First Northwest Bancorp — 2019 Third-Quarter 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 through 13 locations. The company provides residential, commercial real estate, construction, consumer, commercial business, deposit, mortgage banking, and investment services. This unaudited Form 10-Q covers the three and nine months ended September 30, 2019, with comparisons to the same periods in 2018 and to December 31, 2018 for balance-sheet data.
Financial Results and Key Metrics
| Metric | Three Months Ended September 30, 2019 | Three Months Ended September 30, 2018 | Nine Months Ended September 30, 2019 | Nine Months Ended September 30, 2018 |
|---|---|---|---|---|
| Total interest income | $12.1 million | $11.6 million | $36.8 million | $33.7 million |
| Net interest income | $9.3 million | $9.3 million | $28.0 million | $27.4 million |
| Net interest margin | 3.17% | 3.25% | 3.15% | 3.21% |
| Noninterest income | $2.1 million | $1.4 million | $5.3 million | $4.3 million |
| Noninterest expense | $8.4 million | $8.1 million | $24.5 million | $24.7 million |
| Net income | $2.5 million | $1.9 million | $6.8 million | $5.0 million |
| Diluted earnings per share | $0.25 | $0.19 | $0.68 | $0.47 |
| Net cash from operating activities | Not separately provided | Not separately provided | $11.0 million | $11.9 million |
- Total assets were $1.25 billion at September 30, 2019, compared with $1.26 billion at December 31, 2018.
- Total loans were $846.1 million, excluding loans held for sale, down from $869.7 million at year-end 2018. Net loans receivable were $841.1 million.
- Deposits increased to $970.7 million from $940.3 million. Borrowings declined to $85.3 million from $136.6 million.
- Cash and cash equivalents totaled $56.5 million, while available-for-sale securities totaled $251.2 million and provided additional liquidity.
- Shareholders’ equity increased to $177.3 million, or 14.2% of total assets. Book value per share was $16.42, compared with $15.42 at December 31, 2018.
- The Bank reported regulatory capital ratios well above the levels required to be considered “well capitalized,” including a 12.0% Tier 1 leverage ratio and a 19.1% total risk-based capital ratio.
Material Changes Versus Comparable Periods
- Third-quarter net income increased 30.3% to $2.5 million; nine-month net income increased 36.6% to $6.8 million.
- Net interest income was essentially unchanged in the third quarter but increased 2.2% for the first nine months. Higher loan balances and yields were offset in part by materially higher deposit costs.
- Net interest margin declined eight basis points in the quarter and six basis points year to date, as the cost of interest-bearing liabilities increased faster than asset yields.
- Third-quarter noninterest income increased 46.5%, primarily because net gains on loan sales increased to $655,000 from $139,000 and service-fee income increased.
- Nine-month noninterest income increased 22.9%, reflecting higher loan and deposit service fees and gains on sales of residential loan pools.
- Third-quarter noninterest expense increased 3.8%, including a $344,000 FHLB prepayment penalty. Nine-month noninterest expense declined 0.8% despite the penalty and higher regulatory assessments.
- The company recorded a $170,000 recapture of loan-loss provision in the third quarter, compared with a $197,000 provision in the prior-year quarter. The nine-month provision declined to $420,000 from $902,000.
- Loan mix shifted toward auto and other consumer loans and construction and land loans, while one-to-four-family and multi-family balances declined. Auto and other consumer loans increased $24.0 million year to date; construction and land loans increased $10.9 million.
- Nonperforming loans decreased to $1.3 million from $1.7 million at year-end, while the allowance for loan losses remained approximately 1.1% of total loans. Classified loans increased to $4.6 million from $3.4 million.
- The company repurchased approximately $6.0 million of common stock during the first nine months and paid $986,000 of dividends. As of September 30, 2019, 130,809 shares remained available under the repurchase authorization.
- Accumulated other comprehensive loss improved to $672,000 from $4.7 million, primarily because of higher unrealized values in the available-for-sale securities portfolio.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- The filing does not provide formal earnings or financial guidance. Management intends to diversify the loan portfolio, expand deposit offerings and technology, support lending capabilities, and evaluate wholesale loan-growth opportunities.
- Management noted continued competition for quality commercial credits and deposits. Promotional savings products and brokered certificates of deposit increased deposit balances but also raised funding costs; the average cost of deposits rose to 1.02% for the first nine months from 0.65% in the prior-year period.
- Certificates of deposit totaling $214.4 million, or 76.8% of the CD portfolio, mature within one year. Failure to renew these deposits could require higher-cost replacement funding.
- Construction commitments totaled $93.9 million, including $38.7 million of undisbursed commitments. Management reported a slowing of construction lending and cautioned that outstanding balances could decline as projects are completed.
- Indirect auto lending generated significant charge-offs, and management adjusted product offerings to improve credit quality and reduce future losses.
- Key risks include changing interest rates and yield curves, deposit competition, loan demand, residential and commercial real estate conditions, credit losses, fair-value estimates, regulatory examinations, technology disruptions, cybersecurity events, third-party vendor failures, and execution of growth or acquisition strategies.
- The company adopted the new lease standard on January 1, 2019, recognizing a $3.9 million right-of-use asset and lease liability. Management stated that other recently adopted standards did not have a material effect.
- The company is evaluating the current expected credit loss standard. The filing states that the implementation impact cannot yet be reasonably estimated; management expected to adopt the guidance on January 1, 2023, subject to the anticipated effective-date deferral for smaller reporting companies.
- A $441,000 health-insurance credit, a $268,000 FDIC Small Bank Assessment Credit, the $344,000 FHLB prepayment penalty, and costs related to the CEO search and transition affected nine-month results.
- Legal proceedings in the ordinary course were not considered material. The company reported no material changes to previously disclosed risk factors, no material changes in market-risk disclosures, and effective disclosure controls as of September 30, 2019.
Investor Verification Checklist
- Verify whether deposit pricing and the high volume of near-term CD maturities continue to pressure net interest margin and funding costs.
- Review subsequent trends in auto-loan charge-offs, classified loans, nonperforming loans, and the adequacy of the allowance before relying on the reported asset-quality improvement.
- Assess whether construction commitments convert into funded loans and whether construction lending slows further as projects are completed.
- Separate recurring earnings from gains on loan sales, provision recaptures, insurance credits, FDIC credits, and other unusual items.
- Monitor the transition to the CECL credit-loss model and the eventual effect on capital, reserves, earnings, and regulatory ratios.
- Confirm the pace and pricing of share repurchases, dividend payments, and remaining authorization.
- Review liquidity availability, pledged collateral, brokered deposits, FHLB borrowings, and the company’s ability to replace maturing deposits at acceptable rates.