or greater shall only be made with the consent of the Participant.
         
   
x
b.
The Plan shall make involuntary cash-out distributions of Vested Account Balances of $1,000 or less. Distribution of amounts greater than $1,000 shall only be made with the consent of the Participant.
         
   
3.
When determining the value of the Participant’s nonforfeitable account balance for purposes of the Plan’s involuntary cash-out rules, the Plan elects to:
           
   
o
a.
exclude Rollover Contributions.
           
        
x
b.
include Rollover Contributions.
         
      If no selection is made, the Plan will exclude Rollover Contributions when determining the value of the Participant’s nonforfeitable account balance for involuntary cash-out purposes. Rollover Contributions, if any, will always be included when determining whether the $1,000 threshold has been exceeded.
     
 
G.
Automatic Rollovers:
           
   
Do not complete if a selection has been made at Section XVI(F)(1) or (2) above.
       
 
o
1.
The Plan shall make automatic rollovers of Vested Account Balances that are greater than $1,000 but are not more than $5,000 in accordance with the provisions of Article VI of the Basic Plan Document #01.
           
 
o
2.
The Plan shall make automatic rollovers of Vested Account Balances that are not more than $5,000 in accordance with the provisions of Article VI of the Basic Plan Document #01.
           
 
H.
Distribution Upon Severance from Employment:
           
 
o
1.
Not applicable.
           
 
x
2.
Distribution upon severance from employment as described in the Basic Plan Document #01 shall apply for distributions after December 31, 2001 regardless of when the severance from employment occurred.
           
 
o
3.
Distribution upon severance from employment as described in the Basic Plan Document #01 shall apply for distributions after ___________________ (no earlier than December 31, 2001) for severance from employment occurring after _______________ (enter the Effective Date if different than the Effective Date above).
 
 
35  401(k) NS AA #010
 
 
XVII.
SPONSOR INFORMATION AND ACCEPTANCE
   
 
This Plan may not be used and shall not be deemed to be a Prototype Plan unless an authorized representative of the Sponsor has acknowledged the use of the Plan. Such acknowledgment that the Employer is using the Plan does not represent that the Adoption Agreement (as completed) and Basic Plan Document #01 have been reviewed by a representative of the Sponsor or constitute a qualified retirement plan.
   
 
Acknowledged and accepted by the Sponsor this 22 nd day of October, 2012.
 
Name:
Robert D. Alin
 
     
Title:
1st SVP, Secretary & General Counsel
 
     
Signature:
/s/ Robert D. Alin  
     
Questions concerning the language contained in and qualification of the Prototype should be addressed to:
 
 
(Position): _________________________________________
 
(Phone Number): _________________________________________
 
 
In the event that the Sponsor amends, discontinues or abandons this Prototype Plan, notification will be provided to the Employer’s address provided on the first page of this Adoption Agreement.
 
 
36  401(k) NS AA #010
 
 
XVIII.
SIGNATURES
   
 
Completion of this Adoption Agreement requires consideration of complex tax and legal issues. The Employer should consult with or should obtain the advice of its legal counsel and/or tax advisor before executing this Adoption Agreement. By executing this Adoption Agreement, the Employer acknowledges that it is a legal document with significant tax and legal ramifications. The Employer understands that its failure to properly complete or amend this Adoption Agreement may result in failure of the Plan to qualify or in disqualification of the Plan. Neither the Sponsor nor any of its agents or affiliates assumes any responsibility for the completion and operation of the Plan established under this Adoption Agreement and Basic Plan Document #01.
   
A.
Employer:
   
 
This Adoption Agreement and the corresponding provisions of Basic Plan Document #01 are adopted by the Employer this__________ day of _____________________, ___________.
 
 
Executed on behalf of the Employer by:
 
     
 
Title:
 
     
 
Signature:
 
   
 
Employer’s Reliance : The adopting Employer may rely on an Opinion Letter issued by the Internal Revenue Service as evidence that the Plan is qualified under Code Section 401 except to the extent provided in Revenue Procedure 2005-16. The Employer may not rely on the Opinion Letter in certain other circumstances or with respect to certain qualification requirements, which are specified in the Opinion Letter issued with respect to the Plan and in Revenue Procedure 2005-16. In order to have reliance in such circumstances or with respect to such qualification requirements, application for a determination letter must be made to Employee Plans Determinations of the Internal Revenue Service. This Adoption Agreement may only be used in conjunction with Basic Plan Document #01.
 
 
37  401(k) NS AA #010
 
 
     
 
B.
Trust Agreement/Custodial Agreement:
     
 
o
Plan assets will be invested in group annuity contracts and the terms of the contract(s) will apply.
     
 
o
Plan assets are held in a tax qualified Trust. The Trust provisions used will be as contained in the Basic Plan Document #01.
     
 
x
Plan assets are held in a tax qualified Trust. The Trust provisions used will be as contained in the accompanying pre-approved executed Trust Agreement between the Employer and the Trustee attached hereto.
     
 
o
Plan assets are being held in a Custodial Account arrangement. The Custodial Account provisions used will be as contained in the Basic Plan Document #01.
     
 
x
Plan assets are being held in a Custodial Account arrangement. The Custodial Account provisions used will be as contained in the accompanying pre-approved executed Custodial Account Agreement between the Employer and the Custodian attached hereto.
     
 
C.
Trustee:
     
 
x
The Trustee appointed shall act in the capacity of a non-discretionary directed Trustee.
     
 
o
The Trustee appointed shall act in the capacity of a discretionary Trustee.

Name and address of Trustee:
   

Pentegra Trust Company
c/o Pentegra Services, Inc.
108 Corporate Park Drive
White Plains, NY 10604
     
   
The Employer’s Plan as contained herein is accepted by the Trustee this ____________ day of  ____________________, ___________.
 
 
Accepted on behalf of the Trustee by:
 
     
 
Title:
 
     
 
Signature:
 
     
 
Accepted on behalf of the Trustee by:
 
     
 
Title:
 
     
 
Signature:
 
     
 
Accepted on behalf of the Trustee by:
 
     
 
Title:
 
     
 
Signature:
 
 
 
38  401(k) NS AA #010
 
 
       
 
D.
Custodian:
     
   
Name and address of Custodian:
     
   
Reliance Trust Company
1100 Abernathy Drive NE
Suite 400
Atlanta, GA 30328
     
   
The Employer’s Plan as contained herein is accepted by the Custodian this __________ day of ________________, __________.
     
   
Accepted on behalf of the Custodian by:
 
       
   
Title:
 
       
   
Signature:
 
 
 
39  401(k) NS AA #010
 
 
PARTICIPATION AGREEMENT
 
Each Participating Employer must execute a separate Participation Agreement. If not applicable, do not complete this Participation Agreement.
 
By executing this Participation Agreement, the undersigned Employer elects to become a Participating Employer in the Plan and accompanying Adoption Agreement as if the Participating Employer were a signatory to the Adoption Agreement. The Participating Employer accepts, and agrees to be bound by, all of the elections granted under the provisions of the Prototype Plan as made by the signatory sponsoring Employer in Section XVIII(A) of the Adoption Agreement. Further, the Participating Employer hereby appoints the signatory sponsoring Employer as its attorney in fact for the purpose of adopting on its behalf of all future amendments whether required or voluntary and any applicable corresponding documents (e.g., Loan Policy, QDRO procedures, Trust Agreement). This includes the adoption of all future Model Amendments to this Prototype Plan which are required by the U.S. Department of the Treasury or the Internal Revenue Service as a result of a modification or amendment of applicable Federal laws or regulations that become effective subsequent to the execution of this Participation Agreement.
       
A.
PARTICIPATING EMPLOYER:
   
 
Name and address of any Participating Employer.
   
       
 
First Northwest Bancorp
   
       
 
Phone Number: __________________
 
Tax ID Number: _________________
       
B.
EFFECTIVE DATE:
   
 
The Effective Date of the Plan for the Participating Employer is:    December 1, 2012 .
       
x
This is an adoption of a new plan by the Participating Employer.
       
o
This is an adoption of an amendment and/or restatement of a plan currently maintained by the Participating Employer identified as follows:
       
 
Name of Plan: First Federal Savings & Loan Association of Port Angeles 401(k) Plan
       
 
Original Effective Date: December 1, 2012
       
C.
SIGNATURES:
   
 
Executed on behalf of the Participating Employer by:
   
       
 
Title:
   
       
 
Signature:
   
       
 
Executed on behalf of the Signatory Sponsoring Employer by:
   
       
 
Title:
   
       
 
Signature:
   
       
 
Executed on behalf of the Trustee by:
   
       
 
Title:
   
       
 
Signature:
   
 
 
40  401(k) NS AA #010
 
 
SCHEDULE A
 
PROTECTED BENEFITS
 
This Schedule describes Code Section 411(d)(6) protected benefits included in the adopting Employer’s prior plan document that are not available in this Prototype Defined Contribution Plan, Basic Plan Document #01. Complete as applicable.
       
1.
Plan Provision:
 
     
     
     
     
     
 
Effective Date:
   
     
2.
Plan Provision:
 
     
     
     
     
     
 
Effective Date:
   
     
3.
Plan Provision:
 
     
     
     
     
     
 
Effective Date:
   
     
4.
Plan Provision:
 
     
     
     
     
     
 
Effective Date:
   
     
5.
Plan Provision:
 
     
     
     
     
     
 
Effective Date:
   
 
 
41  401(k) NS AA #010
 
 
SCHEDULE B
 
PRIOR PLAN PROVISIONS
 
This Schedule should be used by the adopting Employer if a prior plan contains provisions not found in this Prototype Defined Contribution Plan, Basic Plan Document #01, or where the Employer wishes to document transactions or historical provisions of the Employer’s Plan.
       
1.
Plan Provision:
 
     
     
     
     
     
 
Effective Date:
   
     
2.
Plan Provision:
 
     
     
     
     
     
 
Effective Date:
   
     
3.
Plan Provision:
 
     
     
     
     
     
 
Effective Date:
   
     
4.
Plan Provision:
 
     
     
     
     
     
 
Effective Date:
   
     
5.
Plan Provision:
 
     
     
     
     
     
 
Effective Date:
   
 
 
42  401(k) NS AA #010
 
 
SCHEDULE C
 
SAFE HARBOR ELECTIONS FOR FLEXIBLE NON-ELECTIVE CONTRIBUTION
 
The following elections are made with regard to the Plan’s Safe Harbor status pursuant to Section VII herein. For Plan Years indicated below, the Plan hereby invokes a Safe Harbor status in accordance with IRS Notices 98-52 and 2000-3.
 
For all Plan Years in which this Safe Harbor election is being made, the limitations and restrictions found in Section VII herein apply.
   
1.
For the Plan Year beginning _____ and ending _____, the Employer hereby invokes a Safe Harbor status as provided in IRS Notice 2000-3. The Safe Harbor Contribution will be an amount equal to _____% (not less than 3%) of Compensation. This election is made on this _____ day of _____, _____ (date may not be later than 30 days prior to the end of the Plan Year in which such election is being made).
   
2.
For the Plan Year beginning _____ and ending _____, the Employer hereby invokes a Safe Harbor status as provided in IRS Notice 2000-3. The Safe Harbor Contribution will be an amount equal to _____% (not less than 3%) of Compensation. This election is made on this _____ day of _____, _____ (date may not be later than 30 days prior to the end of the Plan Year in which such election is being made).
   
3.
For the Plan Year beginning _____ and ending _____, the Employer hereby invokes a Safe Harbor status as provided in IRS Notice 2000-3. The Safe Harbor Contribution will be an amount equal to _____% (not less than 3%) of Compensation. This election is made on this _____ day of _____, _____ (date may not be later than 30 days prior to the end of the Plan Year in which such election is being made).
   
4.
For the Plan Year beginning _____ and ending _____, the Employer hereby invokes a Safe Harbor status as provided in IRS Notice 2000-3. The Safe Harbor Contribution will be an amount equal to _____% (not less than 3%) of Compensation. This election is made on this _____ day of _____, _____ (date may not be later than 30 days prior to the end of the Plan Year in which such election is being made).
   
5.
For the Plan Year beginning _____ and ending _____, the Employer hereby invokes a Safe Harbor status as provided in IRS Notice 2000-3. The Safe Harbor Contribution will be an amount equal to _____% (not less than 3%) of Compensation. This election is made on this _____ day of _____, _____ (date may not be later than 30 days prior to the end of the Plan Year in which such election is being made).
 
 
43  401(k) NS AA #010
 
 
SCHEDULE D
 
COLLECTIVE AND COMMINGLED FUNDS
 
The Trustee is authorized to invest all or any part of the Fund in the following Collective and Commingled Funds as provided for in the Basic Plan Document #01:
 
1.
 
2.
 
3.
 
4.
 
5.
 
6.
 
7.
 
8.
 
9.
 
10.
 
 
44  401(k) NS AA #010
 
 
SCHEDULE E
MISCELLANEOUS ADMINISTRATIVE ELECTIONS
 
The following elections are made with regard to the administration of the Plan:
         
o
1.
ERISA Section 404(c): The Employer intends to be covered by the fiduciary liability provisions with respect to Participant-directed investments under ERISA Section 404(c). Under the terms of this Plan, Participants (or their Beneficiaries) have a reasonable opportunity to give instructions to the Plan Administrator in accordance with the policy set by the Plan Administrator (whether written, oral, or in electronic form) regarding the choice of investment of their account balance. The Plan Administrator is obligated to comply with the Participant’s or Beneficiary’s investment instructions unless complying with such instructions would result in a prohibited transaction under the Code, ERISA or the Department of Labor, violate the Plan document, or jeopardize the Plan’s tax-qualified status.
     
x
2.
Fees: Listed below are the charges your account will incur as a condition of the receipt of a benefit under the Plan, depending upon the transaction involved.
 
 
x
a.
Participants have the ability to take a loan from the Plan. [x] There will be a loan set-up fee of $50 paid from the account prior to obtaining a loan from the Plan. [x] $40 will be charged on an annual basis until the loan is paid in full. [x] The loan set-up charge is deducted from the Participant’s account. All other costs of administering the Plan will be paid by the Employer or from Plan assets.
       
 
x
b.
The costs of administering the Plan are shared between Participants and the Employer.
       
 
o
c.
A service fee equal to $___ / ___% of a Participant’s account balance will be charged per [ ] Plan quarter [ ] Plan Year.
       
 
o
d.
All costs of administering the Plan will be paid by the Employer or from Plan assets.
       
 
o
e.
In order to maintain a self-directed brokerage option, Participants will be charged an initial fee of $_______ [ ] and annual fee of $_________.
       
 
o
f.
To obtain a Hardship distribution, Participants will incur a charge of $_________.
       
 
x
g.
Qualified Domestic Relations Order (QDRO) presented to the Plan for payment will be charged $500 to the Participant’s/Alternate Payee’s account for processing.
       
 
o
h.
Other:
 
o
3.
Automatic Rollover Of Distributions: If a Plan Participant does not elect to take a distribution and include it in income or have the distribution rolled over to either a qualified retirement plan or an Individual Retirement Account (“IRA”), the Plan is required to make a Direct Rollover of the distribution to an IRA. The Employer as Plan Sponsor has the authority to execute the documents necessary to establish the IRA account, and once established, the Trustee/Issuer of the IRA will provide the Participant with a Disclosure Statement detailing the terms and conditions as well as any fees imposed on the IRA, including the procedures regarding the seven (7) day revocation period. The Plan has selected the following IRA Trustee/Issuer:

 
Name:
_______________________________________________________________________________________________________
     
 
Address:
 
     
 
Phone:
_______________________________________________________________________________________________________
   
 
The initial IRA setup fee shall be: _______________________________________________________________________________________
   
 
The initial IRA setup fee shall be paid by: ________________________________________________________________________________
   
 
The IRA Provider’s annual fee shall be: __________________________________________________________________________________
   
 
The IRA funds shall be invested in:
 
 
45  401(k) NS AA #010
 
 
RESOLUTION OF THE BOARD OF DIRECTORS
OF
First Federal Savings & Loan Association of Port Angeles
 
I, _____________________________, Secretary of First Federal Savings & Loan Association of Port Angeles (the “Corporation”), hereby certify that the following is a true copy of resolutions duly adopted by the Board of Directors of the Corporation at a meeting held on __________________ at which a quorum was present and acting throughout.
 
WHEREAS , the Corporation previously participated in the Pentegra Defined Contribution Plan for Financial Institutions (a multiple employer plan) and now desires to adopt a single employer qualified retirement plan;
 
NOW THEREFORE , be it resolved, that the Corporation hereby adopts a 401(k) plan in the form of Pentegra Retirement Services Prototype Defined Contribution Plan and Trust and the accompanying Adoption Agreement filed with the minutes of this meeting (the “Plan”), and appoints the entity specified in the Adoption Agreement as Trustee(s) effective as of December 1, 2012 ;
 
RESOLVED , that the proper officers of the Corporation are hereby authorized and directed to execute all necessary documents setting forth the terms and conditions of the Corporation’s Plan, and each of them is hereby authorized and directed in the name of and on behalf of the Corporation, to execute and deliver the Adoption Agreement and to do all other things, including the execution of any other documents which they deem necessary or appropriate to implement the foregoing resolution or otherwise pertaining to the Plan;
 
RESOLVED , that the Corporation hereby designates the following individual(s) or position(s) to serve as the Plan Administrator under the terms of the Plan;
 
RESOLVED , that the Treasurer is hereby authorized and directed to remit to the Plan such sums in accordance with the terms of the Plan from year to year until otherwise directed by the Board.
 
IN WITNESS WHEREOF , I have hereunto set my hand and affixed the seal of the Corporation on the _______ day of __________________.
   
   
Secretary
 
   
Corporate Seal
 
 
 
 
 46   401(k) NS AA #010
 
Exhibit 21
 
Subsidiaries of the Registrant
 
 Parent  
 
First Northwest Bancorp
   
    Percentage
 
  Jurisdiction or  
 Subsidiaries (a)  
              
  of Ownership
 
    State of Incorporation
 
     
First Federal Savings and Loan Association of Port Angeles
100%
Washington
     
North Olympic Peninsula Services, Inc. (1)
100%
Washington
     
Craft3 Development, IV, LLC
(2)
Washington
     
Craft3 Investment IV, LLC
(2)
Washington
 
(1)
Wholly-owned subsidiary of First Federal Savings and Loan Association of Port Angeles; inactive since 2003.

(2)
Two limited liability companies form in 2008 through partnership with Craft3, Inc., a Washington nonprofit corporation, for the purpose of participating in a new markets tax credit program.


 
 
GRAPHIC www.mossadams.com
 
Exhibit 23.1
 

 

 
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 

 
We consent to the reference to our firm under the caption “Experts” and to the use of our report dated August 24, 2012, with respect to the consolidated financial statements of First Federal Savings and Loan Association of Port Angeles and Subsidiaries as of June 30, 2012 and 2011, and for each of the three years in the period ended June 30, 2012, which is included in the Registration Statement (Form S-1) of First Northwest Bancorp and related Prospectus for the registration of between 5,950,000 and 9,257,500 shares of common stock.
 
/s/ Moss Adams LLP
 
 
Everett, Washington
November 21, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
GRAPHIC
 
 
Exhibit 23.5
 
RP ®   FINANCIAL, LC.  
Advisory | Planning | Valuation  
   
  November 21, 2012
 
Board of Directors
First Federal Savings and Loan Association of Port Angeles
105 West Eighth Street
Port Angeles, Washington  98362
 
Members of the Board:
 
We hereby consent to the use of our firm’s name in the Application for Approval of Conversion and any amendments thereto to be filed with the Washington Department of Financial Institutions, the Federal Deposit Insurance Corporation, in the Registration Statement on Form S-1 and any amendments thereto to be filed with the Securities and Exchange Commission.  We also hereby consent to the inclusion of, summary of and references to our Valuation Appraisal Report and any Valuation Appraisal Report Updates in such filings including the prospectus of First Northwest Bancorp and to the reference to our firm under the heading “Experts” in the prospectus.
 
   Sincerely,  
   
   /s/ RP Financial, LC.  
  RP Financial, LC.
 
   
Washington Headquarters
 
Three Ballston Plaza
Telephone:  (703) 528-1700
1100 North Glebe Road, Suite 600
Fax No.:  (703) 528-1788
Arlington, VA 22201
Toll-Free No.:  (866) 723-0594
www.rpfinancial.com
E-Mail: mail@rpfinancial.com
 
 
Exhibit 99.1
 
First Federal Savings and
  Loan Association of Port Angeles
Stock Information Center
105 West 8th St., Port Angeles, WA 98362
xxx-xxx-xxxx
Expiration Date
for Stock Order Forms:
___day, ________ __, 2013
5:00 p.m. Pacific Time
(received not postmarked)
IMPORTANT: A properly completed original stock order form must be used to subscribe for common stock.  Copies of this form are not required to be accepted.  Please read the Stock Ownership Guide and Stock Order Form Instructions as you complete this form.
(1) Number of Shares
Subscription
Price
X 10.00 =
 
(2) Total Payment Due
 
Minimum number of shares: 25 shares ($250)
Maximum number of shares: 20,000 shares ($200,000)
Maximum number of shares for associates or group: 40,000 shares ($400,000)
See Instructions.
   
$
   
 
(3) Employee/Officer/Director Information
o Check here if you are an employee, officer or director of First Federal or a member of such person’s immediate family living in the same household.
(4) Method of Payment by Check
Enclosed is a check, bank draft or money order payable to First Northwest Bancorp in the amount indicated here.
Total
Check
Amount
$
 
   ▪
(5) Method of Payment by Withdrawal - The undersigned authorizes withdrawal from the following account(s) at First Federal.  There is no early withdrawal penalty for this form of payment.  Individual Retirement Accounts maintained at First Federal cannot be used unless special transfer arrangements are made.
Bank Use
Account Number(s) To Withdraw
$ Withdrawal Amount
 
 
$
 
   ▪

  		 
$
 
   ▪
 
(6) Purchaser Information
Subscription Offering
o   a. Check here if you are an Eligible Account Holder with a deposit account(s) totaling $50.00 or more on March 31, 2011.
o b. Check here if you are a Supplemental Eligible Account Holder with a deposit account(s) totaling $50.00 or more on _________ __, 2012 but are not an Eligible Account Holder.
o c. Check here if you are a Depositor or Borrower with us as of the close of business on ________ __, 2012 to the extent not already included in a prior category.
Community Offering
o  d. Check here if you are a community member (Indicate county of residence in #9 below).
 
Account Information
List below all accounts in which you had an ownership interest as of the applicable eligibility date as indicated in a, b or c above.   Failure to list all your eligible accounts, or providing incorrect information, may result in the loss of part or all of your subscription rights .  Use reverse side for additional space.
Bank Use
Account Number(s)
Account Title (Name(s) on Account)
     
     
     
 
(7) Form of Stock Ownership & SS# or Tax ID#:
   SS#/Tax ID#      
  (ARROW)
 o Individual
  o     Joint Tenants
o     Tenants in Common               
o     Fiduciary (i.e., trust, estate)
 o Uniform Transfers to Minors Act
          (Indicate SS# of Minor only)
o     Company/Corporation/
       Partnership
o     IRA or other qualified plan
(Both Tax ID# & SS# for IRAs)
   SS#/Tax ID#
  (ARROW)
(8) Stock Registration & Address:
Name and address to appear on stock certificate .   Shares must be registered as reflected on your qualifying account.  Adding or deleting a name or otherwise altering the form of beneficial ownership of a qualifying account will result in a loss of your subscription rights (with certain exceptions for IRA and Keogh purchases).
Name:
 
Name
Continued:
 
Mail to-
Street:
 
City:
 
   State:
 
   Zip Code:
 
(9) Telephone
Daytime/Evening
  (            )                          --
  (             )                             --
   County of  
  Residence
 
(10) Associates/Acting in Concert
o   Check here and complete the reverse side of this form if you or any associates or persons acting in concert with you have submitted other orders for shares.
(11) Acknowledgement - To be effective, this stock order form must be properly completed and physically received (not postmarked) by First Northwest Bancorp no later than 5:00 p.m., Pacific Time, on ____________ xx, 2013, unless extended; otherwise this stock order form and all subscription rights will be void.  The undersigned agrees that after receipt by First Northwest Bancorp, this stock order form may not be modified, withdrawn or canceled without First Northwest Bancorp’s consent and if authorization to withdraw from deposit accounts at First Federal Savings and Loan Association of Port Angeles has been given as payment for shares, the amount authorized for withdrawal shall not otherwise be available for withdrawal by the undersigned. Under penalty of perjury, I hereby certify that the Social Security or Tax ID Number and the information provided on this stock order form are true, correct and complete and that I am not subject to back-up withholding.  It is understood that this stock order form will be accepted in accordance with, and subject to, the terms and conditions of the plan of conversion of   First Federal Savings and Loan Association of Port Angeles described in the accompanying prospectus.
Federal regulations prohibit any person from transferring, or entering into any agreement, directly or indirectly, to transfer the legal or beneficial ownership of subscription rights or the underlying securities to the account of another.  First Federal Savings and Loan Association of Port Angeles and First Northwest Bancorp will pursue any and all legal and equitable remedies in the event they become aware of the transfer of subscription rights and will not honor orders known by them to involve such transfer.  Under penalty of perjury, I certify that I am purchasing shares solely for my account and that there is no agreement or understanding regarding the sale or transfer of such shares, or my right to subscribe for shares .
By signing below, I also acknowledge that I have read the Certification Form on the reverse side of this form.
Bank Use
                 
 

 
     Signature                                                                                   Date            
     (ARROW)
     Signature                                                                                                               Date
     (ARROW)
         
 
 
 
 
Item (6) Purchaser Account Information continued:
Bank Use
Account Number(s)
Account Title (Name(s) on Account)
     
     
     
     
     
 
Item (10) Associates/Acting In Concert continued:
If you checked the box in item #10 on the reverse side of this form, list below all other orders submitted by you or associates (as defined below) or by persons acting in concert with you (also defined below).
Name(s) listed on other stock order forms
Number of shares ordered
 
Name(s) listed on other stock order forms
Number of shares ordered
         
         
         
 
Associate - The term “associate” of a particular person means:
 
(1) a corporation or organization other than First Federal Savings and Loan Association of Port Angeles, First Northwest Bancorp or a majority-owned subsidiary of First Federal Savings and Loan Association of Port Angeles, of which a person is a senior officer or partner or is, directly or indirectly, the beneficial owner of 10% or more of any class of equity securities of such corporation or organization;
 
(2) a trust or other estate in which a person has a substantial beneficial interest or as to which a person serves as a trustee or a fiduciary; and
 
(3) any person who is related by blood or marriage to such person and who lives in the same home as such person or who is a director or senior officer of First Federal Savings and Loan Association of Port Angeles or First Northwest Bancorp , or any of their subsidiaries.
 
       Acting in concert – The term “acting in concert” means:
 
(1) knowing participation in a joint activity or interdependent conscious parallel action towards a common goal whether or not pursuant to an express agreement or understanding; or
 
(2) a combination or pooling of voting or other interests in the securities of an issuer for a common purpose pursuant to any contract, understanding, relationship, agreement or other arrangement, whether written or otherwise.
 
In general, a person who acts in concert with another party will also be deemed to be acting in concert with any person who is also acting in concert with that other party.
 
We may presume that certain persons are acting in concert based upon various facts, among other things, joint account relationships and the fact that such persons may have filed joint Schedules 13D or 13G with the Securities and Exchange Commission with respect to other companies.
 
CERTIFICATION FORM
I ACKNOWLEDGE THAT THIS SECURITY IS NOT A DEPOSIT OR ACCOUNT AND IS NOT FEDERALLY INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, AND IS NOT INSURED OR GUARANTEED BY FIRST NORTHWEST BANCORP, FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF PORT ANGELES, THE FEDERAL GOVERNMENT OR BY ANY GOVERNMENT AGENCY.  THE ENTIRE AMOUNT OF AN INVESTOR’S PRINCIPAL IS SUBJECT TO LOSS.
 
If anyone asserts that this security is federally insured or guaranteed, or is as safe as an insured deposit, I should call the Federal Deposit Insurance Corporation [DFI?] [Fed?] .
 
I further certify that, before purchasing the common stock, par value $0.01 per share, of First Northwest Bancorp (the “Company”), which will become the holding company for First Federal Savings and Loan Association of Port Angeles, I received a prospectus of the Company dated _____, 2013 relating to such offer of common stock.  The prospectus that I received contains disclosure concerning the nature of the common stock being offered by the Company and describes in the “Risk Factors” section beginning on page __, the risks involved in the investment in this common stock, including but not limited to the following:
 
  Risks Related to Our Business
 
1.
The current weak economic conditions in the market areas we serve may continue to adversely impact our earnings and could increase the credit risk associated with our loan portfolio.
 
 
2.
A current water conservation proposal could adversely affect the value of undeveloped lots in our market area.
 
 
3.
Our proposed strategy of pursuing acquisitions exposes us to financial, execution and operational risks that could adversely affect us.
 
 
4.
We may engage in FDIC-assisted transactions, which could present additional risks to our business.
 
 
5.
Our business may be adversely affected by credit risk associated with residential property.
 
 
6.
Our non-owner-occupied real estate loans may expose us to increased credit risk.
 
 
7.
A significant portion of our business involves commercial real estate lending which is subject to various risks that could adversely impact our results of operations and financial condition.
 
 
8.
Repayment of our commercial business loans is often dependent on the cash flows of the borrower, which may be unpredictable, and the collateral securing these loans may fluctuate in value.
 
 
9.
A portion of our loan portfolio is serviced by third parties, which may limit our ability to foreclose on such loans.
 
 
10.
Our lending limit may restrict our growth.
 
 
11.
Our allowance for loan losses may prove to be insufficient to absorb losses in our loan portfolio.
 
 
12.
Our independent public accounting firm has identified certain significant deficiencies in our internal controls over financial reporting. If we fail to remediate these internal control deficiencies, address the potential for future deficiencies and maintain an effective system of internal controls over financial reporting, we may not be able to accurately report our financial results.
 
 
13.
If our nonperforming assets increase, our earnings will be adversely affected.
 
 
14.
If our real estate owned is not properly valued or sufficiently reserved to cover actual losses, or if we are required to increase our valuation reserves, our earnings could be reduced.
 
 
15.
Impairment of our investment and mortgage-backed securities could require charges to earnings, which could result in a negative impact on our results of operations.
 
 
16.
Decreased volumes and lower gains on sales of mortgage loans sold could adversely impact our noninterest income.
 
 
17.
We use estimates in determining the fair value of certain assets, such as mortgage servicing rights. If our estimates prove to be incorrect, we may be required to write down the value of these assets which could adversely affect our earnings.
 
 
18.
New lines of business or new products and services may subject us to additional risk.
 
 
19.
If we are unable to effectively integrate new personnel hired to carry out our business plan our business may be adversely affected.
 
 
20.
We are subject to interest rate risk.
 
 
21.
Liquidity risk could impair our ability to fund operations and jeopardize our financial condition.
 
 
22.
We are dependent on the services of our president and chief executive officer and other members of our management team and a loss of these individuals may impair our operations and disrupt relationships with certain customers.
 
 
23.
We operate in a highly competitive industry.
 
 
24.
We operate in a highly regulated environment and may be adversely affected by changes in federal and state laws and regulations, including new financial reform legislation recently enacted by Congress that is expected to increase our costs of operations.
 
 
25.
The short-term and long-term impact of the changing regulatory capital requirements and anticipated new capital rules is uncertain.
 
 
26.
Increases in deposit insurance premiums and special FDIC assessments will negatively impact our earnings.
 
 
27.
If our investment in the Federal Home Loan Bank of Seattle becomes impaired, our earnings and shareholders’ equity could decrease.
 
 
28.
We rely on communications, information, operating and financial control systems technology from third-party service providers, and we may suffer an interruption in those systems.
 
 
29.
New or changes in existing tax, accounting, and regulatory rules and interpretations could significantly impact strategic initiatives, results of operations, cash flows, and financial condition.
 
 
30.
We participate in a multiple employer defined benefit pension plan for the benefit of our employees. If we were to withdraw from this plan, we could incur a substantial expense in connection with the withdrawal.
 
 
31.
Our net unrealized built-in-losses and other losses could be substantially limited as to future use if we experience an ownership change as defined in the Internal Revenue Code.
 
   
Risks Related to this Offering
 
1.
Our operating expenses are high as a percentage of our net interest income, making it more difficult to maintain profitability. After this offering, our expenses will increase. Our return on equity also will be low compared to other companies. These factors could negatively impact the price of our stock.  
 
2.
The final aggregate purchase price of the shares of common stock in the offering will be based on an independent appraisal and may not be indicative of the actual value of First Northwest Bancorp.
 
 
3.
There may be a limited trading market in our common stock, which would hinder your ability to sell our common stock and may lower the market price of the stock.
 
 
4.
The cost of additional finance and accounting systems, procedures and controls in order to satisfy our new public company reporting requirements will increase our expenses.
 
 
5.
Our equity incentive plans will increase our costs, which will reduce our income.
 
 
6.
Management and the board of directors have significant discretion over the investment of the offering proceeds and may not be able to achieve acceptable returns on the proceeds from the offering.
 
 
7.
The amount of common stock we will control, our articles of incorporation and bylaws, and state and federal law could discourage hostile acquisitions of control of First Northwest Bancorp.
 
 
8.
The implementation of an equity incentive plan may dilute your ownership interest.
 
 
9.
Our growth or future losses may require us to raise additional capital in the future, but that capital may not be available when it is needed or the cost of that capital may be very high.
 
   
Risks Related to the Contribution to the Foundation
 
1.
The contribution to the First Federal Community Foundation will decrease our profits for 2013.
 
 
2.
The contribution to the First Federal Community Foundation will decrease the ownership interest and voting interest in the shares sold to the public after the contribution.
 
 
3.
Our contribution to the First Federal Community Foundation may not be tax deductible, which could decrease our profits.
 
   
   
   
   
(By Signing the Front of this Form the Investor is Not Waiving Any Rights Under the Federal Securities Laws,
 
Including the Securities Act of 1933 and the Securities Exchange Act of 1934)
 
   
 
 
 
 
 
First Northwest Bancorp
Stock Ownership Guide
Individual
Include the first name, middle initial and last name of the shareholder.  Avoid the use of two initials.  Please omit words that do not affect ownership rights, such as “ Mrs.”, “Mr.”, “Dr.”, “special account”, “single person”, etc.
Joint Tenants
Joint tenants with right of survivorship may be specified to identify two or more owners.  When stock is held by joint tenants with right of survivorship, ownership is intended to pass automatically to the surviving joint tenant(s) upon the death of any joint tenant.  All parties must agree to the transfer or sale of shares held by joint tenants.
Tenants in Common
Tenants in common may also be specified to identify two or more owners.  When stock is held by tenants in common, upon the death of one co-tenant, ownership of the stock will be held by the surviving co-tenant(s) and by the heirs of the deceased co-tenant.  All parties must agree to the transfer or sale of shares held by tenants in common.
Uniform Transfers to Minors Act (“UTMA”)
Stock may be held in the name of a custodian for a minor under the Uniform Transfers to Minors Act of each state.  There may be only one custodian and one minor designated on a stock certificate.  The standard abbreviation for Custodian is “CUST”, while the Uniform Transfers to Minors Act is “UTMA”.  Standard U.S. Postal Service state abbreviations should be used to describe the appropriate state.  For example, stock held by John Doe as custodian for Susan Doe under the Washington Uniform Transfers to Minors Act will be abbreviated John Doe, CUST Susan Doe UTMA WA (use minor ’ s social security number).
Fiduciaries
Information provided with respect to stock to be held in a fiduciary capacity must contain the following:
●  The name(s) of the fiduciary.  If an individual, list the first name, middle initial and last name.  If a corporation, list the full corporate title (name).  If an individual and a corporation, list the corporation’s title before the individual.
●   The fiduciary capacity, such as administrator, executor, personal representative, conservator, trustee, committee, etc.
●  A description of the document governing the fiduciary relationship, such as a trust agreement or court order.  Documentation establishing a fiduciary relationship may be required to register your stock in a fiduciary capacity.
●   The date of the document governing the relationship, except that the date of a trust created by a will need not be included in the description.
●   The name of the maker, donor or testator and the name of the beneficiary.
An example of fiduciary ownership of stock in the case of a trust is: John Doe, Trustee Under Agreement Dated 10-1-93 for Susan Doe.
Stock Order Form Instructions
Items 1 and 2 - Number of Shares and Total Payment Due
Fill in the number of shares that you wish to purchase and the total payment due.  The amount due is determined by multiplying the number of shares by the subscription price of $10.00 per share.  The minimum purchase in the subscription offering is $250 (25 shares) of common stock.  As more fully described in the plan of conversion outlined in the prospectus, the maximum purchase in any category of the subscription offering is $200,000 (20,000 shares) of common stock, and the maximum purchase in the community offering (if held) by any person is $200,000 (20,000 shares) of common stock.  No person, together with associates and persons acting in concert with such person, may purchase in the aggregate more than $400,000 (40,000 shares) of common stock.
Item 3 - Employee/Officer/Director Information
Check this box to indicate whether you are an employee, officer or director of First Federal Savings and Loan Association of Port Angeles or a member of such person’s immediate family living in the same household.
Item 4 - Method of Payment by Check
If you pay for your stock by check, bank draft or money order, indicate the total amount in this box. Payment for shares may be made by check, bank draft or money order payable to First Northwest Bancorp Payment in cash may not be made.  Your funds will earn interest at First Federal’s statement savings rate of interest until the stock offering is completed.
Item 5 - Method of Payment by Withdrawal
If you pay for your stock by a withdrawal from a deposit account at First Federal, indicate the account number(s) and the amount of your withdrawal authorization for each account.  The total amount withdrawn should equal the amount of your stock purchase.  There will be no penalty assessed for early withdrawals from certificate accounts used for stock purchases.   This form of payment may not be used if your account is an Individual Retirement Account.
Item 6 – Purchaser Information
Subscription Offering
a.  Check this box if you h ad a deposit account(s) totaling $50.00 or more on March 31, 2011 (“Eligible Account Holder”).
    b.  Check this box if you h ad a deposit account(s) totaling $50.00 or more on _________ 2012 but are not an Eligible Account Holder (“Supplemental Eligible Account Holder”).
c.  Check here if you are a Depositor or Borrower with us as of the close of business on ________ __, 2012 to the extent not already included in a prior category.
Please list all account numbers and all names on accounts you had on these dates in order to insure proper identification of your purchase rights.
Note:   Failure to list all your eligible accounts, or providing incorrect information, may result in the loss of part or all of your subscription rights.
Community Offering
 d.  Check this box if you are a community member (Indicate county of residence in item 9).
Items 7 and 8 - Form of Stock Ownership, SS# or Tax ID#, Stock Registration and Mailing Address
Check the box that applies to your requested form of stock ownership and indicate your social security or tax ID number(s) in item 7.  Complete the requested stock registration and mailing address in item 8.  The stock transfer industry has developed a uniform system of shareholder registrations that will be used in the issuance of your common stock.  If you have any questions regarding the registration of your stock, please consult your legal advisor.  Stock ownership must be registered in one of the ways described above under “Stock Ownership Guide.”   Shares must be registered as reflected on your qualifying account.  Adding or deleting a name or otherwise altering the form of beneficial ownership of a qualifying account will result in a loss of your subscription rights (with certain exceptions for IRA and Keogh purchases).
Item 9 – Telephone Number(s) and County of Residence
Indicate your daytime and evening telephone number(s) and county.  We may need to call you if we have any questions regarding your order or we cannot execute your order as given.
Item 10 – Associates/Acting in Concert
Check this box and complete the reverse side of the stock order form if you or any associates or persons acting in concert with you (as defined on the reverse side of the stock order form) have submitted other orders for shares.
Item 11– Acknowledgement
Please review the prospectus carefully before making an investment decision.  Sign and date the stock order form where indicated. Before you sign, review the stock order form, including the acknowledgement and certification.  Normally, one signature is required.  An additional signature is required only when payment is to be made by withdrawal from a deposit account that requires multiple signatures to withdraw funds.
Your properly completed signed stock order form and payment in full (or withdrawal authorization) at the subscription price must be physically received (not postmarked) by First Northwest Bancorp no later than 5:00 p.m., Pacific Time, on ___________ __, 2013 or it will become void.
 
Delivery Instructions :   You may deliver your stock order form by mail using the enclosed postage-paid envelope marked “STOCK ORDER RETURN, by hand delivery or by overnight courier to the First Northwest Bancorp Stock Information Center located at 105 West 8th St., Port Angeles, WA 98362 .
 
If you have any remaining questions, or if you would like assistance in completing your stock order form, you may call our Stock Information Center at (___) ___-____, Monday through Friday, between the hours of 10:00 a.m. and 4:00 p.m., Pacific Time.
 
                                                                                                                                                                                                    First Federal
                                                                                                                                                                                           Stock Information Center
                                                                                                                                                                           105 West 8th St., Port Angeles, WA 98362
 
 
 
 
 

       
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REVOCABLE PROXY  
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þ Please vote by marking one of the boxes as shown.
 
1.   Approval of the Plan of Conversion of First Federal Savings and Loan Association of Port Angeles.
                              FOR  o           AGAINST o
 
2.   Approval of the funding of the First Federal Community Foundation through a contribution of shares of First Northwest Bancorp common stock and cash
                                  FOR  o           AGAINST o
 
 
CONTROL #
 
 
 
 
 
 
The undersigned acknowledges receipt of a Notice of Special Meeting of Members, the proxy statement of First Federal Savings and Loan Association of Port Angeles dated _________, 2013, and the prospectus of First Northwest Bancorp prior to the execution of this proxy.
 
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Signature
Date  
   
 
Joint accounts need only one signature.
     
PLEASE SIGN, DATE AND RETURN ALL PROXY CARDS THAT YOU RECEIVE IN THE ENCLOSED POSTAGE-PAID RETURN ENVELOPE.  NONE ARE DUPLICATES.
 
