First Northwest Bancorp — 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. The filing covers the three months ended September 30, 2017. The Company changed its fiscal year-end from June 30 to December 31 and expects to file a transition Form 10-K covering July 1 through December 31, 2017.
The interim financial statements are unaudited and should be read with the fiscal 2017 Form 10-K. Results for the quarter are not necessarily indicative of future periods.
Financial Highlights
| Metric | September 30, 2017 / Quarter | Comparable or Prior Period |
|---|---|---|
| Total assets | $1.150 billion | $1.088 billion at June 30, 2017 |
| Total loans, gross | $734.2 million | $734.0 million at June 30, 2017 |
| Investment securities | $341.2 million | $280.5 million at June 30, 2017 |
| Deposits | $850.9 million | $823.8 million at June 30, 2017 |
| Borrowings | $111.7 million | $77.4 million at June 30, 2017 |
| Net interest income | $8.5 million | $7.4 million in Q1 2017 |
| Net interest margin | 3.20% | 3.06% in Q1 2017 |
| Net income | $1.8 million | $651,000 in Q1 2017 |
| Basic and diluted EPS | $0.17 | $0.06 in Q1 2017 |
| Operating cash flow | $3.4 million | $(6.0) million in Q1 2017 |
| Ending cash and cash equivalents | $25.0 million | $29.8 million at September 30, 2016 |
Total interest income increased 17.6% to $10.0 million, while interest expense increased 32.9% to $1.6 million. Noninterest income increased 17.6% to $1.7 million, and noninterest expense increased 4.7% to $7.8 million. Income before taxes was $2.4 million, compared with $985,000 in the prior-year quarter; income tax expense was $581,000 and the effective tax rate was 24.7%.
Shareholders’ equity was $177.9 million, or 15.5% of total assets. Book value per share was $15.03. The Bank and consolidated Company exceeded regulatory capital requirements, and the Bank was considered well capitalized. The Bank’s total risk-based capital ratio was 20.0%, compared with a 10.0% minimum for well-capitalized status.
Material Changes Versus the Prior Comparable Period
- Net income increased $1.1 million, or 172.4%, primarily from higher net interest income and the absence of a loan-loss provision.
- Net interest income increased $1.1 million, reflecting higher average loan balances and yields. Average loans increased to $727.9 million from $629.3 million, and the average loan yield increased to 4.36% from 4.27%.
- The provision for loan losses declined to zero from $350,000. Net charge-offs were $85,000 versus $93,000.
- Noninterest income benefited from a $136,000 net gain on securities sales, a $108,000 increase in loan-sale gains, and a $51,000 increase in mortgage-servicing income.
- Noninterest expense increased $347,000, led by higher compensation and benefits, occupancy and equipment costs, and professional fees.
- Investment securities increased $60.7 million, or 21.6%, to $341.2 million as management used deposits and FHLB borrowings to acquire liquid, primarily variable-rate securities.
- Deposits increased $27.2 million, or 3.3%, while FHLB borrowings increased $34.3 million, or 44.3%.
- Gross loans were essentially flat overall, but construction and land loans increased $10.4 million, or 14.5%, and other consumer loans increased $2.3 million, or 11.0%.
- Nonperforming loans decreased to $1.8 million from $1.9 million; nonperforming loans were 0.2% of total loans. The allowance for loan losses was $8.6 million, or 1.2% of gross loans.
- The Company repurchased 96,900 shares for $1.5 million during the quarter and authorized a new repurchase program for up to 1,166,659 shares.
Cash Flow, Liquidity, Debt, and Commitments
Operating activities generated $3.4 million of cash. Investing activities used $63.1 million, primarily for purchases of available-for-sale securities, while financing activities provided $60.4 million from deposit growth and net FHLB advances. Cash and cash equivalents increased $717,000 during the quarter.
Available-for-sale securities had a market value of $290.2 million and represented the principal additional liquidity source. FHLB borrowings totaled $111.7 million. The Company had $120.7 million of certificates of deposit maturing within one year, representing 52.2% of certificates of deposit, and management noted that refinancing these balances could require higher deposit or borrowing costs.
Total contractual obligations were $348.4 million, including $231.2 million of certificates of deposit and $111.7 million of FHLB advances. Off-balance-sheet commitments totaled $91.0 million, including $50.8 million of undisbursed construction commitments.
Outlook, Management Commentary, Risks, and Unusual Items
Management plans to expand lending across the Puget Sound region, increase construction, commercial real estate, multifamily, and consumer lending, expand deposit relationships, and reduce reliance on long-term fixed-rate residential mortgage loans. Management expects its securities-leveraging strategy to be accretive to earnings and to mitigate interest-rate risk through variable-rate investments, while continuing to pursue longer-term loan growth.
Key risks include credit deterioration in residential and commercial real estate, construction-loan concentration and execution risk, changes in interest rates and deposit costs, dependence on FHLB funding, deposit attrition or repricing, reduced secondary-market demand for mortgage loans, securities-market losses, regulatory actions, fair-value estimation uncertainty, operating-cost control, competition, and reliance on third-party vendors.
At September 30, 2017, construction commitments totaled $118.2 million, including $50.8 million undisbursed. The portfolio included $5.8 million of troubled debt restructurings, of which $5.2 million were performing and on accrual status. Unrealized securities losses were attributed primarily to interest-rate and liquidity conditions; management reported no other-than-temporary impairment losses.
The Company disclosed no material changes to previously reported market-risk disclosures or risk factors, no material legal proceedings, and no subsequent events requiring recognition or disclosure. Management concluded that disclosure controls and procedures were effective and that no material changes had affected internal control over financial reporting.
Recently issued accounting standards discussed include revenue recognition, financial instruments, leases, and the current expected credit loss model. Management did not expect material effects from ASU 2016-01 or the lease standard, did not anticipate an increase in the allowance from CECL at that time, and was continuing its implementation assessment for revenue recognition.
Important Facts for Investors to Verify
- Whether the securities-leveraging strategy produces the expected earnings benefit without materially increasing interest-rate, funding, or liquidity risk.
- The sustainability of deposit growth and the cost of renewing or replacing the $120.7 million of certificates of deposit maturing within one year.
- Credit performance of the growing construction, commercial real estate, multifamily, and consumer portfolios, including the $50.8 million of undisbursed construction commitments.
- Whether the $8.6 million allowance remains adequate as loan growth and geographic expansion continue, particularly under regulatory review and future CECL adoption.
- The effect of higher FHLB borrowings and deposit costs on the 3.20% net interest margin.
- Future securities fair values and accumulated other comprehensive losses if interest rates rise or market liquidity deteriorates.
- Execution of the Puget Sound expansion, home lending strategy, branch initiatives, and expense-control efforts.
- Implementation conclusions and financial effects of the accounting standards scheduled for adoption after the reporting period.