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 bank serving primarily the North Olympic Peninsula and other Washington markets. The filing covers the quarter and nine months ended March 31, 2016, although the request metadata identifies “2015 Q3.” The financial statements are unaudited and amounts are in thousands except per-share data.
Financial performance and position
| Metric | Three months ended March 31, 2016 | Comparable period | Nine months ended March 31, 2016 | Comparable period |
|---|---|---|---|---|
| Total interest income | $8.2 million | $6.9 million | $23.6 million | $20.2 million |
| Net interest income | $7.0 million | $5.7 million | $20.1 million | $16.9 million |
| Net interest margin | 3.01% | 2.54% | 2.90% | 2.77% |
| Provision for loan losses | $0 | $0 | $0 | $0 |
| Noninterest income | $1.1 million | $1.3 million | $4.2 million | $3.4 million |
| Noninterest expense | $6.9 million | $15.8 million | $20.5 million | $26.7 million |
| Net income | $897,000 | $(7.6) million | $2.8 million | $(5.8) million |
| Basic and diluted EPS | $0.07 | $(0.62) | $0.24 | $(0.48) |
- Total assets were $995.4 million at March 31, 2016, up 6.3% from June 30, 2015. Net loans increased 17.7% to $574.4 million; gross loans increased 17.5% to $580.3 million.
- Loan growth was concentrated in one-to-four-family residential, commercial real estate, multifamily, construction and land, and commercial business loans.
- Deposits increased 9.7% to $709.7 million. Borrowings declined 5.8% to $84.8 million.
- Cash and cash equivalents were $20.5 million, supplemented by $300.3 million of available-for-sale securities and $84.8 million of FHLB borrowing capacity outstanding.
- Nine-month operating cash flow was $3.0 million, compared with $(2.6) million in the prior-year period. Investing cash flow was $(82.7) million, primarily reflecting loan growth and securities purchases. Financing cash flow was $55.2 million, principally from deposit growth and FHLB activity.
- Total stockholders’ equity was $191.3 million. The Bank reported regulatory capital ratios above all minimums and remained well-capitalized, including a 14.2% Tier 1 leverage ratio and a 23.4% total risk-based capital ratio.
Material changes versus prior comparable periods
- Quarterly net income improved by $8.5 million and nine-month net income improved by $8.6 million, primarily because the prior-year periods included approximately $9.8 million of charitable contributions, including $9.7 million to the First Federal Community Foundation.
- Net interest income increased 22.3% for the quarter and 19.0% for the nine months. Management attributed the improvement to loan growth, higher investment and mortgage-backed securities balances and yields, and lower borrowing costs.
- Quarterly noninterest income declined 18.7%, primarily because the Bank retained more residential mortgage originations rather than selling them. Nine-month noninterest income increased 22.8%, including an $856,000 gain on securities sales.
- The Bank prepaid $19.9 million of long-term FHLB advances, incurring a $779,000 prepayment penalty. Management used securities-sale proceeds to offset that cost and expects the refinancing action to reduce future borrowing expense.
- Asset quality improved: nonperforming loans declined to $3.9 million from $4.9 million, nonperforming assets declined to $4.0 million from $6.8 million, and classified loans declined to $4.9 million from $9.9 million. Loans 30 days or more past due increased to $4.7 million from $2.4 million.
- The allowance for loan losses declined to $7.0 million from $7.1 million, or 1.2% of gross loans versus 1.4%. No loan-loss provision was recorded in either comparative period.
Guidance, outlook, risks and unusual items
- Management anticipated opening a second full-service Bellingham location and a Seattle Home Lending Center during the first quarter of fiscal 2017. Additional compensation, occupancy, advertising and other operating expenses are expected.
- The Bank is emphasizing loan growth and commercial lending while reducing the relative concentration of earning assets in securities. Nine-month loan originations were $160.1 million, and construction commitments totaled $54.8 million, including $33.6 million undisbursed.
- Liquidity depends on deposit inflows, loan repayments, securities maturities and sales, and FHLB borrowings. Certificates of deposit totaling $66.9 million mature within one year; failure to renew these deposits could require higher-cost funding.
- Key risks include economic and real-estate deterioration, construction and commercial real-estate credit exposure, interest-rate and prepayment risk, deposit retention, regulatory capital requirements, fair-value estimates, operating expenses from expansion, and possible future increases in loan-loss provisions.
- The filing states that no material legal proceedings, material risk-factor changes, subsequent events requiring disclosure, or material changes in market-risk disclosures occurred. Disclosure controls were considered effective.
Important facts for investors to verify
- Confirm that the intended reporting period is the quarter ended March 31, 2016, rather than “2015 Q3” in the request metadata.
- Evaluate whether reported earnings improvement is sustainable after excluding the prior-year charitable contribution and considering the nonrecurring securities gain and FHLB prepayment penalty.
- Monitor rapid loan growth, particularly construction, multifamily and commercial real estate exposure, along with the increase in loans past due.
- Assess the effect of deposit pricing, upcoming certificate maturities, interest-rate movements and securities prepayments on liquidity and net interest margin.
- Verify the cost and revenue contribution of the planned Bellingham and Seattle expansion initiatives.