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DETACH HERE
 
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE
“FOR” APPROVAL OF THE PLAN OF CONVERSION AND “FOR” APPROVAL OF THE
CONTRIBUTION OF STOCK AND CASH TO THE FOUNDATION
 
 
VOTE BY MAIL
 
     
 
(GRAPHIC)
 
     
 
DETACH THE
 PROXY CARD ABOVE
 
     
 
þ   VOTE, SIGN, DATE & RETURN
THE CARD IN THE ENCLOSED
PROXY RETURN ENVELOPE
 
 
 
     
 
YOU MAY RETURN ALL PROXY CARDS
RECEIVED IN ONE ENVELOPE
 
 
VOTING “FOR” THE CONVERSION DOES NOT OBLIGATE  YOU TO BUY STOCK AND
DOES NOT AFFECT THE TERMS OR INSURANCE ON YOUR ACCOUNTS
 
IF YOU HAVE MORE THAN ONE ACCOUNT, YOU MAY RECEIVE MORE THAN ONE PROXY
 DEPENDING ON THE OWNERSHIP STRUCTURE OF YOUR ACCOUNTS
PLEASE SUPPORT US BY VOTING “FOR”  AND RETURNING ALL PROXY CARDS RECEIVED
   
 
 
 
 

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REVOCABLE PROXY   
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Insert proxy card language here
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
VOTING DOES NOT REQUIRE YOU TO PURCHASE SHARES OF FIRST NORTHWEST BANCORP COMMON STOCK IN THE STOCK OFFERING.

IMPORTANT:  PLEASE VOTE, DATE AND SIGN, ON REVERSE SIDE
 
é
DETACH HERE
 
   
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE
“FOR” APPROVAL OF THE PLAN OF CONVERSION AND “FOR” APPROVAL OF THE
CONTRIBUTION OF STOCK AND CASH TO THE FOUNDATION
 
   
VOTING “FOR” THE CONVERSION DOES NOT OBLIGATE  YOU TO BUY STOCK AND
DOES NOT AFFECT THE TERMS OR INSURANCE ON YOUR ACCOUNTS
 
   
IF YOU HAVE MORE THAN ONE ACCOUNT, YOU MAY RECEIVE MORE THAN ONE PROXY
 DEPENDING ON THE OWNERSHIP STRUCTURE OF YOUR ACCOUNTS
PLEASE SUPPORT US BY VOTING “FOR”  AND RETURNING ALL PROXY CARDS RECEIVED
 
   
   
   
   

Exhibit 99.2
 
First Federal Saving and Loan Association of Port Angeles

Dear Member:
 
We are pleased to announce that the Board of Directors of First Federal Savings and Loan Association of Port Angeles (“First Federal”) has voted unanimously in favor of a plan of conversion whereby First Federal will convert from the mutual form to the stock form of organization and become a wholly owned subsidiary of First Northwest Bancorp, a company we recently formed.  We are converting so that First Federal will be structured in the form of ownership that we believe will best increase our capital, continue to support future lending and operational growth, and support future branching activities and/or the acquisition of financial services companies.
 
To continue our long-standing commitment to our local communities, we intend to establish and fund through a contribution of shares of our common stock and cash to a foundation to be known as the First Federal Community Foundation.  The foundation will be dedicated to charitable purposes within the communities in which First Federal operates.
 
The Proxy Card
To accomplish the conversion and the funding of the foundation through a contribution of our common stock and cash to the foundation, your participation is extremely important.   On behalf of the Board, I ask that you help us meet our goal by reading the enclosed material and then casting your vote in favor of the plan of conversion and in favor of the contribution to the foundation.  Please support us by returning your proxy by mail using the enclosed postage-paid envelope marked “PROXY RETURN.”  If you have an IRA or other Qualified Retirement Plan account for which First Federal acts as trustee and we do not receive a proxy from you, First Federal, as trustee for your account, intends to vote in favor of the plan of conversion and in favor of the contribution of our common stock and cash to the foundation on your behalf.  If you have more than one account, you may receive more than one proxy.   Please vote by returning all proxy cards received.
 
If the plan of conversion is approved, let me assure you that:
 
●
deposit accounts will continue to be federally insured to the maximum extent permitted by law;
 
●
existing deposit accounts and loans will not undergo any change; and
 
●
voting for approval will not obligate you to buy any shares of common stock.
 
The Stock Order Form
As a qualifying account holder, you may take advantage of your nontransferable rights to subscribe for shares of First Northwest Bancorp common stock on a priority basis, before the stock is offered to the general public. The enclosed prospectus describes the stock offering of First Northwest Bancorp and our operations.   Please read the prospectus carefully before making an investment decision.
 
If you wish to subscribe for shares of common stock, please complete the enclosed stock order form and return it to First Northwest Bancorp, together with your payment for the shares, by mail using the enclosed postage-paid envelope marked “STOCK ORDER RETURN,” by hand delivery, or by overnight courier to the First Northwest Bancorp Stock Information Center located at 105 West 8th St., Port Angeles, WA 98362.   Your order must be physically received (not postmarked) by First Northwest Bancorp no later than 5:00 p.m., Pacific Time, on ___day, ____________ __, 2013
 
If you have any questions after reading the enclosed material, please call our Stock Information Center at ___-___-____, Monday through Friday, between the hours of 10:00 a.m. and 4:00 p.m., Pacific Time.
 
Sincerely,
 
Levon L. Mathews
President and Chief Executive Officer
 
The shares of common stock being offered are not savings accounts or deposits and are not insured or guaranteed by First Federal Savings and Loan Association of Port Angeles, First Northwest Bancorp, the Federal Deposit Insurance Corporation or any other government agency.
 
This is not an offer to sell or a solicitation of an offer to buy common stock.  The offer is made only by the prospectus.
 
 
 
 
 
First Federal Saving and Loan Association of Port Angeles
 
Dear Member:
 
We are pleased to announce that the Board of Directors of First Federal Savings and Loan Association of Port Angeles (“First Federal”) has voted unanimously in favor of a plan of conversion whereby First Federal will convert from the mutual form to the stock form of organization and become a wholly owned subsidiary of First Northwest Bancorp, a company we recently formed.  We are converting so that First Federal will be structured in the form of ownership that we believe will best increase our capital, continue to support future lending and operational growth, and support future branching activities and/or the acquisition of financial services companies.
 
To continue our long-standing commitment to our local communities, we intend to establish and fund through a contribution of shares of our common stock and cash to a foundation to be known as the First Federal Community Foundation.  The foundation will be dedicated to charitable purposes within the communities in which First Federal operates.
 
To accomplish the conversion and the funding of the foundation through a contribution of our common stock and cash to the foundation, your participation is extremely important.   On behalf of the Board, I ask that you help us meet our goal by reading the enclosed material and then casting your vote in favor of the plan of conversion and in favor of contribution to the foundation.  Please support us by returning your proxy by mail using the enclosed postage-paid envelope marked “PROXY RETURN.”  If you have an IRA or other Qualified Retirement Plan account for which First Federal acts as trustee and we do not receive a proxy from you, First Federal, as trustee for your account, intends to vote in favor of the plan of conversion and in favor of the contribution of our common stock and cash to the foundation on your behalf.   If you have more than one account, you may receive more than one proxy.  Please vote by returning all proxy cards received.
 
If the plan of conversion is approved let me assure you that:
 
 
●
deposit accounts will continue to be federally insured to the maximum extent permitted by law; and
 
●
existing deposit accounts and loans will not undergo any change.
 
We regret that we are unable to offer you common stock in the subscription offering because the laws of your state or jurisdiction require us to register (1) the to-be-issued common stock of First Northwest Bancorp or (2) an agent of First Federal to solicit the sale of such stock, and the number of eligible subscribers in your state or jurisdiction does not justify the expense of such registration.
 
If you have any questions after reading the enclosed material, please call our Stock Information Center at ___-___-____, Monday through Friday, between the hours of 10:00 a.m. and 4:00 p.m., Pacific Time.
 
Sincerely,
 
Levon L. Mathews
Chairman, President and Chief Executive Officer
 
The shares of common stock being offered are not savings accounts or deposits and are not insured or guaranteed by First Federal Savings and Loan Association of Port Angeles, First Northwest Bancorp, the Federal Deposit Insurance Corporation or any other government agency.
 
This is not an offer to sell or a solicitation of an offer to buy common stock.  The offer is made only by the prospectus.
 
 
 
 
 
First Federal Saving and Loan Association of Port Angeles
Dear Friend of First Federal:
 
We are pleased to announce that the Board of Directors of First Federal Savings and Loan Association of Port Angeles (“First Federal”) has voted unanimously in favor of a plan of conversion whereby First Federal will convert from the mutual form to the stock form of organization and become a wholly owned subsidiary of First Northwest Bancorp, a company we recently formed.  We are converting so that First Federal will be structured in the form of ownership that we believe will best increase our capital, continue to support future lending and operational growth, and support future branching activities and/or the acquisition of financial services companies.
 
To continue our long-standing commitment to our local communities, we intend to establish and fund through a contribution of shares of our common stock and cash a foundation to be known as the First Federal Community Foundation.  The foundation will be dedicated to charitable purposes within the communities in which First Federal operates.
 
As a former account holder, you may take advantage of your nontransferable right to subscribe for shares of First Northwest Bancorp common stock on a priority basis, before the stock is offered to the general public. The enclosed prospectus describes the stock offering of First Northwest Bancorp and our operations.   Please read the prospectus carefully before making an investment decision.
 
If you wish to subscribe for shares of common stock, please complete the enclosed stock order form and return it to First Northwest Bancorp, together with your payment for the shares, by mail using the enclosed postage-paid envelope marked “STOCK ORDER RETURN,” by hand delivery, or by overnight courier to the First Northwest Bancorp Stock Information Center located at 105 West 8th St., Port Angeles, WA 98362.   Your order must be physically received (not postmarked) by First Northwest Bancorp no later than 5:00 p.m., Pacific Time, on ___day, ___________ __, 2013.
 
If you have any questions after reading the enclosed material, please call our Stock Information Center at ___-___-____, Monday through Friday, between the hours of 10:00 a.m. and 4:00 p.m., Pacific Time.
Sincerely,
 
Levon L. Mathews
President and Chief Executive Officer
 
The shares of common stock being offered are not savings accounts or deposits and are not insured or guaranteed by First Federal Savings and Loan Association of Port Angeles, First Northwest Bancorp, the Federal Deposit Insurance Corporation or any other government agency.
 
This is not an offer to sell or a solicitation of an offer to buy common stock.  The offer is made only by the prospectus.
 
 
 
 
 
First Northwest Bancorp
 
Dear Potential Investor:
 
We are pleased to provide you with the enclosed material in connection with the stock offering by First Northwest Bancorp.
 
This information packet includes the following:
 
PROSPECTUS :  This document provides detailed information about the operations of First Federal and the proposed stock offering by First Northwest Bancorp.   Please read it carefully before making an investment decision.
 
STOCK ORDER FORM:   Use this form to subscribe for shares of common stock and return it to First Northwest Bancorp, together with your payment for the shares, by mail using the enclosed postage-paid envelope marked “STOCK ORDER RETURN,” by hand delivery, or by overnight courier to the First Northwest Bancorp Stock Information Center located at 105 West 8th St., Port Angeles, WA 98362.   Your order must be physically received (not postmarked) by First Northwest Bancorp no later than 5:00 p.m., Pacific Time, on ___day, ____________ __, 2013.
 
We are pleased to offer you this opportunity to become one of our shareholders.  If you have any questions regarding the stock offering or the prospectus, please call our Stock Information Center at ___-___-____, Monday through Friday, between the hours of 10:00 a.m. and 4:00 p.m., Pacific Time.
 
Sincerely,
 
Levon L. Mathews
President and Chief Executive Officer
 
The shares of common stock being offered are not savings accounts or deposits and are not insured or guaranteed by First Federal Savings and Loan Association of Port Angeles, First Northwest Bancorp, the Federal Deposit Insurance Corporation or any other government agency.
 
This is not an offer to sell or a solicitation of an offer to buy common stock.  The offer is made only by the prospectus.
 
 
 
 
 
Sandler O’Neill & Partners, L.P.

Dear Prospective Investor of First Federal Savings and Loan Association of Port Angeles:
 
At the request of First Federal Savings and Loan Association of Port Angeles (“First Federal”) and its proposed new holding company, First Northwest Bancorp, we have enclosed material regarding the offering of common stock of First Northwest Bancorp.  The material is offered in connection with the conversion of First Federal from the mutual to the stock form of organization.  These materials include a prospectus and a stock order form, which offer you the opportunity to subscribe for shares of common stock of First Northwest Bancorp.
 
Please read the prospectus carefully before making an investment decision.   If you decide to subscribe for shares, you must return the properly completed and signed stock order form, along with full payment for the shares to First Northwest Bancorp by mail using the enclosed postage-paid envelope marked “STOCK ORDER RETURN,” by hand delivery, or by overnight courier to the First Northwest Bancorp Stock Information Center located at 105 West 8th St., Port Angeles, WA 98362.   Your order must be physically received (not postmarked) by First Northwest Bancorp no later than 5:00 p.m., Pacific Time, on ___day, _____________ __, 2013.
 
If you have any questions after reading the enclosed material, please call the Stock Information Center at ___-___-____, Monday through Friday, between the hours of 10:00 a.m. and 4:00 p.m., Pacific Time, and ask for a Sandler O’Neill representative.
 
We have been asked to forward these documents to you in view of certain requirements of the securities laws of your jurisdiction. We should not be understood as recommending or soliciting in any way any action by you with regard to the enclosed material.
 
Sandler O’Neill & Partners, L.P.
 
The shares of common stock being offered are not savings accounts or deposits and are not insured or guaranteed by First Federal Savings and Loan Association of Port Angeles, First Northwest Bancorp, the Federal Deposit Insurance Corporation or any other government agency.
 
This is not an offer to sell or a solicitation of an offer to buy common stock.  The offer is made only by the prospectus.
 
 
 
 

[Cover page]
First Federal Savings and Loan Association of Port Angeles
Proxy Q&A
 
Questions & Answers About Voting
 
The Board of Directors of First Federal Savings and Loan Association of Port Angeles (“First Federal”) has voted unanimously in favor of a plan of conversion whereby First Federal will convert from the mutual to the stock form of organization, subject to the affirmative vote of a majority of the total number of outstanding votes entitled to be cast by the members of First Federal at a special meeting of members.  In connection with the conversion, First Federal ’s new holding company, First Northwest Bancorp, is offering shares of its common stock for sale in an initial public offering.  To continue our long-standing commitment to our local communities, we intend to establish and fund through a contribution of shares of our common stock and cash to a foundation to be known as the First Federal Community Foundation. The foundation will be dedicated to the promotion of charitable causes within the communities in which the Bank operates.
 
Your vote is very important .   If you have more than one account, you may receive more than one proxy.  Please vote today by returning all proxy cards received.
 
Your Board of Directors urges you to vote “FOR” the conversion and return your proxy today.
 
Q.
Why is First Federal converting to the stock form of organization?
A.
The conversion to the stock holding company form of organization will enable First Federal to access capital through the sale of common stock by First Northwest Bancorp. This additional capital will provide us with the flexibility to support internal growth through increased lending in the communities we serve, support future operational growth, support future branching activities and/or the acquisition of financial services companies as opportunities arise, implement more flexible capital management strategies and retain and attract qualified personnel.
 
Q.
What changes will occur as a result of the conversion?  Will there be changes at my local branch?
A.
No changes are planned in the way we operate our business.  The Plan will have no effect on the staffing, products or services that we offer to our customers through our offices, except to enable us to add additional services in the future.
 
Q.
Will the conversion affect any of my deposit accounts or loans?
A.
No.  The conversion will have no effect on the balance or terms of any deposit account.  Your deposits will continue to be federally insured to the fullest extent permissible.  The terms, including interest rates, of your loans with us will also be unaffected by the conversion.
 
Q.             Will any account I hold with First Federal be converted into stock?
A.
No.  All accounts will remain as they were prior to the conversion.
 
Q.           Who is eligible to vote on the conversion?
A.
Depositors and borrowers of First Federal as of the close of business on ___day __, 2012 (the “Voting Record Date”) are eligible to vote at the special meeting of members.
 
 
 
 
 
Q.           Why did I receive several proxies?
A.
If you have more than one account, you may have received more than one proxy, depending upon the ownership structure of your accounts.  Please vote, sign, date and return all proxy cards that you received.
 
Q.
Does my vote for the conversion mean that I must buy common stock of First Northwest Bancorp?
A.
No.  Voting for the plan of conversion does not obligate you to buy shares of common stock of First Northwest Bancorp.
 
Q.           How do I vote my proxy?
A.
You may vote by mailing your signed proxy card(s) in the enclosed postage-paid envelope marked “PROXY RETURN.”  Should you choose to attend the special meeting of members to be held on ______ __, 2013, and decide to change your vote, you may do so by revoking any previously executed proxy.
 
Q.
Are two signatures required on the proxy card for a joint account?
A.
Only one signature is required on a proxy card for a joint account.
 
Q.
Who should sign proxies for trust or custodian accounts?
A.
The trustee or custodian must sign proxies for such accounts, not the beneficiary.
 
Q.
I am the executor (administrator) for a deceased depositor.  Can I sign the proxy card?
A.
Yes.  Please indicate on the card the capacity in which you are signing.
 
Q.           What is the First Federal Community Foundation and why is it being funded?
A.
To continue our long-standing commitment to our local communities, we intend to establish and fund through a contribution of shares of our common stock and cash a foundation to be known as the First Federal Community Foundation, subject to member approval.  The foundation will be dedicated to charitable purposes within the communities in which First Federal operates.
 
Q.           Will the First Federal Community Foundation be funded if the conversion is not approved and completed?
A.
No.  The foundation will only be funded if both the plan of conversion and the contribution of our common stock and cash to the foundation are approved by the members and shareholders.  However, if we receive all other approvals, we will be permitted to complete the conversion without funding the foundation, if funding the foundation is not approved by our members.
 
Additional Information
 
Q.
What if I have additional questions or require more information?
A.
First Federal’s proxy statement and the prospectus that accompanies this brochure describe the conversion in detail.  Please read the proxy statement and prospectus carefully before voting or subscribing for stock.   If you have any questions after reading the enclosed material, you may call our Stock Information Center at ___-___-____, Monday through Friday, between the hours of 10:00 a.m. and 4:00 p.m., Pacific Time.  Additional material may only be obtained from the Stock Information Center.
 
The shares of common stock being offered are not savings accounts or deposits and are not insured or guaranteed by First Federal Savings and Loan Association of Port Angeles, First Northwest Bancorp, the Federal Deposit Insurance Corporation or any other government agency.
 
This is not an offer to sell or a solicitation of an offer to buy common stock.  The offer is made only by the prospectus.
 
 
 
 

[Cover page]
 First Northwest Bancorp
Stock Q&A
 
Questions & Answers About the Stock Offering
 
The Board of Directors of First Federal Savings and Loan Association of Port Angeles (“First Federal”) has voted unanimously in favor of a plan of conversion whereby First Federal will convert from the mutual to the stock form of organization, subject to the affirmative vote of a majority of the total number of outstanding votes entitled to be cast by the members of First Federal at a special meeting of members.  In connection with the conversion, First Federal ’s new holding company, First Northwest Bancorp, is offering shares of its common stock for sale in an initial public offering.  To continue our long-standing commitment to our local communities, we intend to establish and fund through a contribution of shares of our common stock and cash to a foundation to be known as the First Federal Community Foundation. The foundation will be dedicated to the promotion of charitable causes within the communities in which the Bank operates.
 
Investment in common stock involves certain risks.  For a discussion of these risks and other factors, investors are urged to read the accompanying prospectus.
 
Q.
Why is First Federal converting to the stock form of organization?
A.
The conversion to the stock holding company form of organization will enable First Federal to access capital through the sale of common stock by First Northwest Bancorp. This additional capital will provide us with the flexibility to support internal growth through increased lending in the communities we serve, support future operational growth, support future branching activities and/or the acquisition of financial services companies as opportunities arise, implement more flexible capital management strategies and retain and attract qualified personnel.
 
Q.
What changes will occur as a result of the conversion?  Will there be changes at my local branch?
A.
No changes are planned in the way we operate our business.  The plan will have no effect on the staffing, products or services that we offer to our customers through our offices, except to enable us to add additional services in the future.
 
Q.
Will the conversion affect any of my deposit accounts or loans?
A.
No.  The conversion will have no effect on the balance or terms of any deposit account.  Your deposits will continue to be federally insured to the fullest extent permissible.  The terms, including interest rates, of your loans with us will also be unaffected by the conversion.
 
Q.           Will any account I hold with the Bank be converted into stock?
A.
No.  All accounts will remain as they were prior to the conversion.
 
Q.
Who can purchase stock?
A.
The common stock of First Northwest Bancorp will be offered in the subscription offering in the following order of priority:
 
 
(1)
Depositors who held at least $50 with us as of the close of business on March 31, 2011.
 
 
(2)
The First Northwest Bancorp Tax-Qualified Employee Stock Benefit Plans .
 
 
 
 
 
 
(3)
Depositors who held at least $50 with us as of the close of business on ________ __, 2012.
 
 
(4)
Depositors and borrowers with us as of the close of business on ________ __, 2012 to the extent not already included in a prior category.
 
Upon completion of the subscription offering, common stock that is not sold in the subscription offering, if any, will be offered first to certain members of the general public in a community offering with priority to natural persons residing in Clallam, Jefferson and Kitsap counties, Washington and then, to the extent any shares remain, to the general public in a syndicated offering or underwritten offering.
 
Q.
Am I guaranteed to receive shares by placing an order?
A.
No.  It is possible that orders received during the offering period will exceed the number of shares being sold.  Such an oversubscription would result in shares being allocated among subscribers starting with subscribers who are Eligible Account Holders.  If the offering is oversubscribed in the subscription offering, no orders received in the community offering will be filled.
 
Q.
How many shares of stock are being offered, and at what price?
A.
First Northwest Bancorp is offering for sale a maximum of _________   shares of common stock at a subscription price of $10 per share.  Under certain circumstances, First Northwest Bancorp may increase the maximum and sell up to _________ shares.
 
Q.
How much stock can I purchase?
A.
The minimum purchase is $250 (25 shares).  As more fully discussed in the plan of conversion and in the prospectus, the maximum purchase by any person in the subscription or community offering is $200,000 (20,000 shares); no person by himself or herself or with an associate or group of persons acting in concert, may purchase more than $400,000 (40,000 shares) of common stock in the offering.
 
Q.
How do I order stock?
 
A.
If you decide to subscribe for shares, you must return the properly completed and signed stock order form, along with full payment for the shares, to First Northwest Bancorp by mail using the enclosed postage-paid envelope marked “STOCK ORDER RETURN,” by hand delivery , or by overnight courier to the First Northwest Bancorp Stock Information Center located at 105 West 8th St., Port Angeles, WA 98362.   Your order must be physically received (not postmarked) by First Northwest Bancorp no later than 5:00 p.m., Pacific Time, on __day, ___________ __, 2013.  Please read the prospectus carefully before making an investment decision.
 
Q.
How can I pay for my shares of stock?
A.
You can pay for the common stock by check, money order, or withdrawal from your deposit account or certificate of deposit at First Federal.  Checks and money orders must be made payable to First Northwest Bancorp.  Withdrawals from a deposit account or a certificate of deposit at First Federal to buy shares of common stock may be made without penalty.  Cash must be converted to a bank check or money order.   Please do not send cash in the mail.
 
Q.
Can I borrow money from First Federal to purchase First Northwest Bancorp’s stock?
A.
No.  First Federal cannot knowingly lend funds to anyone to subscribe for shares.  This includes the use of funds available through a First Federal home equity line of credit.
 
Q.
When is the deadline to subscribe for stock?
A.
An executed stock order form with the required full payment must be physically received (not postmarked) by First Northwest Bancorp no later than 5:00 p.m., Pacific Time, on ___day, __________ __, 2013.
 
 
 
 
 
Q.
Can I subscribe for shares using funds in my IRA at First Federal?
A.
No.   Federal regulations do not permit the purchase of common stock with your existing IRA or other qualified plan at First Federal.  To use these funds to subscribe for common stock, you need to establish a “self directed” trust account with an unaffiliated trustee.   The transfer of these funds takes time, so please make arrangements as soon as possible.   However, if you intend to use other funds to subscribe for common stock due to your eligibility as an IRA account holder, you need not close and transfer the IRA account.   Please call our Stock Information Center if you require additional information.
 
Q.
Can I subscribe for shares and add someone else who is not on my account to my stock registration?
A.
No. Federal regulations prohibit the transfer of subscription rights. Adding the names of other persons who are not owners of your qualifying account(s) or titling the stock in names different then is on the deposit account will result in the loss of your subscription rights and could result in legal action against you.
 
Q.
Can I subscribe for shares in my name alone if I have a joint account?
A.
No.  With the exception of certain orders placed through an IRA, Keogh or 401(k) plan, a name can be deleted only in the event of the death of a named eligible depositor.
 
Q.
Will payments for common stock earn interest until the conversion closes?
A.
Yes. Any payment made in cash or by check or money order will earn interest at First Federal’s statement savings rate from the date of receipt to the completion or termination of the conversion.  Depositors who elect to pay for their common stock by a withdrawal authorization will receive interest at the contractual rate on the account until the completion or termination of the offering.
 
Q.
Will dividends be paid on the stock?
A.
Following the offering, we initially do not expect to pay cash dividends on the common stock .
 
Q.
Will my stock be covered by deposit insurance?
A.
No.
 
Q.
Where will the stock be traded?
A.
Upon completion of the conversion, our shares of common stock are expected to trade on the Nasdaq Capital Market under the symbol “FNBC.”
 
Q.
Can I change my mind after I place an order to subscribe for stock?
A.
No.  After receipt, your order may not be modified or withdrawn.
 
About The Foundation
 
Q.
What is the First Federal Community Foundation and why is it being funded?
A.
To continue our long-standing commitment to our local communities, we intend to establish and fund through a contribution of shares of our common stock and cash a foundation to be known as the First Federal Community Foundation, subject to member approval.  The foundation will be dedicated to charitable purposes within the communities in which First Federal operates.
 
 
 
 
 
Q.           Will the First Federal Community Foundation be funded if the conversion is not approved and completed?
A.
No.  The foundation will only be established and funded if both the plan of conversion and the contribution of our common stock and cash to the foundation are approved by members.  However, if we receive all other approvals, we will be permitted to complete the conversion without the foundation, if the foundation is not approved by our members.
 
Additional Information
 
Q.
What if I have additional questions or require more information?
A.
First Northwest Bancorp’s prospectus that accompanies this brochure describes the conversion in detail.  Please read the prospectus carefully before subscribing for stock.   If you have any questions after reading the enclosed material, you may call our Stock Information Center at ___-___-____, Monday through Friday, between the hours of 10:00 a.m. and 4:00 p.m., Pacific Time.  Additional material may only be obtained from the Stock Information Center.
 
 
The shares of common stock being offered are not savings accounts or deposits and are not insured or guaranteed by First Federal Savings and Loan Association of Port Angeles, First Northwest Bancorp, the Federal Deposit Insurance Corporation or any other government agency.
 
This is not an offer to sell or a solicitation of an offer to buy common stock.  The offer is made only by the prospectus.
 
 
 
 
 
First Federal Savings and Loan Association of Port Angeles
 
Dear Member:
 
As a follow-up to our recent mailing, this is to remind you that your vote is very important.
 
The Board of Directors of First Federal Savings and Loan Association of Port Angeles (“First Federal”) has voted unanimously in favor of a plan of conversion whereby First Federal will convert from the mutual form to the stock form of organization.  We are converting so that First Federal will be structured in the form of ownership that we believe will best support First Federal’s future growth.
 
 
To accomplish the conversion and the funding of the foundation through the contribution of our common stock and cash to the foundation, your participation is extremely important.   On behalf of the Board, I ask that you help us meet our goal by reading the enclosed material and then casting your vote in favor of the plan of conversion and in favor of the contribution to the foundation.  Please support us by returning your proxy by mail using the enclosed postage-paid envelope marked “PROXY RETURN.”   If you have more than one account, you may receive more than one proxy.  Please vote by returning all proxy cards received.
 
If the plan of conversion is approved, let me assure you that:
 
 
●
deposit accounts will continue to be federally insured to the maximum extent permitted by law;
 
●
existing deposit accounts and loans will not undergo any change; and
 
●
voting for approval will not obligate you to buy any shares of common stock.
 
If you have any questions after reading the enclosed material, please call our Stock Information Center at ___-___-____, Monday through Friday, between the hours of 10:00 a.m. and 4:00 p.m., Pacific Time.
 
Sincerely,
 
Levon L. Mathews
President and Chief Executive Officer
 
The shares of common stock being offered are not savings accounts or deposits and are not insured or guaranteed by First Federal Savings and Loan Association of Port Angeles, First Northwest Bancorp, the Federal Deposit Insurance Corporation or any other government agency.
 
This is not an offer to sell or a solicitation of an offer to buy common stock.  The offer is made only by the prospectus.
 
 
 
 
 
PROXY REQUEST
 
[Logo]
 
WE NEED YOUR VOTE
 
Dear Member:
 
Your vote on our plan of conversion and the funding of the foundation through the contribution of our common stock and cash to the foundation has not yet been received .   Your vote is very important to us.   Please vote and mail the enclosed proxy today.  If you have more than one account, you may receive more than one proxy. Please complete and mail all proxies you receive.
 
Remember:   Voting does not obligate you to buy stock.  Your Board of Directors has approved the plan of conversion and urges you to vote “FOR” the conversion and “FOR” the contribution of our common stock and cash to the foundation.  Your deposit accounts or loans with First Federal will not be affected in any way. Deposit accounts will continue to be federally insured to the legal maximum.
 
Please vote by completing and mailing your signed proxy card in the enclosed postage-paid envelope.  If you have any questions, please call our Stock Information Center at ___-___-____, Monday through Friday, between the hours of 10:00 a.m. and 4:00 p.m., Pacific Time.
 
Sincerely,
 
Levon L. Mathews
President and Chief Executive Officer
 
 
 
 
 
 
               
    An   Invitation      
Community
Meetings
 
             
 
We cordially invite you to attend one of our community meetings to learn more about the opportunity to purchase newly issued shares from our proposed holding company, First Northwest Bancorp.
     
  Day, Month __
Location
Address
City, State Zip Code    
 
v
 
Day, Month __
Location
Address
City, State Zip Code

First Northwest Bancorp
(logo)
 
  Proposed Holding Company for
 First Federal
 
           
    v
Members of senior management will discuss First Federal Savings and Loan Association of Port Angeles (“First Federal”) operations, past performance and financial history.
       
             
    v
You will be able to meet one-on-one with First Federal officers to ask questions.
       
             
    v
There will be no sales pressure. You will receive First Northwest Bancorp stock offering materials. Then you decide if the stock purchase matches your investment objectives.
       
           
  Community meetings have been scheduled in _______. For meeting times and to make a reservation, or to receive a prospectus and a stock order form, please call our Stock Information Center at (xxx)-xxx-xxxx Monday through Friday, 10:00 a.m. to 4:00 p.m., Pacific Time.          
       
The shares of common stock being offered are not savings accounts or deposits and are not insured or guaranteed by First Federal Savings and Loan Association of Port Angeles, First Northwest Bancorp, the Federal Deposit Insurance Corporation or any other government agency.
 
             
  First Northwest Bancorp [logo)]
Proposed Holding Company for
First Federal 		     
This is not an offer to sell or a solicitation of an offer to buy common stock. The offer is made only by the prospectus .
 
             
 
 
 
 

First Federal Savings and Loan Association of
Port Angeles
[LOGO]
 
Please Support Us
 
Vote Your Proxy Card Today
 
If you have more than one account, you may have received more than one proxy depending upon the ownership structure of your accounts.  Please vote, sign and return all proxy cards that you received.
 
 
 
 
 
First Federal Savings and Loan Association of Port Angeles
 
_______________, 2013
 
Dear __________:
 
The Board of Directors of First Federal Savings and Loan Association of Port Angeles ( “ First Federal ” ) has voted unanimously in favor of a plan of conversion, whereby First Federal will convert from the mutual to the stock form of organization.
 
To learn more about the stock offering you are cordially invited to join members of our senior management team at a community meeting to be held at _______on___ at ___:00 _._, Pacific Time.
 
A member of our staff will be calling to confirm your interest in attending the meeting.
 
If you would like additional information regarding the meeting or our conversion, please call our Stock Information Center at ___-___-____, Monday through Friday between the hours of 10:00 a.m. to 4:00 p.m., Pacific Time.
 
Sincerely,
 
Levon L. Mathews
President and Chief Executive Officer
 
The shares of common stock being offered are not savings accounts or deposits and are not insured or guaranteed by First Federal Savings and Loan Association of Port Angeles, First Northwest Bancorp, the Federal Deposit Insurance Corporation or any other government agency.
 
This is not an offer to sell or a solicitation of an offer to buy common stock.  The offer is made only by the prospectus.
 
 
 
 
 
First Northwest Bancorp
 
_______________, 2013
 
Dear Subscriber:
 
We hereby acknowledge receipt of your order for shares of First Northwest Bancorp common stock.  If you are issued shares, the shares will be registered as indicated above.
 
At this time, we cannot confirm the number of shares of First Northwest Bancorp common stock that will be issued to you.  Following completion of the stock offering, shares will be allocated in accordance with the plan of conversion.
 
If you have any questions, please call our Stock Information Center at ___-___-____, Monday through Friday, between the hours of 10:00 a.m. and 4:00 p.m., Pacific Time.
 
First Northwest Bancorp
Stock Information Center
 
The shares of common stock being offered are not savings accounts or deposits and are not insured or guaranteed by First Federal Savings and Loan Association of Port Angeles, First Northwest Bancorp, the Federal Deposit Insurance Corporation or any other government agency.
 
 
 
 
 
First Northwest Bancorp
 
_______________, 2013
 
Dear Shareholder:
 
Our subscription offering has been completed and we are pleased to confirm your subscription for XX shares at a price of $10.00 per share.  If your subscription was paid for by check, bank draft or money order, interest and any refund due to you will be mailed promptly.
 
The closing of the transaction occurred on ______ __, 2013; this is your stock purchase date. Trading will commence on the Nasdaq Capital Market under the symbol “ FNBC ” on ________ __, 2013.
 
Thank you for your interest in First Northwest Bancorp.  Your stock certificate will be mailed to you shortly.
 
First Northwest Bancorp
Stock Information Center
 
The shares of common stock being offered are not savings accounts or deposits and are not insured or guaranteed by First Federal Savings and Loan Association of Port Angeles, First Northwest Bancorp, the Federal Deposit Insurance Corporation or any other government agency.
 
 
 
 
 
First Northwest Bancorp
 
_______________, 2013
 
Dear Interested Investor:
 
We recently completed our subscription offering.  Unfortunately, due to the excellent response from our Eligible Account Holders, stock was not available for our Supplemental Eligible Account Holders, Other Members or community friends.  If your subscription was paid for by check, bank draft or money order, a refund of any balance due to you with interest will be mailed promptly.
 
We appreciate your interest in First Northwest Bancorp and hope you become an owner of our stock in the future.  The stock is expected to trade on the Nasdaq Capital Market under the symbol “ FNBC ” on _______, 2013.
 
First Northwest Bancorp
Stock Information Center
 
The shares of common stock being offered are not savings accounts or deposits and are not insured or guaranteed by First Federal Savings and Loan Association of Port Angeles, First Northwest Bancorp, the Federal Deposit Insurance Corporation or any other government agency.
 
 
 
 
 
First Northwest Bancorp

_______________, 2013
 
Welcome Shareholder:
 
We are pleased to enclose your stock certificate representing your shares of common stock of First Northwest Bancorp   Please examine your stock certificate to be certain that it is properly registered.  If you have any questions about your certificate, you should contact the Transfer Agent immediately at the following address:
 
Registrar and Transfer Company
 Investor Relations Department
10 Commerce Drive
Cranford, NJ 07016
1 (800) 368-5948
email: info@rtco.com
 
Please remember that your certificate is a negotiable security that should be stored in a secure place, such as a safe deposit box or on deposit with your stockbroker.
 
On behalf of the Board of Directors, officers and employees of First Northwest Bancorp, I thank you for supporting our offering.
 
Sincerely,
 
Levon L. Mathews
President and Chief Executive Officer
 
The shares of common stock being offered are not savings accounts or deposits and are not insured or guaranteed by First Federal Savings and Loan Association of Port Angeles, First Northwest Bancorp, the Federal Deposit Insurance Corporation or any other government agency.
 
 
 
 
 
First Northwest Bancorp
_______________, 2013
 
Dear Interested Subscriber:
 
We regret to inform you that First Federal Savings and Loan Association of Port Angeles ( “ First Federal ” ) and First Northwest Bancorp, the holding company for First Federal, did not accept your order for shares of First Northwest Bancorp common stock in its community offering.  This action is in accordance with our plan of conversion, which gives First Federal and First Northwest Bancorp the absolute right to reject the order of any person, in whole or in part, in the community offering.
 
If your subscription was paid for by check, enclosed is your original check.
 
First Northwest Bancorp
Stock Information Center
 
The shares of common stock being offered are not savings accounts or deposits and are not insured or guaranteed by First Federal Savings and Loan Association of Port Angeles, First Northwest Bancorp, the Federal Deposit Insurance Corporation or any other government agency.
 
 
 
 
 
Sandler O ’ Neill & Partners, L.P.

_______________, 2013
 
To Our Friends:
 
We are enclosing material in connection with the stock offering by First Northwest Bancorp, the proposed holding company for First Federal Savings and Loan Association of Port Angeles ( “ First Federal ” ).
 
Sandler O ’ Neill & Partners, L.P. is acting as financial and marketing advisor in connection with the subscription and community offering, which will conclude at 5:00 p.m., Pacific Time, on _____ __, 2013.  In the event that all the stock is not sold in the subscription and community offerings, Sandler O ’ Neill may form and manage a syndicated offering or underwritten offering to sell the remaining stock.
 
Members of the general public are eligible to participate.  If you have any questions about this transaction, please do not hesitate to call.
 
Sandler O ’ Neill & Partners, L.P.
 
The shares of common stock being offered are not savings accounts or deposits and are not insured or guaranteed by First Federal Savings and Loan Association of Port Angeles, First Northwest Bancorp, the Federal Deposit Insurance Corporation or any other government agency.
 
This is not an offer to sell or a solicitation of an offer to buy common stock.  The offer is made only by the prospectus.
 
 
 
 

 
 
 
First Northwest Bancorp
[logo]
 
An Invitation
To Attend a Community Meeting
 
First Northwest Bancorp is offering shares of its common stock in connection with the conversion of First Federal Savings and Loan Association of Port Angeles into the stock form of organization.
 
X,xxx,xxx – x,xxx,xxx shares of First Northwest Bancorp are being offered at a price of $10.00 per share.
 
If you would like to learn more about our stock offering, or would like to attend a community meeting, we invite you to obtain a prospectus and offering material by calling our Stock Information Center at (xxx) xxx-xxxx, Monday through Friday between the hours of 10:00 a.m. and 4:00 p.m. Pacific Time.
 
 
 
 
Exhibit 99.3
 
F eldman F inancial A dvisors , I nc .
1001 Connecticut Avenue, NW •   Suite 840
Washington, DC  20036
(202) 467-6862 •   Fax (202) 467-6963

April 19, 2012
Confidential

Board of Directors
First Federal Savings and Loan Association
   of Port Angeles
105 West Eighth Street
Port Angeles, Washington 98362

Members of the Board:

This letter agreement (“Agreement”) describes the terms under which Feldman Financial Advisors, Inc. (“Feldman Financial”) will assist First Federal Savings and Loan Association of Port Angeles (“First Federal” or the “Bank”) with the business plan (“Business Plan”) to be submitted to regulatory authorities in conjunction with the Bank’s conversion from a mutual savings institution to a stock savings institution, the concurrent stock offering by the Bank’s holding company, and infusion of a portion of the net offering proceeds as capital into First Federal.  The services that we will provide and our fees for this proposal are explained in this Agreement.

Description of Engagement

Under the Bank’s direction, we will prepare the narrative text to be submitted as part of the Business Plan.  We will compile demographic, economic, or geographic data needed for the Business Plan.  We also will provide the pro forma financial projections for the Business Plan.  Our preparation of the Business Plan will be based on information that First Federal provides to us regarding the Bank’s strategic goals and objectives.  After submission of the Business Plan and, as part of our services under this Agreement, we will be available to provide additional services in relation to the Business Plan, including assisting with preparation of your responses to questions or comments from the regulators while the regulators evaluate the Business Plan.  First Federal will be responsible for final approval of the Business Plan and other information before submission to the applicable regulatory agency.

Fees and Expenses

Our professional fee for assisting with the development, preparation, submission and approval of the Business Plan will be $37,500, payable in three installments:  (i) $7,500 retainer fee due upon acceptance and execution of this Agreement; (ii) $30,000 due upon delivery of the completed Business Plan to be filed with the applicable regulatory agency;
 
 
 
 
 
F eldman F inancial Advisors, I nc.
 
Board of Directors
First Federal Savings and Loan Association
  of Port Angeles
April 19, 2012
Page 2 
 
In addition, we will invoice you for actual out-of-pocket expenses for data purchases, document reproduction, express mail, courier service, travel, and other costs incurred in connection with providing the professional consulting services under this Agreement.  Total reimbursable out-of-pocket expenses will not exceed $2,000 without the Bank’s prior approval.
 
Termination

First Federal may terminate this Agreement at any time by providing notice of such termination to Feldman Financial.  The “Termination Date” shall be either:  (i) the date oral notice of such termination is provided to Feldman Financial, as long as written notice is received within three business days thereafter, or (ii) if oral notice is not provided, the date Feldman Financial receives the written notice of termination.

In the event of termination prior to submission of the Business Plan, First Federal will pay Feldman Financial for all time incurred in preparing the Business Plan through the Termination Date at hourly rates that correspond with the aforementioned fee schedule.  Such charges shall not exceed $37,500.  In addition, First Federal will pay Feldman Financial for all expenses incurred through the Termination Date.

Financial Information and Confidentiality

First Federal will use its best efforts to assure Feldman Financial that First Federal will provide such information as Feldman Financial may reasonably request to prepare the Business Plan.  First Federal acknowledges that in performing services hereunder, Feldman Financial will be relying on the information furnished by First Federal, and First Federal further acknowledges that Feldman Financial will not independently verify the accuracy and completeness of such information.

