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 Washington’s North Olympic Peninsula and other Washington markets. The filing covers the quarter and six months ended December 31, 2016, corresponding to fiscal 2016 second quarter. Financial statements are unaudited.
Key financial metrics
| Metric | Three months ended Dec. 31, 2016 | Six months ended Dec. 31, 2016 |
|---|---|---|
| Total interest income | $8.9 million | $17.5 million |
| Net interest income | $7.7 million | $15.0 million |
| Provision for loan losses | $410,000 | $760,000 |
| Noninterest income | $1.3 million | $2.8 million |
| Noninterest expense | $6.9 million | $14.3 million |
| Net income | $1.2 million | $1.8 million |
| Diluted earnings per share | $0.11 | $0.16 |
| Net interest margin | 3.12% | 3.09% |
- Total assets were $1.04 billion at December 31, 2016, up 3.3% from June 30, 2016.
- Total loans were $697.3 million, and net loans receivable were $690.4 million, up 11.4% from June 30, 2016. Growth was concentrated in commercial real estate, construction and land, residential, multifamily, and indirect consumer lending.
- Deposits increased 9.8% to $794.1 million, while borrowings declined 18.3% to $65.9 million.
- Shareholders’ equity was $176.9 million, or 16.9% of total assets. Book value per share was $14.55.
- Cash and cash equivalents totaled $22.6 million; available-for-sale securities totaled $222.3 million.
- Net cash used in operating activities was $4.3 million for the six months, compared with $1.5 million of net cash provided in the prior-year period. Net cash used in investing activities was $39.4 million, offset by $43.7 million of financing cash flow, resulting in a net decrease in cash and cash equivalents of approximately $1,000.
- The allowance for loan losses was $8.1 million, or 1.2% of total loans. Nonperforming loans were $2.5 million, or 0.4% of total loans.
- The Bank exceeded applicable regulatory capital requirements and was considered well capitalized under FDIC guidelines. The Bank’s total risk-based capital ratio was 20.9% and its Tier 1 leverage ratio was 13.4%.
Material changes versus prior comparable periods
- Quarterly net income increased 66.6% from $713,000 to $1.2 million, driven by higher net interest income and lower noninterest expense.
- Six-month net income decreased 5.3% from $1.9 million to $1.8 million, as higher revenue was more than offset by loan-loss provisions and increased operating expenses.
- Net interest income increased 13.5% for the quarter and 15.0% for the six-month period. Net interest margin improved 14 basis points for the quarter and 21 basis points for the six-month period, primarily because loans represented a larger share of earning assets and borrowing costs declined.
- Quarterly noninterest income declined 29.2%, and six-month noninterest income declined 11.7%, primarily because the prior-year periods included an $856,000 gain on sale of investment securities. Gains on loan sales and bank-owned life insurance income increased in 2016.
- Quarterly noninterest expense declined 10.5%, primarily because the prior-year quarter included a $779,000 FHLB prepayment penalty. Six-month noninterest expense increased 5.5%, reflecting higher compensation, stock-based compensation, expansion-related occupancy costs, and data-processing expenses.
- The company repurchased 912,714 shares during the six months for $12.4 million, reducing common shares outstanding and shareholders’ equity.
- Investment securities declined 14.8% to $276.1 million, while loans increased 11.4%, reflecting management’s strategy to shift earning assets toward lending.
- Nonperforming loans declined from $3.3 million at June 30, 2016 to $2.5 million at December 31, 2016; classified substandard loans declined from $4.6 million to $3.5 million.
Outlook, commentary, risks, and unusual items
- Management intends to continue loan growth, increase commercial and multifamily lending, expand deposit relationships, and reduce reliance on securities and purchased residential loan pools. The company expects to retain more residential loan production while selling excess production into the secondary market.
- Management expects noninterest expenses to remain elevated as it expands its branch network, Seattle home lending center, technology infrastructure, and market presence.
- The allowance for loan losses increased because of loan growth. Management considers the allowance adequate but notes that actual losses, regulatory reviews, economic conditions, housing values, and commercial real estate performance could require additional provisions.
- Construction and land lending increased materially. Undisbursed construction commitments were $35.5 million, within total construction commitments of $88.1 million. These exposures are geographically concentrated in Washington and include speculative residential construction.
- Certificates of deposit totaling $57.6 million mature within one year. If deposits are not renewed, the company may need to offer higher rates or use other funding sources.
- At December 31, 2016, the company had $73.6 million of commitments and contingent liabilities, including loan commitments, unfunded lines of credit, and standby letters of credit.
- Key risks include changes in interest rates, deposit pricing and retention, loan demand, credit quality, real estate values, secondary-market demand for loans, regulatory capital requirements, operating costs, competition, and fair-value estimates.
- The company adopted employee share-based payment guidance early without a material impact. It expects future standards on revenue, leases, and credit losses to affect reporting; management anticipates that the current expected credit loss standard could increase the allowance for loan losses.
- No material changes to previously disclosed market risks or risk factors were reported. Management concluded that disclosure controls were effective and reported no material changes in internal control over financial reporting.
Investor verification checklist
- Verify that loan growth remains supported by underwriting standards, particularly in commercial real estate, construction, multifamily, and indirect consumer lending.
- Monitor nonperforming loans, classified assets, charge-offs, recoveries, and the adequacy of the allowance as the portfolio expands.
- Assess the effect of deposit promotions and maturities on funding costs, liquidity, and net interest margin.
- Review the sensitivity of securities, mortgage servicing rights, and capital to changes in interest rates and unrealized investment losses.
- Confirm the financial impact and remaining authorization of the common-stock repurchase program, including its effect on capital and book value per share.
- Track expansion-related compensation, technology, occupancy, and other operating costs against future revenue growth.
- Evaluate the eventual impact of the current expected credit loss, lease, and revenue-recognition accounting standards.