Regulatory Capital Requirements

12 Months Ended

Jun. 30, 2016

Banking and Thrift [Abstract]

Regulatory Capital Requirements

Regulatory Capital Requirements

Under Federal regulations, pre-conversion retained earnings are restricted for the protection of pre-conversion depositors.

The Bank is subject to various regulatory capital requirements administered by federal and state 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. Prompt corrective action provisions are not applicable to bank holding companies.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table that follows) of total and Tier I capital to risk-weighted assets (as defined in the regulations) and of Tier 1 capital to average assets.

Effective January 1, 2015 (with some changes transitioned into full effectiveness over two to four years), the Bank is subject to capital requirements which created a required ratio for common equity Tier 1 (“CET1”) capital, increased the leverage and Tier 1 capital ratios, changed the risk-weightings of certain assets for purposes of the risk-based capital ratios, created an additional capital conservation buffer over the required capital ratios and changed what qualifies as capital for purposes of meeting these various capital requirements. The Bank is required to maintain additional levels of Tier 1 common equity over the minimum risk-based capital levels before it may pay dividends, repurchase shares or pay discretionary bonuses.

The minimum requirements are a ratio of common equity Tier 1 capital (CET1 capital) to total risk-weighted assets the (“CET1 risk-based ratio”) of 4.5%, a Tier 1 capital ratio of 6.0%, a total capital ratio of 8.0%, and a leverage ratio of 4.0%.

In addition to the capital requirements, there were a number of changes in what constitutes regulatory capital, subject to a certain transition period. These changes include the phasing-out of certain instruments as qualifying capital. The Bank does not have any of these instruments. Mortgage servicing and deferred tax assets over designated percentages of CET1 are deducted from capital, subject to a transition period ending December 31, 2017. CET1 consists of Tier 1 capital less all capital components that are not considered common equity. In addition, Tier 1 capital includes accumulated other comprehensive income, which includes all unrealized gains and losses on available for sale debt and equity securities, subject to a transition period ending December 31, 2017. Because of the Bank’s asset size, the Bank is not considered an advanced approaches banking organization and has elected to permanently opt-out of the inclusion of unrealized gains and losses on available for sale debt and equity securities in its capital calculations.

The requirements also include changes in the risk-weighting of assets to better reflect credit risk and other risk exposure. These include a 150% risk weight (up from 100%) for certain high volatility commercial real estate acquisition, development and construction loans and for non-residential mortgage loans that are 90 days past due or otherwise in nonaccrual status; a 20% (up from 0%) credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable; and a 250% risk weight (up from 100%) for mortgage servicing and deferred tax assets that are not deducted from capital.

In addition to the minimum CET1, Tier 1 and total capital ratios, the Bank will have to maintain a capital conservation buffer consisting of additional CET1 capital equal to 2.5% of risk-weighted assets above the required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses based on percentages of eligible retained income that could be utilized for such actions. This capital conservation buffer requirement began to be phased in starting in January 2016 at 0.625% of risk-weighted assets and will increase each year until fully implemented in January 2019.

Under the new standards, in order to be considered well-capitalized, the Bank must maintain a CET1 risk-based ratio of 6.5% (new), a Tier 1 risk-based ratio of 8% (increased from 6%), a total risk-based capital ratio of 10% (unchanged) and a leverage ratio of 5% (unchanged).

As of June 30, 2016, the most recent regulatory notifications categorized First Federal 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 First Federal’s category.

At periodic intervals, the DFI and FDIC routinely examine First Federal as part of its legally prescribed oversight of the banking industry. A future examination by the DFI and FDIC could include a review of certain transactions or other amounts reported in First Federal’s consolidated financial statements. Based on these examinations, the regulators can direct that First Federal’s consolidated financial statements be adjusted in accordance with their findings. In view of the uncertain regulatory environment in which First Federal 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 June 30, 2016 and 2015, regulatory capital for First Federal was calculated in accordance with the FDIC’s regulatory capital guidelines.

First Federal’s actual and required capital amounts and ratios are presented in the following table:

	Actual				For Capital Adequacy Purposes				To Be Categorized As Well Capitalized Under Prompt Corrective Action Provision
	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(Dollars in thousands)
As of June 30, 2016 (1)
Common equity tier 1 capital
Bank only	$	132,800	21.36	%	$	27,982	4.50	%	$	40,419	6.50	%
Consolidated company	187,846		29.92		28,252		4.50		40,809		6.50
Tier 1 risk-based capital
Bank only	132,800		21.36		37,310		6.00		49,746		8.00
Consolidated company	187,846		29.92		37,670		6.00		50,227		8.00
Total risk-based capital
Bank only	140,237		22.55		49,746		8.00		62,183		10.00
Consolidated company	195,283		31.10		50,227		8.00		62,783		10.00
Tier 1 leverage capital
Bank only	132,800		13.77		38,566		4.00		48,208		5.00
Consolidated company	187,846		18.73		40,124		4.00		50,155		5.00
As of June 30, 2015
Common equity tier 1 capital
Bank only	$	129,618	23.76%		$	24,549	4.50%		$	35,460	6.50%
Tier 1 risk-based capital
Bank only	129,618		23.76		32,733		6.00		43,643		8.00
Total risk-based capital
Bank only	136,443		25.01		43,643		8.00		54,554		10.00
Tier 1 leverage capital
Bank only	129,618		14.53		35,695		4.00		44,618		5.00
(1) As a small bank holding company, First Northwest Bancorp is not required to file regulatory ratios until March 31, 2017. Ratios were calculated voluntarily during the fiscal year ended June 30, 2016 in preparation of the filing requirement.