First Federal agrees that the intended use of the Business Plan is only for submission with the appropriate regulatory authorities and for other internal purposes.  First Federal will not use the product of Feldman Financial’s services under this Agreement in any other manner, including references within a proxy statement or offering circular, without the express written consent of Feldman Financial.
 
 
 
 
 
Feldman Financial Advisors, Inc.
 
Board of Directors
First Federal Savings and Loan Association
  of Port Angeles
April 19, 2012
Page 3
 
Feldman Financial agrees to hold in confidence all information First Federal provides pursuant to this Agreement, other than information, which is or becomes publicly available, unless such disclosure is approved by First Federal or otherwise required by law.  In the event Feldman Financial is required by law to disclose confidential information, it will provide First Federal prior notice of this fact.  Similarly, First Federal agrees to hold in confidence all information provided by Feldman Financial pursuant to this Agreement, other than information that is or becomes publicly available, unless such disclosure is approved by Feldman Financial or otherwise required by law.


Sole Terms of Agreement

This Agreement embodies the sole terms of agreement between First Federal and Feldman Financial with respect to the engagement of Feldman Financial to prepare the Business Plan.  This Agreement can be modified only if such modification is stated in writing and signed by both First Federal and Feldman Financial.
 
*                    *                    *
 
To indicate your acceptance of this Agreement, please sign below and return one original of this letter to me with a check for $7,500, such payment to be credited as the retainer fee.
 
     Sincerely,  
       
 
 
Feldman Financial Advisors, Inc.  
    /s/ Trent R. Feldman  
    Trent R. Feldman  
    President  
       
 
 Attachment
     
  Agreed to and Accepted  
     
  First Federal Savings and Loan Association of Port Angeles
     
 By:  /s/ Larry Hueth  
     
  Title:  CEO & PRESIDENT / CFO / COO  
     
  Date: 5/10/12  
      
 
 
 
 
  Feldman Financial Advisors, Inc.
1001 CONNECTICUT AVENUE, NW, SUITE 840
WASHINGTON, DC 20036
(202) 467-6862 • FAX (202) 467-6963
 
Schedule of Professional Fees and E xpenses
 
    P rofessional F ees  
 
Feldman Financial Advisors, Inc.’s hourly billing rates for professional services are shown below. Actual time expended for depositions and courtroom testimony is billed at twice the stated hourly rate.

Title
 
Hourly Rate
     
President
 
$375
     
Principal
 
$325
     
Senior Vice President
 
$300
     
Vice President
 
$275
     
Research staff
 
$125
 
Reimbursable Expenses
 
Out-of-pocket expenses (including, but not limited to, transportation, lodging and meals, express and regular mail, document delivery services, purchase of data or reference materials, color photocopying, and telephone/fax) are billed without mark-up. The charge for in-house duplication of documents is $0.20 per page.
 
 
Exhibit 99.4
 
  RP ®   FINANCIAL, LC.  
  Advisory    Planning   Valuation  
 
April 10, 2012
 
Mr. Levon L. Mathews
President and Chief Executive Officer
First Federal Savings and Loan Association of Port Angeles
105 West Eighth Street
Port Angeles, Washington  98362

Dear Mr. Mathews:
 
This letter sets forth the agreement between First Federal Savings and Loan Association of Port Angeles, Port Angeles, Washington (the “Association”), and RP ® Financial, LC. (“RP Financial”) for independent appraisal services in connection with the stock to be issued concurrent with the mutual-to-stock conversion transaction whereby the Association will become a wholly-owned subsidiary of a newly-formed stock holding company.
 
The specific appraisal services to be rendered by RP Financial are described below.  The undersigned will direct the engagement with the assistance of other senior staff.
 
Description of Conversion Appraisal Services
 
Prior to preparing the valuation report, RP Financial will conduct a financial due diligence including on-site interviews of senior management and reviews of financial and other documents and records, to gain insight into the Association’s operations, financial condition, profitability, market area, business strategies and plans, risks and various internal and external factors which impact the pro forma value of the Association.  Such due diligence will be critical to preparing the appraisal.
 
RP Financial will prepare a written detailed valuation report of the Association that will be fully consistent with applicable regulatory guidelines and standard pro forma valuation practices.  In this regard, the applicable regulatory guidelines are those set forth in the Office of Thrift Supervision’s (“OTS”) October 21, 1994 “Guidelines for Appraisal Reports for the Valuation of Savings and Loan Associations Converting from Mutual to Stock Form of Organization,” which have been endorsed by the Federal Deposit Insurance Corporation (“FDIC”) and other federal and state banking agencies.
 
The appraisal report will include an in-depth analysis of the Association’s financial condition and operating results, as well as an overall assessment of the Association’s risk profile.  The appraisal report will describe the Association’s business strategies, market area, prospects for the future and the intended use of proceeds both in the short term and over the longer term.  A peer group analysis relative to publicly-traded savings institutions will be conducted for the purpose of determining appropriate valuation adjustments relative to the peer group.  The valuation report will also include an evaluation of the stock market and the related impact on the valuation of the Association.
 
   
  Washington Headquarters  
 Three Ballston Plaza   Direct:  (703) 647-6546
 1100 North Glebe Road, Suite 600    Telephone:  (703) 528-1700
 Arlington, VA 22201  Fax No.:  (703) 528-1788
 E-Mail:  wpommerening@rpfinancial.com    Toll-Free No.:  (866) 723-0594
 
 
 
 
 
Mr. Levon L. Mathews
April 10, 2012
Page 2
 
RP Financial will review pertinent sections of the conversion applications and related offering documents to obtain necessary data and information for the appraisal, including financial and operational information, the impact of key deal elements on the appraised value, such as anticipated dividend policy, use of proceeds and reinvestment rate, tax rate, conversion expenses, characteristics of stock plans and charitable foundation contribution (if applicable).  The appraisal report will conclude with a midpoint pro forma market value that will establish the range of value, and reflect the offering price per share determined by the Association’s Board of Directors.  The appraisal report will be updated at the appropriate times if required prior to the commencement of the conversion offering and the appraisal is required to be updated just prior to the closing of the conversion offering.
 
RP Financial agrees to deliver the valuation appraisal and subsequent updates, in writing, to the Association at the above address in conjunction with the filing of the regulatory application.  Subsequent updates will be filed promptly as certain events occur which would warrant the preparation and filing of such valuation updates.  Further, RP Financial agrees to perform such other services as are necessary or required in connection with the regulatory review of the appraisal and respond to the regulatory comments, if any, regarding the valuation appraisal and subsequent updates.
 
Fee Structure and Payment Schedule
 
The Association agrees to pay RP Financial a fixed fee of $80,000 for preparation and delivery of the original appraisal report, plus reimbursable expenses, and $7,500 for preparation and delivery of each required updated appraisal report, plus reimbursable expenses.  Payment of these fees shall be made according to the following schedule:
 
 
●
$15,000 upon execution of the letter of agreement engaging RP Financial’s appraisal services;
 
 
●
$65,000 upon delivery of the completed original appraisal report; and
 
 
●
$7,500 upon completion of each required appraisal update.
 
The Association will reimburse RP Financial for out-of-pocket expenses incurred in preparation of the valuation.  Such out-of-pocket expenses will likely include travel, printing, telephone, facsimile, shipping, computer and data services.  RP Financial will agree to limit reimbursable expenses in connection with this appraisal engagement, subject to written authorization from the Association to exceed such level.
 
In the event the Association shall, for any reason, discontinue the proposed mutual-to-stock conversion transaction prior to delivery of the completed documents set forth above and payment of the respective progress payment fees, the Association agrees to compensate RP Financial according to RP Financial’s standard billing rates for consulting services based on accumulated and verifiable time expenses, not to exceed the respective fee caps noted above, after giving full credit to the initial retainer fee.  RP Financial’s standard billing rates range from $75 per hour for research associates to $450 per hour for managing directors.
 
 
 
 
 
Mr. Levon L. Mathews
April 10, 2012
Page 3
 
If during the course of the proposed transaction, unforeseen events occur so as to materially change the nature or the work content of the services described in this contract, the terms of said contract shall be subject to renegotiation by the Association and RP Financial.  Such unforeseen events shall include, but not be limited to, major changes in the conversion regulations, appraisal guidelines or processing procedures as they relate to appraisals, major changes in management or procedures, operating policies or philosophies, and excessive delays or suspension of processing of conversion applications by the regulators such that completion of the transaction requires the preparation by RP Financial of a new appraisal.
 
Representations and Warranties
 
The Association and RP Financial agree to the following:
 
1.       The Association agrees to make available or to supply to RP Financial such information with respect to its business and financial condition as RP Financial may reasonably request in order to provide the aforesaid valuation.  Such information heretofore or hereafter supplied or made available to RP Financial shall include:  annual financial statements, periodic regulatory filings and material agreements, debt instruments, off balance sheet assets or liabilities, commitments and contingencies, unrealized gains or losses and corporate books and records.  All information provided by the Association to RP Financial shall remain strictly confidential (unless such information is otherwise made available to the public), and if the mutual-to-stock conversion is not consummated or the services of RP Financial are terminated hereunder, RP Financial shall upon request promptly return to the Association the original and any copies of such information.
 
2.       The Association hereby represents and warrants to RP Financial that any information provided to RP Financial does not and will not, to the best of the Association’s knowledge, at the times it is provided to RP Financial, contain any untrue statement of a material fact or fail to state a material fact necessary to make the statements therein not false or misleading in light of the circumstances under which they were made.
 
3.        (a)         The Association agrees that it will indemnify and hold harmless RP Financial, any affiliates of RP Financial, the respective directors, officers, agents and employees of RP Financial or their successors and assigns who act for or on behalf of RP Financial in connection with the services called for under this agreement (hereinafter referred to as “RP Financial”), from and against any and all losses, claims, damages and liabilities (including, but not limited to, all losses and expenses in connection with claims under the federal securities laws) attributable to (i) any untrue statement or alleged untrue statement of a material fact contained in the financial statements or other information furnished or otherwise provided by the Association to RP Financial, either orally or in writing; (ii) the omission or alleged omission of a material fact from the financial statements or other information furnished or otherwise made available by the Association to RP Financial; or (iii) any action or omission to act by the Association, or the Association’s respective officers, Directors, employees or agents which action or omission is willful or negligent.  The Association will be under no obligation to indemnify RP Financial hereunder if a court determines that RP Financial was negligent or acted in bad faith with respect to any actions or omissions of RP Financial related to a matter for which indemnification is sought hereunder.  Any time devoted by employees of RP Financial to situations for which indemnification is provided hereunder, shall be an indemnifiable cost payable by the Association at the normal hourly professional rate chargeable by such employee.
 
 
 
 
 
Mr. Levon L. Mathews
April 10, 2012
Page 4
 
   (b)         RP Financial shall give written notice to the Association of such claim or facts within thirty days of the assertion of any claim or discovery of material facts upon which RP Financial intends to base a claim for indemnification hereunder.  In the event the Association elects, within ten business days of the receipt of the original notice thereof, to contest such claim by written notice to RP Financial, RP Financial will be entitled to be paid any amounts payable by the Association hereunder within five days after the final determination of such contest either by written acknowledgement of the Association or a final judgment (including all appeals therefrom) of a court of competent jurisdiction.  If the Association does not so elect, RP Financial shall be paid promptly and in any event within thirty days after receipt by the Association of the notice of the claim.
 
(c)         The Association shall pay for or reimburse the reasonable expenses, including attorneys’ fees, incurred by RP Financial in advance of the final disposition of any proceeding within thirty days of the receipt of such request if RP Financial furnishes the Association:  (1) a written statement of RP Financial’s good faith belief that it is entitled to indemnification hereunder; and (2) a written undertaking to repay the advance if it ultimately is determined in a final adjudication of such proceeding that it or he is not entitled to such indemnification.  The Association may assume the defense of any claim (as to which notice is given in accordance with 3(b)) with counsel reasonably satisfactory to RP Financial, and after notice from the Association to RP Financial of its election to assume the defense thereof, the Association will not be liable to RP Financial for any legal or other expenses subsequently incurred by RP Financial (other than reasonable costs of investigation and assistance in discovery and document production matters).  Notwithstanding the foregoing, RP Financial shall have the right to employ their own counsel in any action or proceeding if RP Financial shall have concluded that a conflict of interest exists between the Association and RP Financial which would materially impact the effective representation of RP Financial.  In the event that RP Financial concludes that a conflict of interest exists, RP Financial shall have the right to select counsel reasonably satisfactory to the Association which will represent RP Financial in any such action or proceeding and the Association shall reimburse RP Financial for the reasonable legal fees and expenses of such counsel and other expenses reasonably incurred by RP Financial.  In no event shall the Association be liable for the fees and expenses of more than one counsel, separate from its own counsel, for all indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same allegations or circumstances.  The Association will not be liable under the foregoing indemnification provision in respect of any compromise or settlement of any action or proceeding made without its consent, which consent shall not be unreasonably withheld.
 
(d)         In the event the Association does not pay any indemnified loss or make advance reimbursements of expenses in accordance with the terms of this agreement, RP Financial shall have all remedies available at law or in equity to enforce such obligation.
 
 
 
 
 
Mr. Levon L. Mathews
April 10, 2012
Page 5
 
It is understood that, in connection with RP Financial’s above-mentioned engagement, RP Financial may also be engaged to act for the Association in one or more additional capacities, and that the terms of the original engagement may be incorporated by reference in one or more separate agreements.  The provisions of Paragraph 3 herein shall apply to the original engagement, any such additional engagement, any modification of the original engagement or such additional engagement and shall remain in full force and effect following the completion or termination of RP Financial’s engagement(s).  This agreement constitutes the entire understanding of the Association and RP Financial concerning the subject matter addressed herein, and such contract shall be governed and construed in accordance with the laws of the Commonwealth of Virginia.  This agreement may not be modified, supplemented or amended except by written agreement executed by both parties.
 
The Association and RP Financial are not affiliated, and neither the Association nor RP Financial has an economic interest in, or is held in common with, the other and has not derived a significant portion of its gross revenues, receipts or net income for any period from transactions with the other.
 
*  *  *  *  *  *  *  *  *  *  *
 
Please acknowledge your agreement to the foregoing by signing as indicated below and returning to RP Financial a signed copy of this letter, together with the initial retainer fee of $15,000.
       
     Sincerely,  
       
    /s/ William E. Pommerening  
    William E. Pommerening  
    Chief Executive Officer and  
    Managing Director  
 
 Agreed To and Accepted By:   Levon L. Mathews /s/ Levon L. Mathews
    President and Chief Executive Officer
 
  /s/ Larry Hueth  
 Upon Authorization by the Board of Directors for:     First Federal Savings and Loan Association
  of Port Angeles
Port Angeles, Washington
 
 Date Executed:   April 17 th 2012  
 
 
  Exhibit 99.5
 
PRO FORMA VALUATION REPORT
 
FIRST NORTHWEST BANCORP
Port Angeles, Washington
 
PROPOSED HOLDING COMPANY FOR:
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF PORT ANGELES
Port Angeles, Washington
 
Dated As Of:
November 9, 2012
 
 
Prepared By:
 
RP ® Financial, LC.
1100 North Glebe Road
Suite 600
Arlington, Virginia  22201
 
 
 
 
 
(RP LOGO)
 
November 9, 2012
 
Board of Directors
First Federal Savings and Loan Association of Port Angeles
105 West Eighth Street
Port Angeles, Washington  98362
 
Members of the Board of Directors:
 
At your request, we have completed and hereby provide an independent appraisal (“Appraisal”) of the estimated pro forma market value of the common stock which is to be offered in connection with the plan of conversion described below.  This Appraisal is furnished pursuant to the conversion regulations issued by the Office of Thrift Supervision (“OTS”) and reissued by the Office of the Comptroller of the Currency (“OCC”), and applicable interpretations thereof.  Such Valuation Guidelines are relied upon by the Federal Reserve Board (“FRB”), the Federal Deposit Insurance Corporation (“FDIC”) and the Washington Department of Financial Institutions (“DFI”) in the absence of separate written valuation guidelines.  Specifically, this Appraisal has been prepared in accordance with the “Guidelines for Appraisal Reports for the Valuation of Savings and Loan Associations Converting from Mutual to Stock Form of Organization” as set forth by the OTS, and applicable regulatory interpretations thereof.
 
Description of Plan of Conversion
 
The Board of Directors of First Federal Savings and Loan Association of Port Angeles, Port Angeles, Washington (“First Federal” or the “Bank”) adopted a plan of conversion on May 22, 2012. which was subsequently amended on November 20, 2012.  Pursuant to the plan of conversion, the Bank will convert from a state chartered mutual savings bank form of organization to a state chartered fully stock form and become a wholly owned subsidiary of First Northwest Bancorp (“First Northwest Bancorp” or the “Company”) a newly formed Washington corporation.  The Company will own all of the outstanding shares of the Bank.  Following the completion of the offering, First Northwest Bancorp will be a bank holding company and its primary regulator will be the Board of Governors of the Federal Reserve System (the “FRB”).
 
Pursuant to the plan of conversion, the Company will offer its stock in a subscription offering to Eligible Account Holders, Tax-Qualified Employee Stock Benefit Plans, Supplemental Eligible Account Holders, and Other Members.  To the extent that shares remain available for purchase after satisfaction of all subscriptions received in the subscription offering, the shares may be offered for sale in a community offering, syndicated offering, or in a separate firm commitment underwritten public offering. A portion of the net proceeds received from the sale of the common stock will be used to purchase all of the then to be issued and outstanding capital stock of First Federal and the balance of the net proceeds will be retained by the Company.
 
 
Washington Headquarters
Three Ballston Plaza
1100 North Glebe Road, Suite 600
Arlington, VA  22201
www.rpfinancial.com
 
Telephone:  (703) 528-1700
Fax No.:  (703) 528-1788
Toll-Free No.:  (866) 723-0594
 E-Mail:  mail@rpfinancial.com
 
 
 
 
 
Board of Directors
November 9, 2012
Page 2
 
At this time, no other activities are contemplated for First Northwest Bancorp other than the ownership of the Bank, a loan to the newly-formed employee stock ownership plan (“ESOP”) and reinvestment of the proceeds that are retained by the Company.  In the future, First Northwest Bancorp may acquire or organize other operating subsidiaries, diversify into other banking-related activities, pay dividends to shareholders and/or repurchase its stock, although there are no specific plans to undertake such activities at the present time.
 
The plan of conversion provides for the establishm ent of a new charitable foundation, First Federal Community Foundation (the “Foundation”).  The Foundation will be funded with First Northwest Bancorp common stock contributed by the Company and $400,000 cash in a total amount equal to 8.0% of the shares sold in the offering.  The purpose of the Foundation is to provide financial support to charitable organizations in the communities in which First Federal operates and to enable those communities to share in the Bank’s long-term growth.  The Foundation will be dedicated completely to community activities and the promotion of charitable causes.
 
RP ® Financial, LC.
 
RP ® Financial, LC. (“RP Financial”) is a financial consulting firm serving the financial services industry nationwide that, among other things, specializes in financial valuations and analyses of business enterprises and securities, including the pro forma valuation for savings institutions converting from mutual-to-stock form.  The background and experience of RP Financial is detailed in Exhibit V-1.  For its appraisal services, RP Financial is being compensated on a fixed fee basis for the original appraisal and for any subsequent updates, and such fees are payable regardless of the valuation conclusion or the completion of the conversion offering transaction.  We believe that we are independent of the Company, the Bank, and the other parties engaged by the Bank or the Company to assist in the stock conversion process.
 
Valuation Methodology
 
In preparing the Appraisal, we have reviewed First Northwest Bancorp’s and the Bank’s regulatory applications, including the prospectus as filed with the FRB, the DFI, the FDIC and the Securities and Exchange Commission (“SEC”).  We have conducted a financial analysis of the Bank that has included due diligence related discussions with First Federal’s management, Breyer and Associates PC, First Federal’s conversion counsel; and Sandler O’Neill + Partners, L.P., which has been retained as the financial and marketing advisor in connection with the stock offering.  All conclusions set forth in the Appraisal were reached independently from such discussions.  In addition, where appropriate, we have considered information based on other available published sources that we believe are reliable.  While we believe the information and data gathered from all these sources are reliable, we cannot guarantee the accuracy and completeness of such information.
 
We have investigated the competitive environment within which First Federal operates and have assessed the Bank’s relative strengths and weaknesses.  We have monitored all material regulatory and legislative actions affecting financial institutions, generally, and analyzed the potential impact of such developments on First Federal and the industry as a whole; to the extent we were aware of such matters.  We have analyzed the potential effects of the stock conversion on the Bank’s operating characteristics and financial performance as they relate to the pro forma market value of First Northwest Bancorp.  We have reviewed the economy and demographic characteristics of the primary market area in which the Bank currently operates.  We have compared First Federal’s financial performance and condition with publicly-traded thrift institutions evaluated and selected in accordance with the Valuation Guidelines, as well as all publicly-traded thrifts and thrift holding companies.  We have reviewed conditions in the securities markets in general and the market for thrifts and thrift holding companies, including the market for new issues.  We have excluded from such analyses thrifts subject to announced or rumored acquisition, and/or institutions that exhibit other unusual characteristics.
 
 
 
 
 
Board of Directors
November 9, 2012
Page 3
 
The Appraisal is based on First Federal’s representation that the information contained in the regulatory applications and additional information furnished to us by the Bank and its independent auditors, legal counsel, investment bankers and other authorized agents are truthful, accurate and complete.  We did not independently verify the financial statements and other information provided by the Bank, or its independent auditors, legal counsel, investment bankers and other authorized agents nor did we independently value the assets or liabilities of the Bank.  The valuation considers First Federal only as a going concern and should not be considered as an indication of the Bank’s liquidation or control value.
 
Our appraised value is predicated on a continuation of the current operating environment for the Bank and the Company and for all thrifts and their holding companies.  Changes in the local, state and national economy, the federal and state legislative and regulatory environments for financial institutions and mutual holding companies, the stock market, interest rates, and other external forces (such as natural disasters or significant world events) may occur from time to time, often with great unpredictability, and may materially impact the value of thrift stocks as a whole or the Bank’s value alone.  It is our understanding that First Federal intends to remain an independent institution and there are no current plans for selling control as a converted institution.  To the extent that such factors can be foreseen, they have been factored into our analysis.
 
The estimated pro forma market value is defined as the price at which the Company’s stock, immediately upon completion of the offering, would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts.
 
Valuation Conclusion
 
It is our opinion that, as of November 9, 2012, the estimated aggregate pro forma valuation of the shares of the Company to be issued and outstanding at the end of the conversion offering and including the contribution to the Foundation is $75,200,000 at the midpoint, equal to 7,520,000 shares at $10.00 per share.  The resulting range of value and pro forma shares are based on $10.00 per share and includes the contribution to the Foundation, which is set forth in the table on the following page.  The Foundation will be funded with $400,000 in cash and the remainder in shares of common stock so that the total amount contributed is equal to 8% of the gross offering proceeds received by the Company in the offering.
 
Based on the pro forma valuation, the number of shares of common stock offered for sale will range from a minimum of 5,950,000 shares to a maximum of 8,050,000 shares, with a midpoint offering of 7,000,000 shares.  Based on an offering price of $10.00 per share, the amount of the offering will range from a minimum of $59,500,000 to a maximum of $80,500,000 with a midpoint of $70,000,000.  If market conditions warrant, the number of shares offered can be increased to an adjusted maximum of 9,257,500 shares (the “supermaximum”) equal to an offering of $92,575,000 at the offering price of $10.00 per share.
 
 
 
 
 
Board of Directors
November 9, 2012
Page 4
 
First Northwest Bancorp
Standard Conversion Offering @ $70.0 Million Midpoint
 
         
Offering
   
Foundation
 
   
Total Shares
   
Shares
   
Shares
 
Shares
                 
Supermaximum
    9,958,100       9,257,500       700,600  
Maximum
    8,654,000       8,050,000       604,000  
Midpoint
    7,520,000       7,000,000       520,000  
Minimum
    6,386,000       5,950,000       436,000  
                         
Distribution of Shares
                       
Supermaximum
    100.00 %     92.96 %     7.04 %
Maximum
    100.00 %     93.02 %     6.98 %
Midpoint
    100.00 %     93.09 %     6.91 %
Minimum
    100.00 %     93.17 %     6.83 %
                         
Aggregate Market Value(1)
                       
Supermaximum
  $ 99,581,000     $ 92,575,000     $ 7,006,000  
Maximum
    86,540,000       80,500,000       6,040,000  
Midpoint
    75,200,000       70,000,000       5,200,000  
Minimum
    63,860,000       59,500,000       4,360,000  
           
(1) Based on offering price of $10.00 per share.
         
 
Limiting Factors and Considerations
 
The valuation is not intended, and must not be construed, as a recommendation of any kind as to the advisability of purchasing shares of the common stock.  Moreover, because such valuation is determined in accordance with applicable regulatory guidelines and is necessarily based upon estimates and projections of a number of matters, all of which are subject to change from time to time, no assurance can be given that persons who purchase shares of common stock in the conversion will thereafter be able to buy or sell such shares at prices related to the foregoing valuation of the estimated pro forma market value thereof.  The appraisal reflects only a valuation range as of this date for the pro forma market value of First Northwest Bancorp immediately upon issuance of the stock and does not take into account any trading activity with respect to the purchase and sale of common stock in the secondary market on the date of issuance of such securities or at anytime thereafter following the completion of the public stock offering.
 
 
 
 
 
Board of Directors
November 9, 2012
Page 5
 
The valuation prepared by RP Financial in accordance with applicable regulatory guidelines was based on the consolidated financial condition and operations of First Northwest Bancorp as of or for the periods ended September 30, 2012, the date of the financial data included in the prospectus.
 
RP Financial is not a seller of securities within the meaning of any federal and state securities laws and any report prepared by RP Financial shall not be used as an offer or solicitation with respect to the purchase or sale of any securities.  RP Financial maintains a policy which prohibits RP Financial, its principals or employees from purchasing stock of its financial institution clients.
 
The valuation will be updated as provided for in the conversion regulations and guidelines.  These updates will consider, among other things, any developments or changes in the financial performance and condition of First Northwest Bancorp, management policies, and current conditions in the equity markets for thrift stocks, both existing issues and new issues.  These updates may also consider changes in other external factors which impact value including, but not limited to:  various changes in the federal and state legislative and regulatory environments for financial institutions, the stock market and the market for thrift stocks, and interest rates.  Should any such new developments or changes be material, in our opinion, to the valuation of the shares, appropriate adjustments to the estimated pro forma market value will be made.  The reasons for any such adjustments will be explained in the update at the date of the release of the update.  The valuation will also be updated at the completion of First Northwest Bancorp’s stock offering.
 
 
Respectfully submitted,
RP ® FINANCIAL, LC.
   
  /s/ William E. Pommerening
   
 
William E. Pommerening
Managing Director
   
  /s/ James J. Oren
   
 
James J. Oren
Director
 
 
 
 
RP ® Financial, LC.
 
TABLE OF CONTENTS
First Federal Savings and Loan Association of Port Angeles
Port Angeles, Washington
 
    PAGE
DESCRIPTION
  NUMBER
       
CHAPTER ONE
OVERVIEW AND FINANCIAL ANALYSIS
   
     
Introduction
 
I.1
Plan of Conversion
 
I.2
Establishment of a Charitable Foundation
 
I.2
Strategic Overview
 
I.3
Balance Sheet Trends
 
I.6
Income and Expense Trends
 
I.9
Interest Rate Risk Management
 
I.13
Lending Activities and Strategy
 
I.15
Asset Quality
 
I.20
Funding Composition and Strategy
 
I.21
Subsidiaries
 
I.22
Legal Proceedings
 
I.22
       
       
CHAPTER TWO
MARKET AREA ANALYSIS
   
     
Introduction
 
II.1
National Economic Factors
 
II.3
Interest Rate Environment
 
II.5
Market Area Demographics
 
II.5
Local Economy
 
II.8
Employment Sectors
 
II.10
Unemployment Trends
 
II.11
Real Estate Trends
 
II.11
Market Area Deposit Characteristics
 
II.12
Market Area Deposit Competition
 
II.14
       
       
CHAPTER THREE
PEER GROUP ANALYSIS
   
     
Peer Group Selection
 
III.1
Financial Condition
 
III.7
Income and Expense Components
 
III.10
Loan Composition
 
III.13
Credit Risk
 
III.15
Interest Rate Risk
 
III.16
Summary
 
III.17
 
 
 
 
 
RP ® Financial, LC.
 
TABLE OF CONTENTS
First Federal Savings and Loan Association of Port Angeles
Port Angeles, Washington
(continued)
 
    PAGE
DESCRIPTION
  NUMBER
       
CHAPTER FOUR
VALUATION ANALYSIS    
     
Introduction
 
IV.1
Appraisal Guidelines
 
IV.1
RP Financial Approach to the Valuation
 
IV.1
Valuation Analysis
 
IV.2
          1.        Financial Condition  
IV.3
          2.        Profitability, Growth and Viability of Earnings  
IV.4
          3.        Asset Growth  
IV.6
          4.        Primary Market Area  
IV.6
          5.        Dividends  
IV.7
          6.        Liquidity of the Shares  
IV.8
          7.        Marketing of the Issue  
IV.8
                          A. The Public Market  
IV.9
                        B. The New Issue Market  
IV.14
                        C. The Acquisition Market  
IV.17
          8.        Management  
IV.17
          9.        Effect of Government Regulation and Regulatory Reform  
IV.18
Summary of Adjustments
 
IV.18
Valuation Approaches
 
IV.18
          1.        Price-to-Earnings (“P/E”)  
IV.20
          2.        Price-to-Book (“P/B”)  
IV.21
          3.        Price-to-Assets (“P/A”)  
IV.21
Comparison to Recent Offerings
 
IV.23
Valuation Conclusion
 
IV.23
 
 
 
 
RP ® Financial, LC.
 
LIST OF TABLES
First Federal Savings and Loan Association of Port Angeles
Port Angeles, Washington
 
TABLE
       
NUMBER
 
DESCRIPTION
  PAGE
         
1.1
 
Historical Balance Sheet Data
 
I.5
1.2
 
Historical Income Statements
 
I.10
         
2.1
 
Summary Demographic/Economic Information
 
II.6
2.2
 
Primary Market Area Employment Sectors
 
II.10
2.3
 
Market Area Unemployment Trends
 
II.11
2.4
 
Deposit Summary
 
II.13
2.5
 
Market Area Counties Deposit Competitors
 
II.15
         
3.1
 
Peer Group of Publicly-Traded Thrifts
 
III.3
3.2
 
Balance Sheet Composition and Growth Rates
 
III.8
3.3
 
Inc as a % of Average Assets and Yields, Costs, Spreads
 
III.11
3.4
 
Loan Portfolio Composition and Related Information
 
III.14
3.5
 
Credit Risk Measures and Related Information
 
III.15
3.6
 
Interest Rate Risk Measures and Net Interest Income Volatility
 
III.16
         
4.1
 
Pricing Characteristics and After-Market Trends
 
IV.15
4.2
 
Market Pricing Comparatives
 
IV.16
4.3
 
Public Market Pricing
 
IV.22
 
 
 
 
RP ® Financial, LC.   OVERVIEW AND FINANCIAL ANALYSIS
    I.1
 
I.  OVERVIEW AND FINANCIAL ANALYSIS
 
Introduction
 
First Federal Savings and Loan Association of Port Angeles (“First Federal” or the “Bank”) is a state chartered mutual savings bank primarily serving the North Olympic Peninsula (the “Peninsula”) region of Washington through nine full-service banking offices.  The Bank conducts business through its headquarters office in Port Angeles, Washington and 8 full-service offices within Clallam, Jefferson, and Kitsap Counties of Washington.  The Bank also maintains a loan production office (“LPO”) in Whatcom County, Washington.  A map of the Bank’s branch network is shown in Exhibit I-1.
 
In addition to the traditional retail branches, the Bank delivers its banking products and services through alternative delivery methods including direct deposit, ATMs and debit and check card services, overdraft protection, telephone and Internet banking, remote deposit capture, and notary and merchant services, thereby providing its customers multiple channels to access their accounts.  The Bank has served customers on the Peninsula since its founding in 1923.
 
The Bank’s primary business activity consists of accepting deposit accounts from the general public and investing those deposits, together with funds generated from operations and borrowings in first lien 1-4 family residential mortgage loans, commercial and multi-family real estate loans, commercial business loans, residential construction and lot loans, and consumer loans, consisting primarily of home equity loans and lines of credit.  The Bank also invests in securities, primarily mortgage - backe d   securities (“MBS”) issued or guaranteed by U.S. government agencies, securities issued by government sponsored agencies and obligations of state and political subdivisions .   The Bank is a member of the Federal Home Loan Bank (“FHLB”) system and its deposits are insured up to the regulatory maximums by the Federal Deposit Insurance Corporation (“FDIC”).  The Bank is subject to comprehensive regulation, supervision and examination by the Washington Department of Financial Institutions (“DFI”) and the FDIC.
 
 
 
 
 
RP ® Financial, LC.   OVERVIEW AND FINANCIAL ANALYSIS
    I.2
 
First Federal operates as a community-oriented financial institution offering traditional financial services to consumers and businesses in the regional market area, thereby attracting deposits from the general public and using those funds, to originate loans to their customers a nd invest in securities.  At September 30, 2012, the Bank had $781.8 million of total assets, $412.4 million in loans, $589.9 million of total deposits, and equity equal to $78.5 million, equal to 10.04% of total assets.  At the same date, the Bank’s tangible equity totaled $78.4 million, or 10.03% of assets, reflecting a minor adjustment for intangible assets of $14,000, which consisted of capitalized start up costs for a majority-owned subsidiary operation.  For the twelve months ended September 30, 2012, the Bank reported a net loss equal to $1.11 million, resulting in a return on average assets equal to negative 0.14%.  The Bank’s audited financial statements are included by reference as Exhibit I-2 and k ey operating ratios are shown in Exhibit I-3.
 
Plan of Conversion
 
The Board of Directors of First Federal adopted a plan of conversion on May 22, 2012, which was subsequently amended on November 20, 2012.  Pursuant to the plan of conversion, the Bank will convert from a state chartered mutual savings bank form of organization to a state chartered fully stock form and become a wholly owned subsidiary of First Northwest Bancorp (“First Northwest Bancorp” or the “Company”) a newly formed Washington corporation.  The Company will own all of the outstanding shares of the Bank.  Following the completion of the offering, First Northwest Bancorp will be a bank holding company and its primary regulator will be the Board of Governors of the Federal Reserve System (the “FRB”).
 
At this time, no other activities are contemplated for First Northwest Bancorp other than the ownership of the Bank, a loan to the newly-formed employee stock ownership plan (“ESOP”) and reinvestment of the proceeds that are retained by the Company.  In the future, First Northwest Bancorp may acquire or organize other operating subsidiaries, diversify into other banking-related activities, pay dividends to shareholders and/or repurchase its stock, although there are no specific plans to undertake such activities at the present time.
 
Establishment of a Charitable Foundation
 
In order to continue and enhance the Bank’s long-standing commitment to their local communities and historically strong community service, the Company intends to establish a charitable foundation, the First Federal Community Foundation (the “Foundation”), as a non-stock Washington corporation in connection with the conversion.  The Company will fund the Foundation with $400,000 in cash and the remainder in shares of common stock so that the total amount contributed is equal to 8% of the gross offering proceeds received in the offering.  The Foundation will make grants and donations to qualified charitable organizations and/or public entities in the communities in which First Federal maintains full-service branches.  The Foundation will be established in 2013 and it is anticipated that the Foundation will distribute at least 5% of its net investment assets each year.  The Foundation will allow the local communities to share in the anticipated future success of the Company through cash dividends payable on the common stock and potential appreciation of the value of the common stock, as well as enable the Company and its related entities to develop a unified charitable donation strategy.
 
 
 
 
 
RP ® Financial, LC.   OVERVIEW AND FINANCIAL ANALYSIS
    I.3
 
Strategic Overview
 
First Federal originally began serving the Peninsula in 1923 under the name Lincoln Savings and Loan Association, as a Washington state chartered mutual savings and loan association.  In 1934, the Bank converted to a federal charter and became known as First Federal Savings and Loan Association of Port Angeles.  Over time, through de novo branching and internal growth, the Bank expanded the market area throughout the Peninsula, and currently serves Clallam, Jefferson, Kitsap and Whatcom Counties in Washington through a network of nine branch offices and one LPO.  The newest full service branch is located in Kitsap County and was first opened as a new lending center in December 2011, which became a full-service branch in October 2012.  In addition, in July 2012, the Bank opened the LPO in Bellingham, Washington in Whatcom County.
 
First Federal operates as a full-service community bank in the North Olympic Peninsula and the surrounding region.  All of the Bank’s products and services are focused on the lending and investment needs of the local retail and commercial customer base as well as households in the market area.  First Federal’s vision includes continuing as the premier community bank in the market area served.  Based on the operating history and growth of the Bank since its founding, the Bank has established to a notable degree, its name recognition and overall reputation in the area.  In addition, the Bank views itself as an integral part of the local communities served, and thus has historically strongly supported local entities through charitable contributions.  Thus, the planned formation of the Foundation furthers this past operating perspective.
 
Historically, the Bank has operated as a traditional savings and loan association, attracting deposits and investing those funds primarily in residential mortgage loans and investment securities.  During the past few years, recognizing the need to adapt to current and future changing market conditions, the Bank revised its operating strategy to diversify the loan portfolio, sell residential mortgage loans into the secondary market, expand deposit product offerings, and enhance infrastructure, both in terms of equipment and personnel to better position the Bank for growth.  A new senior management team has been put into place over the past several years to direct the operations of the Bank.
 
 
 
 
 
RP ® Financial, LC.   OVERVIEW AND FINANCIAL ANALYSIS
    I.4
 
Growth has been pursued through having a competitive product line of deposit accounts, positioning the Bank as a local community bank, and using local deposits and borrowings for reinvestment in earning assets.  The growth in funding and reinvestment in investment securities has resulted in a gradual increase in assets and equity, with loan balances declining over the past five years.  The Bank’s conservative lending operations and the corresponding concentration in residential loan products has typically limited the level of delinquent loans.  However, during the most recent economic recession, the Bank experienced an increase in non-performing assets (“NPAs”).  The rise in NPAs combined with the Bank’s emphasis in higher risk commercial lending has also led to an increase in ALLLs and corresponding increase in loan loss provisions, resulting in a reported net loss for the most recent twelve months.
 
The equity from the stock offering will increase the Bank’s liquidity, leverage and growth capacity and the overall financial strength.  First Federal’s higher equity position resulting from the infusion of stock proceeds is anticipated to reduce interest rate risk through enhancing the interest-earning assets to interest-bearing liabilities (“IEA/IBL”) ratio.  The increased equity is expected to reduce overall funding costs for the asset base.  The Bank will also be better positioned to pursue growth and revenue diversification.  The projected use of proceeds is highlighted below.
 
 
●
The Company.   The Company is expected to retain an estimated 50% of the net conversion proceeds.  At present, funds at the holding company level are expected to be initially invested primarily into short-term liquid investments, along with providing the funds for the employee stock ownership plan purchases.  Over time, the funds may be utilized for various corporate purposes.
 
 
●
The Bank.   A majority of the net conversion proceeds will be infused into the Bank as cash and equity.  Cash proceeds (i.e., net proceeds less deposits withdrawn to fund stock purchases) infused into the Bank is expected to be deposited as an interest-earning deposit, providing additional funds for reinvestment in earning assets.
 
Balance Sheet Trends
 
Table 1.1 presents the Bank’s historical balance sheet data for the most recent five fiscal years and as of September 30, 2012. During this period, First Federal’s total assets have increased at a 2.3% annual rate, with assets increasing steadily from fiscal 2008 through September 30, 2012 as a result of the Bank’s efforts to achieve balance sheet growth and leverage the equity base. The structure of the earning asset base has changed notably since fiscal 2008, with loans receivable, representing the majority of the asset base, decreasing at a 6.6% rate over the same time period. Loans receivable have declined by $139.9 million, or 25.3%, over the last four and a quarter years, primarily as a result of lower loan demand in the local market area (as a result of the economic recession), along with the impact of a strategy to sell longer term fixed rate loans into the secondary market. Funds obtained from the reduction in loans have been reinvested primarily into cash and investments, with investments primarily consisting of mortgage backed securities (“MBS”), small business administration (“SBA”) bonds and municipal bonds.
 
 
 
 
 
RP ® Financial, LC.   OVERVIEW AND FINANCIAL ANALYSIS
    I.5
Table 1.1
First Federal Savings and Loan Association of Port Angeles
Historical Balance Sheet Data
 
                                                                           
06/30/08-
 
                                                                           
09/30/12
 
   
As of June 30,
   
As of September 30,
   
Annual.
 
