First Northwest Bancorp — Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2016. The requested “2015 Q4” period does not match this filing; the filing includes audited annual results and unaudited quarterly data, including the fourth quarter of fiscal 2016.
Business context
First Northwest Bancorp is the holding company for First Federal Savings and Loan Association of Port Angeles, a community-oriented Washington bank serving the North Olympic Peninsula and Puget Sound regions. The Bank operates 10 full-service offices and focuses on residential mortgage, commercial real estate, multifamily, construction and land, commercial business, consumer lending, and deposit services.
Management continued shifting the balance sheet toward higher-yielding commercial and construction lending, expanding deposits and infrastructure, and extending its market presence. A second Bellingham branch and a Seattle home lending center were planned for the first half of fiscal 2017.
Financial performance and condition
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Total assets | $1.010 billion | $936.8 million | +7.8% |
| Net loans receivable | $619.8 million | $487.9 million | +27.0% |
| Total deposits | $723.3 million | $647.2 million | +11.8% |
| Total borrowings | $80.7 million | $90.0 million | -10.4% |
| Total shareholders’ equity | $189.7 million | $190.7 million | -0.5% |
| Net interest income | $27.4 million | $22.9 million | +19.7% |
| Net income | $4.0 million | $(5.1) million | Returned to profit |
| Basic and diluted EPS | $0.33 | $(0.42) | Improved |
| Net interest margin | 2.98% | 2.79% | +19 basis points |
| Return on average assets | 0.41% | (0.58)% | Improved |
| Return on average equity | 2.09% | (3.92)% | Improved |
Total interest income increased 17.1% to $32.2 million, while interest expense rose 3.9% to $4.8 million. The provision for loan losses was $233,000, compared with none in fiscal 2015. Noninterest income increased 31.2% to $6.2 million, primarily because of a $1.6 million net gain on investment securities. Noninterest expense declined 15.6% to $27.9 million.
Operating cash flow was $10.6 million. Investing activities used $93.1 million, primarily because of net loan growth and securities activity, while financing activities provided $60.1 million, primarily from deposit growth. Cash and cash equivalents declined to $22.7 million from $45.0 million.
Material changes versus the prior comparable period
- Gross loans increased 26.7% to $626.0 million. Commercial real estate loans rose 28.3% to $161.2 million, multifamily loans rose 39.3% to $46.1 million, and construction and land loans increased 163.2% to $50.4 million.
- Commercial real estate, multifamily, and commercial business loans represented $224.2 million, or 35.8% of total loans, versus $109.4 million, or 26.7%, in fiscal 2012.
- Investment securities declined 10.2% to $323.9 million as securities cash flows and sales were used to fund loan growth.
- Deposits grew $76.1 million, led by a $65.0 million increase in transaction, savings, and money market accounts. Certificates of deposit increased to $159.1 million.
- Borrowings decreased $9.4 million after repayment of $30.0 million of long-term FHLB advances. The Bank had $133.4 million of remaining FHLB borrowing capacity at year-end.
- Nonperforming assets declined to $3.3 million, or 0.3% of assets, from $6.8 million, or approximately 0.8% of assets. Loans delinquent 60 days or more fell to $602,000, or 0.1% of loans, from $2.3 million.
- Classified loans declined 53.5% to $4.6 million. Troubled debt restructurings declined to $6.5 million from $7.7 million, with $5.6 million performing under revised terms.
- The allowance for loan losses increased to $7.2 million but declined to 1.2% of total loans from 1.4%. Net charge-offs fell to $105,000 from $961,000.
- The fiscal 2015 net loss was materially affected by a $9.7 million pre-tax contribution of cash and common stock to the First Federal Community Foundation. No comparable contribution was recorded in fiscal 2016.
Guidance, outlook, risks and unusual items
The filing does not provide formal quantitative earnings or revenue guidance. Management expects continued loan growth, greater emphasis on commercial and construction lending, additional deposit growth, and expansion through a second Bellingham branch and a Seattle home lending center. Management also expects higher operating expenses associated with these initiatives and anticipates increasing residential mortgage originations for sale through the Seattle center.
- Credit concentration: Approximately 95.9% of the loan portfolio was secured by real estate. Commercial real estate, multifamily, and construction lending carry greater exposure to property values, vacancy, project completion, cash flow, and borrower concentration.
- Loan growth and seasoning: The commercial portfolio is relatively unseasoned, and actual credit performance could differ from historical experience. The five largest borrower relationships totaled approximately $54.1 million including unused commitments.
- Construction risk: Construction and land loans increased sharply, with $65.6 million of construction commitments and $7.3 million of speculative construction loans at June 30, 2016.
- Interest-rate risk: Management’s model indicated projected net interest income could decline 16.6% under an immediate 300-basis-point rate increase. The economic value of equity declined 16.4% under a 100-basis-point rate decrease in the modeled scenario.
- Liquidity and funding: Certificates of deposit totaling $61.9 million matured within one year. Failure to renew these deposits could require more expensive deposits or borrowings.
- Capital and dividends: First Federal was well capitalized and exceeded its capital conservation buffer requirements. The Company had not paid dividends since formation, and future dividends depend on regulatory limits and distributions from the Bank.
- Unusual and subsequent items: The Company repurchased 423,700 shares for $5.5 million during fiscal 2016. On July 7, 2016, it granted 402,500 restricted shares. It also purchased $10.0 million of additional bank-owned life insurance in August 2016.
- Legal and controls: Management reported no material legal proceedings, effective disclosure controls, and effective internal control over financial reporting. The independent auditor issued unqualified opinions.
Important facts for investors to verify
- Reconcile the requested 2015 Q4 period with the filing’s fiscal year ended June 30, 2016 and the separate quarterly data.
- Assess whether rapid growth in commercial real estate, multifamily, construction, and out-of-market loans is producing sustainable risk-adjusted returns.
- Review nonperforming loans, classified assets, TDRs, construction commitments, and allowance coverage as the newer loan balances season.
- Verify liquidity under deposit runoff scenarios, particularly the $61.9 million of certificates maturing within one year and reliance on FHLB funding.
- Evaluate sensitivity to interest-rate changes, including the modeled decline in projected net interest income under rising rates.
- Confirm the effect of new branches, the Seattle home lending center, restricted-stock grants, and related compensation and operating expenses.
- Review future adoption impacts of CECL, revenue recognition, lease accounting, and other accounting standards identified in the filing.