First Northwest Bancorp — Form 10-Q Summary
Business context and reporting period
This unaudited Form 10-Q covers the quarter and six months ended December 31, 2014, the second quarter of fiscal 2015. Because the mutual-to-stock conversion was not completed until January 29, 2015, the financial statements primarily present First Federal Savings and Loan Association of Port Angeles and its subsidiaries rather than the newly formed holding company.
First Federal is a community-oriented bank operating nine full-service offices in Washington’s Olympic Peninsula and surrounding markets. It provides residential, commercial real estate, multifamily, construction, commercial business and consumer lending, together with deposit and related financial services.
Key financial metrics
| Metric | Three months ended Dec. 31, 2014 | Six months ended Dec. 31, 2014 |
|---|---|---|
| Net income | $882,000 | $1.731 million |
| Net interest income | $5.601 million | $11.124 million |
| Net interest margin | 2.87% | 2.91% |
| Noninterest income | $979,000 | $2.121 million |
| Noninterest expense | $5.442 million | $10.959 million |
| Provision for loan losses | None | None |
| Cash flow from operating activities | Not separately presented | $3.803 million |
- Total assets were $924.2 million at December 31, 2014, up 16.2% from $795.3 million at June 30, 2014.
- Net loans were $493.5 million, compared with $496.2 million at June 30, 2014. Gross loans were $500.3 million.
- Investment securities totaled $242.2 million, including $192.3 million available for sale and $49.9 million held to maturity.
- Cash and cash equivalents increased to $139.3 million from $19.0 million, primarily from deposits accumulated in anticipation of the stock offering.
- Deposits were $740.8 million, up 23.4% from June 30, 2014. Approximately $128.8 million represented deposits made in anticipation of participating in the offering.
- Borrowings were $90.0 million, down from $105.1 million, primarily because $15.1 million of short-term FHLB cash-management advances were repaid. Long-term FHLB advances totaled $89.9 million.
- Equity was $83.0 million, compared with $81.0 million at June 30, 2014.
- The allowance for loan losses was $7.7 million, or 1.5% of gross loans, compared with $8.1 million, or 1.6%, at June 30, 2014.
Material changes versus prior comparable periods
- Second-quarter net income increased 2.9% from $857,000 to $882,000. Six-month net income increased 12.6% from $1.537 million to $1.731 million.
- Second-quarter net interest income increased $223,000, while six-month net interest income increased $616,000. Lower funding costs and higher average loan balances were the principal contributors.
- Net interest margin increased from 2.86% to 2.87% for the quarter and from 2.79% to 2.91% for the six-month period.
- Noninterest income declined $180,000 in both the quarter and six-month period. Lower loan and deposit service fees and reduced gains on loan sales were partly offset by higher mortgage-servicing income.
- Noninterest expense increased 1.8% for the quarter and 6.3% for the six-month period, driven primarily by compensation, data processing and occupancy costs associated with staffing and growth initiatives.
- Asset quality improved: nonaccrual loans declined to $4.1 million from $6.0 million, and nonperforming loans as a percentage of total loans declined to 0.8% from 1.2% at June 30, 2014.
- Real estate owned and repossessed assets increased to $2.0 million from $810,000, primarily because approximately $1.4 million of commercial real estate was transferred to real estate owned.
- Total troubled debt restructurings declined to $9.8 million from $12.2 million, while nonaccrual TDRs declined to $1.9 million from $3.5 million.
Conversion, outlook, risks and unusual items
On January 29, 2015, First Federal completed its mutual-to-stock conversion and became a wholly owned subsidiary of First Northwest Bancorp. The offering generated approximately $117.8 million of net proceeds from the sale of 12,167,000 shares at $10.00 per share. Approximately $58.5 million was contributed to the Bank for future lending, investment and general corporate purposes. Total shares outstanding after the offering and foundation contribution were 13,100,360.
The filing provides no formal earnings or revenue guidance. Management expects to expand lending and investment activities using the new capital and plans a proposed Bellingham, Washington branch, subject to regulatory approval, with opening estimated during the quarter ending December 2015.
- Management identifies credit deterioration, real estate values, loan demand, interest-rate movements, deposit retention, funding costs, competition, regulatory changes and the ability to manage growth as key risks.
- Approximately 95.0% of the loan portfolio was secured by real estate at December 31, 2014, creating geographic and real-estate-market concentration risk.
- Approximately $211.8 million, or 84.0% of the investment portfolio including FHLB stock, was exposed to U.S. government, agency or GSE obligations.
- Certificates of deposit totaling $60.9 million, or 43.7% of total certificates, matured within one year. Management expects substantial renewal or migration into money-market accounts but may need to obtain higher-cost funding if deposits are not renewed.
- Off-balance-sheet commitments totaled approximately $37.1 million, including $36.7 million of unfunded loan and line-of-credit commitments and $285,000 of standby letters of credit.
- The quarter included no loan-loss provision and a net gain from real estate owned and repossessed assets, but future provisions and valuation adjustments remain subject to management estimates and regulatory review.
- A nonrecurring after-tax expense of approximately $5.6 million related to the contribution to the First Federal Community Foundation was expected to reduce net income in the quarter ended March 31, 2015.
- Management stated that the Bank was well-capitalized at December 31, 2014, with a Tier 1 leverage ratio of 10.0%, Tier 1 risk-based capital ratio of 18.8% and total risk-based capital ratio of 20.0%.
Important facts for investors to verify
- Confirm that post-conversion financial reporting, capitalization and the $58.5 million Bank capital contribution are reflected consistently in subsequent filings.
- Monitor whether the unusually high cash balance and $128.8 million of offering-related deposits normalize after the conversion.
- Evaluate the sustainability of improved asset quality, including nonaccrual loans, TDRs, classified loans, past-due loans and real estate owned.
- Assess the effect of lower loan-sale activity, declining loan yields and the 2.91% net interest margin on future earnings.
- Track compensation, data-processing, branch-expansion and public-company costs, including the expected $5.6 million foundation expense and future equity-based compensation.
- Review deposit retention, certificate maturities, FHLB borrowing maturities and liquidity after the offering-related deposits leave or are redeployed.
- Verify regulatory approval and economics of the proposed Bellingham branch and the intended use of newly raised capital.