   
2008
   
2009
   
2010
   
2011
   
2012
   
2012
   
Growth Rate
 
   
Amount
   
Pct(1)
   
Amount
   
Pct(1)
   
Amount
   
Pct(1)
   
Amount
   
Pct(1)
   
Amount
   
Pct(1)
   
Amount
   
Pct(1)
   
Pct
 
    ($ 000 )  
(%)
    ($ 000 )  
(%)
    ($ 000 )  
(%)
    ($ 000 )  
(%)
    ($ 000 )  
(%)
    ($ 000 )  
(%)
   
(%)
 
Total Amount of:
                                                                                         
Assets
  $ 711,239       100.00 %   $ 736,490       100.00 %   $ 738,563       100.00 %   $ 748,851       100.00 %   $ 771,864       100.00 %   $ 781,778       100.00 %     2.25 %
Loans Receivable (net) (2)
    552,293       77.65 %     527,630       71.64 %     472,178       63.93 %     424,462       56.68 %     401,077       51.96 %     412,353       52.75 %     -6.64 %
Cash and Equivalents
    21,117       2.97 %     32,748       4.45 %     26,966       3.65 %     35,751       4.77 %     42,475       5.50 %     36,525       4.67 %     13.76 %
Investment Securities (AFS)
    49,461       6.95 %     95,266       12.94 %     163,270       22.11 %     198,917       26.56 %     218,163       28.26 %     219,214       28.04 %     41.95 %
Investment Securities (HTM)
    40,520       5.70 %     33,369       4.53 %     24,534       3.32 %     37,081       4.95 %     57,385       7.43 %     60,702       7.76 %     9.98 %
FHLB Stock
    10,819       1.52 %     10,819       1.47 %     10,819       1.46 %     10,819       1.44 %     10,819       1.40 %     10,722       1.37 %     -0.21 %
                                                                                                         
Real Estate Owned/
Repossessed Assets
    6       0.00 %     479       0.07 %     2,073       0.28 %     4,475       0.60 %     2,864       0.37 %     3,230       0.41 %  
NM
 
Mortgage Servicing Rights
    2,512       0.35 %     2,702       0.37 %     2,813       0.38 %     2,494       0.33 %     1,873       0.24 %     1,666       0.21 %     -9.21 %
BOLI
    16,237       2.28 %     15,420       2.09 %     16,398       2.22 %     16,950       2.26 %     17,656       2.29 %     17,804       2.28 %     2.19 %
Fixed Assets
    14,343       2.02 %     14,126       1.92 %     13,395       1.81 %     12,840       1.71 %     12,200       1.58 %     11,932       1.53 %     -4.24 %
Subsidiary Start Up Intangible
    0       0.00 %     0       0.00 %     833       0.11 %     517       0.07 %     15       0.00 %     14       0.00 %  
NM
 
Other Assets
    3,931       0.55 %     3,932       0.53 %     5,285       0.72 %     4,545       0.61 %     7,337       0.95 %     7,616       0.97 %     16.84 %
                                                                                                         
Deposits
  $ 491,536       69.11 %   $ 530,822       72.07 %   $ 556,223       75.31 %   $ 562,398       75.10 %   $ 583,238       75.56 %   $ 589,871       75.45 %     4.38 %
FHLB Advances, Notes Payable
    137,906       19.39 %     119,675       16.25 %     99,993       13.54 %     100,033       13.36 %     100,033       12.96 %     100,033       12.80 %     -7.28 %
Other Liabilities
    9,707       1.36 %     14,918       2.03 %     9,699       1.31 %     9,200       1.23 %     11,293       1.46 %     13,420       1.72 %     7.92 %
                                                                                                         
Equity
  $ 72,091       10.14 %   $ 71,075       9.65 %   $ 72,648       9.84 %   $ 77,220       10.31 %   $ 77,300       10.01 %   $ 78,454       10.04 %     2.01 %
Tangible Equity
  $ 72,091       10.14 %   $ 71,075       9.65 %   $ 71,815       9.72 %   $ 76,703       10.24 %   $ 77,285       10.01 %   $ 78,440       10.03 %     2.01 %
Accumulated other Comprehensive
                                                                                                       
Gain/(Loss)
  $ 121       0.02 %   ($ 1,665 )     -0.23 %   ($ 94 )     -0.01 %   $ 583       0.08 %   $ 2,623       0.34 %   $ 3,142       0.40 %        
                                                                                                         
Loans/Deposits
            112.36 %             99.40 %             84.89 %             75.47 %             68.77 %             69.91 %        
                                                                                                         
Offices Open
    9               9               9               8               9               9                  
 
(1)  Ratios are as a percent of ending assets.
(2)  Includes loans held for sale.
 
Source:  Audited and unaudited financial statements; RP Financial calculations.
 
 
 
 
 
RP ® Financial, LC.   OVERVIEW AND FINANCIAL ANALYSIS
    I.6
 
Asset growth has been funded entirely with deposits, offset by reduction in borrowed funds.  Deposits have steadily increased over fiscal 2008 to September 30, 2012 by 4.4% on an annual basis, while borrowed funds have declined at an annual rate of 7.3% over the same time period.  The Bank’s equity base has consistently remained in the range of 10.0% of assets, with the dollar amounts of equity increasing through fiscal 2011 due to profitable operations, and through September 30, 2012 due to increases in other comprehensive income associated with the investment portfolio, which offset the fiscal 2012 and the twelve months ended September 30, 2012 net losses.  A small balance of intangible ($14,000 as of September 30, 2012), results in a slightly lower amount of tangible equity.
 
First Federal’s loan portfolio totaled $412.4 million, or 52.8% of assets at September 30, 2012.  The loan portfolio balance has been declining since fiscal 2008 due to lower loan demand and the Bank’s mortgage banking activities, with the decline in loans partially offset by efforts to expand the Bank’s commercial lending activities.  The combination of the decline in loans receivable and primary dependence on deposits for funding resulted in the loan/deposit ratio decreasing from 112.36% at June 30, 2008 to 69.91% at September 30, 2012.  First Federal’s loan portfolio reflects the Bank’s historical concentration in 1-4 family residential first and second position mortgage lending for portfolio, as these loans comprised 64.8% of total loans as of September 30, 2012.  The Bank has been pursuing a diversification strategy and emphasizing growth in the commercial lending portfolio.  As of September 30, 2012, commercial real estate loans (including multi-family loans) totaled $110.1 million (26.1% of loans) and commercial business loans totaled $9.2 million (2.2% of loans), together maintaining 28.3% of the loan portfolio, versus 9.6% of total loans as of June 30, 2008.  The residential mortgage loan portfolio consists of both fixed and adjustable rate loans.  The Bank originates both fixed and adjustable rate residential loan mortgage loans (“ARM”) that are either sold in the secondary market or retained in the residential portfolio based on internal investment, credit and interest rate risk objectives.  As a result of the strategy of selling longer-term fixed rate residential loans into the secondary market on a servicing retained basis, First Federal has built a portfolio of loans serviced for others equal to $277.8 million and capitalized such servicing in the amount of $1.7 million on the balance sheet as of September 30, 2012.
 
 
 
 
 
RP ® Financial, LC.   OVERVIEW AND FINANCIAL ANALYSIS
    I.7
 
The intent of the Bank’s cash and investment policy is to provide adequate liquidity and to generate a favorable return within the context of supporting First Federal’s cash operating needs and credit, reinvestment, liquidity, and interest rate risk objectives.  The level of cash and equivalents has typically remained in the range of 3% to 5% of assets, which has been sufficient for daily operational needs.  As of September 30, 2012 the portfolio of cash and cash equivalents totaled $36.5 million, equal to 4.7% of assets.
 
The investment securities portfolio, which includes MBS, SBA bonds and municipal bonds, totaled $279.9 million or 35.8% of assets as of September 30, 2012.  The majority of the portfolio, or $219.2 million was classified as available-for-sale (“AFS”), with a pre-tax gain of $4.8 million as of September 30, 2012, while the remaining balance of investment securities, or $60.7 million, were classified as held to maturity (“HTM”).  Additionally, the Bank has an investment in FHLB stock of $10.7 million or 1.4% of assets.  Investment in MBS represented $218.9 million, or 75% of total investment securities as of September 30, 2012.  These investments are attractive to the Bank due to their low credit risk and assist in managing interest rate risk while providing for an enhanced yield over other short term investment vehicles.  Essentially all of the MBS securities are agency-issued, although there is a small balance ($4.3 million) of corporate MBS.  The investment in SBA bonds equaled $41.4 million as of September 30, 2012, or 14% of the investment portfolio.  These bonds also provide similar benefits to the Bank as are obtained with MBS investments.  The level of cash and investments is anticipated to increase initially following conversion, pending gradual redeployment into higher yielding loans.  Details of the Bank’s investment securities portfolio are presented in Exhibit I-4.
 
Over the time period shown in Table 1.1, the investment in fixed assets has declined from $14.3 million, or 2.02% of assets at June 30, 2008, to $11.9 million, or 1.53% of assets at September 30, 2012, as First Federal has maintained a relatively stable office network.  The Bank owns eight of the nine branch office locations, leasing the newly opened branch in Poulsbo, Washington as well as the newly established LPO in Bellingham, Washington.  The net book value in the headquarters office and all of the branch offices and LPO (including the value of land) totaled $9.0 million, or 1.2% of assets as of September  30, 2012.  The newly established branch office in Poulsbo is an 883 square foot space (which became a full service branch in October 2012 and is scheduled to receive deposits by October 31, 2012) with a lease expiration date of January 31, 2014 and lease renewal for two successive three year terms.  The LPO in Bellingham is a 340 square foot space (established in July 2012) with a lease term of six months from July 12, 2012 until January 31, 2013 and has no specific renewal terms.
 
 
 
 
 
RP ® Financial, LC.   OVERVIEW AND FINANCIAL ANALYSIS
    I.8
 
Real estate owned (“REO”) and repossessed assets totaled $3.2 million or 0.4% of assets at September 30, 2012, with single family first position residential real estate properties totaling $2.9 million, or 88% of the total.  Other REO properties included balances of construction/land loans and a small balance of commercial real estate.  The largest REO property had an aggregate book value of $869,000 and consisted of a single family residence in the Portland, Oregon metropolitan area.  This loan was a part of a pool of loans purchased in 2006.  Upon obtaining title to such properties, First Federal is able to market and resolve such assets.
 
As of September 30, 2012, First Federal held a balance of bank owned life insurance (“BOLI”), $17.8 million, which reflects growth since fiscal 2009 owing to increases in the cash surrender value of the policies.  The balance of the BOLI reflects the value of life insurance contracts on selected members of the Bank’s management and has been purchased with the intent to offset various benefit program expenses on a tax advantaged basis.  The increase in the cash surrender value of the BOLI is recognized as an addition to other non-interest income on an annual basis.
 
Over the past four and a quarter years, First Federal’s funding needs have been provided by retail deposits, borrowed funds, and retained earnings.  Deposits have historically comprised the majority of funding liabilities, and increased at an annual rate of 4.4% since the end of fiscal 2008.  Deposit growth in recent years has been primarily driven by transaction and savings account deposits, as the balance of CDs has declined.  Borrowings serve as an alternative funding source for the Bank to address funding needs for growth and to support management of deposit costs and interest rate risk.  From fiscal 2008 through September 30, 2012, borrowings decreased at an annual rate of 7.3% and totaled $100.0 million at September 30, 2012, comprised of $99.9 million in FHLB advances and a minimal amount of other borrowings.
 
 
 
 
 
RP ® Financial, LC.   OVERVIEW AND FINANCIAL ANALYSIS
    I.9
 
The balance of equity increased over the past four and a quarter years as the Bank recorded cumulative profitability from fiscal 2008 to fiscal 2011, as well as an increase in the accumulated other comprehensive gain from the available for sale investment portfolio from fiscal 2008 to September 30, 2012.  Reflecting the combination of the increase in equity and the increase in assets since fiscal 2008, the equity-to-assets ratio declined from 10.14% at fiscal year end 2008 to 10.04% at September 30, 2012.  The Bank’s tangible equity ratio has also declined as a result of the subsidiary intangible booked in fiscal 2010.  The Bank maintained surpluses relative to all of its regulatory capital requirements at September 30, 2012.  The pro forma return on equity (“ROE”) is expected to initially decline following the conversion, given the increased equity position.
 
Income and Expense Trends
 
Table 1.2 presents the Bank’s income and expense trends over the past five fiscal years and twelve months ended September 30, 2012.  First Federal recorded consistently profitable operations from fiscal 2008 to fiscal 2011, ranging from a high of $3.9 million or 0.52% of average assets for fiscal 2011 to a low of $1,000, or 0.00% of average assets for fiscal 2010.  The Bank reported a net loss in fiscal 2012 and for the twelve months ended September 30, 2012 primarily from increased provisioning for loan losses, increased expenses related to REO and repossessed assets, as well as a decline in net interest income.
 
The income statement has been affected by various non-operating income or expense items over the past five fiscal years and for the twelve months ended September 30, 2012, including such items as gains on the sale of loans and investment securities, other than temporary impairment (“OTTI”) charges related to BOLI and investment securities, and a recovery on loan servicing expenses.  Net interest income and operating expenses represent the primary components of the Bank’s income statement.  Other revenues for the Bank largely are derived from customer service fees and charges on the deposit base and lending operations.  The level of loan loss provisions due to the prevailing economic trends has also affected the level of net income over the past five fiscal years, as well as for the twelve months ended September 30, 2012.
 
 
 
 
 
RP ® Financial, LC.   OVERVIEW AND FINANCIAL ANALYSIS
    I.10
 
Table 1.2
First Federal Savings and Loan Association of Port Angeles
Historical Income Statements
 
                                                                         
                                                               
For the Twelve Months Ended
 
   
For the Fiscal Year Ended June 30,
   
September 30,
 
   
2008
   
2009
   
2010
   
2011
   
2012
   
2012
 
   
Amount
   
Pct(1)
   
Amount
   
Pct(1)
   
Amount
   
Pct(1)
   
Amount
   
Pct(1)
   
Amount
   
Pct(1)
   
Amount
   
Pct(1)
 
    ($ 000 )  
(%)
    ($ 000 )  
(%)
    ($ 000 )  
(%)
    ($ 000 )  
(%)
    ($ 000 )  
(%)
    ($ 000 )  
(%)
 
                                                                                     
Interest Income
  $ 41,517       5.73 %   $ 39,106       5.56 %   $ 33,896       5.10 %   $ 29,416       3.93 %   $ 26,942       3.57 %   $ 26,571       3.41 %
Interest Expense
    (23,218 )     -3.21 %     (16,823 )     -2.39 %     (11,681 )     -1.76 %     (8,258 )     -1.10 %   $ (7,140 )     -0.95 %   $ (6,831 )     -0.88 %
  Net Interest Income
  $ 18,299       2.53 %   $ 22,283       3.17 %   $ 22,215       3.35 %   $ 21,158       2.82 %   $ 19,802       2.63 %   $ 19,740       2.53 %
Provision for Loan Losses
    (259 )     -0.04 %     (1,966 )     -0.28 %     (4,373 )     -0.66 %     (926 )     -0.12 %   ($ 7,970 )     -1.06 %   ($ 7,046 )     -0.90 %
  Net Interest Income after Provisions
  $ 18,039       2.49 %   $ 20,317       2.89 %   $ 17,842       2.69 %   $ 20,232       2.70 %   $ 11,832       1.57 %   $ 12,694       1.63 %
                                                                                                 
Other Income
  $ 2,513       0.35 %   $ 2,217       0.32 %   $ 3,893       0.59 %   $ 3,940       0.53 %   $ 4,022       0.53 %   $ 4,003       0.51 %
Operating Expense
    (19,145 )     -2.64 %     (20,906 )     -2.97 %     (21,886 )     -3.30 %     (19,765 )     -2.64 %   ($ 20,991 )     -2.78 %   ($ 21,074 )     -2.70 %
  Net Operating Income
  $ 1,408       0.19 %   $ 1,628       0.23 %   $ (151 )     -0.02 %   $ 4,407       0.59 %   $ (5,137 )     -0.68 %   $ (4,377 )     -0.56 %
                                                                                                 
Gain(Loss) on Sale of Loans
  $ 381       0.05 %   $ 886       0.13 %   $ 2,525       0.38 %   $ 1,472       0.20 %   $ 1,503       0.20 %   $ 1,434       0.18 %
                                                                                                 
Gain(Loss) on Sale of Investment Securities
  $ 0       0.00 %   $ 0       0.00 %   $ 908       0.14 %   $ 40       0.01 %   $ 293       0.04 %   $ 344       0.04 %
FHLB Borrowings Prepayment Penalty
    0       0.00 %     (38 )     -0.01 %     (729 )     -0.10 %     0       0.00 %     0       0.00 %     0       0.00 %
Recovery on Loan Servicing Expenses
    0       0.00 %     0       0.00 %     0       0.00 %     0       0.00 %     0       0.00 %     550       0.08 %
Net Impairment Losses on Investment Secs
    0       0.00 %     (494 )     -0.07 %     (3,154 )     -0.48 %     (829 )     -0.11 %     (419 )     -0.06 %     (249 )     -0.03 %
OTTI on BOLI
    0       0.00 %     (874 )     -0.12 %     0       0.00 %     0       0.00 %     0       0.00 %     0       0.00 %
  Total Non-Operating Income/(Expense)
  $ 0       0.00 %   ($ 1,406 )     -0.20 %   ($ 2,975 )     -0.45 %   ($ 789 )     -0.11 %   ($ 126 )     -0.02 %   $ 645       0.08 %
                                                                                                 
Net Income Before Tax
  $ 1,789       0.25 %   $ 1,108       0.16 %   ($ 601 )     -0.09 %   $ 5,090       0.68 %   ($ 3,760 )     -0.50 %   ($ 2,298 )     -0.29 %
Income Tax Provision (Benefit)
    (268 )     -0.04 %     (335 )     -0.05 %     602       0.09 %     (1,195 )     -0.16 %     1,800       0.24 %     1,193       0.15 %
  Net Income (Loss)
  $ 1,521       0.21 %   $ 773       0.11 %   $ 1       0.00 %   $ 3,895       0.52 %   ($ 1,960 )     -0.26 %   ($ 1,105 )     -0.14 %
                                                                                                 
Adjusted Earnings
                                                                                               
Net Income
  $ 1,521       0.21 %   $ 773       0.11 %   $ 1       0.00 %   $ 3,895       0.52 %   ($ ,960 )     -0.26 %   ($ 1,105 )     -0.14 %
Add(Deduct):  Non-Operating Items
    0       0.00 %     1,406       0.20 %     2,975       0.45 %     789       0.11 %     126       0.02 %     (645 )     -0.08 %
Tax Effect (2)
    0       0.00 %     (478 )     -0.07 %     (1,012 )     -0.15 %     (268 )     -0.04 %     (43 )     -0.01 %     219       0.03 %
  Adjusted Earnings
  $ 1,521       0.21 %   $ 1,701       0.24 %   $ 1,964       0.30 %   $ 4,415       0.59 %   ($ 1,877 )     -0.25 %   ($ 1,531 )     -0.20 %
                                                                                                 
Expense Coverage Ratio
    95.58 %             106.59 %             101.50 %             107.05 %             94.34 %             93.67 %        
Efficiency Ratio
    91.99 %             85.33 %             83.83 %             78.75 %             88.11 %             88.76 %        
Return on Equity
    2.11 %             1.09 %             0.00 %             5.17 %             -2.52 %             -1.41 %        
Effective Tax Rate (Benefit)
    14.98 %             30.23 %             100.11 %             23.48 %             47.87 %             51.91 %        
 
(1)  Ratios are as a percent of average assets
(2) Assumes a 34% effective tax rate for federal & state income taxes.
 
Source: Audited & unaudited financial statements & RP Financial calculations
 
 
 
 
 
RP ® Financial, LC.   OVERVIEW AND FINANCIAL ANALYSIS
    I.11
 
The Bank’s net interest income to average assets ratio increased from a low of 2.53% for fiscal 2008 to a high of 3.35% for fiscal 2010, which declined to 2.53% for the twelve months ended September 30, 2012, reflecting market trends in interest rates over that time period, along with the impact of the Bank’s operating strategies.  The dollar amount of net interest income has declined since 2009 due to the depressed economic operating environment in the Bank’s regional market area that has resulted in the substantial reduction in loans receivable on the balance sheet, along with the lower prevailing interest rate environment that has substantially reduced loan and investment yields.  While deposit costs have fallen, reducing the interest expense ratio from 3.21% of average assets for fiscal 2008 to 0.88% of average assets for the twelve months ended September 30, 2012, the impact of lower interest rates and the decline in loans has been greater.  For the twelve months ended September 30, 2012, net interest income totaled $19.7 million, or 2.53% of average assets.  The Bank’s interest rate spreads and yields and costs for the past three fiscal years and for the quarter ended September 30, 2012 are set forth in Exhibits I-3 and I-5.
 
Non-interest operating income (excluding non-operating items) has trended upward since fiscal 2008 in dollar terms and in relation to the growth in assets.  The non-interest operating income ratio is dependent upon the level of banking activities, with fees and charges on loan and deposit accounts constituting the primary source of non-interest income for the Bank.  First Federal also receives a level of income from dividends on the BOLI investment.  While fee income related to lending activities has been somewhat limited, the increase in the dollar amount of non-interest income shown in Table 1.2 reflects in part increases in balances of deposit accounts, including core accounts which provide higher levels of fee income.  For the twelve months ended September 30, 2012, non-interest income totaled $4.0 million, or 0.51% of average assets.
 
Operating expenses represent the other major component of the Bank’s income statement, and ranged from a low of 2.64% of average assets for fiscal 2008 and fiscal 2011 to a high of 3.30% of average assets for fiscal 2010.  Such expenses totaled $21.1 million, or 2.70% of average assets for the twelve months ended September 30, 2012.  The fluctuations in the dollar amount of operating expenses since 2008 reflects the impact of recent operational strategies, including reductions in personnel, changes to the lending strategy, and the impact of non-performing assets.  Since fiscal 2009, higher costs have been incurred related to REO from asset value write downs as a result of disposition strategies including short sales, along with ongoing costs of managing and maintaining REO properties.  Compensation and benefits costs declined in fiscal 2011 as a result of significant staffing reductions completed in that year.  Increases in expenses have been experienced in recent years in the areas of data processing and occupancy and equipment, in particular as the branch office network has been expanded.  Upward pressure will be placed on the Bank’s expense ratio following the stock offering, due to expenses associated with operating as a publicly-traded company, including expenses related to the stock benefit plans.
 
 
 
 
 
RP ® Financial, LC.   OVERVIEW AND FINANCIAL ANALYSIS
    I.12
 
The trends in the net interest income and operating expense ratios since fiscal 2008 have caused the expense coverage ratio (net interest income divided by operating expenses) to range from a high of 107.1% in fiscal 2011 to a low of 93.7% for the most recent 12 month period ended September 30, 2012, which indicates that net interest income was not sufficient to cover the Bank’s operating expenses, another factor in the Bank’s reported net loss for the last twelve months.  Similarly, First Federal’s efficiency ratio (operating expenses, net of amortization of intangibles, as a percent of the sum of net interest income and other operating income) has fluctuated since fiscal 2008, and was 88.8% during the twelve months ended September 30, 2012, a decline from a high of 92.0% in fiscal 2008.  The increasing levels of net interest and non-interest income have been the primary reasons for the slight improvement in the efficiency ratio.
 
The levels of loan loss provisions incurred over the last five fiscal years, as well as over the last twelve months, have also impacted the Bank’s operating results, reflecting the more challenging economic environment and the related impact on asset quality as the Bank experienced more loan delinquencies and defaults that resulted in an increase in loan charge-offs.  During fiscal years 2008 through 2012 and for the twelve months ended September 30, 2012, the Bank’s total loan loss provisions ranged from a low of $259,000 or 0.04% of average assets during fiscal 2008 to a high of $8.0 million or 1.06% of average assets for fiscal 2012.  For the last twelve months ended September 30, 2012, total loan loss provisions remain high at $7.0 million, or 0.90% of average assets.  The increase in provisions since 2008, resulted in an increase in the ALLL balance to $8.2 million as of September 30, 2012.  Net loan charge-offs totaled $4.5 million for the twelve months ended September 30, 2012, a $1.9 million increase over the last eighteen months.  As of September 30, 2012, ALLLs equaled 51.2% of non-performing loans (“NPLs”), 42.6% of non-performing assets, and 1.95% of total loans.  Exhibit I-6 sets forth the Bank’s allowance for loan loss activity during the past five years and the quarter ended September 30, 2012.
 
Non-operating items have had a relatively notable impact on the Bank’s income statement over the past five and a quarter fiscal years and have consisted primarily of gains on the sale of investment securities and loans, as well as OTTI charges on investments.  As shown in Table 1.2, the ongoing strategy of selling longer-term fixed rate residential loans into the secondary market has provided substantial fee income in the form of gains on the sale of loans.  The Bank has also recognized significant levels of OTTI charges beginning in 2009, related to $6.0 million in collateralized debt obligations secured by pooled trust preferred securities that were purchased prior to 2007.  These securities were sold during 2012.  Separately, the Bank has periodically realized gains on the sale of investment securities; as such gains have been available in the declining interest rate environment of the past several years.  During the twelve months ended September 30, 2012, First Federal reported a $1.4 million gain on sale of loans, a $344,000 gain on sale of investment securities, and a $550,000 recovery on loan servicing expenses, which were partially offset by OTTI charges on investment securities of $249,000.  In prior years, the Bank reported one-time expenses due to the OTTI on BOLI in fiscal 2008, and charges related to the prepayment of FHLB advances in fiscal 2009 and 2010.
 
 
 
 
 
RP ® Financial, LC.   OVERVIEW AND FINANCIAL ANALYSIS
    I.13
 
The Bank’s income tax status has been impacted by the varying levels of income recorded over the past five and a quarter fiscal years and by the investment in BOLI.  For fiscal years 2010 and fiscal 2012, as well as for the twelve months ended September 30, 2012, First Federal recorded tax benefits based on the negative to minimal earnings recorded by the Bank.  For fiscal years 2008, 2009, and 2011, First Federal recorded tax expense based on recorded taxable income, which was adjusted for the tax-advantaged income noted above.  The effective tax rates for the Bank ranged from 15.0% in fiscal 2008 to 100.1% in fiscal 2010 and 51.9% for the twelve months ended September 30, 2012.  The effective tax rates for fiscal 2010 and 2012 are essentially not meaningful effective tax rates, due to the income tax benefit based on the minimal earnings or loss reported.  The Bank’s marginal effective statutory tax rate approximates 34%, and this is the rate utilized to calculate the net reinvestment benefit from the offering proceeds.
 
Interest Rate Risk Management
 
First Federal utilizes the services of a third party to analyze the impact of interest rate changes on the Bank’s income statement.  An analysis of the Bank’s balance sheet in terms of reactions to increases in interest rates indicates that for interest rate increases of up to 200 basis points, net interest income will increase.  For increases in interest rates above that level, net interest income is projected to decrease.  First Federal also measures its interest rate risk exposure by use of an interest rate sensitivity analysis which measures interest rate risk by computing changes in the present value of the Bank’s cash flows from assets, liabilities, and off-balance sheet items in the event of a range of assumed changes in market interest rates.  The analysis provides the estimated changes in the present value of the Bank’s equity or Net Portfolio Value (“NPV”) under the assumed instantaneous changes in the U.S. treasury yield curve.  Utilizing figures as of September 30, 2012, based on a 200 basis point instantaneous and sustained increase in interest rates, the analysis indicates that the Bank’s NPV would decrease by 4.2% (see Exhibit I-7).
 
 
 
 
 
RP ® Financial, LC.   OVERVIEW AND FINANCIAL ANALYSIS
    I.14
 
The Bank pursues a number of strategies to manage interest rate risk, particularly with respect to seeking to limit the repricing mismatch between interest rate sensitive assets and liabilities.  The Bank manages interest rate risk from the asset side of the balance sheet through underwriting residential mortgages that will allow for their sale to the secondary market when such a strategy is appropriate and diversifying into other types of lending beyond 1-4 family permanent mortgage loans which consist primarily of shorter term commercial real estate and commercial business loans, along with adjustable rate home equity loans.  The Bank also invests in short-term securities, which generally have lower yields compared to longer-term investments.  On the liability side of the balance sheet the Bank has focused on increasing the balances of core deposit accounts, including checking, savings and money market accounts, all of which are deemed to be less interest rate sensitive than time deposits.
 
As of June 30, 2012, of the Bank’s total loans due after June 30, 2013, adjustable rate loans comprised 36.7% of those loans (see Exhibit I-8).  In addition, the Bank is actively selling the majority of all residential fixed-rate mortgages at the time of origination to the secondary market for interest rate risk management purposes.  On the liability side of the balance sheet, management of interest rate risk has been pursued through maintaining a concentration of deposits in lower cost and less interest rate sensitive transaction and savings accounts and maintaining a base of interest-free equity.  Transaction and savings accounts comprised 71.9% of the Bank’s deposits at September 30, 2012.  The infusion of stock proceeds will serve to further limit the Bank’s interest rate risk exposure, as most of the net proceeds will be redeployed into interest-earning assets and the increase in the Bank’s capital will lessen the proportion of interest rate sensitive liabilities funding assets.
 
There are numerous limitations inherent in interest rate risk analyses such as the credit risk of Bank’s loans pursuant to changing interest rates.  Additionally, such analyses do not measure the impact of changing spread relationships, as interest rates among various asset and liability accounts rarely move in tandem, as the shape of the yield curve for various types of assets and liabilities is constantly changing in response to investor perceptions and economic events and circumstances.
 
 
 
 
 
RP ® Financial, LC.   OVERVIEW AND FINANCIAL ANALYSIS
    I.15
 
Lending Activities and Strategy
 
Since it’s founding in 1923 up to the last decade, First Federal conducted its lending   operations as a traditional savings and loan association, attracting deposits and investing those funds primarily in long term fixed rate 1-4 family residential first mortgage loans to local residents of the geographic areas surrounding the office locations.  During the past decade, the Bank has gradually diversified the lending function into commercial real estate and commercial business loans, while lessening the proportion of 1-4 family residential loans in portfolio.  To a much lesser extent, the First Federal originates residential construction and lot loans, home equity loans, home equity lines of credit (“HELOCs”) and consumer loans.  Details of the Bank’s loan portfolio composition are shown in Exhibit I-9 and Exhibit I-10. 
 
Residential Real Estate First Mortgage Lending
 
As noted above, First Federal has historically engaged in the origination and retention in portfolio of first mortgage loans secured by traditional 1-4 family residential owner-occupied property.  As of September 30, 2012, total 1-4 family residential mortgage loans equaled $225.0 million, or 53.2% of total loans, primarily consisting of fixed rate residential mortgage loans.  Reflecting the Bank’s recent loan diversification strategy, the balance of 1-4 family first mortgage loans has declined from a high of $368.2 million, or 66.3% of total loans as of June 30, 2008.
 
The Bank originates both fixed and adjustable-rate loans which can be sold in the secondary market or retained in the loan portfolio based on First Federal’s interest rate risk, credit and earnings targets.  Residential loans are underwritten to secondary market standards or to other acceptable standards for loans, which may not meet all of Freddie Mac and Fannie Mae eligibility requirements.
 
Fixed-rate residential mortgages are offered with amortization periods of between 10 to 30 years.  Quoted loan yields are based on Freddie Mac secondary market rates as well as other internal and external economic considerations.  ARM products with similar amortizations terms are also offered, with the interest rate usually fixed for an initial period, such as one to five years, with annual adjustments thereafter.  Future interest rate adjustments are usually limited to increases or decreases of no more than 2% per adjustment and a cap of 5% to 6% above the initial interest rate over the life of the loan, with no borrower prepayment restrictions.  ARM loans are typically retained in portfolio.  The Bank does not offer ARMs with deep discount teaser rates, and as of September 30, 2012 the average interest rate on the ARM loans was approximately 64% over the fully indexed rate.  As of September 30, 2012, the Bank reported $173.2 million of fixed rate one- to four-family residential mortgage loans and $51.7 million of ARM loans, or 77.0% and 23.0% of total residential mortgage loans in the loan portfolio.
 
 
 
 
 
RP ® Financial, LC.   OVERVIEW AND FINANCIAL ANALYSIS
    I.16
 
In recent years First Federal has followed a strategy of originating and selling long-term fixed rate residential loans into the secondary market.  This strategy has been pursued primarily for interest rate risk management purposes, given the historically low interest rate environment that has existed over the past several years.  Since 2009, the Bank has generally sold most newly originated and refinanced, conforming single-family owner-occupied mortgage loans into the secondary market on a servicing retained basis.  In 2012, after extended refinance activity, the Bank began selectively adding fixed-rate mortgages to the portfolio in an effort to enhance net interest income.
 
Residential loans are primarily generated through the Bank’s in-house lending staff.  All of the residential loans are evaluated at the time of origination using secondary market underwriting criteria.  Most of the Bank’s 1-4 family loans are originated with LTV ratios of up to 95%, with private mortgage insurance (“PMI”) being required for loans in excess of an 80% LTV ratio.  The Bank does not offer “interest only”, “negative amortization”, “Alt A”, or subprime loans, all of which are loans with higher risk underwriting characteristics.
 
Home Equity/Home Equity Lines of Credit
 
Home equity loans and HELOCs are offered by First Federal as part of the residential lending activities and provide interest rate risk and yield enhancement benefits.  First Federal offers such loans in the geographic footprint served by the branches, and currently these loans are sourced by the branch offices.  This lending activity is expected to continue, recognizing the risk in this type of lending given that home values have declined.  Home equity and HELOC loans totaled $48.6 million, or 11.5% of total loans as of September 30, 2012, a slight increase from $45.8 million, or 8.2% of loans as of June 30, 2008.
 
Home equity loans are made for, among other purposes, the improvement of residential properties, weatherization, and other consumer needs.  The majority of these loans are secured by a second deed of trust on the residential property.  These loans are originated as fixed rate, fixed term loans underwritten as amortizing loans with terms available up to a maximum loan amount of $250,000 with a 7 year repayment.  HELOCs are currently originated with adjustable rates tied to the prime rate of interest with a maximum loan amount up to $50,000.  A balloon payment for the balance is due at 15 years.  The maximum combined LTV (first and second liens) for this product is limited to 70% of the appraised value.
 
 
 
 
 
RP ® Financial, LC.   OVERVIEW AND FINANCIAL ANALYSIS
    I.17
 
First Federal offers a weatherization loan program guaranteed by either the City of Port Angeles or the Clallam County Public Utility District, with the purpose to promote energy conservation by weatherizing homes and providing a low interest rate program for consumers to achieve lower energy costs and tax rebates.  These loans are one-year adjustable-rate loans indexed to LIBOR.
 
Construction and Land Loans
 
Historically, First Federal has pursued construction and land lending, which has been more limited since the economic downturn in 2008.  As of September 30, 2012, construction and land loans totaled $18.0 million, or 4.3% of total loans, consisting of $16.4 million of land loans and $1.6 million of residential construction loans.  Credit risk is managed by limiting lending activities within the primary market area as almost all of the construction and land portfolio is on the Peninsula.  These loans are typically attractive due to the relatively short average duration and attractive yields.
 
The largest segment of the construction/land loan portfolio consists of land acquisition, development and construction (“ADC”) loans, originated primarily to local contractors and developers for the purpose of holding and/or developing residential building sites and homes when market conditions warrant such activity.  Such lending has been restricted since the economic downturn in 2008.  Land loans are secured by a first lien on the property and carry a LTV ratio limited at 65% of the lower of the acquisition price or the appraised value.  Development land loans are generally limited to a 75% LTV.  These loans have been limited to projects within the Bank’s primary market area.  The Bank also originates individual lot loans secured by a first lien on the property to borrowers who are planning to build on the lot or who are holding the lot for investment purposes.  Generally, these loans have a maximum LTV ratio of 75% for improved lands and 65% for unimproved land.   The interest rate on these loans is fixed with a 20-year amortization and a five-year term.
 
Residential construction loans totaled $1.6 million as of September 30, 2012.  The Bank has modified the construction loan product offerings to assist in interest rate risk management.  Prior to 2010, First Federal offered an “all-in-one” residential-fixed-rate-custom construction loan product, which enabled the borrower to lock in the interest rate for the construction phase as well as for the permanent financing.  This loan type created unacceptable interest rate risk during periods of interest rate volatility, and thus was replaced in 2010 with an adjustable-rate custom construction loan which, upon completion of the construction period, is generally retained in portfolio as an adjustable rate mortgage loan.
 
 
 
 
 
RP ® Financial, LC.   OVERVIEW AND FINANCIAL ANALYSIS
    I.18
 
First Federal also offers construction loans for commercial real estate projects.  These loans are typically secured by multi-family, apartment, retail, office/warehouse and office buildings.  These loans are typically underwritten with minimum debt service coverage requirements of 1.30x or better, LTV limitations, pre-leasing requirements, construction cost over-run contingency reserves, interest and absorption period reserves, occupancy, capitalization rates and interest rate stress testing, as well as other underwriting criteria, all in order to limit credit risk of the portfolio.
 
Commercial and Multi-Family Real Estate Lending
 
As noted previously, a key lending strategy for First Federal is the expansion of commercial real estate lending activities, including lending on multi-family income producing properties.  Most of the multi-family loans are secured by property in the regional market area.  At September 30, 2012, $110.1 million or 26.1% of the Bank’s total loan portfolio was secured by commercial and multi-family real estate property, respectively.  First Federal offers both fixed-and adjustable-rate loans on commercial and multi-family real estate loans.  These loans are secured by a wide variety of commercial properties located in the Bank’s primary market areas, including hotels and motels, office/warehouse, retail strip centers, self-storage facilities, medical and professional office buildings, combination gas stations and convenience stores, and assisted living facilities located within the Bank’s market areas.  These loans generally have terms to maturity from three to ten years with amortization terms up to 25 years.
 
Adjustable rate commercial and multi-family real estate loans generally adjust after an initial period ranging from three to five years and are generally priced to market indexes with appropriate margins, which may include the a US treasury rate, LIBOR, or another acceptable index.  As of September 30, 2012, the Bank had $15.0 million in adjustable rate multi-family loans and $42.9 million in adjustable rate commercial real estate loans.
 
Beginning in 2012, First Federal began originating loans with pre-payment penalties on loans.  The maximum LTV ratio for commercial and multi-family real estate loans is typically limited to 80% of appraised value or a debt service ratio of 1.30x.  Independent appraisals are required on all loans secured by commercial real estate collateral from an approved appraisers list and require most of the commercial and multi-family real estate loan borrowers to submit annual financial statements and/or rent rolls.  The Bank’s largest single commercial and multi-family borrowing relationship at September 30, 2012, totaled $8.2 million, is collateralized by commercial real estate, and consists of four loans.  All such loans with this borrower were performing as of September 30, 2012.
 
 
 
 
 
RP ® Financial, LC.   OVERVIEW AND FINANCIAL ANALYSIS
    I.19
 
Consumer Lending
 
First Federal offers a variety of consumer loans, including new and pre-owned automobile loans, and other miscellaneous vehicles (recreational vehicles or RVs, travel trailers and motorcycles) and personal lines of credit, which totaled $11.2 million as of September 30, 2012 (2.7% of total loans).  The Bank offers such loans as they tend to have shorter maturities and higher interest rates than mortgage loans.  Automobile loans (both direct and indirect), are originated by the Bank as an additional loan product for customers.  Such loans are originated on both new and used vehicles for terms of up to 84 months.  The Bank maintains lending relationships with two automotive dealerships in the local market area.  The Bank has also engaged a third-party vendor with a well-known, web-based program that allows consumers living in Washington, Idaho, and Oregon to apply online for auto refinances.
 
Commercial Business Lending
 
Reflecting the emphasis on commercial lending, First Federal is also active in originations of non-mortgage commercial loans.  The Bank originates commercial business loans to local or regional, small- to medium-sized, privately-held companies that operate in their market area, which include lines of credit, term loans, and letters of credit.  These loans are typically secured by business assets and utilized for working capital, equipment financing or business investments.  Most commercial customers are required to have a depository relationship with First Federal.  As of September 30, 2012, the Bank had $9.2 million of commercial business loans in portfolio, equal to 2.2% of total loans.  This represents an increase from $8.1 million, or 1.5% of loans as of June 30, 2008.
 
Commercial business loans usually have shorter maturity terms and higher interest rates than real estate loans, but typically involve more credit risk because of the type and nature of the collateral.  Personal guarantees are usually obtained on these loans.  Loan terms can vary from one to seven years with rates tied to an index.
 
 
 
 
 
RP ® Financial, LC.   OVERVIEW AND FINANCIAL ANALYSIS
    I.20
 
Exhibit I-11 provides a summary of the Bank’s lending activities since fiscal 2010.  Lending volumes have fluctuated over this time period, with total originations ranging from a high of $122.9 million during fiscal 2010 to $92.6 million for fiscal 2011.  Over the last twelve months ended September 30, 2012, the Bank has originated $137.3 million of loans.  Residential fixed rate loans have accounted for the largest portion of loan volumes (average of $73.79 million of total originations for the last three and a quarter fiscal years), followed by commercial real estate/multi-family and commercial business loans.  Only minimal purchases of loans have been completed since fiscal 2010, consisting of both commercial real estate loans (fiscal 2010) and home equity loans (fiscal 2012).  As indicated previously, sales of fixed rate residential loans have been a primary operating strategy, and such loan sales have ranged from a high of $102.6 million, or 83.5% of total loan originations for fiscal 2010 to a low of $53.9 million, or 58.1% of total loan originations for fiscal 2011.  For the twelve months ended September 30, 2012, loan sales totaled $57.9 million, or 42.1% of total loan originations.
 
Asset Quality
 
First Federal’s lending operations include originations of construction/land, commercial real estate and multi-family, commercial business, and consumer loans for portfolio, all of which carry a higher risk profile than traditional 1-4 family mortgage lending.  Beginning in fiscal 2009 the Bank began to experience higher levels of non-performing assets (“NPAs”).  NPAs, inclusive of accruing loans past due 90 days or more, REO and repossessed assets, and performing troubled debt restructurings (“TDRs”) totaled $19.3 million as of September 30, 2012, decreasing by $7.1 million from a high of $26.4 million as of June 30, 2010.  As of September 30, 2012, the Bank reported $11.1 million of non-accruing loans, a zero balance of accruing loans past due 90 days or more, REO and repossessed assets of $3.2 million, and performing TDRs of $5.0 million, equal to 2.47% of assets at September 30, 2012.  As of September 30, 2012, 47.7% of non-accrual loans were related to commercial real estate and the performing TDRs were mainly 1-4 residential real estate and commercial real estate loans.  Exhibit I-12 presents a history of NPAs for the Bank since fiscal 2008.
 
To track the Bank’s asset quality and the adequacy of valuation allowances, First Federal has established detailed asset classification policies and procedures which are consistent with regulatory guidelines.  Detailed asset classifications are reviewed regularly by senior management and the Chief Credit Officer assesses the allowance for loan losses on a monthly basis and reports to the Board no less than quarterly.  Pursuant to these procedures, when needed, the Bank establishes additional valuation allowances to cover anticipated losses in classified or non-classified assets.  As of September 30, 2012, the Bank maintained reserves of $8.2 million, equal to 1.95% of total loans and 42.6% of NPAs.
 
