First Northwest Bancorp — 2018 Q1 Form 10-Q Summary
Business Context and Reporting Period
First Northwest Bancorp is the holding company for First Federal Savings and Loan Association of Port Angeles, a community-oriented bank serving Western Washington through 13 banking locations, including a home lending center. The bank provides residential, commercial real estate, construction, consumer, commercial business, deposit, and related financial services.
This unaudited Form 10-Q covers the three months ended March 31, 2018. The company changed its fiscal year-end from June 30 to December 31 effective December 31, 2017; therefore, the quarter is not necessarily indicative of future results.
Key Financial Metrics
| Metric | Q1 2018 | Comparable / Prior Period |
|---|---|---|
| Total assets | $1.190 billion | $1.216 billion at December 31, 2017 |
| Total loans | $805.953 million | $786.141 million at December 31, 2017; $713.455 million at March 31, 2017 |
| Net loans receivable | $798.828 million | $779.111 million at December 31, 2017 |
| Net interest income | $8.972 million | $8.105 million in Q1 2017 |
| Net interest margin | 3.15% | 3.18% in Q1 2017 |
| Net income | $1.523 million | $2.164 million in Q1 2017 |
| Diluted earnings per share | $0.14 | $0.20 in Q1 2017 |
| Cash flow from operating activities | $5.378 million | $2.974 million in Q1 2017 |
| Cash flow from investing activities | $11.015 million | $(36.289) million in Q1 2017 |
| Cash flow from financing activities | $(28.044) million | $33.854 million in Q1 2017 |
| Cash and cash equivalents | $25.150 million | $36.801 million at December 31, 2017 |
| Deposits | $880.622 million | $885.032 million at December 31, 2017 |
| Borrowings | $122.949 million | $144.100 million at December 31, 2017 |
| Shareholders’ equity | $173.502 million | $177.045 million at December 31, 2017 |
Revenue, Profitability, Cash Flow, Debt and Liquidity
- Total interest income increased 15.3% to $10.846 million, primarily from higher average loan balances and yields.
- Interest expense increased 43.8% to $1.874 million as deposit and borrowing costs rose. The average cost of interest-bearing liabilities increased to 0.85% from 0.68%.
- Net interest income increased 10.7% to $8.972 million, but the net interest margin declined three basis points to 3.15% as funding costs increased.
- Provision for loan losses increased to $310,000 from $215,000. The allowance for loan losses was $8.984 million, or 1.1% of total loans.
- Noninterest income declined 32.7% to $1.482 million, primarily because Q1 2017 included a $768,000 bank-owned life insurance death benefit. Q1 2018 included a $122,000 gain on securities sales.
- Noninterest expense increased 10.4% to $8.275 million, driven by compensation, occupancy, advertising, and other growth-related costs.
- Income before taxes declined to $1.869 million from $2.593 million. The effective tax rate was 18.5%, compared with 16.5% in Q1 2017.
- Operating cash flow was $5.378 million. Investing cash flow was positive because the company received $32.859 million from sales of available-for-sale securities and reduced securities purchases relative to the prior year.
- Financing cash flow was negative due mainly to a $21.151 million net reduction in FHLB borrowings, a $4.410 million decline in deposits, and $3.385 million of share repurchases.
- At March 31, 2018, cash and cash equivalents were $25.2 million, available-for-sale securities were $258.2 million, and FHLB borrowings were $122.9 million. Management stated that these resources, together with deposits and other funding sources, were expected to provide sufficient foreseeable liquidity.
- The bank and consolidated company exceeded regulatory capital requirements, and the bank was considered well capitalized. The bank’s Tier 1 leverage ratio was 12.2%, common equity Tier 1 ratio was 18.4%, and total risk-based capital ratio was 19.6%.
Material Changes Versus Comparable Period and Prior Quarter
- Net income fell 29.6% year over year, primarily because of the absence of the prior-year BOLI death benefit, higher operating expenses, and a higher loan-loss provision.
- Loan balances increased $19.8 million, or 2.5%, from December 31, 2017. Commercial real estate, construction and land, and other consumer loans increased; one-to-four-family and multifamily loans declined.
- The company added $11.4 million of newly originated auto loans, including loans purchased through a classic-car lending program.
- Investment securities declined $34.4 million, or 10.1%, from year-end to $305.9 million as the company sold securities and used a portion of the proceeds to repay borrowings.
- Total assets declined $26.1 million, or 2.1%, from year-end, primarily because of the securities repositioning.
- Nonperforming loans increased 41.6% to $2.173 million, or 0.3% of total loans, largely because of a $583,000 nonperforming commercial business loan. Classified loans increased to $9.987 million from $6.650 million, including a $3.7 million multifamily construction loan downgraded in March.
- Shareholders’ equity declined 2.0% from year-end, reflecting $3.385 million of share repurchases and a $2.174 million after-tax increase in accumulated other comprehensive loss, partly offset by net income.
- The company repurchased 208,113 shares during the quarter at an average price of $16.27. As of March 31, 2018, 918,746 shares remained authorized for repurchase.
Guidance, Outlook, Risks and Unusual Items
- No formal earnings or financial guidance was provided in the filing.
- Management expects noninterest expenses to increase as the company grows, expands into new markets, and supports additional staffing, branches, technology, and lending activities.
- Management intends to continue growing loans, improving the mix of earning assets, reducing the relative concentration in securities, and evaluating share repurchases and other capital management strategies.
- Certificates of deposit totaling $154.3 million, or 64.2% of certificates, mature within one year. If these deposits are not renewed, the company may need to offer higher rates or rely more heavily on other borrowings.
- Construction commitments totaled $125.8 million, with $62.2 million undisbursed. The portfolio has meaningful exposure to construction, commercial real estate, multifamily lending, and regional real estate conditions.
- Key risks include credit deterioration, changes in real estate values, loan demand, deposit competition, rising funding costs, interest-rate movements, securities-market volatility, regulatory changes, cybersecurity and third-party vendor disruptions, and the ability to control operating expenses.
- Management stated that the increase in nonperforming and classified loans represented normal fluctuations and did not indicate broad deterioration in credit quality. The filing also states that the allowance was adequate at March 31, 2018.
- The company adopted revenue-recognition and financial-instrument accounting updates during the quarter without a material impact. It expects the future lease standard to increase reported assets and liabilities, but not materially affect income or equity. The expected effect of the future current expected credit loss standard was not yet quantified.
- The filing reports no material legal proceedings, no material changes to previously disclosed risk factors, and no material change in market-risk disclosures.
Important Facts for Investors to Verify
- Whether higher loan growth can offset rising deposit and borrowing costs without further pressure on the 3.15% net interest margin.
- The performance of the newly added auto-loan portfolio and the company’s expanding commercial real estate, multifamily, and construction exposures.
- Trends in nonperforming loans, classified loans, charge-offs, and the adequacy of the $8.984 million allowance.
- Deposit retention and repricing as $154.3 million of certificates of deposit mature within one year.
- The effect of securities sales, interest-rate changes, and accumulated other comprehensive losses on capital and liquidity.
- Future operating-expense growth associated with branch expansion, staffing, technology, and new lending programs.
- Implementation effects of the forthcoming lease and expected-credit-loss accounting standards, which the filing does not quantify clearly.