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 surrounding markets. This Form 10-Q covers the quarter ended September 30, 2016, the first quarter of fiscal 2017. Financial statements are unaudited and amounts are in thousands except per-share data.
The Bank operated 11 locations and continued shifting its loan mix toward commercial real estate, multifamily, construction and business lending. Management anticipated opening a Seattle Home Lending Center during the second quarter of fiscal 2017.
Financial performance and key metrics
- Net income: $651,000, or $0.06 diluted earnings per share, compared with $1.228 million, or $0.10 per share, in the prior-year quarter.
- Net interest income: $7.351 million, up from $6.297 million. Net interest margin increased to 3.06% from 2.78%.
- Provision for loan losses: $350,000, compared with none in the prior-year quarter.
- Noninterest income: $1.444 million, up from $1.263 million, driven primarily by higher gains on loan sales and increased bank-owned life insurance income.
- Noninterest expense: $7.460 million, up from $5.915 million. Compensation and benefits increased to $4.160 million, partly due to restricted stock awards and additional personnel.
- Pre-tax income: $985,000, compared with $1.645 million. The effective tax rate was 33.9%, versus 25.3%.
- Total assets: $1.049 billion at September 30, 2016, up 3.8% from June 30, 2016.
- Loans: Net loans receivable were $664.1 million; total loans before deductions were $670.2 million, up 7.1% from June 30. Commercial real estate loans increased 11.5% to $179.6 million, while one-to-four-family loans increased 6.6% to $328.8 million.
- Deposits: $776.3 million, up 7.3% from June 30. The weighted-average deposit cost was 0.34%.
- Borrowings: $75.1 million, down from $80.7 million.
- Shareholders’ equity: $189.3 million, equal to 18.1% of total assets. Book value per share was $14.60, compared with $14.97 at June 30.
- Credit quality: The allowance for loan losses was $7.7 million, or 1.2% of total loans. Nonperforming loans were $2.9 million, or 0.4% of total loans, versus $3.3 million, or 0.5%, at June 30.
Cash flow, liquidity and capital
- Operating activities used $6.0 million of cash, investing activities used $33.7 million, and financing activities provided $46.8 million.
- Cash and cash equivalents increased to $29.8 million from $22.7 million at June 30.
- Available-for-sale securities totaled $247.1 million, providing an additional liquidity source. Total investment securities declined to approximately $302.0 million from $323.9 million.
- Certificates of deposit totaling $57.9 million matured within one year. Management expected a significant portion to renew or move into money market accounts, but noted that nonrenewal could require higher-cost funding.
- The Bank was considered well capitalized and exceeded all regulatory capital requirements. Its total risk-based capital ratio was 21.2%, and its Tier 1 leverage ratio was 13.8%.
- Off-balance-sheet commitments totaled $76.3 million, including $75.5 million of unfunded loan and line-of-credit commitments and $38.2 million of undisbursed construction commitments.
Material changes versus the prior comparable period
- Net income declined 47.0%, primarily because noninterest expense increased $1.545 million, or 26.1%.
- Net interest income rose 16.8%, supported by loan growth, lower borrowing costs and an improved earning-asset mix.
- Interest income increased 13.3%; average loans increased to $629.3 million from $490.3 million, although the average loan yield declined to 4.27% from 4.49%.
- Noninterest income increased 14.3%, including a $227,000 increase in net gains on loan sales and a $131,000 increase in BOLI income.
- Compensation expense increased $887,000, including $256,000 of equity incentive compensation. The company granted 402,500 restricted shares during the quarter, with $4.8 million of related unrecognized compensation cost remaining.
- Loan growth was funded principally through a $53.1 million increase in deposits and a reduction in borrowings. The company also purchased a $30.3 million pool of one-to-four-family residential loans and sold $10.2 million of residential loan originations.
- Asset quality improved: classified loans declined to $4.0 million from $4.6 million, loans 30 days or more past due declined to $927,000 from $1.7 million, and total nonperforming assets declined to $3.0 million from $3.3 million.
Guidance, outlook, management commentary, risks and unusual items
Management expected continued loan growth and further expansion of commercial lending, while planning to retain selected residential originations and sell excess production. The anticipated Seattle Home Lending Center was expected to increase both revenue opportunities and operating expenses.
Management stated that the allowance for loan losses was adequate and that asset quality remained stable, but acknowledged that future provisions could exceed prior amounts and that regulatory examinations could require additional reserves or asset write-downs.
- Key risks include economic deterioration, housing and commercial real estate weakness, loan delinquencies and charge-offs, interest-rate changes, deposit competition and liquidity pressures.
- Growth and geographic expansion may increase operating costs, execution risk, construction-loan exposure and regulatory requirements.
- Investment securities had $954,000 of unrealized losses at September 30. Management attributed the losses principally to interest rates and liquidity rather than credit quality and did not expect to sell the affected securities before recovery or maturity.
- Tax-exempt BOLI income and tax-exempt interest reduced the effective tax rate. A $1.9 million valuation allowance remained related to the charitable contribution carryforward.
- The company repurchased 99,314 shares at an average price of $13.42 and authorized a new program to repurchase up to 1,300,756 shares, approximately 10% of shares outstanding at September 30.
- No material legal proceedings, subsequent events, market-risk changes or changes in risk factors were reported. Management concluded disclosure controls were effective and reported no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether loan growth, particularly in commercial real estate, construction and multifamily lending, remains sustainable without materially increasing credit losses.
- Whether elevated compensation, expansion and Home Lending Center costs translate into sufficient revenue growth and improved operating leverage.
- Future trends in net interest margin as deposit pricing, loan yields, securities prepayments and interest rates change.
- Renewal rates and pricing for the $57.9 million of certificates of deposit maturing within one year, and the effect on liquidity and funding costs.
- The adequacy of the $7.7 million allowance for loan losses and the potential impact of regulatory examinations or changes in economic conditions.
- Execution of the new share-repurchase authorization and its effect on capital, book value per share and future earnings per share.