 
 
 
 
RP ® Financial, LC.   OVERVIEW AND FINANCIAL ANALYSIS
    I.21
 
Funding Composition and Strategy
 
Deposits have consistently accounted for the major portion of the Bank’s interest bearing liabilities, although the Bank has historically utilized borrowings as a supplemental funding source.  Deposits increased from fiscal 2008 to September 30, 2012 at an annual rate of 4.4%, while borrowed funds declined by 7.3% annually over the same time period.  The increase in deposits, more recently, was the result of the Bank’s marketing of transactional accounts to the customer base as part of a continued focus on core deposits.
 
The Bank relies on marketing activities, convenience, customer service, and the availability of a broad range of deposit products and services to attract and retain customer deposits.  At September 30, 2012 deposits equaled $589.9 million, or 75.5% of total assets.  Exhibit I-13 sets forth the Bank’s deposit composition for the past three and a quarter fiscal years and Exhibit I-14 provides the interest rate and maturity composition of the CD portfolio at September 30, 2012.  Transaction and savings accounts constitute the largest portion of the Bank’s deposit base, totaling 71.9% of deposits as of September 30, 2012 versus 63.4% of deposits for fiscal year 2010.  Core deposits, including interest-bearing and noninterest-bearing transaction, money market and savings accounts, increased over the past three and a quarter fiscal years both in balance and as a percent of total deposits (savings accounts remained relatively unchanged as a percent of deposits), reflecting management’s emphasis on growing core accounts and the continued impact of the customer base concern for safety and liquidity as well as the historically low-rate environment.
 
Transaction and savings account deposits totaled $424.0 million, or 71.9% of total deposits as of September 30, 2012, versus $352.4 million, or 63.4% of total deposits for fiscal 2010.  The remaining balance of the Bank’s deposits consists of CDs, which totaled $165.9 million or 28.1% of total deposits as of September 30, 2012, a decrease from $203.8 million or 36.6% of total deposits for fiscal 2010.  First Federal’s current CD composition reflects a concentration of short-term CDs, where 63.4% of the CDs were scheduled to mature in one year or less from September 30, 2012.  As of the same date, jumbo CDs (balances of $100,000 or more) amounted to $73.0 million, or 44.0% of total CDs.  The Bank did not have any brokered deposits at September 30, 2012.
 
Borrowed funds comprise the remainder of the Bank’s funding liabilities.  Borrowed funds, primarily consisting of FHLB advances have been the primary source of funds outside of deposits and totaled $100.0 million, representing 12.8% of total assets as of September 30, 2012, as shown in Exhibit I-15.  The Bank’s outstanding FHLB advances totaled $99.9 million as of September 30, 2012 and have a weighted average interest rate of 4.22%.  The remaining balance of borrowed funds is related to a promissory note of $109,000 with a weighted average rate of 4.50%, associated with a nonprofit corporation.   In addition, First Federal maintains a committed credit facility with the FHLB and had collateral pledged that would support additional borrowing capacity of $60.1 million at September 30, 2012.
 
 
 
 
 
RP ® Financial, LC.   OVERVIEW AND FINANCIAL ANALYSIS
    I.22
 
The Bank anticipates utilizing borrowings as a supplemental funding source in the future, generally for the same purposes.  The Bank’s overall preference is to utilize deposits to fund operations with the objective of building customer relationships and increasing cross-sell potential and fee income.
 
Subsidiaries
 
First Federal has one subsidiary, North Olympic Peninsula Services, Inc. (“NOPS”), which is wholly-owned and has been inactive for approximately nine years.  The Bank’s initial capital investment in NOPS was $500,000 and as of September 30, 2012, the Bank had not made any subsequent investment.
 
Additionally, in 2008, First Federal partnered with Craft3, Inc., a Washington nonprofit corporation, to form two limited liability companies for the purpose of participating in the new markets tax credit program (“NMTC”).  Through these companies, First Federal originated a loan to the Downtown Ambulatory Health Center, LLC for construction of a medical facility in Port Angeles, Washington.  First Federal will participate in the NMTC program over a seven year period and realize $1.9 million in tax credits.  Based on the terms of the tax program, First Federal will receive a $4.6 million reimbursement for its debt and equity contributions and the $300,000 deficiency between the amount of the investment and the amount of the reimbursement is being amortized over the new markets tax period.
 
Legal Proceedings
 
The Bank is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business which, in the aggregate, are believed by management to be immaterial to the financial condition of the Bank.
 
 
 
 
 
RP ® Financial, LC.   MARKET AREA ANALYSIS
  II.1
 
II.  MARKET AREA ANALYSIS
 
Introduction
 
Established in 1923, the Bank is headquartered in the town of Port Angeles, Washington and serves the North Olympic Peninsula region of Washington through a total of nine full service branch offices and one loan production office.  The main administrative office and six branch offices are located in Clallam County, while one branch is located in Jefferson County and the newest full-service branch is located in Kitsap County.  The Kitsap County branch in Poulsbo, Washington was initially opened in December 2011 as a new lending center, which became a full-service branch in October 2012.  The Bank also maintains an LPO in Bellingham, Whatcom County, Washington.  This office provides access to a far greater population base, and reflects the Bank’s strategy to open additional retail service facilities in more populated areas.
 
(MAP)
 
 
 
 
 
 
RP ® Financial, LC.   MARKET AREA ANALYSIS
  II.2
 
A map showing the Bank’s office coverage is set forth on the previous page (with the exception of the newest branch in Kitsap County) and details regarding the Bank’s offices are set forth in Exhibit II-1.  The Bank’s depository market area is concentrated in western Washington on the North Olympic Peninsula, directly across the Puget Sound from the Seattle-Tacoma-Bellevue, WA Metropolitan Statistical Area (“Seattle MSA”).  The Bank primarily serves the North Olympic Peninsula region of Washington through their nine branch office network located within Clallam, Jefferson, and Kitsap Counties.  Clallam County is situated on the northern portion of the Peninsula, an area best known for its natural resources, beautiful terrain, and geographic landmarks.  The Bank maintains seven branches in Clallam County, including its home office and three branch offices in Port Angeles, two branches in Sequim, and one branch office in Forks, Washington.  Just south of Clallam County is Jefferson County where the Bank maintains a branch office in Port Townsend.  Kitsap County, where the Bank’s Poulsbo branch has been established, is located to the east of Jefferson County and is connected to the eastern shore of Puget Sound.  The recently opened Whatcom County LPO in Bellingham provides access to the western shore of Puget Sound, and a county with a population in excess of 200,000.  This expansion is seen as a key strategic need of the Bank in order to achieve long-term growth objectives.
 
The broader economy of the Peninsula is historically rooted in goods producing sectors, which has shifted more towards the services sector, including increasing employment in health care, tourism, and professional and business service industries.  The government sector and wholesale/retail trade also play a prominent role in the regional economy.  The regional banking environment is highly competitive, and includes a wide range of thrifts, commercial banks, credit unions and other financial services companies, some of which have a national presence.
 
Future business and growth opportunities will be partially influenced by economic and demographic characteristics of the markets served by the Bank, particularly the future growth and stability of the regional economy, demographic growth trends, and the nature and intensity of the competitive environment for financial institutions.  These factors have been examined to help determine the growth potential that exists for the Bank and the relative economic health of the Bank’s market area, and the relative impact on value.
 
 
 
 
 
RP ® Financial, LC.   MARKET AREA ANALYSIS
  II.3
 
National Economic Factors
 
The business potential of a financial institution is partially dependent on the future operating environment and growth opportunities for the banking industry and the economy as a whole.  The national economy experienced a severe downturn during 2008 and 2009, as the fallout of the financial crisis caused the broader economy to falter, with most significant indicators of economic activity declining by substantial amounts.  The economic recession was the deepest since the great depression of the 1930s.  Approximately 8 million jobs were lost as consumers cut back on spending, leading to weak performance in most economic sectors.  Total personal wealth declined notably with real estate being particularly impacted, as evidenced by a drop in real estate values within many regions.  As measured by the nation’s gross domestic product (“GDP”), the recession officially ended in the fourth quarter of 2009, after the national GDP expanded for two consecutive quarters (1.7% annualized growth in the third quarter of 2009 and 3.8% annualized growth in fourth quarter of 2009).  The economic expansion has continued since that date, with GDP growth of 2.8% for calendar year 2010, 1.6% for calendar year 2011, and 2.0% and 1.5% for the first and second calendar quarters of 2012.  Notably, a large portion of GDP growth during 2009 through 2011 was generated through federal stimulus programs, bringing into question the sustainability of the recovery without government support.  Moreover, the rate of expansion was insufficient to make significant progress in reducing the stubbornly high unemployment rate.
 
The economic recession caused the inflation rate to diminish during 2009.  Inflation averaged 3.85% for all of 2008, while nominal deflation was reported in 2009.  There was a decline in prices during eight of the 12 months during 2009.  Reflecting a measure of recovery of the economy, the national annualized inflation rate was 1.64% for 2010 and a higher 3.16% for 2011.  For the first nine months of 2012, the national inflation rate averaged 2.13%.  The national unemployment rate equaled 7.9% as of October 2012, a decline from 8.5% as of December 2011, but still high compared to recent historical levels.  There remains significant uncertainty about the near term future, particularly in terms of the speed at which the economy will recover, the impact of the housing crisis on longer term economic growth, and the near-term future performance of the real estate industry, including both residential and commercial real estate prices, all of which have the potential to impact future economic growth.  The current and projected size of government spending and deficits also has the ability to impact the longer-term economic performance of the country.
 
The major stock exchange indices have reflected moderate improvement over the last 12 months.  As an indication of the changes in the nation ’ s stock markets over the last 12 months, as of November 9, 2012, the Dow Jones Industrial Average closed at 12,815.39, an increase of 8.8% from November 9, 2011, while the NASDAQ Composite Index stood at 2,904.87, an increase of 10.8% over the same time period.  The Standard & Poors 500 Index totaled 1,379.85 as of November 9, 2012, an increase of 12.3% from November 9, 2011.
 
 
 
 
 
RP ® Financial, LC.   MARKET AREA ANALYSIS
  II.4
 
Regarding factors that most directly impact the banking and financial services industries, in the past year the number of housing foreclosures have reached historical highs, median home values remained well below historical highs in many areas of the country, and the housing construction industry has been severely limited.  These factors have led to substantial losses at many financial institutions, and subsequent financial institution failures.  Despite efforts by the federal and state governments to limit the impact of the housing crisis, there remain concerns about a “double-dip” housing recession, whereby another wave of foreclosures occurs.
 
Based on the consensus outlook of approximately 50 economists surveyed by The Wall Street Journal in October 2012, economic growth is expected to improve from an annualized growth rate of 1.5% in the second quarter of 2012 to 2.9% in 2014.  Most of the economists expect that the unemployment rate will decrease from the second quarter of 2012 through 2014, but the pace of job growth will only serve to bring the unemployment rate down slowly.  On average, the economists expect that the unemployment rate will be 7.1% by the end of 2014, with the economy adding around 147,000 jobs a month over the next year.  On average, the economists did not expect the Federal Reserve to begin raising its target rate until 2014, at the very earliest, and the yield on the 10-year Treasury would increase to 3.15% by the end of 2014.  The economists also forecasted home prices would increase by 3.3% in 2012 and 3.3% in 2013, as measured by the Federal Housing Finance Agency index.  Housing starts were forecasted to increase modestly through 2013, but remain at historically depressed levels.
 
The October 2012 housing forecast from the Mortgage Bankers Association (the “MBA”) was for existing home sales to increase by approximately 2.8% in 2013 and 7.6% in 2014 from 2012 levels and new home sales were expected to increase by 8.3% in 2013 and 23.1% in 2014 from 2012 levels.  The MBA forecast showed increases in the median sale price for new and existing homes through 2014.  Total mortgage production is forecasted to be down in 2013 and 2014 to $1.3 trillion and $1.1 trillion compared to $1.7 trillion in 2012.  The reduction in 2013 and 2014 originations is largely due to a 36% and 69% reduction in refinancing volume (from 2012 levels), with refinancing volume forecasted to total $758 billion and $363 billion in 2013 and 2014.  Comparatively, house purchase mortgage originations are predicted to increase by 16% and 18% in 2013 and 2014 (from 2012 levels), with purchase lending forecasted to total $585 billion and $690 billion in 2013 and 2014 .
 
 
 
 
 
RP ® Financial, LC.   MARKET AREA ANALYSIS
  II.5
 
Interest Rate Environment
 
Reflecting a strengthening economy which could lead to inflation, the Fed increased interest rates a total of 17 times from 2004 to 2006, with the Federal Funds rate and discount rate peaking at 5.25% and 6.25% in 2006.  The Fed then held these two interest rates steady until mid-2007, at which time the downturn in the economy was evident, and the Fed began reacting to the increasingly negative economic news.  Beginning in August 2007 and through December 2008, the Fed decreased market interest rates a total of 12 times in an effort to stimulate the economy.
 
As of January 2009, the Discount Rate had been lowered to 0.50%, and the Federal Funds rate target was 0.00% to 0.25%.  This low interest rate environment has been maintained through the appraisal date, as part of a strategy to stimulate the economy by keeping both personal and business borrowing costs as low as possible.  The strategy has achieved its goals, as key borrowing cost indices for residential housing and the Prime Rate are at their historical lows.  Additionally, at the October 24, 2012, Federal Open Market Committee (“FOMC”) meeting, the FOMC decided to continue its program of purchasing agency MBS at a pace of $40 billion per month and will continue through the end of the year its program to extend the average maturity of its securities holdings.  The FOMC is maintaining its policy of reinvesting principal and these actions together will increase its holdings of longer-term securities by about $85 billion each month through the end of the year and is expected to continue to place downward pressure on longer-term interest rates.  Key borrowing cost indices for residential housing and the Prime Rate are at historical lows.  As of November 9, 2012, one- and ten-year U.S. government bonds were yielding 0.18% and 1.61%, respectively, compared to 0.10% and 2.00%, respectively, as of November 9, 2011.   The FOMC anticipates exceptionally low federal funds rates through late-2014 .  Data on historical interest rate trends is presented in Exhibit II-2.
 
Market Area Demographics
 
Demographic and economic growth trends, measured by changes in population, number of households, and median household income, provide key insights into the characteristics of the Bank’s market area.  Trends in these key measures are summarized by the data presented in Table 2.1 from 2010 to 2011 and projected through 2016, with additional detail shown in Exhibit II-3.  Data for the nation and Washington is included for comparative purposes.  The size and scope of the market area is evidenced by the demographic data, which shows that as of 2011 the total population of the market area was 556,000, approximately 8.2% of the state population.  However, a majority of this population base (252,000, or 45%), is located in Kitsap County or Whatcom County (203,000, or 37%), areas that First Federal has only recently established a presence.  Since the population base is concentrated in Kitsap and Whatcom Counties, most of the Bank’s offices, deposits and operations are in a relatively rural market area.  To enable desired growth, First Federal’s strategic plan contemplates near-term branch expansion into the contiguous counties of Whatcom, Skagit, Island, Snohomish, and San Juan, Washington, while considering acquisitions of other financial institutions located in the Western United States.
 
 
 
 
 
RP ® Financial, LC.   MARKET AREA ANALYSIS
  II.6
 
Table 2.1
 
First Federal Savings and Loan Association of Port Angeles
 
Summary Demographic/Economic Information
 
                               
                     
Growth
   
Growth
 
   
Year
   
Rate
   
Rate
 
   
2010
   
2011
   
2016
      2010-2011       2011-2016  
                     
(%)
   
(%)
 
Population(000)
                                 
United States
    308,746       310,704       321,315       0.6 %     0.7 %
Washington
    6,725       6,798       7,175       1.1 %     1.1 %
Clallam County
    71       71       73       0.0 %     0.5 %
Jefferson County
    30       30       31       0.1 %     0.7 %
Kitsap County
    251       252       259       0.5 %     0.6 %
Whatcom County
    201       203       217       1.0 %     1.3 %
                                         
Households(000)
                                       
United States
    116,716       117,458       121,713       0.6 %     0.7 %
Washington
    2,620       2,649       2,804       1.1 %     1.1 %
Clallam County
    31       31       32       0.0 %     0.7 %
Jefferson County
    14       14       15       0.1 %     1.0 %
Kitsap County
    97       98       102       0.5 %     0.8 %
Whatcom County
    80       81       88       1.0 %     1.5 %
                                         
Median Household Income($)
                                       
United States
 
NA
    $ 50,227     $ 57,536    
NA
      2.8 %
Washington
 
NA
      55,260       65,660    
NA
      3.5 %
Clallam County
 
NA
      41,245       47,982    
NA
      3.1 %
Jefferson County
 
NA
      44,074       51,704    
NA
      3.2 %
Kitsap County
 
NA
      56,578       67,635    
NA
      3.6 %
Whatcom County
 
NA
      48,726       57,831    
NA
      3.5 %
                                         
Per Capita Income($)
                                       
United States
 
NA
    $ 26,391     $ 30,027    
NA
      2.6 %
Washington
 
NA
      28,624       32,801    
NA
      2.8 %
Clallam County
 
NA
      23,850       26,461    
NA
      2.1 %
Jefferson County
 
NA
      27,937       30,884    
NA
      2.0 %
Kitsap County
 
NA
      29,012       33,401    
NA
      2.9 %
Whatcom County
 
NA
      26,198       30,608    
NA
      3.2 %
                                         
            $ 25,001-     $ 50,001                  
2011 HH Income Dist.(%)
 
<$25,000
    $ 50,000     $ 100,000    
>$100,000+
         
United States
    24.7 %     25.1 %     30.4 %     19.9 %        
Washington
    20.5 %     24.0 %     32.9 %     22.7 %        
Clallam County
    29.4 %     28.6 %     31.3 %     10.8 %        
Jefferson County
    26.3 %     29.0 %     30.4 %     14.4 %        
Kitsap County
    18.8 %     23.8 %     35.1 %     22.3 %        
Whatcom County
    24.9 %     26.0 %     32.1 %     17.0 %        
                                         
2011 Age Distribution (%)
 
0-14 Yrs.
   
15-34 Yrs.
   
35-54 Yrs.
   
55+ Yrs.
         
United States
    19.7 %     27.5 %     27.7 %     25.2 %        
Washington
    19.3 %     27.6 %     28.0 %     25.0 %        
Clallam County
    14.7 %     20.5 %     23.5 %     41.4 %        
Jefferson County
    11.8 %     15.9 %     23.9 %     48.3 %        
Kitsap County
    18.2 %     26.8 %     27.4 %     27.7 %        
Whatcom County
    17.1 %     31.0 %     25.3 %     26.6 %        
                                         
Source:  SNL Financial, LC.
                                       
 
 
 
 
 
RP ® Financial, LC.   MARKET AREA ANALYSIS
  II.7
 
As of 2011, the population in the Bank’s primary market area counties ranged from 30,000 in Jefferson County to 252,000 in Kitsap County, while the population of Clallam County was 71,000.  From 2010 to 2011, all of the market area counties reported population growth rates below the state and national growth rates of 1.1% and 0.6%, with the exception of Whatcom County, which reported the highest growth rate of 1.0%.  Clallam County reported relatively no change in population, while Jefferson County reported minimal growth in population over the year.  Annual population growth over the next five years is projected to grow at a faster pace of 0.5%, 0.7%, 0.6% and 1.3%, respectively for Clallam, Jefferson, Kitsap and Whatcom Counties, with Whatcom County growing at a slightly faster pace than projected for the state.  Growth in households mirrored the population growth rates from 2010 to 2011, and all of the market area counties are projected to grow at a faster pace over the next five years.  Specifically, the number of households in Clallam, Jefferson, Kitsap and Whatcom Counties are projected to increase at 0.7%, 1.0%, 0.8% and 1.5% annual rates, respectively, over the next five years.
 
Age distribution information in Table 2.1 illustrates that the Bank’s market area of both Clallam and Jefferson Counties contain a very high level of residents with ages above 55 years of 41.4% and 48.3% versus 25.0% of the state and 25.2% nationally.  Alternatively, Kitsap and Whatcom Counties reported 27.7% and 26.6% of residents, respectively with ages above 55 years, which was only slightly higher than the state and nationwide levels.  A large number of residents have retired to the Clallam and Jefferson County region, drawn by the lower cost of living, the attractive lifestyle of the ocean and mountains nearby, and temperate weather conditions.  The town of Sequim, Washington within Clallam County is recognized as the “retirement retreat of the region” and has also been recognized as one of the top retirement communities in the nation.
 
 
 
 
 
RP ® Financial, LC.   MARKET AREA ANALYSIS
  II.8
 
Table 2.1 also includes income data for the Bank’s market area.  The 2011 median household income and per capita income levels in Clallam, Jefferson and Whatcom Counties were generally less than the state and national averages, while Kitsap County reported income levels above the state and national aggregates, due to its more urban nature and closer access to the city of Seattle.  Kitsap County has four ferry terminals and has the highest percentage in the nation of ferry commuters in its work force.  Median household and per capital income growth over the next five years is projected to be highest in Kitsap County and Whatcom County, above both national and state projections, while Clallam and Jefferson Counties are expected to record income growth at somewhat lower levels.  Household income distribution patterns further imply Clallam and Jefferson County’s lower income levels as well as Kitsap and Whatcom County’s higher income levels as approximately 58.0%, 55.3%, 42.6% and 50.9% of the households in those areas had income levels of $50,000 or less annually in 2011, while the ratio was 44.5% for Washington and 49.8% for the national average.
 
Local Economy
 
The geographic make-up of the Bank’s market area in Clallam County has created an employment base traditionally concentrated in the marine and forestry/forest resources sectors.  As demand has declined for some of the goods-producing and agricultural products in the county, positions in leisure and tourism have grown in their place.  Other new industries have moved into the county in the past decade, as advanced composites manufacturing has been established in and around the Port Angeles area, providing manufactured parts to the aerospace and marine industries.  However, limited growth in the regional economy, in part due to the impact of the nationwide recession of 2008-2009 and the ongoing weakness in the housing sector, continues to impact the business potential of financial institutions such as First Federal.
 
The labor market continues to develop, benefiting from the region’s national resources, as Port Angeles and Forks host a variety of innovative industrial water (marine) and wood (forest resources) companies.  As mentioned earlier, Clallam County is also home to the city of Sequim, a popular destination for retirement in the state of Washington.  In addition, the previously mentioned retirement-aged population has provided the need for additional resources in the areas of health care and elderly services.  The largest employers in Clallam County include the Olympic Medical Center (1,062 employees), Peninsula College (544 employees), the Port Angeles School District (505 employees), Clallam County Government (466 employees), Seven Cedars Casino (435 employees), the Clallam Bay Corrections Center (430 employees), Westport Shipyard (416 employees), Wal-Mart (390 employees), Safeway (360 employees), and the US Coast Guard (350 employees).
 
 
 
 
 
RP ® Financial, LC.   MARKET AREA ANALYSIS
  II.9
 
The economy of Jefferson County is comprised of both an industrial and an agricultural base.  Industrially, the county’s history, climate and terrain support healthy forest products and maritime sectors, including lumber, fish processing, ship repair and maintenance, as well as ship and boatbuilding.  The agricultural base encompasses tree farms for logging, aquaculture and a flourishing organic farming sector.  Tourism also provides revenue streams to the county.  Port Townsend is the largest and only incorporated community in Jefferson County.  It is the county seat and serves as the major commercial center of the area.  It is home to the county’s largest manufacturing employer, Port Townsend Paper Corporation.  There are also three major industrial parks in Port Townsend; the Port of Port Townsend’s Marine Industrial Park, the private Port Townsend Business Park and Glen Cove Industrial Area.  Additional primary employers in the area are Jefferson Healthcare, Jefferson School District, the Port Authority of Port Townsend and related marine trade, and the Jefferson County government.
 
The Bank’s recent expansion into Kitsap County provides for a larger urban area with a more diverse economy than the more rural counties of Clallam and Jefferson.  The United States Navy is a key element for Kitsap County’s economy.  The United States Navy is the largest employer in the county, with installations at Puget Sound Naval Shipyard, Naval Undersea Warfare Center Keyport and the Kitsap Naval Base (which comprises former Naval Submarine Base Bangor and Naval Station Bremerton).  Other private industries that support the economic base are healthcare, retail, and tourism.  The primary employers in the county include the Harrison Medical Center, Wal-Mart, and Port Madison Enterprises, which owns and operates Clearwater Casino and Resort, gas stations, and other retail operations.  Additionally, water transportation is dominant in the culture and economy of the county and as mentioned previously, Kitsap County has four ferry terminals and the highest percentage in the nation of ferry commuters in its work force.
 
Whatcom County is the only market area county located on the eastern shore of Puget Sound, and thus is more closely tied to the economic and demographic trends of the greater Seattle metropolitan area.  Whatcom County thus has employment characteristics of suburban communities, with employment dominated by local hospitals, school districts, and local government.   Whatcom County is also the northernmost county in the state of Washington, bordering British Columbia, Canada to the north.  Much of the county is mountainous (and part of National Forest and National Parks), with most of the population centered around the city of Bellingham, the location of the Bank’s LPO.   The largest employers in Whatcom County include the western Washington University (2,235 employees), St. Joseph Hospital (1,757 employees), Bellingham School District (1,651 employees), Whatcom County Government (930 employees), Ferndale School District (910 employees), City of Bellingham (858 employees) and Haggen Grocery (843 employees).
 
 
 
 
 
RP ® Financial, LC.   MARKET AREA ANALYSIS
  II.10
 
Employment Sectors
 
Employment data, presented in Table 2.2 below, indicates that similar to many larger, developed areas of the country, services are the most prominent sector for the state of Washington and the four market area counties, comprising on average 37.9% of the Bank’s market area total employment, as compared to 38.9% of statewide employment.  The services sector includes health care and related employment, which is significant in the market area as a result of the Sequim, Washington retirement community.  The next largest component of the local economy, on average, is government, at 21.6%, reflecting the many national parks and other attractions owned by local government, as well as the military bases throughout the Bank’s market area, in particular Kitsap County.  Reflecting a more rural character, Clallam County recorded the highest levels of forestry/fishing employment of all four market area counties, while Whatcom County reported the highest level of manufacturing employment.  Wholesale and retail trade, at 13.3% on average, was another large component, reflecting the trade employment in the ports of the region.  Additional details are presented in Exhibit II-4.
 
Table 2.2
 
First Federal Savings and Loan Association of Port Angeles
 
Primary Market Area Employment Sectors
 
(Percent of Labor Force)(1)
 
                                     
   
Washington
   
Clallam
   
Jefferson
   
Kitsap
   
Whatcom
   
Mkt Area
 
   
State
   
County
   
County
   
County
   
County
   
Average
 
Employment Sector
 
(% of Total Employment)
 
                                     
Services
    38.9 %     35.7 %     43.2 %     37.0 %     35.8 %     37.9 %
Government
    16.7 %     22.0 %     16.5 %     32.9 %     14.9 %     21.6 %
Wholesale/Retail Trade
    13.6 %     14.0 %     12.3 %     12.5 %     14.3 %     13.3 %
Finance/Insurance/Real Estate
    8.9 %     9.5 %     8.4 %     7.5 %     7.8 %     8.3 %
Manufacturing
    7.3 %     5.6 %     5.3 %     1.5 %     8.0 %     5.1 %
Information
    3.0 %     1.0 %     1.7 %     1.3 %     1.7 %     1.4 %
Construction
    5.3 %     6.0 %     6.9 %     4.8 %     7.0 %     6.2 %
Transportation/Utility
    3.0 %     1.9 %     1.4 %     1.2 %     2.5 %     1.8 %
Forestry/Fishing Activities
    1.0 %     2.4 %     1.8 %     0.7 %     1.4 %     1.6 %
Agriculture
    2.2 %     1.6 %     1.8 %     0.6 %     3.0 %     1.7 %
Other
    0.2 %     0.3 %     0.7 %     0.1 %     3.6 %     1.2 %
  Total
    100.0 %     100.0 %     100.0 %     100.0 %     100.0 %     100.0 %
                                                 
(1) As of 2010.
                                               
                                                 
Source: U.S. Bureau of Economic Analysis.
                                         
 
 
 
 
 
RP ® Financial, LC.   MARKET AREA ANALYSIS
  II.11
 
Unemployment Trends
 
Comparative unemployment rates for the four market area counties, as well as for the U.S. and the state of Washington are shown in Table 2.3.  September 2012 unemployment rates for the market area counties ranged from a low of 7.0% in Whatcom County to a high of 9.1% in Clallam County versus comparable Washington and U.S. unemployment rates of 8.5% and 7.8%, respectively.  The September 2012 unemployment rates for the market area counties were lower compared to a year ago, which was consistent with the national and state unemployment rate trends.  At the same time, unemployment rates remain high by historical standards and are indicative of ongoing economic weakness in the Bank’s markets, particularly within Clallam and Jefferson Counties where the September 2012 unemployment rates are above both state and national aggregates.
               
Table 2.3
First Federal Savings and Loan Association of Port Angeles
Market Area Unemployment Trends
                 
Region
   
Sept. 2011
Unemployment
 
Sept. 2012
Unemployment
 
               
United States
 
9.0
%
 
7.8
%
 
Washington
 
9.0
   
8.5
   
Clallam County
 
9.4
   
9.1
   
Jefferson County
 
9.1
   
9.0
   
Kitsap County
 
7.5
   
7.1
   
Whatcom County
 
7.7
   
7.0
   
               
Source: U.S. Department of Labor.
             
 
Real Estate Trends
 
1.  
Home Resales
 
Home resales activity across Washington during the six months ended June 2012 surpassed the mark posted during the same period in 2011, a positive indicator for an industry that has been severely impacted by the recession that commenced in 2008.  An improving job market is helping the housing sector in Washington and according to the Washington Center for Real Estate Research (“WCRER”), home resales during the second quarter of 2012 totaled 94,510, a 10.4% increase from the same period a year prior.  Conversely, statewide home resales decreased by 2.6% over the last quarter.  Home prices are reflecting an improving trend, as the median resale price increased by 4.0% (to $236,000) for the second quarter of 2012, from the level reported for the same period a year prior.
 
 
 
 
 
RP ® Financial, LC.   MARKET AREA ANALYSIS
  II.12
 
Similarly, home resales in the Bank’s market area reflect a comparable trend.  For the second quarter of 2012, home resales for Clallam, Jefferson, and Kitsap Counties were up 7.3% (880 home resales), 4.3% (480 home resales), and 19.8% (3,450 home resales) from the same period last year.  Clallam and Jefferson Counties also saw a decline in home sales from the last quarter at 9.3% and 2.0%; however Kitsap County reported an 11.7% increase over the quarter.  Median resale prices for Clallam and Kitsap Counties reported an improvement from a year ago, at 2.5% and 3.1%, while Jefferson County’s median resale price reflected a minimal decline of 0.1%.  Specifically, the median resale price for existing homes in Clallam, Jefferson, and Kitsap Counties amounted to $190,000, $245,300, and $242,200 for the second quarter of 2012.
 
2.  
Foreclosure Trends
 
Single family foreclosures statewide have been trending upward over the last six months, according to RealtyTrac, a company specializing in real estate foreclosure data.  In June 2012, Washington experienced 2,310 homes in the process of foreclosure (versus 1,957 homes in the process of foreclosure in December 2011) with one in every 1,249 housing units with a foreclosure filing.  Comparably, as of June 2012, Clallam, Jefferson, and Kitsap Counties reported 21, 11, and 45 properties in the process of foreclosure with one in every 1,694, 1,615, and 2,386 housing units with a foreclosure filing.
 
Market Area Deposit Characteristics
 
Table 2.4 displays deposit market trends and deposit market share for commercial banks and savings institutions in the market area from June 30, 2008 to June 30, 2012.  Deposit growth trends are important indicators of a market area’s current and future prospects for growth.  The table indicates that commercial banks hold a large portion of the statewide deposit base, 89.7% as of June 30, 2012.  Since June 30, 2008, commercial banks have increased their deposits at a greater rate than savings institutions, 3.4% on an annual basis versus an annualized net decline of 15.8% for savings institutions.  The primary reason for the decline in savings institution deposits was the failure of Washington Mutual, the largest savings and loan association in the country.  There were a total of 1,876 banking offices in the state of Washington as of June 30, 2012.
 
 
 
 
 
RP ® Financial, LC.   MARKET AREA ANALYSIS
  II.13
 
Table 2.4
 
First Federal Savings and Loan Association of Port Angeles
 
Deposit Summary
 
                                           
   
As of June 30,
       
   
2008
   
2012
   
Deposit
 
         
Market
   
No. of
         
Market
   
No. of
   
Growth Rate
 
   
Deposits
   
Share
   
Branches
   
Deposits
   
Share
   
Branches
      2008-2012  
   
(Dollars in Thousands)
   
(%)
 
                                             
Washington
  $ 112,330,698       100.0 %     1,925     $ 113,262,208       100.0 %     1,876       0.2 %
    Commercial Banks
    89,017,902       79.2 %     1,539       101,569,464       89.7 %     1,694       3.4 %
    Savings Institutions
    23,312,796       20.8 %     386       11,692,744       10.3 %     182       -15.8 %
                                                         
Clallam County
  $ 1,455,152       100.0 %     32     $ 1,457,520       100.0 %     28       0.0 %
    Commercial Banks
    715,555       49.2 %     20       705,062       48.4 %     18       -0.4 %
    Savings Institutions
    739,597       50.8 %     12       752,458       51.6 %     10       0.4 %
       First Federal
    452,500       31.1 %     7       515,246       35.4 %     7       3.3 %
                                                         
Jefferson County
  $ 467,979       100.0 %     16     $ 458,768       100.0 %     13       -0.5 %
    Commercial Banks
    345,433       73.8 %     13       387,858       84.5 %     12       2.9 %
    Savings Institutions
    122,546       26.2 %     3       70,910       15.5 %     1       -12.8 %
       First Federal
    43,391       9.3 %     2       70,910       15.5 %     1       13.1 %
                                                         
Kitsap County
  $ 2,349,062       100.0 %     76     $ 2,314,494       100.0 %     64       -0.4 %
    Commercial Banks
    1,890,779       80.5 %     63       2,138,256       92.4 %     59       3.1 %
    Savings Institutions
    458,283       19.5 %     13       176,238       7.6 %     5       -21.3 %
       First Federal
 
NA
      0.0 %     -    
NA
      0.0 %     -    
NA
 
                                                         
Whatcom County
  $ 3,049,304       100.0 %     77     $ 2,996,679       100.0 %     68       -0.4 %
    Commercial Banks
    2,795,337       91.7 %     71       2,623,348       87.5 %     61       -1.6 %
    Savings Institutions
    253,967       8.3 %     6       373,331       12.5 %     7       10.1 %
       First Federal
 
NA
      0.0 %     -    
NA
      0.0 %     -    
NA
 
                                                         
 Source: FDIC.
                                                       
 
Within the Bank’s market area, the table indicates that annualized deposit growth rates over the last four years show slight declines in deposits for each market area county, besides Clallam County, that increased at a minimal 0.04%.  Jefferson, Kitsap, and Whatcom Counties reported annualized deposit declines of 0.5%, 0.4%, and 0.4%.  Notably, however, First Federal reported annualized growth of 3.3% in Clallam County and 13.1% in Jefferson County over the same time period and reported relatively high deposit market shares of 35.4% and 15.5% in the same counties. This growth by the Bank reveals success in competitive positioning in the market area.  First Federal did not have a depository branch in Kitsap or Whatcom Counties as of June 30, 2012, but the county deposit data is included for comparable purposes.
 
 
 
 
 
RP ® Financial, LC.   MARKET AREA ANALYSIS
  II.14
 
The lack of deposit growth has been due in part to changes in the banking institutions with a presence in the North Olympic Peninsula region of Washington.  Several regional banking competitors failed during the recent banking crisis, including Washington Mutual, Frontier Bank, Horizon Bank and Westsound Bank.  The remaining competitors are dominated by large institutions with a national presence.  These types of institutions in general do not focus on servicing rural regions such as First Federal’s market area.
 
Similar to statewide figures, commercial banks hold in excess of 85% or more of total financial institution deposits in three of the four market area counties, the exception being Clallam County, where savings institution deposits equaled 51.6% of total deposits.  Savings institutions experienced decreases in deposit balances and market share in Jefferson and Kitsap Counties, primarily due to the failure of Washington Mutual.
 
Market Area Deposit Competition
 
As indicated on the previous page and detailed in Table 2.5, significant competitors for the Bank consist of large nationwide and superregional banks, including Bank of America, Wells Fargo and JPMorgan Chase, all of whom maintain a strong presence in the regional market.  This factor, however, allows First Federal to position itself as a community bank, locally owned and managed.  This has been a major factor in the Bank’s ability to expand the deposit base in recent years.
 
As of June 30, 2012, First Federal maintained relatively large deposit market shares in the market area counties, ranking first in Clallam County with 35.4% of total county deposits and ranking third in Jefferson County with 15.5% of total county deposits.  As mentioned previously, as of June 30, 2012, the Bank had not yet established a branch in Kitsap or Whatcom Counties; however the market deposit competitors are included for comparable purposes.
 
 
 
 
 
RP ® Financial, LC.   MARKET AREA ANALYSIS
  II.15
 
Table 2.5
First Federal Savings and Loan Association of Port Angeles
Market Area Counties Deposit Competitors
   
Clallam County, WA
First Federal (35.4%)(1 of 12)
 
Sound Community Bank (12.2%)
 
Bank of America, NA (9.7%)
 
JP Morgan Chase Bank (7.1%)
 
US Bank, NA (6.8%)
   
Jefferson County, WA
Bank of America, NA (21.8%)
 
Kitsap Bank (19.7%)
 
First Federal (15.5%)(3 of 8)
 
US Bank, NA (9.8%)
 
Union Bank NA (9.7%)
   
Kitsap County, WA
Kitsap Bank (22.7%)
 
Bank of America, NA (20.3%)
 
JP Morgan Chase Bank (12.5%)
 
Wells Fargo (10.0%)
 
First Federal (--%)(-- of 15)
   
Whatcom County, WA
Peoples Bank (22.0%)
 
Washington Federal (12.5%)
 
Bank of America, NA (11.9%)
 
US Bank, NA (9.3%)
 
Banner Bank (7.6%)
 
First Federal (--%)(-- of 15)
   
Source: FDIC.
 
 
 
 
 

 
RP ® Financial, LC. PEER GROUP ANALYSIS
 
III.1

III. PEER GROUP ANALYSIS
 
This chapter presents an analysis of First Federal’s operations versus a group of comparable savings institutions (the “ Peer Group ” ) selected from the universe of all publicly-traded savings institutions in a manner consistent with the regulatory valuation guidelines and other regulatory guidance.  The basis of the pro forma market valuation of First Federal is derived from the pricing ratios of the Peer Group institutions, incorporating valuation adjustments to account for key differences in relation to the Peer Group.  Since no Peer Group can be exactly comparable to First Federal, individually or as a whole, key areas examined for differences to determine if valuation adjustments are appropriate were in the following areas:  financial condition; profitability, growth and viability of earnings; asset growth; primary market area; dividends; liquidity of the shares; marketing of the issue; management; and, effect of government regulations and regulatory reform.
 
Peer Group Selection
 
The Peer Group selection process is governed by the general parameters set forth in the regulatory valuation guidelines and other regulatory guidance.  The Peer Group is comprised of only those publicly-traded thrifts whose common stock is either listed on a national exchange (NYSE or AMEX) or is NASDAQ listed, since their stock trading activity is regularly reported and generally more frequent than “non-listed thrifts” i.e., those listed on the Over-the-Counter Bulletin Board or Pink Sheets, as well as those that are non-publicly traded and closely-held.  Non-listed institutions are inappropriate since the trading activity for thinly-traded or closely-held stocks is typically highly irregular in terms of frequency and price and thus may not be a reliable indicator of market value.  We have also excluded from the Peer Group those companies under acquisition or subject to rumored acquisition, mutual holding companies, and recent conversions, since their pricing ratios are subject to unusual distortion and/or have limited trading history.  We typically exclude those that were converted less than one year as their financial results do not reflect a full year of reinvestment benefit and since the stock trading activity is not seasoned.  A recent listing of the universe of all publicly-traded savings institutions is included as Exhibit III-1.
 
 
 
 
 
RP ® Financial, LC. PEER GROUP ANALYSIS
 
III.2
 
Ideally, the Peer Group should be comprised of locally or regionally-based institutions with relatively comparable resources, strategies and financial characteristics.  There are 134 publicly-traded thrift institutions nationally, which includes 21 publicly-traded MHCs.  Given the limited number of public full stock thrifts, it is typically the case that the Peer Group will be comprised of institutions which are not directly comparable, but the overall group will still be the “best fit” group.  To the extent that key differences exist between the converting institution and the Peer Group, valuation adjustments will be applied to account for such key differences.  Since First Federal will be a full stock public company upon completion of the offering, we considered only full stock companies to be viable candidates for inclusion in the Peer Group.
 
From the universe of publicly-traded thrifts, we selected ten institutions with characteristics similar to those of First Federal.  In the selection process, we applied two “screens” to the universe of all public companies that were eligible for consideration:
 
●
Screen #1 :  Northwest and Western institutions (excluding California) with assets between $300 million and $1.2 billion and positive core earnings.   Three of the five companies meeting the criteria were included in the Peer Group.
 
o     
FS Bancorp, Inc. of WA and Sound Financial Bancorp, Inc. of WA were excluded from consideration due to their recent conversions.
 
●
Screen #2 :  Midwest institutions with assets between $400 million and $1.2 billion, and positive core earnings.   Seven of the eleven companies meeting the criteria were included in the Peer Group.
 
o     
Citizens Community Bancorp, Inc. of WI was excluded from consideration due to their consumer lending concentration and supermarket branch network.
 
o     
Cheviot Financial Corp. of OH, LaPorte Bancorp, Inc. of IN, and IF Bancorp, Inc. of IL were excluded from consideration due to their recent conversions.
 
Table 3.1 shows the general characteristics of each of the 10 Peer Group companies and Exhibit III-2 provides summary demographic and deposit market share data for the primary market areas served by each of the Peer Group companies.  While there are expectedly some differences between the Peer Group companies and First Federal, we believe that the Peer Group companies, on average, provide a good basis for valuation subject to valuation adjustments.  The following sections present a comparison of First Federal’s financial condition, income and expense trends, loan composition, interest rate risk and credit risk versus the Peer Group as of the most recent publicly available date.
 
