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 northwestern Washington through nine full-service offices and a Bellingham loan-production office. The filing is a Form 10-K for the fiscal year ended June 30, 2015, not 2014 Q4. The filing includes unaudited quarterly data for the fourth quarter of fiscal 2015.
On January 29, 2015, the Bank completed its mutual-to-stock conversion and the Company issued 13,100,360 shares, including 933,360 shares contributed to the First Federal Community Foundation. Net offering proceeds were approximately $117.6 million.
Financial Highlights
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Total assets | $936.8 million | $795.3 million |
| Deposits | $647.2 million | $600.4 million |
| Borrowings | $90.0 million | $105.1 million |
| Total equity | $190.7 million | $81.0 million |
| Net interest income | $22.9 million | $21.8 million |
| Net income (loss) | $(5.1) million | $2.7 million |
| Net interest margin | 2.75% | 2.89% |
| Noninterest income | $4.7 million | $5.0 million |
| Noninterest expense | $33.0 million | $22.1 million |
Fourth-quarter fiscal 2015 net income was $758,000, compared with $672,000 in the fourth quarter of fiscal 2014. Fourth-quarter net interest income was $6.0 million, noninterest income was $1.3 million, and noninterest expense was $6.3 million.
- Interest income increased 3.5% to $27.5 million, while interest expense declined 2.9% to $4.6 million.
- No provision for loan losses was recorded in FY 2015, compared with a $1.3 million provision in FY 2014.
- Net charge-offs were $961,000, or 0.2% of average loans.
- Return on assets was negative 0.58%; return on equity was negative 3.92%; and the efficiency ratio was 119.7%.
- Cash and cash equivalents totaled $45.0 million at June 30, 2015. Available-for-sale securities had a fair value of $299.0 million.
Material Changes Versus the Prior Comparable Period
- Total assets increased 17.8%, primarily because investment securities increased 55.3% to $360.6 million following the stock offering and deposit growth.
- Net loans declined 1.7% to $487.9 million. Commercial loans declined 9.0% to $173.5 million, consumer loans declined 12.2% to $44.6 million, and one- to four-family residential loans increased 6.1% to $256.8 million.
- Deposits increased 7.8% to $647.2 million, with transaction, savings and money-market deposits increasing 7.0% and certificates of deposit increasing 10.6%.
- Borrowings decreased 14.4% to $90.0 million as cash-management advances were repaid.
- Equity increased 135.4% to $190.7 million, principally due to $126.9 million of net stock-offering proceeds, partially offset by the net loss and $11.8 million of unearned ESOP shares.
- Asset quality improved overall: nonaccruing loans declined to $4.9 million from $6.0 million, classified loans declined to $9.9 million from $13.9 million, and nonperforming assets were 0.7% of assets versus 0.9%.
- The allowance for loan losses declined to $7.1 million, or 1.4% of gross loans, from $8.1 million, or 1.6%.
- Net gains on loan sales declined to $548,000 from $762,000 as the Company retained more eligible mortgage loans. Total noninterest income declined 5.7%.
Guidance, Outlook, Risks and Unusual Items
Management intends to expand in the Puget Sound region, increase higher-yielding commercial lending, attract core deposits, and open up to four additional branches over three years. A full-service Bellingham branch was expected to open during the quarter ending December 31, 2015. Management also may consider acquisitions but reported no specific agreement or understanding.
- The $9.7 million contribution to the Foundation, consisting of $9.3 million of stock and $400,000 of cash, was the primary cause of the FY 2015 net loss. The contribution also created a $9.3 million tax carryforward, subject to a $1.9 million valuation allowance.
- The loan portfolio is heavily concentrated in real estate, representing approximately 95.5% of total loans. Commercial real estate and multifamily loans represented 32.1% of loans and carry greater concentration, valuation and cash-flow risk than traditional residential loans.
- Nonperforming assets were $6.8 million, including $1.9 million of real estate owned. The Company had $7.7 million of troubled debt restructurings, of which $5.7 million were nonaccrual.
- Interest-rate risk remains material. Management estimated that an immediate 300-basis-point increase would reduce economic value of equity by 12.0% and projected net interest income by 12.1%, subject to model assumptions.
- Certificates of deposit totaling $71.5 million, or 48.3% of total certificates, matured within one year. Failure to renew these deposits could increase funding costs or reliance on borrowings.
- FHLB advances totaled $89.9 million, supported by borrowing capacity of approximately $205.7 million and remaining capacity of $115.8 million.
- Off-balance-sheet commitments totaled $43.3 million, including unfunded loan commitments and standby letters of credit. Management did not anticipate material losses from these arrangements.
- The Company disclosed potential withdrawal exposure of up to approximately $8.6 million under its frozen multiple-employer defined-benefit pension plan.
- The Company was categorized as well capitalized. First Federal’s June 30, 2015 ratios included a 23.76% CET1 ratio, 23.76% Tier 1 risk-based capital ratio, 25.01% total risk-based capital ratio and 14.53% leverage ratio.
- No material adverse legal proceedings were reported, but regulatory examinations could require additional reserves, asset write-downs or capital changes.
Most Important Facts to Verify
- Confirm that the intended comparison period is FY 2015 or fourth-quarter FY 2015; the supplied metadata states 2014 Q4, while the filing covers the year ended June 30, 2015.
- Assess normalized profitability excluding the one-time Foundation contribution and related tax effects.
- Review the sustainability of the 2.75% net interest margin after the substantial shift from loans into lower-yielding securities.
- Evaluate commercial real estate concentration, geographic expansion, large-borrower exposures and the adequacy of the $7.1 million loan-loss allowance.
- Monitor deposit renewals, funding costs, FHLB advance maturities and available liquidity.
- Verify execution costs and deposit and loan growth associated with the Bellingham branch and planned future branches.
- Review the pension withdrawal exposure, ESOP funding obligations and restrictions on dividends or stock repurchases following the conversion.