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 the Olympic Peninsula and other Washington markets. The unaudited filing covers the three and six months ended December 31, 2015, the company’s fiscal second quarter. The bank opened a Bellingham, Washington branch during the quarter and continued expanding commercial, multifamily, construction and residential lending.
Financial condition and performance
| Metric | Three months ended December 31 | Six months ended December 31 |
|---|---|---|
| Net interest income | $6.8 million, versus $5.6 million | $13.1 million, versus $11.1 million |
| Net interest margin | 2.94%, versus 2.87% | 2.85%, versus 2.91% |
| Net income | $713,000, versus $882,000 | $1.9 million, versus $1.7 million |
| Basic and diluted EPS | $0.06 | $0.16 |
| Noninterest income | $1.9 million, versus $979,000 | $3.1 million, versus $2.1 million |
| Noninterest expense | $7.7 million, versus $5.4 million | $13.6 million, versus $11.0 million |
- Total assets were $957.8 million at December 31, 2015, up 2.2% from June 30, 2015. Net loans increased 8.1% to $527.1 million, while gross loans increased 8.0% to $533.4 million.
- Loan growth was concentrated in one-to-four-family residential loans, up to $275.7 million; multifamily loans, up to $44.1 million; commercial real estate loans, up to $130.4 million; and construction and land loans, up to $26.6 million.
- Deposits increased 5.9% to $685.1 million. Borrowings declined 16.4% to $75.2 million after repayment of $19.9 million of long-term FHLB advances.
- Cash and cash equivalents were $23.7 million. Available-for-sale securities were $305.1 million, providing a substantial additional liquidity source.
- Six-month operating cash flow was $1.5 million, compared with $3.8 million in the prior-year period. Investing activities used $44.7 million, primarily because of net loan growth and securities purchases. Financing activities provided $21.9 million, principally from deposit growth.
- The allowance for loan losses was $7.0 million, or 1.3% of gross loans, compared with 1.5% in the prior-year comparable period. No provision for loan losses was recorded in either current or prior-year three- or six-month periods.
- Nonperforming loans declined to $2.3 million, or 0.4% of total loans, from $4.9 million, or 1.0%, at June 30, 2015. Total nonperforming assets declined to $2.4 million from $6.8 million.
- Stockholders’ equity was $189.4 million, down 0.7% from June 30, 2015, primarily because of a $2.3 million decline in accumulated other comprehensive income and $1.3 million of additional unearned ESOP shares, partly offset by net income.
- First Federal was reported as well-capitalized, with a Tier 1 leverage ratio of 14.2%, common equity Tier 1 ratio of 22.6%, Tier 1 risk-based capital ratio of 22.6% and total risk-based capital ratio of 23.9%.
Material changes versus prior comparable periods
- Third-quarter? The filing’s second-quarter results showed net income down 19.2% year over year because higher net interest and noninterest income was more than offset by a 41.2% increase in noninterest expense. For the six-month period, net income increased 12.1%.
- Noninterest income benefited from an $856,000 net gain on the sale of investment securities. The securities sale generated $74.4 million of proceeds and was used to reposition the portfolio and help offset a $779,000 FHLB prepayment penalty.
- Net interest income improved as average loan, investment-security and mortgage-backed-security balances increased. However, the six-month net interest margin declined six basis points because a greater portion of assets consisted of lower-yielding securities rather than loans.
- Expense growth reflected additional personnel, the Bellingham branch, public-company costs, higher professional fees, advertising and the FHLB prepayment penalty.
- Credit quality improved overall: classified loans declined to $5.8 million from $9.9 million, although loans 30 days or more past due increased to $3.4 million from $2.4 million.
Outlook, risks, contingencies and unusual items
The filing does not provide specific earnings or balance-sheet guidance. Management expects the FHLB refinancing action to reduce funding costs and improve the net interest margin over time, but the current period included the associated $779,000 prepayment penalty. Management also intends to continue growing loans and improving the mix of earning assets, while using securities purchases as an alternative to holding excess cash.
- Construction commitments totaled $49.8 million, including $37.1 million undisbursed, a substantial increase from June 30, 2015. These commitments are concentrated in Washington, including multifamily projects in the Puget Sound region and a hotel project in Franklin County.
- Total lending commitments and standby letters of credit were $69.6 million, including $68.3 million of unfunded commitments under lines of credit or existing loans.
- Certificates of deposit totaling $75.5 million, or 51.6% of all certificates, mature within one year. Failure to renew these deposits could increase funding costs or reliance on borrowings.
- The investment portfolio had $3.7 million of unrealized losses at December 31, 2015. Management attributed the losses principally to interest-rate and liquidity factors rather than credit quality and reported no other-than-temporary impairment losses.
- Key risks include credit deterioration, real estate and construction exposure, interest-rate changes, deposit competition, liquidity, regulatory examinations, fair-value estimates, operating-cost control, dependence on third-party vendors and the costs of operating as a public company.
- Legal proceedings were described as ordinary-course matters with no material expected impact. Risk factors were not materially changed from the June 30, 2015 Form 10-K. Disclosure controls were deemed effective, with no material changes to internal control over financial reporting.
Important facts for investors to verify
- Whether loan growth, particularly multifamily and construction lending, remains consistent with underwriting standards and does not lead to higher delinquencies or provisions.
- Whether the improved nonperforming-asset metrics persist and whether the $7.0 million allowance remains adequate as the portfolio expands.
- Whether deposit growth continues and how the $75.5 million of certificates maturing within one year affects funding costs and liquidity.
- Whether the investment portfolio repositioning and FHLB advance repayment produce the expected improvement in net interest margin after the one-time prepayment penalty.
- Whether recurring operating expenses normalize after the branch expansion, public-company costs and elevated professional fees.
- The effect of unrealized securities losses, interest-rate movements and mortgage-backed-security prepayments on capital and future earnings.