In addition to the selection criteria used to identify the Peer Group companies, a summary description of the key comparable characteristics of each of the Peer Group companies relative to First Federal’s characteristics is detailed below.
 
 
 
 
 
RP ® Financial, LC. PEER GROUP ANALYSIS
 
III.3
 
Table 3.1
Peer Group of Publicly-Traded Thrifts
November 9, 2012
                                                     
               
Operating
 
Total
         
Fiscal
   
Conv.
   
Stock
   
Market
 
Ticker
 
Financial Institution
 
Exchange
 
Primary Market
 
Strategy
 
Assets
   
Offices
   
Year
   
Date
   
Price
   
Value
 
                                           
($)
   
($Mil)
 
                                                     
HFFC
 
HF Financial Corp. of SD
 
NASDAQ
     
Sioux Falls, SD
 
Thrift
  $ 1,193       33       06-30       04/92     $ 12.70     $ 90  
HFBC
 
HopFed Bancorp, Inc. of KY
 
NASDAQ
 
Hopkinsville, KY
 
Thrift
    1,026       18       12-31       02/98       8.15       61  
FFNW
 
First Fin NW, Inc of Renton WA
 
NASDAQ
 
Renton, WA
 
Thrift
    999       1       12-31       10/07       7.57       142  
TSBK
 
Timberland Bancorp, Inc. of WA
 
NASDAQ
 
Hoquiam, WA
 
Thrift
    729       22       09-30       01/98       6.05       43  
FSFG
 
First Savings Financial Group of IN
 
NASDAQ
 
Clarksville, IN
 
Thrift
    587       12       09-30       12/08       19.00       45  
FCLF
 
First Clover Leaf Fin Corp of IL
 
NASDAQ
 
Edwardsville, IL
 
Thrift
    538       4       12-31       07/06       6.26       48  
FCAP
 
First Capital, Inc. of IN
 
NASDAQ
 
Corydon, IN
 
Thrift
    454       13       12-31       01/99       20.15       56  
WAYN
 
Wayne Savings Bancshares of OH
 
NASDAQ
 
Wooster, OH
 
Thrift
    409       11       03-31       01/03       9.15       27  
RIVR
 
River Valley Bancorp of IN
 
NASDAQ
 
Madison, IN
 
Thrift
    408       10       12-31       12/96       17.38       27  
EBMT
 
Eagle Bancorp Montana of MT
 
NASDAQ
 
Helena, MT
 
Thrift
    327       6       06-30       04/10       10.45       41  
                                                                 
Source:  SNL Financial, LC.
                                                           
 
 
 
 
 
RP ® Financial, LC. PEER GROUP ANALYSIS
 
III.4
 
●
HF Financial Corp of SD (“HFFC”) operates through 33 retail banking offices in South Dakota and Minnesota.  The balance sheet reflects a broadly similar asset and funding mix relative to the Peer Group average, albeit with a higher level of funding through borrowings, as well as the lowest amount of tangible equity as a percent of assets by a Peer Group member.  HFFC’s lending strategy is focused on commercial lending, including both mortgage and non-mortgage C&I loans, which is a riskier strategy, as HFFC has the highest risk weighted assets as a percent of assets, however HFFC’s ratio of NPAs is below the average and median of the Peer Group.  HFFC also has the largest loans serviced for others portfolio of all Peer Group members.  At June 30, 2012, HFFC had total assets of $1.2 billion and a tangible equity-to-assets ratio of 7.8%.  For the twelve months ended June 30, 2012, HFFC reported net income equal to 0.43% of average assets, which is the below the average and median of the Peer Group.  HFFC had a market capitalization of $90 million at November 9, 2012.
 
●
HopFed Bancorp, Inc. of KY (“HFBC”) operates through a total of 18 offices in western Kentucky and central Tennessee.  HFBC maintains a broadly diversified asset base funded primarily by deposits and, to a lesser extent, borrowed funds.  Loan portfolio investment activities are concentrated in mortgage loans (primarily 1-4 family mortgages and commercial mortgage loans).  Asset quality ratios were more favorable than the Peer Group average, both in terms of the level of NPAs and the reserve coverage ratios.  At June 30, 2012, HFBC had total assets of $1.0 billion and a tangible equity-to-assets ratio of 11.8%.  For the twelve months ended June 30, 2012, HFBC reported earnings of 0.56% of average assets.  HFBC had a market capitalization of $61 million at November 9, 2012.
 
●
First Financial Northwest, Inc. of WA (“FFNW”) FFNW operates out of 1 office in the state of Washington.  FFNW’s asset composition was similar to the Peer Group with the exception of maintaining a high level of cash and equivalents.  FFNW reported the greatest decline in assets over the last 12 months.  FFNW reported a lower than average net income ratio, as higher funding costs and lower non-interest income reduced income levels.  The loan portfolio for FFNW had less loan portfolio diversification outside of commercial real estate loans than the Peer Group, but has the highest percentage of mortgage loans, including residential and commercial.  FFNW also recorded the least favorable asset quality ratios as compared to the Peer Group members.  At June 30, 2012, FFNW had total assets of $1.0 billion and a tangible equity-to-assets ratio of 18.4%.  For the twelve months ended June 30, 2012, FFNW reported earnings of 0.33% of average assets.  FFNW had a market capitalization of $142 million at November 9, 2012.
 
●
Timberland Bancorp, Inc. of WA (“TSBK”) TSBK operates from 22 offices in Seattle, Olympia, and southern suburbs of Seattle, Washington.  TSBK maintained one of the highest ratios of cash and equivalents, which serves to offset their relatively high ratios of commercial real estate/multi-family residential mortgages and construction loans relative to the Peer Group.  However, earnings at TSBK have been negatively impacted by relatively high levels of loan loss reserves and operating expenses as compared to the Peer Group.  TSBK also recorded substantially above average asset quality ratios, including the NPAs/Assets ratio and reported the highest level of net loan charge-offs.  At June 30, 2012, TSBK had total assets of $729 million and a tangible equity-to-assets ratio of 11.4%.  For the twelve months ended June 30, 2012, TSBK reported positive earnings of 0.46% of average assets.  TSBK had a market capitalization of $43 million at November 9, 2012.
 
 
 
 
 
RP ® Financial, LC. PEER GROUP ANALYSIS
 
III.5
 
●
First Savings Financial Group of IN (“FSFG”) operates 12 branch offices in southern Indiana.  FSFG had a similar loan/investment mix and funding operations in relation to the Peer Group.  FSFG was more focused on residential mortgage lending than the Peer Group which facilitated its maintenance of relatively favorable asset quality and coverage ratios in comparison to the Peer Group.   Additionally, FSFG had one of the highest tangible equity-to-assets ratios of all the Peer Group members.  Earnings in excess of the Peer Group average and median are supported by a strong net interest margin and a comparatively modest level of loan loss provisions, as FSFG reported the highest percentage of net interest income after provisions.  At June 30, 2012, FSFG had total assets of $587 million and a tangible equity-to-assets ratio of 12.5%.  For the twelve months ended June 30, 2012, FSFG reported a return on average assets of 0.73%.  FSFG had a market capitalization of $45 million at November 9, 2012.
 
●
First Clover Leaf Financial Corp of IL (“FCLF”) operates through four retail banking offices and one loan production office in western Illinois in markets adjacent to St. Louis, Missouri.  The loan portfolio reflects slightly greater diversification into commercial loans in relation to the Peer Group and a slightly lower ratio of residential mortgage loans and MBS.  Asset quality ratios for FCLF were generally similar to the Peer Group, however. FCLF reported the highest amount of loan loss provisions than all of the Peer Group members.  At June 30, 2012, FCLF had total assets of $538 million and a tangible equity-to-assets ratio of 12.3%, which was above the Peer Group average and median.  For the twelve months ended June 30, 2012, FCLF reported earnings of 0.30% of average assets.  FCLF had a market capitalization of $48 million at November 9, 2012.
 
●
First Capital, Inc. of IN (“FCAP”)   operates through a total of 13 offices in southern Indiana.  FCAP’s asset mixture reflects a similar level of cash and investments and loans in comparison to the Peer Group.  Lending is oriented toward mortgage secured collateral and funding is primarily reliant on deposit liabilities with the level of borrowed funds below the Peer Group average and median.  FCAP’s loan portfolio also exhibits the highest level of consumer loans reported by a Peer Group member.  At June 30, 2012, FCAP had total assets of $454 million and a tangible equity-to-assets ratio of 10.3%.  Asset quality ratios for FCAP, including reserve coverage ratios were more favorable than the Peer Group.  For the twelve months ended June 30, 2012, FCAP reported a ROAA of 0.93% which was the highest of the Peer Group members.  FCAP had a market capitalization of $56 million at November 9, 2012.
 
●
Wayne Savings Bancshares of OH (“WAYN”)   operates 11 branches in central Ohio.  The asset structure reflects a relatively lower proportion of loans/assets which was offset by a higher percentage of cash and investments.  The majority of loans are invested in 1-4 family loans (inclusive of an investment in MBS) and WAYN had the highest ratio of residential assets of any Peer Group member.  In comparison to the Peer Group, deposits comprised a higher proportion of the funding mix, while borrowings were slightly lower.  WAYN reported asset quality ratios that were similar to the Peer Group, with the exception of slightly lower reserve coverage ratios.  At June 30, 2012, WAYN had total assets of $409 million and a tangible equity-to-assets ratio of 9.4%.  For the twelve months ended June 30, 2012, WAYN reported a ROAA equal to 0.39%.  WAYN had a market capitalization of $27 million at November 9, 2012.
 
 
 
 
 
RP ® Financial, LC. PEER GROUP ANALYSIS
 
III.6
 
●
River Valley Bancorp of IN (“RIVR”)   operates 10 branch offices in southern Indiana.  RIVR maintains a broadly diversified loan portfolio primarily focused on mortgage loans (both residential and commercial) and funds operations with deposits which are supplemented with borrowings at a level above the Peer Group.  Asset quality ratios are at a disadvantage to the Peer Group, both in terms of the NPA/Assets ratio which is higher and the reserve coverage ratios which are lower.  RIVR’s less favorable asset quality is also shown in their higher provisions as compared to the Peer Group.  At June 30, 2012, RIVR reported total assets of $408 million and a tangible equity-to-assets ratio of 8.2%.  For the twelve months ended June 30, 2012, RIVR reported earnings of 0.40% of average assets.  RIVR had a market capitalization of $27 million at November 9, 2012.
 
●
Eagle Bancorp of MT (“EBMT”) EBMT operates out of 6 offices in southwestern Montana, and reported a relatively similar asset composition as the Peer Group, with a slightly higher level of investments and lower level of loans.  EBMT operates with a capital level at the upper end of the Peer Group range, above the Peer Group average and median.  EBMT funds operations with a lower proportion of deposits and higher level of borrowings than the Peer Group.  Earnings were higher than the Peer Group average, and included the highest level of non-operating income.  EBMT’s loan portfolio was somewhat less diversified than the Peer Group, and included the one of the largest loans serviced for others portfolio of all Peer Group members.  The NPAs/assets ratio was lower than the Peer Group, although reserve coverage in relation to NPAs was slightly less favorable .   At June 30, 2012, EBMT had total assets of $327 million and a tangible equity-to-assets ratio of 16.4%.  For the twelve months ended June 30, 2012, EBMT reported a ROAA equal to 0.66%.  EBMT had a market capitalization of $41 million at November 9, 2012.
 
In the aggregate, the Peer Group companies maintain a slightly higher tangible equity level, in comparison to the industry median (11.66% of assets versus 11.40% for all non-MHC public companies) and generate a slightly lower level of core profitability (0.24% of average assets for the Peer Group versus 0.30% for all non-MHC public companies).  The Peer Group companies reported a modest median core ROE, whereas all non-MHC public companies have a median core ROE slightly higher than the Peer Group (1.97% for the Peer Group versus 2.31% for all non-MHC public companies).  Overall, the Peer Group’s pricing ratios were at a slight discount to all full stock publicly traded thrift institutions on a P/TB basis, as well as on a P/E core basis.
 
   
All Non-MHC
       
   
Public-Thrifts
   
Peer Group
 
Financial Characteristics (Medians)
           
Assets ($Mil)
  $ 792     $ 562  
Market Capitalization ($Mil)
  $ 75     $ 46  
Tangible Equity/Assets (%)
    11.40 %     11.66 %
Core Return on Average Assets (%)
    0.30 %     0.24 %
Core Return on Average Equity (%)
    2.31 %     1.97 %
                 
Pricing Ratios (Medians) (1)
               
Price/Core Earnings (x)
    18.72 x     18.67 x
Price/Tangible Book (%)
    87.24 %     76.43 %
Price/Assets (%)
    10.92 %     7.58 %
           
(1) Based on market prices as of November 9, 2012.
         
 
 
 
 
 
RP ® Financial, LC. PEER GROUP ANALYSIS
 
III.7
 
The thrifts selected for the Peer Group were relatively comparable to First Federal in terms of all of the selection criteria and are considered the “best fit” group.  While there are many similarities between First Federal and the Peer Group on average, there are some notable differences that lead to valuation adjustments.  The following comparative analysis highlights key similarities and differences between First Federal and the Peer Group.
 
Financial Condition
 
Table 3.2 shows comparative balance sheet measures for First Federal and the Peer Group, reflecting the expected similarities and some differences given the selection procedures outlined above.  The Bank’s ratios reflect balances as of September 30, 2012, while the Peer Group’s ratios reflect balances as of June 30, 2012.  On a reported and tangible basis, First Federal’s equity-to-assets ratio and tangible equity to assets ratio of 10.0% were below the Peer Group’s median equity/assets and tangible equity/assets ratios of 12.0% and 11.6%, respectively.  The more modest differential in the tangible equity ratios reflects the lower proportion of goodwill and other intangible assets for First Federal in comparison to the Peer Group (0.0% for First Federal and 0.4% and 0.6% for the Peer Group median and average).
 
The Bank’s pro forma capital position will increase with the addition of stock proceeds, providing the Bank with an equity and tangible equity ratio that is expected to be above the Peer Group’s ratios.  The increase in First Federal’s pro forma capital position will be favorable from a risk perspective and in terms of future earnings potential that could be realized through leverage and lower funding costs.  At the same time, the Bank’s higher pro forma capitalization will initially depress return on equity results.  Both First Federal’s and the Peer Group’s capital ratios reflected capital surpluses with respect to the regulatory capital requirements, with the Bank’s ratios currently lower than the Peer Group’s ratios.  On a pro forma basis, the Bank’s regulatory surpluses will become more significant.
 
The interest-earning asset compositions for the Bank and the Peer Group contained some significant differences.  The Bank’s loans-to-assets ratio of 52.8% was notably below the comparable Peer Group ratio of 61.4%, indicating a restriction on interest income for the Bank as loans represent higher yielding assets than investment securities.  At the same time, First Federal’s level of cash and investments equal to 41.9% of assets was above the comparable Peer Group average and median of 32.4% and 31.4%.  First Federal also reported investment in BOLI of 2.3% of assets, above the 1.5% median ratio for the Peer Group.  Overall, First Federal’s interest-earning assets amounted to 94.7% of assets, which was slightly above the Peer Group’s median ratio of 93.8%.
 
 
 
 
 
RP ® Financial, LC. PEER GROUP ANALYSIS
 
III.8
 
Table 3.2
 
Balance Sheet Composition and Growth Rates
 
Comparable Institution Analysis
 
As of June 30, 2012
 
                                                                                                                           
     
Balance Sheet as a Percent of Assets
   
Balance Sheet Annual Growth Rates
   
Regulatory Capital
 
     
Cash &
   
MBS &
                     
Borrowed
   
Subd.
   
Net
   
Goodwill
   
Tng Net
         
MBS, Cash &
               
Borrows.
   
Net
   
Tng Net
                   
     
Equivalents
   
Invest
   
BOLI
   
Loans
   
Deposits
   
Funds
   
Debt
   
Worth
   
& Intang
   
Worth
   
Assets
   
Investments
   
Loans
   
Deposits
   
&Subdebt
   
Worth
   
Worth
   
Tangible
   
Core
   
Reg.Cap.
 
                                                                                                                           
First Federal of Port Angeles
                                                                                                                       
  September 30, 2012
  4.7 %     37.2 %     2.3 %     52.8 %     75.5 %     12.8 %     0.0 %     10.0 %     0.0 %     10.0 %     3.17 %     10.53 %     -2.07 %     2.92 %     0.00 %     1.13 %     2.40 %     9.67 %     9.67 %     21.58 %
                                                                                                                                                                 
All Public Companies
                                                                                                                                                             
  Averages
  6.8 %     21.2 %     1.6 %     65.8 %     74.5 %     11.0 %     0.4 %     12.9 %     0.7 %     12.1 %     3.97 %     7.06 %     3.08 %     4.50 %     -4.89 %     1.95 %     2.03 %     12.13 %     12.10 %     20.88 %
  Medians
  5.4 %     18.8 %     1.7 %     68.0 %     75.4 %     9.4 %     0.0 %     12.1 %     0.0 %     11.4 %     1.64 %     2.80 %     2.00 %     2.56 %     -4.17 %     2.06 %     1.95 %     11.80 %     11.80 %     19.38 %
                                                                                                                                                                 
State of WA
                                                                                                                                                             
  Averages
  11.0 %     11.6 %     1.3 %     69.8 %     79.4 %     7.4 %     0.7 %     11.4 %     0.8 %     10.6 %     5.31 %     8.95 %     -0.70 %     5.73 %     2.20 %     -2.41 %     -7.18 %     10.67 %     10.67 %     17.24 %
  Medians
  11.8 %     12.4 %     1.1 %     70.5 %     79.8 %     6.6 %     0.0 %     10.3 %     0.1 %     10.1 %     -0.80 %     17.60 %     -6.19 %     -0.35 %     -5.49 %     3.08 %     2.74 %     8.88 %     8.88 %     16.85 %
                                                                                                                                                                 
Comparable Group
                                                                                                                                                             
  Averages
  6.6 %     24.8 %     1.6 %     62.1 %     75.6 %     10.2 %     0.7 %     12.5 %     0.6 %     11.8 %     -0.81 %     5.39 %     -3.57 %     -0.79 %     -9.41 %     6.74 %     7.67 %     12.25 %     12.25 %     20.61 %
  Medians
  4.3 %     28.1 %     1.5 %     61.4 %     75.1 %     9.5 %     0.4 %     12.0 %     0.4 %     11.6 %     -0.75 %     0.03 %     -2.21 %     0.71 %     -11.09 %     2.63 %     2.69 %     11.79 %     11.79 %     18.82 %
                                                                                                                                                                 
Comparable Group
                                                                                                                                                             
EBMT
Eagle Bancorp Montana of MT
  6.1 %     27.9 %     2.8 %     56.4 %     67.2 %     13.0 %     1.6 %     16.4 %     0.0 %     16.4 %     -1.15 %     -2.75 %     -1.50 %     5.16 %     -27.55 %     2.22 %     2.22 %     17.43 %     17.43 %     28.85 %
FCAP
First Capital, Inc. of IN
  5.2 %     28.2 %     1.3 %     60.9 %     83.8 %     4.4 %     0.0 %     11.5 %     1.2 %     10.3 %     1.98 %     18.21 %     -4.67 %     2.95 %     -18.88 %     4.73 %     5.45 %     9.92 %     9.92 %     15.70 %
FCLF
First Clover Leaf Fin Cp of IL
  4.0 %     15.4 %     1.0 %     72.9 %     75.3 %     9.0 %     0.7 %     14.5 %     2.2 %     12.3 %     -5.07 %     -29.09 %     1.98 %     -6.68 %     3.07 %     -0.65 %     -0.34 %     11.79 %     11.79 %     19.53 %
FFNW
First Fin NW, Inc of Renton WA
  16.0 %     13.8 %     0.2 %     65.1 %     72.6 %     8.3 %     0.0 %     18.4 %     0.0 %     18.4 %     -13.27 %     -11.88 %     -13.64 %     -17.03 %     -10.75 %     2.74 %     2.74 %     14.85 %     14.85 %     27.24 %
FSFG
First Savings Fin Grp of IN
  2.6 %     28.9 %     1.4 %     62.2 %     68.6 %     16.9 %     0.0 %     13.8 %     1.3 %     12.5 %     12.12 %     34.16 %     3.56 %     6.81 %     15.66 %     39.71 %     46.81 %     11.08 %     11.08 %     18.11 %
HFFC
HF Financial Corp of SD
  4.2 %     32.0 %     1.6 %     57.8 %     75.0 %     11.9 %     2.3 %     8.1 %     0.4 %     7.8 %     0.11 %     44.51 %     -16.26 %     0.08 %     -2.85 %     2.51 %     2.63 %  
NA
   
NA
   
NA
 
HFBC
HopFed Bancorp, Inc. of KY
  4.4 %     38.6 %     0.9 %     52.7 %     76.6 %     10.0 %     1.0 %     11.8 %     0.0 %     11.8 %     -3.41 %     2.16 %     -5.48 %     -3.83 %     -11.44 %     9.18 %     9.47 %     11.89 %     11.89 %     21.77 %
RIVR
River Valley Bancorp of IN
  3.8 %     27.9 %     2.5 %     62.0 %     74.8 %     14.2 %     1.8 %     8.2 %     0.0 %     8.2 %     2.11 %     14.03 %     -2.93 %     3.18 %     -2.98 %     1.96 %     1.96 %  
NA
   
NA
   
NA
 
TSBK
Timberland Bancorp, Inc. of WA
  15.9 %     2.0 %     2.2 %     73.7 %     81.0 %     6.3 %     0.0 %     12.2 %     0.8 %     11.4 %     -0.80 %     -13.31 %     3.04 %     0.15 %     -17.58 %     3.41 %     3.86 %  
NA
   
NA
      16.85 %
WAYN   
Wayne Savings Bancshares of OH
  3.8 %     33.3 %     2.1 %     57.6 %     81.2 %     7.9 %     0.0 %     9.8 %     0.5 %     9.4 %     -0.70 %     -2.11 %     0.15 %     1.28 %     -20.78 %     1.62 %     1.94 %     8.80 %     8.80 %     16.82 %
                                                                                                                                                                 
Source: SNL Financial, LC. and RP ® Financial, LC. calculations. The information provided in this table has been obtained from sources we believe are reliable, but we cannot guarantee the accuracy or completeness of such information.
                                                                                                                                                               
Copyright (c) 2012 by RP ® Financial, LC.
                                                                                                                                                   
 
 
 
 
 
RP ® Financial, LC. PEER GROUP ANALYSIS
 
III.9
 
First Federal’s funding composition reflected a similar level of deposits, but relied more on borrowings as a supplemental funding source than the Peer Group.  The Bank’s deposits equaled 75.5% of assets, which was similar to the Peer Group’s median ratio of 75.1%.  However, the Bank reported a higher level of borrowings at 12.8% of assets, than the Peer Group’s median ratio of 9.5%.  In addition, the Bank’s borrowings consisted of FHLB advances with maturities in the range of three to four years and bearing interest rates in excess of four percent on average.  Total interest-bearing liabilities maintained by the Bank and the Peer Group, as a percent of assets, equaled 88.3% and 85.0%, respectively.  Following the increase in equity provided by the net proceeds of the stock offering, the Bank’s ratio of interest-bearing liabilities as a percent of assets will likely be more in line with the Peer Group’s ratio.  A key measure of balance sheet strength for a thrift institution is its IEA/IBL ratio.  Presently, the Bank’s IEA/IBL ratio is slightly lower than the Peer Group’s ratio, based on IEA/IBL ratios of 107.3% and 110.4%, respectively.  The additional equity realized from stock proceeds will serve to strengthen First Federal’s IEA/IBL ratio in comparison to the Peer Group ratio, as the increase in equity provided by the infusion of stock proceeds will lower the level of interest-bearing liabilities funding assets and will be primarily deployed into interest-earning assets.
 
The growth rate section of Table 3.2 shows annual growth rates for key balance sheet items, with growth rates for First Federal based on the 12 months ended September 30, 2012 and the Peer Group based on annual growth rates for the 12 months ended June 30, 2012.  First Federal recorded asset growth of 3.2% compared to median asset shrinkage of 0.8% for the Peer Group.  The increase in the Bank’s assets was evident in the 10.5% increase in cash and investments, offset by a 2.1% decline in loans.  First Federal’s asset growth was funded solely by a 2.9% increase in deposits, as borrowings remained unchanged over the last twelve months.  The Peer Group recorded a slight decline in assets, with shrinkage occurring in loans as cash and investment securities were relatively unchanged.  The Peer Group reported minimal growth in deposits and a moderate reduction in borrowings.
 
Notwithstanding the recent net loss, the Bank’s equity increased at a 1.1% annual rate over the last twelve month period, versus a 2.6% increase in equity balances for the Peer Group.  The Bank’s equity increased, as the net loss recorded was offset by an increase in the market value adjustment on available for sale securities, while the Peer Group’s equity increased mainly because of positive earnings reported over the last twelve months ended June 30, 2012.  The increase in equity realized from stock proceeds will likely depress the Bank’s equity growth rate initially following the stock offering.  Dividend payments and stock repurchases, pursuant to regulatory limitations and guidelines could also potentially slow the Bank’s equity growth rate in the longer term following the stock offering.
 
 
 
 
 
RP ® Financial, LC. PEER GROUP ANALYSIS
 
III.10
 
Income and Expense Components
 
Table 3.3 shows comparative income statement measures for First Federal and the Peer Group, reflecting earnings for the 12 months ended September 30, 2012 for the Bank and the 12 months ended June 30, 2012 for the Peer Group.  First Federal reported a net loss of 0.14% of average assets versus the Peer Group’s net income ratios of 0.52% and 0.44% of average assets based on the average and median, respectively.  The Bank’s net loss was mainly caused by a lower level of net interest income and much higher provisions for loan losses.  Offsetting these factors in part was a slightly lower level of operating expense and a slightly higher level of non-operating income.
 
The Bank maintained a lower net interest income to average assets ratio, which was reflective of the Bank’s lower yield-cost spread, which equaled 2.64% versus 3.24% for the Peer Group median.  The Bank maintained a lower yield on interest-earning assets (3.71% versus 4.54% for the Peer Group median), which was only slightly offset by a lower cost of funds (1.08% versus a median of 1.14% for the Peer Group).
 
The impact of the foregoing characteristics of the Bank and the Peer Group’s yields and costs are reflected in the reported ratios of interest income and expense to average assets.  In this regard, the Bank’s interest income to average assets was below the Peer Group, while the ratio of interest expense was slightly lower in comparison to the Peer Group median.  Overall, the Bank’s ratio of net interest income to average assets, equal to 2.53% was lower than the Peer Group’s average and median ratios of 3.17% and 3.11%, respectively.  The Bank’s lower interest income ratio is primarily due to the lower yield earned on interest-earning assets resulting from the shift in composition of interest-earning assets from loans into investment securities.  The lower ratio of interest expense to average assets is partially attributable to the Bank’s higher proportion of funding with core deposits as opposed to CDs, which are generally higher cost funds.
 
 
 
 
 
RP ® Financial, LC. PEER GROUP ANALYSIS
 
III.11
 
Table 3.3
 
Income as Percent of Average Assets and Yields, Costs, Spreads
 
Comparable Institution Analysis
 
For the 12 Months Ended June 30, 2012
 
                                                                                                                     
           
Net Interest Income
         
Other Income
         
G&A/Other Exp.
   
Non-Op. Items
   
Yields, Costs, and Spreads
             
                             
Loss
   
NII
                     
Total
                                             
MEMO:
   
MEMO:
 
     
Net
                     
Provis.
   
After
   
Loan
   
R.E.
   
Other
   
Other
   
G&A
   
Goodwill
   
Net
   
Extrao.
   
Yield
   
Cost
   
Yld-Cost
   
Assets/
   
Effective
 
     
Income
   
Income
   
Expense
   
NII
   
on IEA
   
Provis.
   
Fees
   
Oper.
   
Income
   
Income
   
Expense
   
Amort.
   
Gains
   
Items
   
On Assets
   
Of Funds
   
Spread
   
FTE Emp.
   
Tax Rate
 
                                                                                                                     
First Federal of Port Angeles
                                                                                                                 
  September 30, 2012
    -0.14 %     3.41 %     0.88 %     2.53 %     0.90 %     1.63 %     0.00 %     0.00 %     0.51 %     0.51 %     2.70 %     0.00 %     0.27 %     0.00 %     3.71 %     1.08 %     2.64 %     4,886       51.91 %
                                                                                                                                                           
All Public Companies
                                                                                                                                                       
  Averages
    0.35 %     4.14 %     1.04 %     3.10 %     0.47 %     2.62 %     0.03 %     -0.09 %     0.76 %     0.71 %     2.98 %     0.03 %     0.28 %     0.00 %     4.42 %     1.22 %     3.20 %     5,758       29.16 %
  Medians
    0.46 %     4.15 %     0.99 %     3.09 %     0.30 %     2.67 %     0.00 %     -0.03 %     0.56 %     0.52 %     2.93 %     0.00 %     0.08 %     0.00 %     4.44 %     1.17 %     3.17 %     5,225       30.55 %
                                                                                                                                                           
State of WA
                                                                                                                                                       
  Averages
    0.17 %     4.45 %     1.01 %     3.43 %     0.94 %     2.49 %     3.00 %     0.14 %     1.20 %     1.37 %     3.83 %     0.01 %     0.45 %     0.00 %     4.83 %     1.24 %     3.59 %     5,404       22.91 %
  Medians
    0.52 %     4.47 %     0.98 %     3.42 %     0.58 %     2.72 %     0.00 %     -0.15 %     1.04 %     0.91 %     3.83 %     0.01 %     0.20 %     0.00 %     4.86 %     1.16 %     3.66 %     3,960       30.56 %
                                                                                                                                                           
Comparable Group
                                                                                                                                                       
  Averages
    0.52 %     4.23 %     1.06 %     3.17 %     0.42 %     2.75 %     0.01 %     -0.08 %     0.69 %     0.62 %     2.91 %     0.02 %     0.24 %     0.00 %     4.53 %     1.22 %     3.30 %   $ 4,540       22.59 %
  Medians
    0.44 %     4.24 %     0.96 %     3.11 %     0.36 %     2.74 %     0.00 %     -0.07 %     0.64 %     0.56 %     2.97 %     0.02 %     0.24 %     0.00 %     4.54 %     1.14 %     3.24 %   $ 3,886       26.28 %
                                                                                                                                                           
Comparable Group
                                                                                                                                                       
EBMT
Eagle Bancorp Montana of MT
    0.66 %     4.25 %     0.95 %     3.30 %     0.33 %     2.96 %     0.08 %     -0.05 %     0.44 %     0.46 %     3.19 %     0.00 %     0.66 %     0.00 %     4.69 %     1.16 %     3.53 %     3,762       26.67 %
FCAP
First Capital, Inc. of IN
    0.93 %     4.38 %     0.69 %     3.69 %     0.38 %     3.31 %     0.00 %     0.00 %     0.77 %     0.77 %     2.98 %     0.01 %     0.21 %     0.00 %     4.66 %     0.78 %     3.88 %     3,386       28.76 %
FCLF
First Clover Leaf Fin Cp of IL
    0.30 %     4.07 %     0.96 %     3.11 %     0.95 %     2.16 %     0.00 %     -0.20 %     0.55 %     0.35 %     2.35 %     0.05 %     0.22 %     0.00 %     4.38 %     1.12 %     3.26 %     6,183       9.91 %
FFNW
First Fin NW, Inc of Renton WA
    0.33 %     4.24 %     1.41 %     2.83 %     0.39 %     2.43 %     0.03 %     -0.26 %     0.60 %     0.36 %     2.56 %     0.00 %     0.06 %     0.00 %     4.46 %     1.71 %     2.75 %     9,247    
NM
 
FSFG
First Savings Fin Grp of IN
    0.73 %     4.68 %     0.87 %     3.80 %     0.26 %     3.54 %     0.00 %     -0.05 %     0.63 %     0.58 %     3.12 %     0.05 %     0.04 %     0.00 %     5.00 %     1.02 %     3.98 %     3,914       25.88 %
HFFC
HF Financial Corp of SD
    0.43 %     3.94 %     1.13 %     2.81 %     0.15 %     2.66 %     0.05 %     -0.01 %     0.80 %     0.84 %     3.01 %     0.00 %     0.29 %     0.00 %     4.18 %     1.26 %     2.92 %     4,043       26.84 %
HFBC
HopFed Bancorp, Inc. of KY
    0.56 %     4.18 %     1.55 %     2.63 %     0.21 %     2.42 %     0.00 %     -0.10 %     0.84 %     0.75 %     2.77 %     0.02 %     0.33 %     0.00 %     4.39 %     1.76 %     2.63 %     3,857       19.36 %
RIVR
River Valley Bancorp of IN
    0.40 %     4.32 %     1.35 %     2.97 %     0.67 %     2.29 %     0.00 %     0.07 %     0.33 %     0.40 %     2.53 %     0.00 %     0.30 %     0.00 %     4.61 %     1.49 %     3.12 %     4,537    
NM
 
TSBK
Timberland Bancorp, Inc. of WA
    0.46 %     4.36 %     0.89 %     3.47 %     0.59 %     2.88 %     -0.02 %     -0.13 %     1.32 %     1.17 %     3.65 %     0.02 %     0.25 %     0.00 %     4.76 %     1.01 %     3.74 %     2,815       30.56 %
WAYN   
Wayne Savings Bancshares of OH
    0.39 %     3.93 %     0.83 %     3.10 %     0.28 %     2.83 %     0.00 %     -0.11 %     0.66 %     0.55 %     2.95 %     0.02 %     0.04 %     0.00 %     4.15 %     0.93 %     3.22 %     3,650       12.70 %
                                                                                                                                                           
Source: SNL Financial, LC. and RP ® Financial, LC. calculations. The information provided in this table has been obtained from sources we believe are reliable, but we cannot guarantee the accuracy or completeness of such information.
 
Copyright (c) 2012 by RP ® Financial, LC.
                                                                                                                         
 
 
 
 
 
RP ® Financial, LC. PEER GROUP ANALYSIS
 
III.12
 
In another key area of core earnings strength, the Bank reported a lower ratio of operating expenses, 2.70% of average assets versus the Peer Group (2.97% of average assets).  This ratio was achieved in recent periods due in part to a sizeable reduction in staffing in relation to a reorganization in 2009.  In addition, First Federal maintained a comparatively lower number of employees relative to its asset size.   Assets per full time equivalent employee equaled $4.9 million for the Bank, versus a comparable measure of $3.9 million for the Peer Group.  On a post-offering basis, the Bank’s operating expenses can be expected to increase with the addition of the ESOP and certain expenses that result from being a publicly-traded company, with such expenses already impacting the Peer Group’s operating expenses.  At the same time, First Federal’s capacity to leverage operating expenses will be enhanced following the increase in capital realized from the infusion of net stock proceeds.
 
When viewed together, net interest income and operating expenses provide considerable insight into a savings institution’s earnings strength, since those sources of income and expenses are typically the most prominent components of earnings and are generally more predictable than losses and gains realized from the sale of assets or other non-recurring activities.  In this regard, as measured by their expense coverage ratios (net interest income divided by operating expenses), the Bank’s earnings were slightly less favorable than the Peer Group’s, based on respective expense coverage ratios of 0.94x for First Federal and 1.05x for the Peer Group.  A ratio less than 1.00x typically indicates that an institution depends on non-interest operating income to achieve profitable operations.
 
Sources of non-interest operating income provided a similar contribution to First Federal and the Peer Group’s earnings.  Non-interest operating income equaled 0.51% and 0.56% of First Federal’s and the Peer Group’s average assets, respectively.  Taking non-interest operating income into account in comparing the Bank’s and the Peer Group’s earnings, First Federal’s efficiency ratio (operating expenses, net of amortization of intangibles, as a percent of the sum of non-interest operating income and net interest income) of 88.8% was at a slight disadvantage to the Peer Group’s efficiency ratio of 80.4%.
 
Loan loss provisions had a larger impact on the Bank’s earnings, with loan loss provisions established by the Bank and the Peer Group equaling 0.90% and 0.36% of average assets, respectively.  The impact of loan loss provisions on the Bank’s and the Peer Group’s earnings, particularly when taking into consideration the prevailing credit market environment for mortgage based lenders, were indicative of asset quality factors facing the overall thrift industry in the current operating environment.
 
 
 
 
 
RP ® Financial, LC. PEER GROUP ANALYSIS
 
III.13
 
For the twelve months ended September 30, 2012, the Bank reported net non-operating income equal to 0.27% of average assets, while the Peer Group reported 0.24% of average assets of net non-operating gains.  Non-operating items for the Bank reflected primarily the gain recorded on the sale of loans ($1.4 million), a recovery on loan servicing expenses ($550,000), along with a gain on the sale of investment securities ($344,000) that were slightly offset by net impairment losses on investment securities ($249,000).  Typically, gains and losses generated from non-operating items are viewed as non-recurring in nature, particularly to the extent that such gains and losses result from the sale of investments or other assets that are not considered to be part of an institution’s core operations.  Comparatively, to the extent that gains have been derived through selling fixed rate loans into the secondary market, such gains may be considered to be an ongoing activity for an institution and, therefore, warrant some consideration as a core earnings factor for an institution.  However, loan sale gains are still viewed as a more volatile source of income than income generated through the net interest margin and non-interest operating income.  Extraordinary items were not a factor in either the Bank’s or the Peer Group’s earnings.
 
For the twelve months ended June 30, 2012, the Peer Group reported a median effective tax rate of 26.28%, while First Federal reported an effective tax benefit of 51.91%.  As indicated in the prospectus, the Bank’s effective m arginal tax rate is assumed to equal 34% when calculating the after tax return on conversion proceeds.
 
Loan Composition
 
Table 3.4 presents data related to the comparative loan portfolio composition (including the investment in MBS) for First Federal and the Peer Group.  The Bank’s loan portfolio composition reflected a higher concentration of 1-4 family permanent mortgage loans and mortgage-backed securities relative to the Peer Group median (63.16% of assets versus 37.81% for the Peer Group).  The Bank’s higher ratio was attributable to maintaining higher concentrations of 1-4 family permanent mortgage loans, as well as higher MBS relative to the Peer Group’s ratios.  The Bank reported a balance of loans serviced for others of $277.8 million, while the majority of Peer Group members also reported a balance of loans serviced for others, which at a median totaled $45.1 million, significantly lower than the Bank.  The Bank and the Peer Group also maintained balances of loan servicing intangibles.
 
 
 
 
 
RP ® Financial, LC. PEER GROUP ANALYSIS
 
III.14
 
Diversification into higher risk and higher yielding types of lending was more significant for the Peer Group compared to the Bank, as all loans outside of residential 1-4 family loans (including home equity loans and HELOCs) equaled 31.35% of assets for the Peer Group and 18.99% of assets for the Bank.  Less diversification of the loan portfolio (along with the lower loans/assets ratio mentioned earlier) also resulted in First Federal’s lower risk weighted assets-to-assets ratio as compared to the Peer Group (47.40% versus 65.20% for the Peer Group).  In fact, First Federal’s risk weighted assets-to-assets ratio was lower than all of the Peer Group companies, which ranged from a low of 56.16% to a high of 80.15%.  The Peer Group reported the most significant diversification into commercial real estate lending (22.66% of assets), followed by construction/land lending (3.82% of assets).  The Bank’s highest level of lending diversification was also in commercial real estate lending (14.08% of assets), followed by construction/land lending (2.31% of assets).
 
Table 3.4
 
Loan Portfolio Composition and Related Information
 
Comparable Institution Analysis
 
As of June 30, 2012
 
                                                         
     
Portfolio Composition as a Percent of Assets
                   
              1-4    
Constr.
   
5+Unit
   
Commerc.
         
RWA/
   
Serviced
   
Servicing
 
Institution
   
MBS
   
Family
   
& Land
   
Comm RE
   
Business
   
Consumer
   
Assets
   
For Others
   
Assets
 
     
(%)
   
(%)
   
(%)
   
(%)
   
(%)
   
(%)
   
(%)
    ($ 000 )   ($ 000 )
                                                               
First Federal of Port Angeles
    28.00 %     35.16 %     2.31 %     14.08 %     1.17 %     1.43 %     47.40 %   $ 277,811     $ 1,666  
                                                                           
All Public Companies
                                                                       
  Averages
    12.79 %     33.61 %     3.18 %     23.15 %     4.05 %     1.76 %     62.89 %   $ 1,320,878     $ 11,123  
  Medians
    10.64 %     32.91 %     2.30 %     23.05 %     3.09 %     0.39 %     62.88 %   $ 11,490     $ 180  
                                                                           
State of WA
                                                                       
  Averages
    7.74 %     27.72 %     5.79 %     26.37 %     4.48 %     5.70 %     71.31 %   $ 1,010,649     $ 10,560  
  Medians
    6.30 %     28.39 %     5.93 %     27.98 %     3.12 %     0.71 %     74.26 %   $ 91,140     $ 497  
                                                                           
Comparable Group
                                                                       
  Averages
    11.79 %     26.91 %     4.42 %     24.53 %     4.19 %     1.71 %     65.90 %   $ 201,249     $ 1,804  
  Medians
    9.69 %     28.12 %     3.82 %     22.66 %     3.72 %     1.15 %     65.20 %   $ 45,085     $ 463  
                                                                           
Comparable Group
                                                                       
EBMT
Eagle Bancorp Montana of MT
    6.45 %     29.26 %     2.43 %     17.49 %     4.95 %     2.71 %     61.43 %   $ 338,580     $ 2,218  
FCAP
First Capital, Inc. of IN
    10.27 %     30.72 %     1.75 %     19.07 %     3.78 %     6.13 %     67.97 %   $ 210     $ 0  
FCLF
First Clover Leaf Fin Cp of IL
    4.99 %     26.97 %     6.19 %     29.54 %     10.59 %     0.66 %     68.19 %   $ 85,010     $ 705  
FFNW
First Fin NW, Inc of Renton WA
    6.63 %     32.91 %     3.66 %     29.56 %     0.21 %     0.04 %     62.25 %   $ 5,160     $ 109  
FSFG
First Savings Fin Grp of IN
    11.86 %     30.64 %     3.98 %     20.15 %     5.16 %     2.00 %     62.43 %   $ 0     $ 0  
HFFC
HF Financial Corp of SD
    29.56 %     13.38 %     2.96 %     26.24 %     6.31 %     2.10 %     80.15 %   $ 1,187,880     $ 11,932  
HFBC
HopFed Bancorp, Inc. of KY
    12.85 %     20.60 %     6.37 %     19.89 %     3.65 %     1.41 %     57.91 %   $ 0     $ 0  
RIVR
River Valley Bancorp of IN
    9.10 %     26.72 %     5.58 %     25.17 %     1.78 %     0.75 %     68.25 %   $ 94,480     $ 676  
TSBK
Timberland Bancorp, Inc. of WA
    1.00 %     19.71 %     10.65 %     40.94 %     3.33 %     0.88 %     74.26 %   $ 301,170     $ 2,150  
WAYN
Wayne Savings Bancshares of OH
    25.23 %     38.14 %     0.63 %     17.24 %     2.17 %     0.38 %     56.16 %   $ 0     $ 250  
                                                                           
                                                                           
Source: SNL Financial LC. and RP ® Financial, LC. calculations. The information provided in this table has been obtained from sources we believe are reliable, but we cannot guarantee the accuracy or completeness of such information.
 
