First Northwest Bancorp — Q1 2019 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 bank serving Western Washington through 13 locations, including 10 full-service offices, two interactive teller locations, and a home lending center. The unaudited filing covers the three months ended March 31, 2019, with comparisons to the three months ended March 31, 2018 and the December 31, 2018 balance sheet.
Key financial metrics
| Metric | Q1 2019 / March 31, 2019 | Comparable period / December 31, 2018 |
|---|---|---|
| Total assets | $1.279 billion | $1.259 billion at December 31, 2018 |
| Total loans, excluding loans held for sale | $888.9 million | $869.7 million at December 31, 2018 |
| Deposits | $952.8 million | $940.3 million at December 31, 2018 |
| Borrowings | $135.2 million | $136.6 million at December 31, 2018 |
| Shareholders’ equity | $173.4 million | $172.3 million at December 31, 2018 |
| Net interest income | $9.440 million | $8.972 million in Q1 2018 |
| Net income | $2.207 million | $1.523 million in Q1 2018 |
| Basic/diluted EPS | $0.22 / $0.22 | $0.15 / $0.14 in Q1 2018 |
| Net interest margin | 3.16% | 3.15% in Q1 2018 |
| Allowance for loan losses | $9.759 million, or 1.1% of gross loans | $9.533 million, or 1.1%, at December 31, 2018 |
| Nonperforming loans | $1.606 million, or 0.2% of loans | $1.723 million, or 0.2%, at December 31, 2018 |
| Cash and cash equivalents | $27.657 million | $26.323 million at December 31, 2018 |
- Total interest income increased 13.9% to $12.354 million, primarily from higher average loan balances and yields.
- Total interest expense increased 55.5% to $2.914 million, driven by higher deposit and borrowing costs. The average cost of interest-bearing liabilities increased to 1.25% from 0.85%.
- Net interest income increased 5.2% to $9.440 million. Asset yields rose 33 basis points to 4.14%, while the net interest margin increased one basis point because funding costs rose faster than asset yields.
- Provision for loan losses was $335,000, compared with $310,000 in Q1 2018.
- Noninterest income decreased 4.8% to $1.411 million, reflecting no investment-securities gain and lower gains on loan sales, partly offset by higher loan and deposit service fees.
- Noninterest expense decreased 5.7% to $7.800 million, benefiting from lower compensation and advertising costs. A $441,000 health-insurance credit contributed to the reduction.
- Net cash from operating activities was $5.646 million. Investing activities used $13.336 million, primarily due to a $19.845 million increase in loans. Financing activities provided $9.024 million, mainly from a $12.495 million increase in deposits, partly offset by share repurchases and lower FHLB advances.
- The Bank exceeded all regulatory capital requirements and was classified as well capitalized. Reported ratios included 11.4% Tier 1 leverage, 16.9% common equity Tier 1, 16.9% Tier 1 risk-based capital, and 18.0% total risk-based capital.
Material changes versus prior comparable periods
- Net income rose 44.9% year over year, driven by higher net interest income and lower operating expenses.
- Loans grew $19.2 million, or 2.2%, from year-end 2018. Auto and other consumer loans increased $11.7 million, while construction and land loans increased $9.4 million, or 17.4%.
- Deposits increased $12.5 million, or 1.3%, primarily from promotional savings accounts and transaction accounts. FHLB borrowings declined $1.4 million.
- Available-for-sale securities decreased to $258.5 million from $263.0 million at year-end, while total investment securities decreased 1.6% to $301.5 million.
- Net income and other comprehensive income increased shareholders’ equity, while $2.826 million of common-stock repurchases reduced equity. The company repurchased 177,837 shares during the quarter at an average price of $15.89, leaving 325,209 shares authorized for future repurchase under the program.
- Nonperforming loans declined $117,000 from year-end, and the allowance coverage ratio increased to 607.7% from 553.3%.
Guidance, outlook, commentary, risks and unusual items
- The filing does not provide formal earnings or revenue guidance. Management expects continued competition for deposits and related pressure on funding costs.
- Management intends to continue diversifying the loan portfolio, expanding deposits and technology capabilities, and growing auto, commercial real estate, multifamily, and construction lending. It also expects construction lending to slow because of recent economic changes, potentially resulting in flat or declining construction balances.
- Liquidity sources include deposits, loan repayments, securities maturities and sales, FHLB advances, $27.7 million of cash and cash equivalents, and $258.5 million of unpledged available-for-sale securities. Certificates of deposit totaling $149.2 million mature within one year, creating potential renewal and funding risk.
- Construction commitments totaled $98.0 million, including $42.3 million undisbursed. Total commitments and contingent liabilities with off-balance-sheet risk were $84.7 million, primarily unfunded loan commitments and lines of credit.
- Key risks include changing interest rates and margin pressure, deposit competition, credit losses and real-estate values, construction and commercial real-estate exposure, loan demand and secondary-market conditions, regulatory actions, cybersecurity and third-party vendor disruptions, and the ability to execute growth or acquisition strategies.
- The company adopted the new lease standard on January 1, 2019, recognizing a $3.919 million right-of-use asset and lease liability. The future CECL credit-loss standard was not yet adopted; management could not reasonably estimate its financial impact.
- The quarter included unusual or nonrecurring items, including the $441,000 health-insurance credit and a $1.603 million after-tax unrealized gain in accumulated other comprehensive income from securities. The company reported no other-than-temporary impairment losses.
- Management stated that disclosure controls were effective, there were no material changes to internal controls, and no legal proceedings were expected to materially affect financial condition or results.
Important facts for investors to verify
- Whether higher deposit pricing continues to offset loan-yield improvement and compress the net interest margin.
- The sustainability of loan growth, particularly in auto, construction, commercial real estate, and multifamily lending.
- Credit trends, including nonperforming loans, classified assets, charge-offs, and the adequacy of the $9.759 million allowance before CECL adoption.
- Deposit retention and refinancing needs for the $149.2 million of certificates of deposit maturing within one year.
- Execution and credit exposure associated with the $98.0 million of construction commitments and $84.7 million of other off-balance-sheet commitments.
- The effect of the CECL implementation on capital, earnings, and the allowance for credit losses.
- The extent to which the health-insurance credit and lower advertising expense affect the sustainability of the reported expense reduction.