First Northwest Bancorp 2019 Form 10-K Summary
Business context and reporting period
First Northwest Bancorp is the bank holding company for First Federal Savings and Loan Association of Port Angeles, a community bank serving Western Washington through ten full-service branches and a Seattle lending center. The filing covers the fiscal year ended December 31, 2019; it is an annual report rather than a quarterly filing. The consolidated results primarily reflect First Federal’s banking operations.
At December 31, 2019, the Company reported $1.31 billion of assets, $878.4 million of net loans, $1.00 billion of deposits and $176.9 million of shareholders’ equity. The Bank had 197 full-time equivalent employees.
Financial results and key metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net income | $9.0 million | $7.1 million | +26.8% |
| Basic diluted EPS | $0.92 / $0.91 | $0.69 / $0.68 | Higher |
| Net interest income | $37.9 million | $36.8 million | +$1.1 million |
| Net interest margin | 3.20% | 3.20% | Unchanged |
| Noninterest income | $7.0 million | $5.9 million | +18.6% |
| Noninterest expense | $33.1 million | $32.9 million | +0.8% |
| Provision for loan losses | $669,000 | $1.17 million | Lower |
| Cash flow from operating activities | $14.1 million | $13.3 million | Higher |
| Cash and cash equivalents | $48.7 million | $26.3 million | +$22.4 million |
Interest income increased 7.6% to $49.3 million, primarily from loan growth and higher loan yields. Interest expense increased 26.6% to $11.4 million, driven by higher deposit costs, promotional savings and certificates of deposit, and brokered certificates. The average yield on loans increased to 4.64% from 4.45%, while the average cost of interest-bearing liabilities increased to 1.26% from 1.01%.
Net interest income after the provision for loan losses was $37.2 million. Noninterest income benefited from net gains on loan sales of $1.1 million and investment securities of $836,000. Noninterest expense included a $344,000 FHLB prepayment penalty. The effective income tax expense was $2.1 million, including the reversal of a valuation allowance associated with an expired charitable contribution carryforward.
Balance sheet, lending, liquidity and capital
- Total assets increased 3.9% to $1.31 billion. Net loans increased 1.7% to $878.4 million, while total gross loans increased 1.6% to $883.8 million.
- Loan mix continued shifting toward commercial and consumer lending. Commercial real estate and multifamily loans increased to $351.8 million, or 39.8% of total loans, from $335.6 million, or 38.6%. Commercial business loans increased $22.7 million to $41.6 million, including $22.9 million in the Northpointe Mortgage Participation Program.
- Auto and other consumer loans increased 28.3% to $112.1 million, while construction and land loans declined 31.2% to $37.2 million. One- to four-family residential loans declined 9.0% to $306.0 million, partly because of a $28.5 million loan-pool sale.
- Deposits increased 6.5% to $1.00 billion. Certificates of deposit increased 17.9% to $308.1 million, including $51.6 million of brokered certificates. Approximately $241.1 million, or 78.2% of certificates, matured within one year.
- FHLB borrowings declined 17.4% to $112.9 million. The Bank had $243.2 million of remaining FHLB borrowing capacity against a total committed capacity of $356.2 million.
- Available-for-sale securities totaled $315.6 million at fair value. The Company reclassified all held-to-maturity securities as available for sale during the fourth quarter to provide greater portfolio flexibility.
- First Federal remained well capitalized. At year-end, its CET1, Tier 1 risk-based, total risk-based and Tier 1 leverage ratios were 17.54%, 17.54%, 18.70% and 12.16%, respectively.
- Liquidity included $48.7 million of cash and cash equivalents and $315.6 million of available-for-sale securities. Unfunded commitments under lines of credit and existing loans totaled $88.2 million; total off-balance-sheet commitments were $88.4 million.
Asset quality and material changes
- Nonperforming assets increased modestly to $2.0 million from $1.8 million, but remained 0.1% of total assets. Nonaccruing loans increased to $1.8 million from $1.7 million.
- Nonperforming auto and other consumer loans increased to $848,000 from $245,000, reflecting higher defaults in the indirect auto program. Management changed underwriting criteria, rates and fees and stated it may discontinue the program depending on results.
- Classified loans increased 47.1% to $5.0 million, primarily because of higher classified commercial real estate, multifamily and commercial business loans. Special mention loans totaled $5.1 million.
- The allowance for loan losses increased slightly to $9.6 million, or 1.1% of gross loans, from $9.5 million, or 1.1%. Net charge-offs increased to $574,000 from $401,000, principally due to auto and other consumer loans.
- Loan originations declined to $199.8 million from $253.4 million, while loan purchases were broadly stable at $68.0 million versus $70.4 million. Residential mortgage loan sales increased to $58.0 million from $25.7 million.
- Shareholders’ equity increased 2.7% to $176.9 million. The increase from earnings and improved accumulated other comprehensive income was partly offset by $7.8 million of share repurchases and $1.4 million of dividends. The Company repurchased 477,837 shares during 2019.
Outlook, management commentary, risks and unusual items
Management’s strategy is to grow higher-yielding commercial real estate, multifamily, commercial business and auto lending; expand core deposits and digital banking; improve the online customer experience; and pursue selective branch, lending-center, acquisition and fintech opportunities. In December 2019, the Company committed to invest up to $3.0 million in a fintech-focused limited partnership, with contributions beginning in 2020 and no contributions made by year-end.
Key risks include concentration in commercial and multifamily real estate, geographic concentration in Washington, large borrower relationships, construction and land lending, indirect and purchased auto lending, reliance on deposits and FHLB funding, interest-rate and yield-curve changes, potential deposit repricing, competition from banks and fintech companies, cybersecurity and third-party technology risks, regulatory changes, and potential future increases in credit-loss provisions.
The Company expects to adopt the current expected credit loss model in 2023 as a smaller reporting company and states that the financial impact cannot yet be reasonably estimated. The filing also discusses the transition away from LIBOR, which was expected to sunset after 2021. No material legal proceedings were reported. The independent auditor issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Whether growth in commercial real estate, multifamily, commercial business and auto loans produces sufficient risk-adjusted returns without materially increasing credit losses.
- Recent performance of the indirect auto portfolio after the underwriting, pricing and fee changes, including delinquency, charge-off and recovery trends.
- The maturity and renewal behavior of the $241.1 million of certificates due within one year, including the effect on funding costs and liquidity.
- The sensitivity of net interest income to higher rates, lower rates and yield-curve changes; management’s model projected a 15.5% decline in one-year net interest income under an immediate 300-basis-point increase.
- The effect of the CECL adoption planned for 2023 on the allowance for credit losses, capital and earnings.
- The terms, funding schedule and strategic return expectations for the $3.0 million fintech investment commitment.
- The reconciliation of management’s reported 2019 loan originations in different sections of the filing, which present different totals depending on scope and classification.