                                                                           
Copyright (c) 2012 by RP ® Financial, LC.
                                                                       
 
 
 
 
 
RP ® Financial, LC. PEER GROUP ANALYSIS
 
III.15
 
Credit Risk
 
Based on a comparison of credit quality measures, the Bank’s credit risk exposure was considered to be somewhat more favorable in comparison to the Peer Group’s.  As shown in Table 3.5, the Bank’s non-performing assets/assets and non-performing loans/loans ratios equaled 2.47% and 3.81%, respectively, versus comparable measures of 2.52% and 3.65% for the Peer Group medians.  The ratio of REO to assets was the same for the Bank and the Peer Group median at 0.41%.  First Federal reported more favorable reserve coverage ratios compared to the Peer Group, reporting higher reserves as a percent of loans, NPLs, and NPAs.  Net loan charge-offs as a percent of loans were higher for the Bank, as net loan charge-offs as a percentage of loans for the Bank equaled 1.06% of loans versus 0.35% of loans for the Peer Group.
 
Table 3.5
 
Credit Risk Measures and Related Information
 
Comparable Institution Analysis
 
As of June 30, 2012 or Most Recent Date Available
 
                                                   
           
NPAs &
                     
Rsrves/
             
     
REO/
   
90+Del/
   
NPLs/
   
Rsrves/
   
Rsrves/
   
NPAs &
   
Net Loan
   
NLCs/
 
Institution
   
Assets
   
Assets
   
Loans
   
Loans
   
NPLs
   
90+Del
   
Chargeoffs
   
Loans
 
     
(%)
   
(%)
   
(%)
   
(%)
   
(%)
   
(%)
    ($ 000 )  
(%)
 
                                                     
First Federal of Port Angeles
    0.41 %     2.47 %     3.81 %     1.95 %     51.15 %     42.59 %   $ 4,468       1.06 %
                                                                   
All Public Companies
                                                               
  Averages
    0.54 %     3.37 %     4.04 %     1.53 %     53.92 %     42.20 %   $ 1,224       0.60 %
  Medians
    0.22 %     2.41 %     3.14 %     1.32 %     41.67 %     33.17 %   $ 488       0.29 %
                                                                   
State of WA
                                                               
  Averages
    1.53 %     6.75 %     6.97 %     2.07 %     39.37 %     28.01 %   $ 1,190       0.96 %
  Medians
    1.55 %     7.13 %     7.45 %     1.91 %     30.62 %     24.01 %   $ 1,017       0.66 %
                                                                   
Comparable Group
                                                               
  Averages
    0.72 %     3.81 %     4.72 %     1.58 %     43.88 %     34.25 %   $ 648       0.37 %
  Medians
    0.41 %     2.52 %     3.65 %     1.51 %     42.70 %     34.00 %   $ 515       0.35 %
                                                                   
Comparable Group
                                                               
EBMT
Eagle Bancorp Montana of MT
    0.72 %     1.30 %     1.02 %     0.87 %     85.35 %     38.10 %     335       0.73 %
FCAP
First Capital, Inc. of IN
    0.13 %     1.93 %     2.88 %     1.58 %     54.89 %     50.67 %     96       0.14 %
FCLF
First Clover Leaf Fin Cp of IL
    1.27 %     3.78 %     3.35 %     1.47 %     43.96 %     28.85 %     50       0.05 %
FFNW
First Fin NW, Inc of Renton WA
    2.22 %     10.77 %     12.85 %     2.17 %     16.92 %     13.43 %     1032       0.63 %
FSFG
First Savings Fin Grp of IN
    0.24 %     2.40 %     3.19 %     1.32 %     41.44 %     34.71 %     336       0.37 %
HFFC
HF Financial Corp of SD
    0.14 %     1.60 %     2.47 %     1.51 %     61.12 %     55.55 %     745       -0.65 %
HFBC
HopFed Bancorp, Inc. of KY
    0.13 %     2.26 %     3.95 %     1.92 %     48.50 %     45.67 %     441       0.32 %
RIVR
River Valley Bancorp of IN
    0.59 %     4.32 %     5.94 %     1.37 %     23.06 %     19.95 %     1299       -0.03 %
TSBK
Timberland Bancorp, Inc. of WA
    1.71 %     7.13 %     7.03 %     2.11 %     30.06 %     22.30 %     1561       1.14 %
WAYN
Wayne Savings Bancshares of OH
    0.02 %     2.64 %     4.48 %     1.50 %     33.50 %     33.29 %     588       0.99 %
                                                                   
Source:  Audited and unaudited financial statements, corporate reports and offering circulars, and RP ® Financial, LC. calculations. The information provided in this table has been obtained from sources we believe are reliable, but we cannot guarantee the accuracy or completeness of such information.
                                                                   
Copyright (c) 2012 by RP ® Financial, LC.
                                           
 
 
 
 
 
 
RP ® Financial, LC. PEER GROUP ANALYSIS
 
III.16
 
Interest Rate Risk
 
Table 3.6 reflects various key ratios highlighting the relative interest rate risk exposure of the Bank versus the Peer Group.  In terms of balance sheet composition, First Federal’s interest rate risk characteristics were considered to be less favorable than the Peer Group.  The Bank’s equity-to-assets and IEA/IBL ratios were lower than the Peer Group, thereby implying a greater dependence on the yield-cost spread to sustain the net interest margin for the Bank.  The Bank also reported a lower level of non-interest earning assets, which provides an indication of the earnings capabilities and interest rate risk of the balance sheet.  On a pro forma basis, the infusion of stock proceeds can be expected to provide the Bank with more favorable balance sheet interest rate risk characteristics than currently maintained by the Peer Group, particularly with respect to the increases that will be realized in the  Bank’s equity-to-assets and IEA/IBL ratios.
 
 
 
Table 3.6
 
Interest Rate Risk Measures and Net Interest Income Volatility
 
Comparable Institution Analysis
 
As of June 30, 2012 or Most Recent Date Available
 
                                                         
     
Balance Sheet Measures
                                     
     
Tangible
         
Non-Earn.
   
Quarterly Change in Net Interest Income
 
     
Equity/
   
IEA/
   
Assets/
                                     
Institution
   
Assets
   
IBL
   
Assets
   
6/30/2012
   
3/31/2012
   
12/31/2011
   
9/30/2011
   
6/30/2011
   
3/31/2011
 
     
(%)
   
(%)
   
(%)
   
(change in net interest income is annualized in basis points)
 
                                                         
First Federal of Port Angeles
    10.0 %     107.2 %     5.3 %     -4       6       -14       -20       12       -10  
                                                                           
All Public Companies
    12.0 %     108.5 %     6.2 %     -1       -4       -1       0       4       -1  
State of WA
    10.6 %     105.8 %     7.6 %     7       -3       2       -10       1       -5  
Comparable Group Average
    11.8 %     108.2 %     6.5 %     0       -4       -1       -2       3       1  
                                                                           
Comparable Group
                                                                       
EBMT
Eagle Bancorp Montana of MT
    16.4 %     110.4 %     9.7 %     -20       -7       8       -2       -2       18  
FCAP
First Capital, Inc. of IN
    10.3 %     106.9 %     5.7 %     -5       -11       -5       10       12       1  
FCLF
First Clover Leaf Fin Cp of IL
    12.3 %     108.5 %     7.7 %     6       2       7       -1       10       10  
FFNW
First Fin NW, Inc of Renton WA
    18.4 %     117.3 %     5.1 %     -9       17       2       -14       -1       7  
FSFG
First Savings Fin Grp of IN
    12.5 %     109.5 %     6.3 %     11       -6       -12       -15       12       0  
HFFC
HF Financial Corp of SD
    7.8 %     105.3 %     6.0 %     14       -34       -16       5       4       -17  
HFBC
HopFed Bancorp, Inc. of KY
    11.8 %     109.2 %     4.4 %     -6       -11       14       -3       10       -17  
RIVR
River Valley Bancorp of IN
    8.2 %     103.3 %     6.3 %     -10       12       -10       9       -25       16  
TSBK
Timberland Bancorp, Inc. of WA
    11.4 %     104.9 %     8.5 %     21       -3       -2       -3       0       -4  
WAYN
Wayne Savings Bancshares of OH
    9.4 %     106.2 %     5.3 %     -4       2       -2       -9       14       1  
                                                                           
NA=Change is greater than 100 basis points during the quarter.
                                                         
                                                                           
Source:  SNL Financial LC. and RP ® Financial, LC. calculations. The information provided in this table has been obtained from sources we believe are reliable, but we cannot guarantee the accuracy or completeness of such information.
                                                                           
Copyright (c) 2012 by RP ® Financial, LC.
                                                 
 
 
 
 
 
 
RP ® Financial, LC. PEER GROUP ANALYSIS
 
III.17
 
To analyze interest rate risk associated with the net interest margin, we reviewed quarterly changes in net interest income as a percent of average assets for First Federal and the Peer Group.  The relative fluctuations in the Bank’s net interest income to average assets ratio were considered to be higher than the Peer Group and, thus, based on the interest rate environment that prevailed during the period analyzed in Table 3.6, First Federal was viewed as maintaining a higher degree of interest rate risk exposure in the net interest margin.  The stability of the Bank’s net interest margin should be enhanced by the infusion of stock proceeds, as the increase in capital will reduce the level of interest rate sensitive liabilities funding First Federal’s assets.
 
Summary
 
Based on the above analysis and the criteria employed in the selection of the companies for the Peer Group, RP Financial concluded that the Peer Group forms a reasonable basis for determining the pro forma market value of First Federal.  In those areas where notable differences exist, we will apply appropriate valuation adjustments in the next section.
 
 
 
 
 
RP ® Financial, LC. VALUATION ANALYSIS
 
IV.1

IV. VALUATION ANALYSIS
 
Introduction
 
This chapter presents the valuation analysis and methodology, prepared pursuant to the regulatory valuation guidelines, and valuation adjustments and assumptions used to determine the estimated pro forma market value of the common stock to be issued in conjunction with the Bank’s conversion transaction.
 
Appraisal Guidelines
 
The regulatory written appraisal guidelines as reissued by the Office of the Comptroller of the Currency and which are relied upon by the Federal Reserve Board (“FRB”) specify the market value methodology for estimating the pro forma market value of an institution pursuant to a mutual-to-stock conversion.  Pursuant to this methodology:  (1) a peer group of comparable publicly-traded institutions is selected; (2) a financial and operational comparison of the subject company to the peer group is conducted to discern key differences; and, (3) a valuation analysis in which the pro forma market value of the subject company is determined based on the market pricing of the peer group as of the date of valuation, incorporating valuation adjustments for key differences.  In addition, the pricing characteristics of recent conversions, both at conversion and in the aftermarket, must be considered .
 
RP Financial Approach to the Valuation
 
The valuation analysis herein complies with such regulatory approval guidelines.  Accordingly, the valuation incorporates a detailed analysis based on the Peer Group, discussed in Chapter III, which constitutes “fundamental analysis” techniques.  Additionally, the valuation incorporates a “technical analysis” of recently completed stock conversions, including closing pricing and aftermarket trading of such offerings.  It should be noted that these valuation analyses cannot possibly fully account for all the market forces which impact trading activity and pricing characteristics of a particular stock on a given day.
 
 
 
 
 
RP ® Financial, LC. VALUATION ANALYSIS
 
IV.2
 
The pro forma market value determined herein is a preliminary value for the Bank’s to-be-issued stock.  Throughout the conversion process, RP Financial will:  (1) review changes in First Federal’s operations and financial condition; (2) monitor First Federal’s operations and financial condition relative to the Peer Group to identify any fundamental changes; (3) monitor the external factors affecting value including, but not limited to, local and national economic conditions, interest rates, and the stock market environment, including the market for thrift stocks and First Federal’s stock specifically; and (4) monitor pending conversion offerings (including those in the offering phase), both regionally and nationally.  If material changes should occur during the conversion process, RP Financial will evaluate if updated valuation reports should be prepared reflecting such changes and their related impact on value, if any.  RP Financial will also prepare a final valuation update at the closing of the offering to determine if the prepared valuation analysis and resulting range of value continues to be appropriate.
 
The appraised value determined herein is based on the current market and operating environment for the Bank and for all thrifts.  Subsequent changes in the local and national economy, the legislative and regulatory environment, the stock market, interest rates, and other external forces (such as natural disasters or major world events), which may occur from time to time (often with great unpredictability) may materially impact the market value of all thrift stocks, including First Northwest Bancorp’s value, or First Northwest Bancorp’s value alone.  To the extent a change in factors impacting the Bank’s value can be reasonably anticipated and/or quantified, RP Financial has incorporated the estimated impact into the analysis.
 
Valuation Analysis
 
A fundamental analysis discussing similarities and differences relative to the Peer Group was presented in Chapter III.  The following sections summarize the key differences between the Bank and the Peer Group and how those differences affect the pro forma valuation.  Emphasis is placed on the specific strengths and weaknesses of First Federal relative to the Peer Group in such key areas as financial condition, profitability, growth and viability of earnings, asset growth, primary market area, dividends, liquidity of the shares, marketing of the issue, management, and the effect of government regulations and/or regulatory reform.  We have also considered the market for thrift stocks, in particular new issues, to assess the impact on value of the Bank coming to market at this time.
 
 
 
 
 
RP ® Financial, LC. VALUATION ANALYSIS
 
IV.3
 
1.
Financial Condition
 
The financial condition of an institution is an important determinant in pro forma market value because investors typically look to such factors as liquidity, capital, asset composition and quality, and funding sources in assessing investment attractiveness.  The similarities and differences in the Bank’s and the Peer Group’s financial strengths are noted as follows:
 
 
■
Overall A/L Composition .  In comparison to the Peer Group, the Bank’s IEA composition was somewhat less favorable, reflecting a lower concentration of loans and a higher concentration of cash and investments, resulting in a lower earnings capacity.  Lending diversification into higher yielding types of loans (albeit higher risk loans) was more significant for the Peer Group, with such loans approximately 65% greater as a percent of assets than First Federal.  This lower investment in loans and lower investment in higher risk loans resulted in First Federal reporting a lower risk weighted assets-to-assets ratio in comparison to the Peer Group’s ratio, as well as all of the Peer Group members.  The Bank’s IEA composition also resulted in a lower yield earned on IEA.  The Bank’s cost of IBL was slightly lower than the Peer Group’s cost of funds, notwithstanding the Bank’s higher level of borrowings compared to the Peer Group.  As a percent of assets, First Federal maintained a similar level of IEA and a higher level of IBL, given the lower pre-conversion equity position of the Bank.  The Bank’s IEA/IBL ratio of 107.3% was less favorable than the 110.4% ratio for the Peer Group.  After factoring in the impact of the net stock proceeds, the Company’s IEA/IBL ratio should be comparable to the Peer Group’s ratio.  RP Financial concluded that A/L composition was a moderate downward factor in the adjustment for financial condition.
 
 
■
Credit Quality.   First Federal’s ratio of NPAs/assets was slightly more favorable than the comparable Peer Group median ratio, while the NPLs/Loans ratio was slightly higher.  Loan loss reserves as a percent of NPLs and NPAs were higher for the Bank.  First Federal reported a higher ratio of loan loss reserves as a percent of loans; however the overall low loan balance (as a percent of assets) did not provide a significant measureable advantage in terms of reserve calculations.  Net loan charge-offs as a percent of loans for the Bank were well above the Peer Group average and median ratios.  As noted above, First Federal’s risk weighted assets-to-assets ratio was lower than the Peer Group’s ratio.  In addition, the Bank’s loan portfolio composition was concentrated in lower risk residential assets, including MBS.  Overall, RP Financial concluded that credit quality was a slightly positive factor in the adjustment for financial condition.
 
 
■
Balance Sheet Liquidity .  As of the valuation date, First Federal reported a higher level of cash and investment securities relative to the Peer Group, with the Bank’s investments concentrated in MBS, a majority of which are carried as AFS.  Following the infusion of stock proceeds, the Bank’s cash and investments ratio is expected to increase as the proceeds retained at the holding company level will be initially deployed into shorter term investment securities while the Bank’s portion of the proceeds will also be deployed into investments pending the longer term reinvestment into loans.  The Bank’s future borrowing capacity was considered to be somewhat lower than the Peer Groups’, given the current level of borrowings currently utilized by the Bank in funding the asset base.  Overall, RP Financial concluded that pro forma balance sheet liquidity was a neutral factor in our adjustment for financial condition.
 
 
 
 
 
RP ® Financial, LC. VALUATION ANALYSIS
 
IV.4
 
 
■
Funding Liabilities .  First Federal’s IBL composition reflected a similar concentration of deposits and higher use of borrowings relative to the comparable Peer Group ratios.  Notwithstanding this funding structure, First Federal’s cost of funds was slightly lower than the Peer Group’s ratio.  Total IBL as a percent of assets were higher for the Bank as compared to the Peer Group’s ratio due to the lower pre-conversion equity ratio maintained by the Bank.  Following the stock offering, the increase in the Bank’s equity position will reduce the level of IBL funding the Bank’s assets to a ratio that is in line with the Peer Group’s ratio.  Overall, RP Financial concluded that funding liabilities were a slightly negative factor in our adjustment for financial condition.
 
 
■
Tangible Equity/ROE .  First Federal currently operates with a lower tangible equity-to-assets ratio as compared to the Peer Group.  Following the stock offering, First Federal’s pro forma tangible equity position is expected to exceed the Peer Group’s ratio, which will result in greater leverage potential.  At the same time, the Bank’s more significant equity surplus will likely result in a lower ROE, an unattractive metric from an investor view.  On balance, RP Financial concluded that the tangible equity position was a neutral factor in our adjustment for financial condition.
 
On balance, First Federal’s financial condition, taking into account the above factors, was considered to be less favorable than the Peer Group’s and, thus, a moderate downward adjustment was applied for this valuation adjustment.
 
2.
Profitability, Growth and Viability of Earnings
 
Earnings are a key factor in determining pro forma market value, as the level and risk characteristics of a financial institution’s earnings stream and the prospects and ability to generate future earnings, heavily influence the multiple that the investment community will pay for earnings.  The major factors considered in the valuation are described below.
 
 
■
Reported Profitability .  For the most recent 12 month period, First Federal reported a sizeable net loss of $1.11 million, or 0.14% of average assets, versus average and median profitability of 0.52% and 0.44% of average assets for the Peer Group.  The Bank’s net losses were attributable a lower level of net interest income (caused by low interest income), and higher loan loss provisions, which was partially offset by the Bank’s lower level of operating expenses, higher non-operating income, and a tax benefit, based on a comparison to the Peer Group averages and medians.  The Peer Group reported slightly higher levels of interest expense and non-interest income.  A key difference between the Bank and the Peer Group is First Federal’s lower interest income ratio, a result of the lower loans/assets ratio, which is also evident in the Bank’s lower yield on earning assets and overall yield/cost spread.  Reinvestment and leveraging of stock proceeds into interest-earning assets will serve to increase the Bank’s bottom line income, with the benefit of reinvesting proceeds expected to be somewhat offset by higher operating expenses associated with operating as a publicly-traded company.  The Bank’s only slightly lower level of NPAs, which impacted the income statement in the most recent period through elevated loan loss provisions and loss of interest income, will remain as a potential negative factor in future earnings as additional loan loss reserves may be incurred.  However, the Peer Group can also be expected to experience losses related to problem assets.  On balance, RP Financial concluded that the Bank’s reported earnings were a significantly negative factor in our adjustment for profitability, growth and viability of earnings.
 
 
 
 
 
RP ® Financial, LC. VALUATION ANALYSIS
 
IV.5
 
 
■
Core Profitability .  Net interest income, operating expenses, non-interest operating income and loan loss provisions were reviewed in assessing the relative strengths and weaknesses of core profitability.  First Federal operated with a lower net interest income ratio and a similar level of non-interest operating income, based on a comparison to the Peer Group averages and medians.  The lower revenues were mitigated to a limited extent by the Bank’s lower operating expense ratio such that the Bank’s efficiency ratio was modestly less favorable than the Peer Group’s ratio.  Loan loss provisions had a much larger impact on the Bank’s earnings.  The expected earnings benefits the Bank should realize from the redeployment of stock proceeds into IEA and leveraging of post-conversion equity will be somewhat negated by expenses associated with the stock benefit plans, as well as incremental costs associated with the growth oriented business plan.  On balance we believe the Bank’s core profitability was a moderately negative factor in this valuation adjustment.
 
 
■
Interest Rate Risk .  Quarterly changes in the net interest income ratio for First Federal indicated a slightly higher degree of volatility.  Other measures of interest rate risk, such as tangible equity and the IEA/IBL ratio were less favorable than the Peer Group.  On a pro forma basis, the infusion of stock proceeds can be expected to provide the Bank with equity-to-assets and IEA/IBL ratios that will exceed the Peer Group ratios, as well as enhance the stability of the Bank’s net interest margin through the reinvestment of stock proceeds into IEA.  On balance, RP Financial concluded that interest rate risk was a neutral factor in our adjustment for profitability, growth and viability of earnings.
 
 
■
Credit Risk .  Loan loss provisions were a larger factor in the Bank’s income statement over the most recent 12 month time period.  In terms of future exposure to credit quality related losses, First Federal maintained a lower concentration of assets in loans and less lending diversification into higher credit risk loans.  The Bank’s risk weighted assets-to-assets ratio was lower than the Peer Group’s ratio, as well as all the Peer Group member ratios.  NPAs were somewhat lower for the Bank compared to the Peer Group.  Loss reserves were more favorable for the Bank in comparison to loans receivable, NPAs and NPLs.  Net loan charge-offs over the last twelve months as a percent of loans were significantly higher for the Bank, both in dollar terms and as a percent of loans.  Overall, RP Financial concluded that credit risk was a slightly positive factor in the adjustment for profitability, growth and viability of earnings.
 
 
■
Earnings Growth Potential .  First Federal maintained a lower level of net interest income and lower interest rate spread as compared to the Peer Group.  The Bank’s earnings growth potential is limited by the current low loans/assets ratio, which can only be reversed through substantial growth in the loan portfolio – a key part of the future operating strategy.  However, the timing of such loan growth, and quality of such loans to be obtained, remains uncertain.  The infusion of stock proceeds will provide the Bank with greater leverage potential than the Peer Group.  On balance, because of the limitation of the loans/assets ratio on earnings, we concluded that a moderate downward adjustment was warranted for this factor.
 
 
■
Return on Equity .  Currently, the Bank’s trailing 12 month ROE on either a reported or core basis is substantially lower than the Peer Group’s ROE.  On a pro forma basis, immediately following the conversion the Bank’s earnings increase will be limited whereas the equity will increase considerably, thus resulting in a lower pro forma ROE relative to the Peer Group.  Accordingly, this was a moderately negative factor in the adjustment for profitability, growth and viability of earnings.
 
 
 
 
 
RP ® Financial, LC. VALUATION ANALYSIS
 
IV.6
 
On balance, First Federal’s pro forma earnings strength was considered to be less favorable than the Peer Group’s and, thus, a moderate downward adjustment was warranted for profitability, growth and viability of earnings.
 
3.
Asset Growth
 
First Federal’s assets increased at an annual rate of 3.2% during the most recent 12 month period, while the Peer Group’s assets decreased by 0.8% over the same time period, showing a limited difference.  Four of the ten Peer Group companies reported increases in assets, with the highest growth of a peer member at 12.12%.  On a pro forma basis, First Federal’s tangible equity-to-assets ratio will exceed the Peer Group’s tangible equity-to-assets ratio, indicating greater leverage capacity for the Bank.  On balance, we concluded that no adjustment was warranted for asset growth.
 
4.
Primary Market Area
 
The general condition of an institution’s market area has an impact on value, as future success is in part dependent upon opportunities for profitable activities in the local market served.   First Federal’s primary market area for loans and deposits is considered to be the North Olympic Peninsula region of Washington where the Bank maintains its branch network and LPO.  Within this market, the Bank faces significant competition for loans and deposits from both community based institutions and larger regional financial institutions, which provide a broader array of services and have significantly larger branch networks.  However, the  Peer Group companies by virtue of their relatively comparable size relative to First Federal also face numerous and/or large competitors.
 
Demographic and economic trends and characteristics in the Bank’s primary market area are relatively less favorable than the primary market areas served by the Peer Group companies (see Exhibit III-2).  In this regard, the total population of Clallam County is lower than the median and significantly lower than the average primary market of the Peer Group.  In addition, historical population growth rates in Clallam County reflect no change, respectively, over the 2010-2011 period versus growth rates of an average and median of 0.7% and 0.8% in the Peer Group market areas.  Forecasted population growth rates for the Bank’s market at 2.6% remain below the Peer Group companies based on average and median projected growth of 3.5% and 3.7% for the 2011 to 2016 period.  Per capita income levels in Clallam County were within the lower end of the range exhibited by the average and median of the Peer Group’s markets, but as a percentage of the state average, Clallam County falls below both the average and medians of the Peer Group.  The deposit market share exhibited by the Bank in Clallam County was above the Peer Group average and median, however, indicative of the smaller market within which the Bank operates.  Unemployment rates for the markets served by the Peer Group companies were more favorable than Clallam County.
 
 
 
 
 
RP ® Financial, LC. VALUATION ANALYSIS
 
IV.7
 
The limited size of the Bank’s current market area in terms of population and economic base is an unfavorable comparison to the Peer Group companies.  The Bank’s operations are relatively isolated on the North Olympic Peninsula region, given the separation from the Seattle metropolitan area caused by the Puget Sound and the Strait of Juan de Fuca.  This factor substantially limits the sources for loans, both residential and commercial, which are the focus of future lending activities.  In response, First Federal has recently opened a branch in Kitsap County (Poulsbo) and an LPO in Whatcom County (Bellingham).  Access to these locations and higher potential for loan sources is a key factor for future success.  However, there remains significant uncertainty as to the timing and level of loan originations to be obtained in these new markets.
 
On balance, we concluded that a moderate downward adjustment was appropriate for the Bank’s market area.
 
5.
Dividends
 
At this time the Bank has not established a dividend policy.  Future declarations of dividends by the Board of Directors will depend upon a number of factors, including investment opportunities, growth objectives, financial condition, profitability, tax considerations, minimum capital requirements, regulatory limitations, stock market characteristics and general economic conditions.
 
Seven of the ten Peer Group companies pay regular cash dividends, with implied dividend yields ranging from 0.98% to 4.83%.  The median dividend yield on the stocks of the Peer Group institutions was 2.92% as of November 9, 2012, representing a median payout ratio of 32.10% of core earnings.  As of November 9, 2012, approximately 62% of all fully-converted publicly-traded thrifts had adopted cash dividend policies (see Exhibit IV-1), exhibiting a median yield of 1.04%.  The dividend paying thrifts generally maintain higher than average profitability ratios, facilitating their ability to pay cash dividends.
 
 
 
 
 
RP ® Financial, LC. VALUATION ANALYSIS
 
IV.8
 
The Bank will have the capacity to pay a dividend comparable to the Peer Group’s average dividend yield based on pro forma capitalization.  On balance, we concluded that no adjustment was warranted for this factor.
 
6.
Liquidity of the Shares
 
The Peer Group is by definition composed of companies that are traded in the public markets.  All ten of the Peer Group members trade on NASDAQ.  Typically, the number of shares outstanding and market capitalization provides an indication of how much liquidity there will be in a particular stock.  The market capitalization of the Peer Group companies ranged from $26.5 million to $142.4 million as of November 9, 2012, with average and median market values of $57.9 million and $46.4 million, respectively.  The shares issued and outstanding to the public shareholders of the Peer Group members ranged from 1.5 million to 18.8 million, with average and median shares outstanding of 6.2 million and 5.5 million, respectively.  The Bank’s conversion offering at the midpoint is expected to provide for pro forma shares outstanding that will be higher than the average and median shares outstanding indicated for the Peer Group companies.  Likewise, the market capitalization of the Bank at the midpoint of the offering range will be higher than the Peer Group average and median values.  Like all of the Peer Group companies, the Company’s stock is expected to be quoted on NASDAQ following the conversion offering.  Based on the above factors and the comparability of the anticipated trading market on NASDAQ, we concluded that no valuation adjustment was warranted for this factor.
 
7.
Marketing of the Issue
 
We believe that three separate markets exist for thrift stocks, including those coming to market such as First Federal’s:  (A) the after-market for public companies, in which trading activity is regular and investment decisions are made based upon financial condition, earnings, capital, ROE, dividends and future prospects; (B) the new issue market in which converting thrifts are evaluated on the basis of the same factors, but on a pro forma basis without the benefit of prior operations as a fully-converted publicly-held company and stock trading history; and, (C) the acquisition market for thrift franchises in Washington.  All of these markets were considered in the valuation of the Bank’s to-be-issued stock.
 
 
 
 
 
RP ® Financial, LC. VALUATION ANALYSIS
 
IV.9
 
A.     The Public Market
 
The value of publicly-traded thrift stocks is easily measurable, and is tracked by most investment houses and related organizations.  Exhibit IV-1 provides pricing and financial data on all publicly-traded thrifts.  In general, thrift stock values react to market stimuli such as interest rates, inflation, perceived industry health, projected rates of economic growth, regulatory issues, and stock market conditions in general.  Exhibit IV-2 displays historical stock market trends for various indices and includes historical stock price index values for thrifts and commercial banks.  Exhibit IV-3 displays historical stock price indices for thrifts only.
 
In terms of assessing general stock market conditions, the performance of the overall stock market has been mixed in recent quarters.  More signs of an improving U.S. economy sustained a generally positive trend in the broader stock market at the start of 2012.  Major stock indexes moved to six-month highs in mid-January, as investors responded to encouraging jobs data and solid fourth quarter earnings posted by some large banks.  Disappointing economic data, including weaker than expected new home sales in December and fourth quarter GDP growth falling short of expectations, contributed to the DJIA posting its first weekly loss of 2012 in late-January.  Notwithstanding the downward trend in late-January, gains in the major stock indexes for January were the largest in fifteen years.  A strong jobs report for January helped stocks regain some traction in early-February, with the DJIA moving to its highest close since May 2008.  The DJIA posted its sharpest one day decline for 2012 heading into mid-February, which was attributable to renewed fears of a Greek default and disappointing readings on the U.S. economy.  Signs of an accelerating U.S. economic recovery and indications of progress toward an agreement on a bailout for Greece propelled the DJIA to a 52-week high in mid-February.  In late-February, the DJIA closed above 13000 for the first time since the financial crisis and February marked the fifth straight month that the DJIA closed higher.  Stocks faltered in early-March on worries about Greece and slower global economic growth, which was followed by a rebound going into mid-March.  Some favorable economic reports, including solid job growth reflected in the February employment data, Greece moving closer to completing its debt restructuring and most of the largest U.S. banks passing the latest round of “stress tests” contributed to the rally that pushed the broader stock market to multi-year highs in mid-March.  Concerns about slower growth in China pulled stocks lower heading into the close of the first quarter, while the broader stock market closed out the first quarter with a gain.  Overall, the DJIA was up 8.1% for the first quarter, which was the best first quarter performance for the DJIA since 1998.
 
 
 
 
 
RP ® Financial, LC. VALUATION ANALYSIS
 
IV.10
 
Following the strong first quarter of 2012, stocks moved lower at the beginning of the second quarter.  Among the factors contributing to the decline, included minutes from the latest Federal Reserve meeting that suggested further monetary stimulus was unlikely and a disappointing employment report for March, in which job growth was less than expected.  The DJIA had its worst week for 2012 in mid-April, as worries over rising borrowings costs for European countries fueled the downturn.  Stocks rebounded at the end of April and the DJIA moved to a four year high at the start of May, with some favorable first quarter earnings posted by some blue chip stocks and a stronger than expected reading for manufacturing activity in April, supporting the gains.  A disappointing jobs report for April fueled a selloff in the broader stock market to close out the first week of May, with the DJIA recording its worst week of 2012 on heightened concerns that the economic recovery was heading for a slowdown.  The downward in the broader stock market continued heading into mid-May, as concerns about Greece and Spain weighted on investor sentiment and a large trading loss disclosed by J.P. Morgan rattled financial markets.  Concerns over Europe’s intensifying debt crisis pulled stocks lower at the close of May 2012, which capped the largest monthly decline in the DJIA in two years.  Stocks plunged at the start of June, as investors reacted to the weaker than expected jobs data for May which included a slight increase in the national unemployment rate.  After the DJIA moved into negative territory for 2012, stocks rebounded heading into mid-June on hopes that central banks in both the U.S. and Europe would intervene to battle slowing economic growth and worsening problems in the euro zone.  Volatility prevailed in the broader stock market in mid-June, reflecting investor uncertainty over Spain’s planned bank bailout and the Federal Reserve’s willingness to take more measures to stimulate the economy.  Weak economic reports from Europe, China and the U.S., along with ongoing concerns over the debt crisis in Europe, drove stocks lower heading into late-June.  Some positive readings for the housing sector and Euro finance ministers agreeing to the terms of a bailout for Spain’s troubled banks helped to lift stocks at the close of the second quarter.
 
 
 
 
 
RP ® Financial, LC. VALUATION ANALYSIS
 
IV.11
 
A weak employment for June sent stocks lower at the start of the third quarter of 2012.  The downward trend in stocks continued going into mid-July, as more signs that the economy was stalling weighed on investors.  Some strong second earnings reports coming out of the tech sector, better-than-expected second quarter earnings reported by J.P. Morgan and increased expectations of the Federal Reserve taking new steps to stimulate the economy supported a mid-July rebound in the stock market.  Weak economic data points in the U.S. and Europe and more euro zone concerns after Moody’s lowered its outlook for Germany contributed to three consecutive triple digit declines in the DJIA heading into late-July, which was followed by a two-day rally as relatively modest second quarter GDP growth of 1.5% met expectations and increased hopes of further stimulus by the Federal Reserve.  Stocks traded lower at the close of July and at the beginning of August and then rallied on the stronger-than-expected jobs report for July, as employers hired the most workers in five months.  The DJIA hit a three month high going into mid-August, as worries about Europe’s sovereign debt crisis ebbed and a Federal Reserve official called for additional stimulus by the Federal Reserve to boost economic growth.  Low inflation reflected in the July core consumer price index and an early-August survey showing an increase in consumer confidence contributed to a mild stock market rally in mid-August.  New signs of weakness in the global economy pushed stocks lower heading into the second half of August, which was followed by a rally on growing expectations that the Federal Reserve would take further action to stimulate the economy.  Escalating fears about Europe’s economy push the DJIA to a four week low in late-August, which was followed by a one-day rally sparked by comments made by the Federal Reserve Chairman indicating that the Federal Reserve was prepared to further stimulate the economy if necessary.  News that the European Central Bank planned to make unlimited purchases of euro member government bonds helped stocks to rally to multi-year highs in early-September, with the DJIA closing at its highest level in four years.  Investors turned cautious following the disappointing job growth reflected in the August employment report, as the broader stock market traded in a narrow range going into mid-September.  Stocks rallied following the Federal Reserve’s mid-September announcement that it was launching an aggressive program to spur the economy through open-ended commitments to buy mortgage-backed securities, with the DJIA posting its highest close since December 2007.  Following the rally, stocks traded in a narrow range and then dipped in late-September on renewed concerns over financial bailouts in the euro zone.  Mixed reports on euro zone debt issues provided for a trendless market to close out the third quarter of 2012.  At the start of the fourth quarter, stocks traded up on some better-than-expected economic data including reports that manufacturing activity in September expanded for the first time since May, service sector activity expanded at a higher rate in September and the September unemployment rate dropped below 8.0% to a 44 month low of 7.8%.  Stocks reversed course heading into mid-October amid concerns about a slowing global economy and a disappointing start to the third quarter earnings season.  Favorable readings for September retail sales and residential home construction contributed to a four day upturn in the broader stock market during mid-October, which was followed by a sell-off heading into late-October.  Disappointing third quarter earnings reports posted by some blue chip stocks was noted as the primary factor driving the downturn.  On November 9, 2012, the DJIA closed at 12,815.39, an increase of 8.8% from one year ago and an increase of 3.4% year-to-date and the NASDAQ closed at 2,904.87, an increase of 10.8% from one year ago and an increase of 9.7% year-to-date.  The Standard & Poor’s 500 Index closed at 1,379.85 on November 9, 2012, an increase of 12.3% from one year ago and an increase of 8.0% year-to-date.
 
 
 
 
 
RP ® Financial, LC. VALUATION ANALYSIS
 
IV.12
 
The market for thrift stocks has been somewhat volatile as well in recent quarters, but in general underperformed the broader stock market.  Some encouraging news on the economy helped to sustain the advance in thrift stocks at the beginning of 2012.  Bank and thrift stocks did not keep pace with the broader stock market heading into the second half of January, as financials traded in a narrow range on mixed fourth quarter earnings reports coming out of the sector.  Financial stocks led the broader market lower in late-January, as investors focused on the standoff between Greece and its creditors and the cut in Bank of America’s rating by Goldman Sachs.  The better-than-expected employment report for January boosted thrift stocks in early-February, which was followed by a slight pullback on some profit taking and renewed concerns about the Greek bailout.  Bank and thrift stocks advanced in mid-February on increased optimism that Greece was close to getting approval of its bailout package.  Financials traded in a fairly narrow range into late-February and then retreated along with the broader stock market in late-February and early-March, based on concerns related to the global economy.  Generally favorable results from the Federal Reserve’s latest round of “stress tests” triggered a broad based rally for bank and thrift stocks in mid-March.  Thrift stocks traded in a narrow range to close out the first quarter.
 
Thrift stocks tumbled along with stocks in general at the start of the second quarter 2012, as investors reacted to the weaker than expected job growth reflected in the March employment report and renewed concerns about Europe’s debt problems.  The March consumer price index, which showed that core inflation was still above the Federal Reserve’s target range, also pressured thrift stocks lower in mid-April.  Thrift stocks rebounded in late-April, as the Federal Reserve meeting concluded with no change in its target rate and reaffirmed their plan to keep short-term rates near zero until late-2014.  J.P Morgan’s disclosure of a large trading loss rattled financial stocks in general in mid-May 2012, while weakness in the broader stock market filtered into thrift stocks as well heading into late-May.  The disappointing job numbers for May accelerated the downturn in thrift stocks at the start of June, which was followed by an uneven performance that was consistent with the volatility of the broader stock market.  A Moody’s downgrade of five large U.S. banks, along with weakness in the broader stock market, weighed on thrift stocks heading into late-June.  Thrift stocks posted gains along with the broader stock market at the close of the second quarter, as the sector benefitted from some upbeat reports for the housing sector and the restructuring of a bailout of Spain’s troubled banks.
 
 
 
 
 
RP ® Financial, LC. VALUATION ANALYSIS
 
IV.13
 
Thrift stocks traded lower in early-July 2012, as weaker-than-expected job growth reflected in the June employment report raised concerns that the economy was stalling.  Mixed earnings reports coming out of the thrift sector provided for a narrow trading range for thrift stocks through the first half of July, with a large portion of the sector experiencing a decline in revenues from interest rate spread compression.  Thrift stocks faltered along with the broader stock market heading into late-July, as rising concerns in Europe hurt investor confidence.  Assurances from the European Central Bank president of effective intervention and heightened expectations of further stimulus by the Federal Reserve helped to boost thrift stocks along with the broader stock market in late-July.  After stumbling at the start of August following more weak economic data, thrift stocks rebounded on the better-than-expected job growth reported in the August employment report.  Signs of an improving housing market, including a 6% rise in second quarter home prices, provided a boost to thrift stocks heading into mid-August.  Thrift stocks edged higher in mid-August, as the July consumer price index indicated that inflation remained in check.  Mixed economic data and positive comments from the Federal Reserve concerning further steps to bolster the economy translated into a narrow trading ban for the thrift sector heading in to late-August.  M&T Bank Corp’s announced acquisition of Hudson Bancorp boosted thrift stocks in late-August, which was followed by a narrow trading range to closeout August.  Thrift stocks posted healthy gains in the first week of September, as financial stocks were bolstered by the European Central Bank’s unlimited bond purchase initiative and increased expectations of further stimulus action by the Federal Reserve following the weak jobs report for August.  Financial stocks led the broader stock market higher in mid-September, as investors had a favorable reaction to the Federal Reserve’s announcement of a third round of quantitative easing.  Following the upturn, thrift stocks stabilized heading into the end of the third quarter.  Thrift stocks traded in a narrow range to close out the third quarter of 2012 and then traded up at the start of the fourth quarter, as some of the September economic data showed indications of an improving economy.  Thrift stocks stabilized going into mid-October, and then experienced a sell-off as J.P. Morgan’s and Well Fargo’s third quarter earnings reports raised concerns of accelerating net interest margin contraction being experienced by financial institutions in general.  An increase in residential home construction during September boosted thrift stocks in mid-October, which was followed by a slight pullback in the sector as investors reacted to mixed economic reports for third quarter GDP growth and pending sales of existing homes.  On November 9, 2012, the SNL Index for all publicly-traded thrifts closed at 541.4, an increase of 16.3% from one year ago and an increase of 10.6% year-to-date.
 
