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 bank serving Washington’s Olympic Peninsula and other Washington markets through nine full-service offices. The filing covers the three months ended September 30, 2015, the company’s fiscal first quarter. The interim financial statements are unaudited.
The company completed its mutual-to-stock conversion and became a public company on January 29, 2015, issuing 13,100,360 shares, including shares contributed to its charitable foundation. The stock offering generated $117.6 million of net proceeds.
Financial performance and key metrics
| Metric | Q1 FY2016 | Comparable period or prior quarter |
|---|---|---|
| Total assets | $958.1 million | $936.8 million at June 30, 2015 |
| Net loans | $497.3 million | $487.9 million at June 30, 2015 |
| Deposits | $666.9 million | $647.2 million at June 30, 2015 |
| Borrowings | $89.9 million | $90.0 million at June 30, 2015 |
| Stockholders’ equity | $192.3 million | $190.7 million at June 30, 2015 |
| Net interest income | $6.3 million | $5.5 million in Q1 FY2015 |
| Net income | $1.2 million | $849,000 in Q1 FY2015 |
| Basic and diluted EPS | $0.10 | Not applicable in Q1 FY2015 |
| Net interest margin | 2.76% | 2.94% in Q1 FY2015 |
- Total interest income increased 13.5% to $7.5 million, while interest expense increased 10.8% to $1.2 million.
- Noninterest income increased 10.6% to $1.3 million. Noninterest expense increased 7.2% to $5.9 million.
- There was no provision for loan losses. Net charge-offs were $35,000, compared with $89,000 in the prior-year quarter.
- Cash and cash equivalents were $38.6 million at September 30, 2015. Operating cash flow was negative $1.2 million and investing cash flow was negative $25.1 million, primarily reflecting security purchases and loan growth. Financing cash flow was positive $19.9 million, principally from deposit growth.
- Available-for-sale and held-to-maturity securities totaled $378.1 million. Available-for-sale securities had $1.6 million of unrealized gross losses, which management did not consider other-than-temporary impairment.
- First Federal was well-capitalized, with a 14.3% Tier 1 leverage ratio, 23.4% Tier 1 risk-based capital ratio, and 24.7% total risk-based capital ratio.
Material changes versus comparable periods
- Net income increased $379,000, or 44.6%, primarily because stock-offering proceeds were invested in securities and generated additional interest income.
- Net interest income increased $774,000, but net interest margin declined 18 basis points because newly deployed capital earned lower yields than the loan portfolio. Average interest-earning assets increased to $914.2 million from $750.4 million.
- Net loans increased 1.9% from June 30, 2015, driven mainly by commercial real estate, multifamily, and construction and land loans. Gross loans increased 2.0% to $503.6 million.
- Investment securities increased 4.9% from June 30, 2015, as deposit inflows and capital were deployed into securities.
- Deposits increased 3.1% from June 30, 2015, led by transaction, savings, and money market accounts. Borrowings were essentially unchanged.
- Asset quality improved: nonperforming loans declined to $3.8 million from $4.9 million, nonperforming assets declined to $4.4 million from $6.8 million, and classified loans declined to $7.4 million from $9.9 million.
- Noninterest expense included higher compensation, professional fees, advertising, and other costs associated with operating as a public company. A $352,000 gain on the sale of commercial real estate owned contributed to negative net expense for real estate-owned assets.
Guidance, outlook, risks, and unusual items
The filing does not provide quantified earnings or balance-sheet guidance. Management expects to continue expanding commercial and multifamily lending, developing deposits in new markets, and using investments as an alternative to holding excess cash. A Bellingham, Washington, office was opened during the subsequent fiscal quarter ending December 31, 2015.
- Construction commitments totaled $42.6 million, of which $32.8 million was undisbursed at September 30, 2015. Total commitments, including lines of credit and standby letters of credit, were $65.2 million.
- Certificates of deposit totaling $76.7 million, or 52.5% of all certificates, mature within one year. Management expects a significant portion to renew, but nonrenewal could require higher-cost deposits or borrowings.
- Loan concentration and credit risks include residential, commercial real estate, multifamily, construction, and land lending. Management states that the allowance of $7.1 million, or 1.4% of gross loans, was adequate, but future provisions could increase and regulators may require additional reserves.
- Interest-rate risk could affect the net interest margin, funding costs, securities values, and mortgage prepayments. The investment portfolio’s estimated modified duration was 4.4.
- Other risks include economic and real-estate conditions, competition for loans and deposits, regulatory and capital changes, securities-market volatility, fair-value estimates, public-company costs, litigation, and third-party vendor performance.
- The filing states that there were no material legal proceedings, no material change in previously disclosed risk factors, no material change in market-risk disclosures, and no material change in internal control over financial reporting.
- The filing identifies estimates involving the allowance for loan losses, mortgage servicing rights, fair values, deferred taxes, impaired loans, and real estate owned as particularly subject to change.
Important facts for investors to verify
- Whether loan growth, particularly in commercial real estate, multifamily, and construction, remains consistent with underwriting standards and risk limits.
- Whether the improvement in classified, nonperforming, and past-due loans continues and supports the absence of loan-loss provisions.
- Whether deposit growth persists without materially increasing deposit pricing or reliance on borrowings.
- Whether the lower net interest margin stabilizes as stock-offering proceeds are deployed into higher-yielding assets.
- The timing and performance of the Bellingham expansion and related public-company and branch operating costs.
- The renewal rate and pricing of the $76.7 million of certificates of deposit maturing within one year.
- Exposure to the $32.8 million of undisbursed construction commitments and the broader $65.2 million commitment portfolio.
- Potential changes in the allowance for loan losses, securities fair values, mortgage servicing rights, and deferred-tax assets.