First Northwest Bancorp: 2018 Second-Quarter 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 banking locations and a Seattle home lending center. The filing covers the three and six months ended June 30, 2018. The Company changed its fiscal year from June 30 to December 31 effective December 31, 2017; therefore, the June 30, 2018 results are not necessarily indicative of future periods.
Key financial metrics
| Metric | Three months ended June 30, 2018 | Prior comparable period | Six months ended June 30, 2018 | Prior comparable period |
|---|---|---|---|---|
| Net interest income | $9.2 million | $8.5 million | $18.1 million | $16.6 million |
| Net interest margin | 3.22% | 3.34% | 3.19% | 3.26% |
| Provision for loan losses | $395,000 | $285,000 | $705,000 | $500,000 |
| Noninterest income | $1.4 million | $1.2 million | $2.9 million | $3.4 million |
| Noninterest expense | $8.3 million | $7.9 million | $16.6 million | $15.4 million |
| Net income | $1.5 million | $1.1 million | $3.0 million | $3.3 million |
| Basic and diluted EPS | $0.15 | $0.10 | $0.29 | $0.30 |
- Total assets were $1.20 billion at June 30, 2018, down 1.0% from December 31, 2017. Net loans were $821.3 million, while gross loans increased 5.4% to $828.2 million.
- Loan growth was concentrated in commercial real estate, multi-family, and auto and other consumer loans. Construction and land loans declined 20.0% to $56.9 million.
- Deposits increased 0.9% to $893.3 million. Borrowings declined 12.4% to $126.3 million.
- Shareholders’ equity was $172.9 million, or 14.4% of assets. Book value per share was $15.06. The Bank and consolidated Company exceeded regulatory capital requirements, and the Bank was considered well capitalized.
- Six-month operating cash flow was $6.2 million, compared with $5.5 million in 2017. Investing cash flow was negative $5.5 million, reflecting loan growth and securities activity. Financing cash flow was negative $14.6 million, primarily because FHLB advance repayments exceeded new advances and the Company repurchased stock.
- Cash and cash equivalents were $22.9 million. Available-for-sale securities of $252.4 million provided additional liquidity, and the Company maintained access to FHLB and Federal Reserve borrowing arrangements.
Material changes versus prior comparable periods
- Second-quarter net income increased 36.9%, driven by higher net interest income and noninterest income. Six-month net income decreased 7.0%, primarily because of higher operating expenses, higher loan-loss provision, and lower noninterest income.
- Net interest income increased 7.5% for the quarter and 9.1% for the six months, mainly from loan volume growth. However, the net interest margin contracted 12 basis points for the quarter and 7 basis points for the six months as funding costs increased.
- Total interest expense increased 50.0% for the quarter and 47.0% for the six months. Deposit and borrowing costs rose as the Company used higher-rate certificates of deposit and short-term FHLB advances.
- Six-month noninterest income declined 15.1% because the 2017 period included a $768,000 bank-owned life insurance death benefit. The 2018 period included $135,000 of net securities-sale gains.
- Noninterest expense increased 4.5% for the quarter and 7.4% for the six months, reflecting higher occupancy, data processing, advertising, professional fees, and other growth-related costs.
- The allowance for loan losses increased to $9.3 million from $8.8 million, but remained 1.1% of gross loans. Nonperforming loans increased to $2.1 million from $1.5 million, primarily because of a $583,000 commercial business loan; nonperforming loans remained 0.3% of total loans.
- The investment securities portfolio declined 12.8% to $296.8 million following approximately $57.3 million of securities sales and $37.8 million of purchases. Accumulated other comprehensive loss increased to $4.8 million, largely because of unrealized securities losses.
- The Company repurchased 297,013 shares during the six months at an average cost of $16.35 per share. At June 30, 2018, 829,846 shares remained authorized for repurchase under the applicable plan.
Guidance, outlook, risks, contingencies, and unusual items
The filing does not provide formal earnings or revenue guidance. Management stated that its strategy is to grow and diversify the loan portfolio, expand deposit offerings and technology, improve the earning-asset mix, and pursue geographic and product expansion. Management expects noninterest expenses to increase as the Company grows and expands into new markets.
- Management believes overall asset quality remains strong and that the allowance for loan losses is adequate, while acknowledging that credit metrics may fluctuate as the loan portfolio expands.
- Interest-rate competition may pressure margins and deposit retention. Certificates of deposit totaling $149.3 million, or 60.6% of certificates, mature within one year; failure to renew these deposits could require higher-cost deposits or borrowings.
- Construction commitments totaled $118.8 million, including $71.3 million undisbursed. These exposures are concentrated primarily in the Puget Sound region and are sensitive to real estate values and project performance.
- Total commitments and contingent liabilities were $113.7 million, including $112.5 million of unfunded loan commitments and $241,000 of standby letters of credit.
- Material risks include economic and real estate conditions, borrower credit quality, interest-rate and liquidity risk, deposit competition, securities-market conditions, regulatory changes, technology and cybersecurity disruptions, third-party vendor failures, litigation, and the adequacy of fair-value and loan-loss estimates.
- The Company adopted revenue-recognition and financial-instrument guidance during 2018 without a material reported impact. Management expects the future lease standard to increase reported assets and liabilities but not materially affect income or equity. Management did not anticipate a material increase in the allowance from the future CECL standard based on preliminary testing.
- The filing reports no material legal proceedings, no material changes to previously disclosed risk factors, no material off-balance-sheet transactions affecting financial condition, and no subsequent events requiring recognition or disclosure.
Important facts for investors to verify
- Whether loan growth, particularly commercial real estate, multi-family, construction, and indirect auto lending, is accompanied by deterioration in delinquencies, nonperforming loans, or charge-offs.
- Whether rising deposit and borrowing costs continue to compress the net interest margin.
- The renewal rate and pricing of the $149.3 million of certificates of deposit maturing within one year.
- The adequacy of the $9.3 million allowance for loan losses, including the specific reserve associated with the nonperforming commercial business loan.
- The effect of unrealized securities losses and interest-rate changes on capital, liquidity, and comprehensive income.
- The pace and cost of continued share repurchases relative to earnings generation and regulatory capital.
- The execution and funding risk associated with $113.7 million of loan and credit commitments, including $71.3 million of undisbursed construction commitments.