 
 
 
 
RP ® Financial, LC. VALUATION ANALYSIS
 
IV.14
 
B.      The New Issue Market
 
In addition to thrift stock market conditions in general, the new issue market for converting thrifts is also an important consideration in determining the Bank’s pro forma market value.  The new issue market is separate and distinct from the market for seasoned thrift stocks in that the pricing ratios for converting issues are computed on a pro forma basis, specifically:  (1) the numerator and denominator are both impacted by the conversion offering amount, unlike existing stock issues in which price change affects only the numerator; and (2) the pro forma pricing ratio incorporates assumptions regarding source and use of proceeds, effective tax rates, stock plan purchases, etc. which impact pro forma financials, whereas pricing for existing issues are based on reported financials.  The distinction between pricing of converting and existing issues is perhaps no clearer than in the case of the price/book (“P/B”) ratio in that the P/B ratio of a converting thrift will typically result in a discount to book value whereas in the current market for existing thrifts the P/B ratio may reflect a premium to book value.  Therefore, it is appropriate to also consider the market for new issues, both at the time of the conversion and in the aftermarket.
 
Over the past three months, two standard conversion offerings and three second-step conversion offering have been completed, as shown in Table 4.1.  The two standard conversion offerings are considered to be more relevant for our analysis.  Both offerings were completed in October 2012.  The two standard conversion offerings were completed at an average of 110% of the midpoint valuation range, raising an average of $34.5 million of gross proceeds.  These two offerings closed at an average pro forma price/tangible book ratio of 56.8%, and closed at an average of 31.0% above the offering price after one week of trading.
 
Shown in Table 4.2 are the current pricing ratios for the fully-converted offerings completed during the past three months that trade on NASDAQ or an Exchange.  The current average P/TB ratio for the recent fully-converted offerings equaled 71.94%, based on closing stock prices as of November 9, 2012.
 
 
 
 
 
RP ® Financial, LC. VALUATION ANALYSIS
 
IV.15
 
Table 4.1
Pricing Characteristics and After-Market Trends
Recent Conversions Completed in Last Three Months
 
Institutional Information
Pre-Conversion Data  
Offering Information
 
Contribution to
  Insider Purchases      
     
Financial Info.
   
Asset Quality
       
Char. Found.
 
% Off Incl. Fdn.+Merger Shares
       
                             
Excluding Foundation
   
% of
 
Benefit Plans
       
Initial
 
 
Conversion
         
Equity/
   
NPAs/
   
Res.
   
Gross
   
%
   
% of
   
Exp./
     
Public Off.
       
Recog.
   
Stk
   
Mgmt.&
   
Div.
 
Institution
 
 Date  
Ticker
 
 
Assets
   
Assets
   
Assets
   
Cov.
   
Proc.
   
Offer
   
Mid.
   
Proc.
 
Form
 
Excl. Fdn.
 
ESOP
   
Plans
   
Option
   
Dirs.
   
Yield
 
     
($Mil)
   
(%)
   
(%)
   
(%)
   
($Mil.)
   
(%)
   
(%)
   
(%)
   
(%)
 
(%)
   
(%)
   
(%)
   
(%)(1)
   
(%)
 
                                                                                     
Standard Conversions
                                                                                   
Hamilton Bancorp, Inc. - MD*
10/10/12 HBK-NASDAQ
  $ 316       11.22 %     1.96 %     42 %   $ 37.0       100 %     132 %     3.2 %
N.A.
N.A.
    8.0 %     4.0 %     10.0 %     4.3 %     0.00 %
Madison County Financial, Inc. - NE*
10/4/12 MCBK-NASDAQ
  $ 233       13.78 %     0.16 %     1131 %   $ 31.9       100 %     89 %     4.8 %
N.A.
N.A.
    8.0 %     4.0 %     10.0 %     11.9 %     0.00 %
 
Averages - Standard Conversions:
  $ 275       12.50 %     1.06 %     586 %   $ 34.5       100 %     110 %     4.0 %
N.A.
N.A.
    8.0 %     4.0 %     10.0 %     8.1 %     0.00 %
 
Medians - Standard Conversions:
  $ 275       12.50 %     1.06 %     586 %   $ 34.5       100 %     110 %     4.0 %
N.A.
N.A.
    8.0 %     4.0 %     10.0 %     8.1 %     0.00 %
                                                                                                               
                                                                                                               
Second Step Conversions
                                                                                                             
Malvern Bancorp, Inc., - PA*
10/12/12 MLVF-NASDAQ
  $ 654       9.52 %     2.27 %     75 %   $ 36.4       55 %     132 %     4.2 %
N.A.
N.A.
    0.0 %     0.0 %     0.0 %     0.7 %     0.00 %
LaPorte Bancorp, Inc., - IN*
10/5/12 LPSB-NASDAQ
  $ 479       12.06 %     1.70 %     59 %   $ 27.1       55 %     113 %     4.9 %
N.A.
N.A.
    8.0 %     4.0 %     10.0 %     0.8 %     2.00 %
Sound Financial Bancorp, Inc., - WA* (8)
8/23/12 SFBC-NASDAQ
  $ 349       8.45 %     2.81 %     56 %   $ 14.2       55 %     105 %     11.4 %
N.A.
N.A.
    8.0 %     4.0 %     10.0 %     1.7 %     0.00 %
 
Averages - Second Step Conversions:
  $ 494       10.01 %     2.26 %     64 %   $ 25.9       55 %     117 %     6.8 %
N.A.
N.A.
    5.3 %     2.7 %     6.7 %     1.1 %     0.67 %
 
Medians - Second Step Conversions:
  $ 479       9.52 %     2.27 %     59 %   $ 27.1       55 %     113 %     4.9 %
N.A.
N.A.
    8.0 %     4.0 %     10.0 %     0.8 %     0.00 %
                                                                                                               
                                                                                                               
 
Averages - All Conversions:
  $ 406       11.01 %     1.79 %     273 %   $ 29.3       73 %     114 %     5.7 %
N.A.
N.A.
    6.4 %     3.2 %     8.0 %     3.9 %     0.40 %
 
Medians - All Conversions:
  $ 349       11.22 %     1.91 %     59 %   $ 31.9       55 %     113 %     4.8 %
N.A.
N.A.
    8.0 %     4.0 %     10.0 %     1.7 %     0.00 %
 
Institutional Information
    Pro Forma Data           Post-IPO Pricing Trends
     
Pricing Ratios(2)(5)
   
Financial Charac.
            Closing Price:
                                               
First
         
After
         
After
                   
 
Conversion
 
       
Core
         
Core
         
Core
   
IPO
   
Trading
   
%
   
First
   
%
   
First
   
%
   
Thru
   
%
 
Institution
  Date  
 Ticker
   
P/TB
      P/E       P/A    
ROA
   
TE/A
   
ROE
   
Price
   
Day
   
Chge
   
Week(3)
   
Chge
   
Month(4)
   
Chge
   
11/9/12
   
Chge
 
     
(%)
   
(x)
   
(%)
   
(%)
   
(%)
   
(%)
   
($)
   
($)
   
(%)
   
($)
   
(%)
   
($)
   
(%)
   
($)
   
(%)
 
                                                                                                 
Standard Conversions
                                                                                               
Hamilton Bancorp, Inc. - MD*
10/10/12 HBK-NASDAQ
    57.9 %  
NM
      10.7 %     -0.2 %     18.6 %     -0.9 %   $ 10.00     $ 11.90       19.0 %   $ 11.65       16.5 %   $ 11.25       12.5 %   $ 11.25       12.5 %
Madison County Financial, Inc. - NE*
10/4/12 MCBK-NASDAQ
    55.7 %     10.1 x     12.3 %     1.2 %     22.2 %     5.4 %   $ 10.00     $ 14.89       48.9 %   $ 14.55       45.5 %   $ 14.51       45.1 %   $ 14.50       45.0 %
 
Averages - Standard Conversions:
    56.8 %     10.1 x     11.5 %     0.5 %     20.4 %     2.3 %   $ 10.00     $ 13.40       34.0 %   $ 13.10       31.0 %   $ 12.88       28.8 %   $ 12.88       28.8 %
 
Medians - Standard Conversions:
    56.8 %     10.1 x     11.5 %     0.5 %     20.4 %     2.3 %   $ 10.00     $ 13.40       34.0 %   $ 13.10       31.0 %   $ 12.88       28.8 %   $ 12.88       28.8 %
                                                                                                                           
                                                                                                                           
Second Step Conversions
                                                                                                                         
Malvern Bancorp, Inc., - PA*
10/12/12 MLVF-NASDAQ
    67.5 %     134.24       9.5 %     0.1 %     14.1 %     0.5 %   $ 10.00     $ 11.00       10.0 %   $ 10.73       7.3 %   $ 10.70       7.0 %   $ 10.70       7.0 %
LaPorte Bancorp, Inc., - IN*
10/5/12 LPSB-NASDAQ
    69.1 %     14.11       9.9 %     0.7 %     14.6 %     4.4 %   $ 8.00     $ 8.80       10.0 %   $ 8.65       8.1 %   $ 8.70       8.7 %   $ 8.60       7.5 %
Sound Financial Bancorp, Inc., - WA* (8)
8/23/12 SFBC-NASDAQ
    65.5 %     12.63       7.2 %     0.6 %     11.0 %     5.1 %   $ 10.00     $ 10.23       2.3 %   $ 10.40       4.0 %   $ 10.10       1.0 %   $ 10.26       2.6 %
 
Averages - Second Step Conversions:
    67.4 %     53.7 x     8.9 %     0.4 %     13.2 %     3.3 %   $ 9.33     $ 10.01       7.4 %   $ 9.93       6.5 %   $ 9.83       5.6 %   $ 9.85       5.7 %
 
Medians - Second Step Conversions:
    67.5 %     14.1 x     9.5 %     0.6 %     14.1 %     4.4 %   $ 10.00     $ 10.23       10.0 %   $ 10.40       7.3 %   $ 10.10       7.0 %   $ 10.26       7.0 %
                                                                                                                           
                                                                                                                           
 
Averages - All Conversions:
    63.2 %     42.8 x     9.9 %     0.5 %     16.1 %     2.9 %   $ 9.60     $ 11.36       18.0 %   $ 11.20       16.3 %   $ 11.05       14.9 %   $ 11.06       14.9 %
 
Medians - All Conversions:
    65.5 %     13.4 x     9.9 %     0.6 %     14.6 %     4.4 %   $ 10.00     $ 11.00       10.0 %   $ 10.73       8.1 %   $ 10.70       8.7 %   $ 10.70       7.5 %
Note:  * - Appraisal performed by RP Financial; BOLD = RP Fin. Did the business plan, “NT ” - Not Traded; “NA ” - Not Applicable, Not Available; C/S-Cash/Stock.
   
(1)  As a percent of MHC offering for MHC transactions.
(5)  Mutual holding company pro forma data on full conversion basis.
(2)  Does not take into account the adoption of SOP 93-6.
(6)  Simultaneously completed acquisition of another financial institution.
(3)  Latest price if offering is less than one week old.
(7)  Simultaneously converted to a commercial bank charter.
(4)  Latest price if offering is more than one week but less than one month old.
(8) Former credit union. 
November 9, 2012
 
 
 
 
 
RP ® Financial, LC. VALUATION ANALYSIS
 
IV.16

Table 4.2
Market Pricing Comparatives
Recent Conversions Completed Last Three Months
As of November 9, 2012
 
     
Market
   
Per Share Data
                                                                                                 
     
Capitalization
   
Core
   
Book
                                    Dividends(4)       Financial Characteristics(6)
     
Price/
   
Market
   
12 Month
   
Value/
      Pricing Ratios(3)    
Amount/
         
Payout
   
Total
   
Equity/
   
Tang. Eq./
   
NPAs/
   
Reported
   
Core
 
     
Share(1)
   
Value
   
EPS(2)
   
Share
      P/E       P/B       P/A    
P/TB
   
P/Core
   
Share
   
Yield
   
Ratio(5)
   
Assets
   
Assets
   
Assets
   
Assets
   
ROA
   
ROE
   
ROA
   
ROE
 
     
($)
   
($Mil)
   
($)
   
($)
   
(x)
   
(%)
   
(%)
   
(%)
   
(x)
   
($)
   
(%)
   
(%)
   
($Mil)
   
(%)
   
(%)
   
(%)
   
(%)
   
(%)
   
(%)
   
(%)
 
                                                                                                                                 
All Non-MHC Public Companies(7)
                                                                                                                             
Averages
  $ 13.16     $ 288.13     $ 0.15     $ 15.01       19.14 x     87.86 %     11.05 %     94.21 %     21.87 x   $ 0.21       1.58 %     25.24 %   $ 2,449       12.12 %     11.50 %     3.39 %     0.30 %     1.94 %     0.12 %     -0.06 %
Medians
  $ 12.72     $ 75.07     $ 0.37     $ 14.81       17.70 x     83.98 %     10.92 %     87.24 %     18.72 x   $ 0.12       1.04 %     0.00 %   $ 792       12.91 %     11.40 %     2.48 %     0.40 %     3.45 %     0.30 %     2.31 %
                                                                                                                                                                   
Comparable Group
                                                                                                                                                               
Averages
  $ 11.06     $ 48.28     $ 0.45     $ 15.97       15.16 x     69.07 %     11.60 %     71.94 %     14.24 x   $ 0.06       0.64 %     11.32 %   $ 432       16.65 %     16.09 %     2.97 %     0.51 %     2.94 %     0.48 %     2.89 %
Medians
  $ 10.70     $ 46.30     $ 0.57     $ 15.59       14.10 x     66.15 %     10.64 %     72.25 %     14.65 x   $ 0.08       0.78 %     14.29 %   $ 360       16.08 %     14.58 %     2.97 %     0.40 %     3.58 %     0.57 %     4.36 %
                                                                                                                                                                   
Comparable Group
                                                                                                                                                               
HBK
Hamilton Bancorp, Inc. of MD
  $ 11.25     $ 41.66     ($ 0.16 )   $ 18.05    
NM
      62.33 %     12.00 %     65.18 %  
NM
    $ 0.00       0.00 %  
NM
    $ 347       19.25 %     18.57 %     2.41 %     -0.09 %     -0.46 %     -0.17 %     -0.89 %
LPSB
LaPorte Bancorp, Inc. of IN
  $ 8.60     $ 52.87     $ 0.57     $ 13.00       14.10 x     66.15 %     10.64 %     74.33 %     15.09 x   $ 0.12       1.40 %     19.67 %   $ 502       16.08 %     14.58 %     1.70 %     0.75 %     4.68 %     0.70 %     4.36 %
MCBK   
Madison County Financial of NE
  $ 14.50     $ 46.30     $ 0.99     $ 18.40       13.06 x     78.80 %     17.81 %     80.69 %     14.65 x   $ 0.00       0.00 %     0.00 %   $ 260       22.60 %     22.18 %  
NA
      1.36 %     6.03 %     1.22 %     5.40 %
MLVF
Malvern Bancorp, Inc. of PA
  $ 10.70     $ 70.18     $ 0.07     $ 14.81    
NM
      72.25 %     10.19 %     72.25 %  
NM
    $ 0.11       1.03 %  
NM
    $ 689       14.10 %     14.10 %     3.53 %     0.12 %     0.89 %     0.07 %     0.50 %
SFBC
Sound Financial Bancorp, Inc. of WA
  $ 10.26     $ 30.37     $ 0.79     $ 15.59       18.32 x     65.81 %     7.38 %     67.23 %     12.99 x   $ 0.08       0.78 %     14.29 %   $ 360       11.22 %     11.01 %     4.23 %     0.40 %     3.58 %     0.57 %     5.08 %
 
(1)  Average of High/Low or Bid/Ask price per share.
(2) EPS (estimate core basis) is based on actual trailing 12 month data, adjusted to omit non-operating items on a tax-effected basis, and is shown on a pro forma basis where appropriate.
(3) P/E = Price to earnings; P/B = Price to book; P/A = Price to assets; P/TB = Price to tangible book value; and P/Core = Price to core earnings.
(4) Indicated 12 month dividend, based on last quarterly dividend declared.
(5) Indicated 12 month dividend as a percent of trailing 12 month estimated core earnings.
(6) ROA (return on assets) and ROE (return on equity) are indicated ratios based on trailing 12 month common earnings and average common equity and total assets balances.
(7) Excludes from averages and medians those companies the subject of actual or rumored acquisition activities or unusual  operating characteristics.
 
Source: SNL Financial, LC and RP Financial, LC. calculations. The information provided in this report has been obtained from sources we believe are reliable, but we cannot guarantee the accuracy or completeness of such information.
 
Copyright (c) 2012 by RP ® Financial, LC.
 
 
 
 
 
 
RP ® Financial, LC. VALUATION ANALYSIS
 
IV.17
 
C.    The Acquisition Market
 
Also considered in the valuation was the potential impact on First Federal’s stock price of recently completed and pending acquisitions of other thrift institutions operating in Washington.  As shown in Exhibit IV-4, there were five thrift acquisitions completed from the beginning of 2000 through November 9, 2012, and there are currently no acquisitions pending of a Washington savings institution.  Additionally, there were 35 acquisitions of commercial banks in Washington over the corresponding timeframe.  The recent acquisition activity may imply a certain degree of acquisition speculation for the Bank’s stock.  To the extent that acquisition speculation may impact the Bank’s offering, we have largely taken this into account in selecting companies for the Peer Group which operate in markets that have experienced a comparable level of acquisition activity as the Bank’s market and, thus, are subject to the same type of acquisition speculation that may influence First Northwest Bancorp’s stock.  However, since converting thrifts are subject to a three-year regulatory moratorium from being acquired, acquisition speculation in First Federal’s stock would tend to be less, compared to the stocks of the Peer Group companies.
 
*  *  *  *  *  *  *  *  *  *  *
 
In determining our valuation adjustment for marketing of the issue, we considered trends in both the overall thrift market, the new issue market including the new issue market for standard conversions and the acquisition market.  Taking these factors and trends into account, RP Financial concluded that a slight downward adjustment was appropriate in the valuation analysis for purposes of marketing of the issue.
 
8.
Management
 
The Bank’s management team appears to have experience and expertise in all of the key areas of the Bank’s operations.  Exhibit IV-5 provides summary resumes of the First Federal’s Board of Directors and senior management.  The financial characteristics of the Bank suggest that the Board and senior management have been effective in implementing an operating strategy that can be well managed by the Bank’s present organizational structure.  The Bank currently does not have any senior management positions that are vacant.
 
Overall, the returns, equity positions, and other operating measures of the Peer Group companies are indicative of well-managed financial institutions, which have Boards and management teams that have been effective in implementing competitive operating strategies.  Therefore, on balance, we concluded no valuation adjustment relative to the Peer Group was appropriate for this factor.
 
 
 
 
 
RP ® Financial, LC. VALUATION ANALYSIS
 
IV.18
 
9.
Effect of Government Regulation and Regulatory Reform
 
In summary, as a fully-converted regulated institution, First Federal will operate in substantially the same regulatory environment as the Peer Group members -- all of whom are adequately capitalized institutions and are operating with no apparent restrictions.  Exhibit IV-6 reflects the Bank’s pro forma regulatory capital ratios.  On balance, no adjustment has been applied for the effect of government regulation and regulatory reform.
 
Summary of Adjustments
 
Overall, based on the factors discussed above, we concluded that the Bank’s pro forma market value should reflect the following valuation adjustments relative to the Peer Group:

Key Valuation Parameters :
 
Valuation Adjustment
     
Financial Condition
 
Moderate Downward
Profitability, Growth and Viability of Earnings
 
Moderate Downward
Asset Growth
 
No Adjustment
Primary Market Area
 
Moderate Downward
Dividends
 
No Adjustment
Liquidity of the Shares
 
No Adjustment
Marketing of the Issue
 
Slight Downward
Management
 
No Adjustment
Effect of Govt. Regulations and Regulatory Reform
 
No Adjustment
 
Valuation Approaches
 
In applying the accepted valuation methodology originally promulgated by the OCC and adopted by the FRB, i.e., the pro forma market value approach, we considered the three key pricing ratios in valuing the Bank’s to-be-issued stock -- price/earnings (“P/E”), price/book (“P/B”), and price/assets (“P/A”) approaches -- all performed on a pro forma basis including the effects of the stock proceeds.  In computing the pro forma impact of the conversion and the related pricing ratios, we have incorporated the valuation parameters disclosed in the Bank’s prospectus for the foundation, reinvestment rate, effective tax rate, stock benefit plan assumptions, and expenses (summarized in Exhibits IV-7 and IV-8).
 
In our estimate of value, we assessed the relationship of the pro forma pricing ratios relative to the Peer Group and recent conversion offerings.
 
 
 
 
 
RP ® Financial, LC. VALUATION ANALYSIS
 
IV.19
 
RP Financial’s valuation placed an emphasis on the following:
 
 
●
P/E Approach .  The P/E approach is generally the best indicator of long-term value for a stock and we have given it the most significant weight among the valuation approaches.  Given certain similarities between the Bank’s and the Peer Group’s earnings composition and overall financial condition, the P/E approach was carefully considered in this valuation.  At the same time, recognizing that (1) the earnings multiples will be evaluated on a pro forma basis for the Bank; and (2) the Peer Group companies have had the opportunity to realize the benefit of reinvesting and leveraging the offering proceeds, we also gave weight to the other valuation approaches.
 
 
●
P/B Approach .  P/B ratios have generally served as a useful benchmark in the valuation of thrift stocks, particularly in the context of a conversion offering, as the earnings approach involves assumptions regarding the use of proceeds.  RP Financial considered the P/B approach to be a valuable indicator of pro forma value, taking into account the pricing ratios under the P/E and P/A approaches.  We have also modified the P/B approach to exclude the impact of intangible assets (i.e., price/tangible book value or “P/TB”), in that the investment community frequently makes this adjustment in its evaluation of this pricing approach.
 
 
●
P/A Approach .  P/A ratios are generally a less reliable indicator of market value, as investors typically assign less weight to assets and attribute greater weight to book value and earnings.  Furthermore, this approach as set forth in the regulatory valuation guidelines does not take into account the amount of stock purchases funded by deposit withdrawals, thus understating the pro forma P/A ratio.  At the same time, the P/A ratio is an indicator of franchise value, and, in the case of highly capitalized institutions, high P/A ratios may limit the investment community’s willingness to pay market multiples for earnings or book value when ROE is expected to be low.
 
The Bank has adopted Statement of Position (“SOP”) 93-6, which causes earnings per share computations to be based on shares issued and outstanding, excluding unreleased ESOP shares.  For purposes of preparing the pro forma pricing analyses, we have reflected all shares issued in the offering, including all ESOP shares, to capture the full dilutive impact, particularly since the ESOP shares are economically dilutive, receive dividends, and can be voted.  However, we did consider the impact of the adoption of SOP 93-6 in the valuation.
 
Based on the application of the three valuation approaches, taking into consideration the valuation adjustments discussed previously and the dilutive impact of the stock contribution to the Foundation, RP Financial concluded that, as of November 9, 2012, the aggregate pro forma market value of First Northwest Bancorp’s conversion stock, inclusive of the shares issued to the Foundation, equaled $75.2 million at the midpoint, equal to 7,520,000 shares at $10.00 per share.  The $10.00 per share price was determined by the First Federal Board.  Before factoring in the shares issued to the Foundation, the size of the offering at the midpoint value is equal to $70.0 million, or 7,000,000 shares.
 
 
 
 
 
RP ® Financial, LC. VALUATION ANALYSIS
 
IV.20
 
1.            Price-to-Earnings (“P/E”) .  The application of the P/E valuation method requires calculating the Bank’s pro forma market value by applying a valuation P/E multiple to the pro forma earnings base.  In applying this technique, we considered both reported earnings and a recurring earnings base, that is, earnings adjusted to exclude any one-time non-operating items, plus the estimated after-tax earnings benefit of the reinvestment of the net proceeds.  The Bank reported a net loss equal to $1.11 million for the twelve months ended September 30, 2012.  In deriving First Federal’s core earnings, the adjustments made to reported earnings were to eliminate gains on the sale of investment securities ($344,000), a recovery on loan servicing expenses ($550,000), and net impairment losses on investment securities ($249,000).  We chose not to exclude gains on the sale of loans ($1.4 million), as this is a recurring event for the Bank.  As shown in the table below, on a tax-effected basis, assuming an effective marginal tax rate of 34.0% for the earnings adjustments, the Bank’s core earnings were determined to equal a net loss of $1.53 million for the twelve months ended September 30, 2012.  (Note: see Exhibit IV-9 for the adjustments applied to the Peer Group’s earnings in the calculation of core earnings).
 
   
Amount
 
    ($ (000 )
         
Net Income(Loss)
  $ (1,105 )
Deduct: Gain on Sale of Investment Securities
    (344 )
Deduct: Recovery on Loan Servicing Expenses
    (550 )
Add: Net Impairment Losses on Investment Securities
    249  
Tax Effect (1)
    219  
Core Earnings Estimate
  $ (1,531 )
         
(1) Tax effected at 34.0%.
       
 
Based on the Bank’s reported and estimated core earnings, and incorporating the impact of the pro forma assumptions discussed previously, the Bank’s pro forma reported and core P/E multiples were deemed not meaningful due to the net loss on a reported and core basis, thus we were unable to apply the P/E method in the valuation of First Federal.  The Peer Group exhibited average reported and core earnings multiples of 19.94 times and 20.45 times, respectively (see Table 4.3).  In comparison, the Peer Group’s median reported and core earnings multiples were 17.87 times and 18.67 times, respectively.
 
 
 
 
 
RP ® Financial, LC. VALUATION ANALYSIS
 
IV.21
 
2.            Price-to-Book (“P/B”) . The application of the P/B valuation method requires calculating the Bank’s pro forma market value by applying a valuation P/B ratio, as derived from the Peer Group’s P/B ratio, to the Bank’s pro forma book value.  Based on the $75.2 million midpoint valuation, the Bank’s pro forma P/B and P/TB ratios both equaled 54.17%, respectively.  In comparison to the average P/B and P/TB ratios for the Peer Group of 76.35% and 81.05%, the Company’s ratios reflected a discount of 29.1% on a P/B basis and a discount of 33.2% on a P/TB basis.  In comparison to the Peer Group’s median P/B and P/TB ratios of 72.86% and 76.43%, respectively, the Bank’s pro forma P/B and P/TB ratios at the midpoint value reflected discounts of 25.7% and 29.1%, respectively.  At the top of the super range or supermaximum, the Bank’s P/B and P/TB ratios both equaled 62.70%, respectively.  In comparison to the Peer Group’s average P/B and P/TB ratios, the Bank’s P/B and P/TB ratios at the top of the super range reflected discounts of 17.9% and 22.6%, respectively.  In comparison to the Peer Group’s median P/B and P/TB ratios, the Bank’s P/B and P/TB ratios at the top of the super range reflected discounts of 13.9% and 18.0%, respectively.  RP Financial considered the discounts under the P/B approach to be reasonable in consideration of the Bank’s higher pro forma equity ratio and in consideration of the trading of recent standard conversions.
 
3.            Price-to-Assets (“P/A”) .  The P/A valuation methodology determines market value by applying a valuation P/A ratio to the Bank’s pro forma asset base, conservatively assuming no deposit withdrawals are made to fund stock purchases.  In all likelihood there will be deposit withdrawals, which results in understating the pro forma P/A ratio, which is computed herein.  At the $75.2 million midpoint of the valuation range, the Bank’s value equaled 8.93% of pro forma assets.  Comparatively, the Peer Group companies exhibited an average P/A ratio of 8.81%, which implies a premium of 1.4% has been applied to the Bank’s pro forma P/A ratio.  In comparison to the Peer Group’s median P/A ratio of 7.58%, the Bank’s pro forma P/A ratio at the midpoint value reflects a premium of 17.8%.
 
 
 
 
 
RP ® Financial, LC. VALUATION ANALYSIS
 
IV.22
 
Table 4.3
Public Market Pricing
First Federal of Port Angeles and the Comparables
As of November 9, 2012
 
     
Market
   
Per Share Data
                                                 
     
Capitalization
   
Core
   
Book
                                    Dividends(4)
     
Price/
   
Market
   
12 Month
   
Value/
      Pricing Ratios(3)    
Amount/
         
Payout
 
     
Share(1)
   
Value
   
EPS(2)
   
Share
      P/E       P/B       P/A    
P/TB
   
P/Core
   
Share
   
Yield
   
Ratio(5)
 
     
($)
   
($Mil)
   
($)
   
($)
   
(x)
   
(%)
   
(%)
   
(%)
   
(x)
   
($)
   
(%)
   
(%)
 
First Federal of Port Angeles
                                                                             
Superrange
  $ 10.00     $ 99.58     ($ 0.27 )   $ 15.95    
NM
      62.70 %     11.55 %     62.70 %  
NM
    $ 0.00       0.00 %     0.00 %
Maximum
  $ 10.00     $ 86.54     ($ 0.30 )     17.12    
NM
      58.41 %     10.16 %     58.41 %  
NM
    $ 0.00       0.00 %     0.00 %
Midpoint
  $ 10.00     $ 75.20     ($ 0.32 )     18.46    
NM
      54.17 %     8.93 %     54.17 %  
NM
    $ 0.00       0.00 %     0.00 %
Minimum
  $ 10.00     $ 63.86     ($ 0.36 )     20.28    
NM
      49.31 %     7.67 %     49.31 %  
NM
    $ 0.00       0.00 %     0.00 %
                                                                                                 
All Non-MHC Public Companies(7)
                                                                                             
Averages
  $ 13.16     $ 288.13     $ 0.15     $ 15.01       19.14 x     87.86 %     11.05 %     94.21 %     21.87 x   $ 0.21       1.58 %     25.24 %
Medians
  $ 12.72     $ 75.07     $ 0.37     $ 14.81       17.70 x     83.98 %     10.92 %     87.24 %     18.72 x   $ 0.12       1.04 %     0.00 %
                                                                                                   
                                                                                                   
All Non-MHC State of WA (7)
                                                                                               
Averages
  $ 11.11     $ 300.14     $ 0.28     $ 13.73       19.00 x     78.34 %     9.65 %     84.53 %     18.47 x   $ 0.05       0.34 %     6.61 %
Medians
  $ 11.10     $ 41.20     $ 0.25     $ 15.25       18.32 x     69.17 %     9.60 %     74.92 %     13.07 x   $ 0.00       0.00 %     0.00 %
                                                                                                   
Comparable Group
                                                                                               
Averages
  $ 11.69     $ 57.91     $ 0.49     $ 14.96       19.94 x     76.35 %     8.81 %     81.05 %     20.45 x   $ 0.29       2.28 %     28.81 %
Medians
  $ 9.80     $ 46.40     $ 0.33     $ 13.74       17.87 x     72.86 %     7.58 %     76.43 %     18.67 x   $ 0.26       2.92 %     32.10 %
                                                                                                   
Comparable Group
                                                                                               
EBMT
Eagle Bancorp Montana of MT
  $ 10.45     $ 40.54     $ 0.19     $ 13.83       18.66 x     75.56 %     12.38 %     75.56 %  
NM
    $ 0.29       2.78 %     51.79 %
FCAP
First Capital, Inc. of IN
  $ 20.15     $ 56.12     $ 1.25     $ 18.62       13.71 x     108.22 %     12.37 %     120.73 %     16.12 x   $ 0.76       3.77 %     51.70 %
FCLF
First Clover Leaf Fin Cp of IL
  $ 6.26     $ 47.95     $ 0.11     $ 10.21       28.45 x     61.31 %     8.91 %     72.45 %  
NM
    $ 0.24       3.83 %  
NM
 
FFNW
First Fin NW, Inc of Renton WA
  $ 7.57     $ 142.35     $ 0.17     $ 9.79       39.84 x     77.32 %     14.25 %     77.32 %  
NM
    $ 0.00       0.00 %     0.00 %
FSFG
First Savings Fin Grp of IN
  $ 19.00     $ 44.84     $ 1.52     $ 27.08       12.03 x     70.16 %     7.64 %     80.03 %     12.50 x   $ 0.00       0.00 %     0.00 %
HFFC
HF Financial Corp of SD
  $ 12.70     $ 89.61     $ 0.41     $ 13.72       17.40 x     92.57 %     7.51 %     96.95 %     30.98 x   $ 0.45       3.54 %     61.64 %
HFBC
HopFed Bancorp, Inc. of KY
  $ 8.15     $ 61.15     $ 0.34     $ 13.75       12.73 x     59.27 %     5.96 %     59.49 %     23.97 x   $ 0.08       0.98 %     12.50 %
RIVR
River Valley Bancorp of IN
  $ 17.38     $ 26.50     $ 0.31     $ 18.78       20.94 x     92.55 %     6.49 %     92.84 %  
NM
    $ 0.84       4.83 %  
NM
 
TSBK
Timberland Bancorp, Inc. of WA
  $ 6.05     $ 42.62     $ 0.15     $ 10.38       18.33 x     58.29 %     5.85 %     63.48 %  
NM
    $ 0.00       0.00 %     0.00 %
WAYN
Wayne Savings Bancshares of OH
  $ 9.15     $ 27.40     $ 0.49     $ 13.41       17.26 x     68.23 %     6.70 %     71.65 %     18.67 x   $ 0.28       3.06 %     52.83 %
 
                                                         
        Financial Characteristics(6)        
     
Total
   
Equity/
   
Tang. Eq./
   
NPAs/
   
Reported
   
Core
   
Offering
 
     
Assets
   
Assets
   
Assets
   
Assets
   
ROA
   
ROE
   
ROA
   
ROE
   
Proceeds
 
     
($Mil)
   
(%)
   
(%)
   
(%)
   
(%)
   
(%)
   
(%)
   
(%)
   
($Mil)
 
First Federal of Port Angeles
                                                     
Superrange
  $ 862       18.43 %     18.43 %     2.24 %     -0.27 %     -1.45 %     -0.32 %     -1.71 %   $ 92.58  
Maximum
    851       17.40 %     17.40 %     2.27 %     -0.25 %     -1.45 %     -0.30 %     -1.73 %   $ 80.50  
Midpoint
    842       16.48 %     16.48 %     2.29 %     -0.24 %     -1.45 %     -0.29 %     -1.75 %   $ 70.00  
Minimum
    833       15.55 %     15.55 %     2.32 %     -0.22 %     -1.45 %     -0.28 %     -1.77 %   $ 59.50  
                                                                           
All Non-MHC Public Companies(7)
                                                                       
Averages
  $ 2,449       12.12 %     11.50 %     3.39 %     0.30 %     1.94 %     0.12 %     -0.06 %        
Medians
  $ 792       12.91 %     11.40 %     2.48 %     0.40 %     3.45 %     0.30 %     2.31 %        
                                                                           
                                                                           
All Non-MHC State of WA (7)
                                                                       
Averages
  $ 2,455       9.31 %     8.64 %     6.75 %     0.07 %     3.07 %     -0.13 %     -1.70 %        
Medians
  $ 772       11.35 %     11.23 %     7.13 %     0.32 %     2.32 %     0.31 %     1.49 %        
                                                                           
Comparable Group
                                                                       
Averages
  $ 667       12.49 %     11.91 %     3.81 %     0.48 %     4.12 %     0.32 %     2.74 %        
Medians
  $ 562       12.04 %     11.66 %     2.52 %     0.41 %     4.03 %     0.24 %     1.97 %        
                                                                           
Comparable Group
                                                                       
EBMT
Eagle Bancorp Montana of MT
  $ 327       16.39 %     16.39 %     1.30 %     0.65 %     4.08 %     0.22 %     1.38 %        
FCAP
First Capital, Inc. of IN
  $ 454       11.45 %     10.39 %     1.93 %     0.92 %     8.05 %     0.79 %     6.84 %        
FCLF
First Clover Leaf Fin Cp of IL
  $ 538       14.54 %     12.59 %     3.78 %     0.30 %     2.15 %     0.15 %     1.08 %        
FFNW
First Fin NW, Inc of Renton WA
  $ 999       18.43 %     18.43 %     10.77 %     0.33 %     1.97 %     0.30 %     1.76 %        
FSFG
First Savings Fin Grp of IN
  $ 587       13.80 %     12.63 %     2.40 %     0.68 %     5.01 %     0.66 %     4.82 %        
HFFC
HF Financial Corp of SD
  $ 1,193       8.12 %     7.78 %     1.60 %     0.43 %     5.39 %     0.24 %     3.03 %        
HFBC
HopFed Bancorp, Inc. of KY
  $ 1,026       11.83 %     11.80 %     2.26 %     0.46 %     4.10 %     0.24 %     2.18 %        
RIVR
River Valley Bancorp of IN
  $ 408       8.23 %     8.22 %     4.32 %     0.31 %     3.82 %     0.12 %     1.43 %        
TSBK
Timberland Bancorp, Inc. of WA
  $ 729       12.24 %     11.52 %     7.13 %     0.32 %     2.66 %     0.14 %     1.21 %        
WAYN
Wayne Savings Bancshares of OH
  $ 409       9.82 %     9.40 %     2.64 %     0.39 %     3.99 %     0.36 %     3.69 %        

(1)  Average of High/Low or Bid/Ask price per share.
(2)  EPS (estimate core basis) is based on actual trailing 12 month data, adjusted to omit non-operating items on a tax-effected basis, and is shown on a pro forma basis where appropriate.
(3)  P/E = Price to earnings; P/B = Price to book; P/A = Price to assets; P/TB = Price to tangible book value; and P/Core = Price to core earnings.
(4)  Indicated 12 month dividend, based on last quarterly dividend declared.
(5)  Indicated 12 month dividend as a percent of trailing 12 month estimated core earnings.
(6)  ROA (return on assets) and ROE (return on equity) are indicated ratios based on trailing 12 month common earnings and average common equity and total assets balances.
(7)  Excludes from averages and medians those companies the subject of actual or rumored acquisition activities or unusual operating characteristics.
Source: SNL Financial, LC and RP Financial, LC. calculations.  The information provided in this report has been obtained from sources we believe are reliable, but we cannot guarantee the accuracy or completeness of such information.
Copyright (c) 2012 by RP ® Financial, LC.
 
 
 
 
 
RP ® Financial, LC. VALUATION ANALYSIS
 
IV.23
 
Comparison to Recent Offerings
 
As indicated at the beginning of this section, RP Financial’s analysis of recent conversion offering pricing characteristics at closing and in the aftermarket has been limited to a “technical” analysis and, thus, the pricing characteristics of recent conversion offerings cannot be a primary determinate of value.  Particular focus was placed on the P/TB approach in this analysis, since the P/E multiples do not reflect the actual impact of reinvestment and the source of the stock proceeds (i.e., external funds vs. deposit withdrawals), as well as the negative core earnings reported by the Bank for the twelve months ended September 30, 2012.
 
As discussed previously, two standard conversion offerings have been completed in the last three months and closed at an average of 110% of the midpoint valuation range, raising an average of $34.5 million of gross proceeds.  These two offerings closed at an average pro forma price/tangible book ratio of 56.8%, and closed at an average of 31.0% above the offering price after one week of trading.  In comparison to the 56.8% average closing forma P/TB ratio of the two recent standard conversions, the Bank’s P/TB ratio of 54.17% at the midpoint value reflects an implied discount of 4.6%.  At the top of the super range, the Bank’s pro forma P/TB ratio of 62.70% reflects an implied premium of 10.4% relative to the two recent standard conversions average P/TB ratio at closing.  Through November 9, 2012, these two conversion stocks were trading at an average price/tangible book ratio of 72.94%.  In comparison, the Bank’s pro forma price/tangible book ratio at the appraised midpoint value (54.17%) reflects a discount of 25.7% and at the supermaximum of the range (62.70%) reflects a discount of 14.0%.
 
Valuation Conclusion
 
Based on the foregoing, it is our opinion that, as of November 9, 2012, the estimated aggregate pro forma valuation of the shares of the Company to be issued and outstanding at the end of the conversion offering and including the contribution to the Foundation is $75,200,000 at the midpoint, equal to 7,520,000 shares at $10.00 per share.  The resulting range of value and pro forma shares are based on $10.00 per share and includes the contribution to the Foundation, which is set forth in the table on the following page.  The Foundation will be funded with $400,000 in cash and the remainder in shares of common stock so that the total amount contributed is equal to 8% of the gross offering proceeds received by the Company in the offering.
 
 
 
 
 
RP ® Financial, LC. VALUATION ANALYSIS
 
IV.24
 
First Northwest Bancorp
Standard Conversion Offering @ $70.0 Million Midpoint

         
Offering
   
Foundation
 
   
Total Shares
   
Shares
   
Shares
 
                   
Shares
                 
Supermaximum
    9,958,100       9,257,500       700,600  
Maximum
    8,654,000       8,050,000       604,000  
Midpoint
    7,520,000       7,000,000       520,000  
Minimum
    6,386,000       5,950,000       436,000  
                         
Distribution of Shares
                       
Supermaximum
    100.00 %     92.96 %     7.04 %
Maximum
    100.00 %     93.02 %     6.98 %
Midpoint
    100.00 %     93.09 %     6.91 %
Minimum
    100.00 %     93.17 %     6.83 %
                         
Aggregate Market Value(1)
                       
Supermaximum
  $ 99,581,000     $ 92,575,000     $ 7,006,000  
Maximum
    86,540,000       80,500,000       6,040,000  
Midpoint
    75,200,000       70,000,000       5,200,000  
Minimum
    63,860,000       59,500,000       4,360,000  
           
(1) Based on offering price of $10.00 per share.
         
 
Based on the pro forma valuation, the number of shares of common stock offered for sale will range from a minimum of 5,950,000 shares to a maximum of 8,050,000 shares, with a midpoint offering of 7,000,000 shares.  Based on an offering price of $10.00 per share, the amount of the offering will range from a minimum of $59,500,000 to a maximum of $80,500,000 with a midpoint of $70,000,000.  If market conditions warrant, the number of shares offered can be increased to an adjusted maximum or supermaximum of 9,257,500 shares (equal to an offering of $92,575,000 at the offering price of $10.00 per share.  The pro forma valuation calculations relative to the Peer Group are shown in Table 4.3 and are detailed in Exhibit IV-7 and Exhibit IV-8.