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-oriented Washington bank with 12 banking locations and a Seattle home lending center. The source filing covers the quarter and nine months ended March 31, 2017; although the request metadata labels the period “2016 Q3,” the filing itself identifies the reporting period as fiscal third quarter 2017. Results are unaudited and should be read with the fiscal 2016 Form 10-K.
Financial performance and condition
| Metric | Three months ended March 31, 2017 | Comparable period | Nine months ended March 31, 2017 | Comparable period |
|---|---|---|---|---|
| Net interest income | $8.1 million | $7.0 million | $23.1 million | $20.1 million |
| Net interest margin | 3.18% | 3.06% | 3.12% | 2.94% |
| Provision for loan losses | $215,000 | None | $975,000 | None |
| Noninterest income | $2.2 million | $1.1 million | $5.0 million | $4.2 million |
| Noninterest expense | $7.5 million | $6.9 million | $21.8 million | $20.5 million |
| Net income | $2.2 million | $897,000 | $4.0 million | $2.8 million |
| Diluted earnings per share | $0.20 | $0.07 | $0.35 | $0.24 |
- Total assets were $1.08 billion at March 31, 2017, up 7.0% from June 30, 2016.
- Net loans were $706.2 million, up 13.9%; total loans were $713.5 million, with growth concentrated in commercial real estate, construction and land, multifamily, and consumer lending.
- Deposits were $807.7 million, up 11.7%, while borrowings were $86.6 million, up 7.3% from June 30, 2016.
- Investment securities totaled $295.5 million, down 8.8% from June 30, 2016, as securities matured, were called, prepaid, or amortized.
- Shareholders’ equity was $178.5 million, or 16.5% of assets. Book value per share was $14.78, compared with $14.97 at June 30, 2016.
- Cash and cash equivalents were $23.2 million; available-for-sale securities provided an additional $242.7 million of liquidity.
- Net cash used in operating activities was $1.4 million for the nine months, compared with $3.0 million of cash generated in the prior-year period. Investing activities used $75.7 million, primarily for net loan growth, while financing activities provided $77.6 million through deposit growth and borrowings.
Material changes versus prior comparable periods
- Quarterly net income increased 141.2%, primarily from higher net interest income and noninterest income.
- Nine-month net income increased 41.1%, despite a $975,000 loan-loss provision and higher operating expenses.
- Net interest margin expanded 12 basis points for the quarter and 18 basis points for the nine-month period, principally because loans replaced lower-yielding cash and securities and borrowing costs declined.
- Noninterest income included a $768,000 tax-advantaged BOLI death benefit related to the death of a former Bank executive. BOLI cash surrender value also increased following a $10.0 million purchase of additional insurance.
- Compensation and benefits expense increased 24.3% for the quarter and 17.6% for the nine-month period, reflecting staffing, expansion, incentives, and equity-award expense.
- The Company repurchased 988,814 shares for $13.6 million during the nine months, reducing shareholders’ equity and outstanding shares. It repurchased an additional 76,100 shares during March 2017 at an average price of $15.72.
- Credit quality improved: nonperforming loans declined to $2.3 million from $3.3 million, nonperforming assets declined to $2.4 million from $3.3 million, and nonperforming loans as a percentage of total loans fell to 0.3% from 0.5%.
- The allowance for loan losses increased to $8.3 million from $7.2 million, but remained 1.2% of total loans. Classified loans declined to $3.7 million from $4.6 million.
Guidance, outlook, risks, contingencies, and unusual items
The filing does not provide formal quantitative earnings or revenue guidance. Management expects lending activity from the Seattle home lending center to increase over time and intends to retain selected residential originations while selling excess production. Management also expects noninterest expenses to increase as the Company expands into new markets and builds infrastructure.
- Construction commitments totaled $93.1 million, including $40.4 million of undisbursed commitments. The portfolio is geographically diversified across Washington but remains exposed to construction, real estate valuation, and regional economic risks.
- Certificates of deposit totaling $67.7 million mature within one year. Management expects a significant portion to renew or move into money-market accounts, but replacement funding could require higher deposit or borrowing costs.
- Off-balance-sheet commitments totaled $78.5 million, including unfunded lines of credit, loan-origination commitments, and standby letters of credit.
- The Bank and consolidated Company exceeded regulatory capital requirements, and the Bank was classified as “well capitalized.” The Bank’s total risk-based capital ratio was 20.4%, and its Tier 1 leverage ratio was 13.1%.
- Key risks include economic and real estate deterioration, loan losses, interest-rate and funding-cost changes, deposit competition, liquidity, regulatory examinations, fair-value estimates, operating expenses, technology vendors, litigation, and execution of growth initiatives.
- Unrealized investment-security losses totaled approximately $2.5 million at March 31, 2017. Management attributed the losses primarily to interest-rate and liquidity conditions, did not consider them other-than-temporary, and stated it did not expect to sell the securities before recovery or maturity.
- The Company made a final $1.2 million contribution to 202 Master Tenant, LLC after March 31, 2017, in connection with an investment expected to generate historic tax credits.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. Legal proceedings were ordinary-course matters and were not considered material; reported risk factors were not materially changed from the fiscal 2016 Form 10-K.
Important facts for investors to verify
- Confirm that the period analyzed is the filing’s March 31, 2017 quarter, rather than the “2016 Q3” label in the request metadata.
- Separate recurring earnings from the $768,000 BOLI death benefit and assess the sustainability of gains on loan sales and BOLI income.
- Monitor whether rapid loan growth, particularly in commercial real estate and construction, leads to higher provisions, delinquencies, or charge-offs.
- Review deposit retention and repricing risk as $67.7 million of certificates of deposit mature within one year.
- Assess liquidity and interest-rate exposure in light of $86.6 million of borrowings, the $242.7 million available-for-sale securities portfolio, and unrealized securities losses.
- Evaluate the effect of continued share repurchases and equity compensation on book value per share, dilution, and regulatory capital.
- Review the implementation impact of forthcoming accounting standards, particularly expected credit losses under CECL and lease accounting; management anticipated a potential increase in the allowance for loan losses under CECL but had not quantified the effect.