Business Context and Reporting Period
First Northwest Bancorp is a Washington bank holding company whose principal subsidiary, First Federal Savings and Loan Association of Port Angeles, provides commercial and consumer banking services across Western Washington. The unaudited Form 10-Q covers the quarter ended March 31, 2020, and compares results with the quarter ended March 31, 2019 and the balance sheet at December 31, 2019.
Key Financial Metrics
| Metric | Q1 2020 / March 31, 2020 | Comparable / Prior Period |
|---|---|---|
| Total assets | $1.397 billion | $1.307 billion at December 31, 2019 |
| Total loans, excluding loans held for sale | $905.7 million | $883.8 million at December 31, 2019 |
| Deposits | $1.064 billion | $1.002 billion at December 31, 2019 |
| Borrowings | $150.0 million | $112.9 million at December 31, 2019 |
| Net interest income | $9.4 million | $9.6 million in Q1 2019 |
| Provision for loan losses | $1.3 million | $335,000 in Q1 2019 |
| Net income | $873,000 | $2.207 million in Q1 2019 |
| Basic and diluted EPS | $0.09 | $0.22 in Q1 2019 |
| Net interest margin | 3.11% | 3.22% in Q1 2019 |
| Net cash from operating activities | $(1.8) million | $5.6 million in Q1 2019 |
| Net increase in cash and cash equivalents | $58.4 million | $1.3 million in Q1 2019 |
| Cash and cash equivalents | $107.2 million | $48.7 million at December 31, 2019 |
Revenue, Profitability, Cash Flow, Margins, Debt and Liquidity
- Total interest income was $12.0 million, down from $12.5 million. Interest expense declined to $2.6 million from $2.9 million, producing net interest income of $9.4 million.
- The average yield on interest-earning assets declined to 3.97% from 4.19%, while the average cost of interest-bearing liabilities declined to 1.11% from 1.25%. The net interest margin contracted 11 basis points to 3.11%.
- Noninterest income increased 85.3% to $2.3 million, including a $605,000 gain on investment securities, a $383,000 gain on loan sales, and $328,000 of bank-owned life insurance cash-value growth.
- Noninterest expense increased 20.3% to $9.4 million, primarily from higher compensation and benefits, occupancy and equipment, advertising, professional fees, and a $210,000 FHLB prepayment penalty.
- Net income fell 60.4% to $873,000. Income before taxes was $1.1 million, and the effective tax rate was 18.9%.
- The allowance for loan losses increased to $10.8 million from $9.6 million, equal to 1.2% of total loans versus 1.1% at year-end. Net charge-offs were $64,000. Nonperforming loans were $1.7 million, or 0.2% of total loans.
- Total nonperforming assets were $2.2 million, including $62,000 of real estate owned and $422,000 of repossessed assets.
- Total shareholders’ equity was $167.2 million, or 12.0% of total assets. The Bank remained “well capitalized”; its Tier 1 leverage ratio was 11.8% and total risk-based capital ratio was 18.1%.
- Liquidity included $107.2 million of cash and cash equivalents and $212.8 million of unpledged available-for-sale securities. FHLB borrowings were $150.0 million, and the Company reported $14.0 million of unconsolidated liquid assets.
- Cash flow from financing activities was $94.3 million, driven by a $62.3 million increase in deposits and a $37.1 million increase in FHLB advances. Investing cash flow was $(34.0) million, primarily reflecting net security purchases and loan growth.
Material Changes Versus Prior Comparable Period
- Net income declined $1.3 million, reflecting lower net interest income, a substantially higher loan-loss provision, and increased operating expenses.
- Loan-loss provision increased by $931,000 as management raised economic qualitative factors in response to COVID-19 uncertainty and portfolio growth.
- Net interest margin declined because asset yields fell faster than funding costs, despite lower borrowing costs.
- Noninterest income benefited from $605,000 of investment-security gains; no comparable securities-sale gain was recorded in Q1 2019.
- Loans increased $21.9 million, or 2.5%, led by construction and land loans, commercial real estate, commercial business, and consumer lending. Construction and land loans increased 30.6% to $48.6 million.
- Deposits increased 6.2% to $1.064 billion, including $90.4 million of brokered certificates of deposit. Borrowings increased $37.1 million.
- Accumulated other comprehensive loss increased by $6.7 million, primarily from unrealized losses on available-for-sale securities amid market volatility. Shareholders’ equity also reflected $3.8 million of common-stock repurchases and $533,000 of dividends.
- The Company repurchased 288,276 shares for $3.8 million during the quarter. The December 2019 repurchase authorization had 272,030 shares remaining at March 31, 2020.
Guidance, Outlook, Commentary, Risks and Unusual Items
- The filing provides no formal earnings or financial guidance. Management stated that COVID-19 creates substantial uncertainty and that actual results may differ materially from forward-looking expectations.
- Washington’s business closures and “Stay Home, Stay Healthy” order affected economic activity, particularly hospitality, restaurants, commercial real estate serving those industries, and professional services. These sectors represented approximately 5.6%, 0.2%, 5.3%, and 1.6% of the loan portfolio, respectively.
- The Bank offered payment deferrals, interest-only options, and fee forbearance to affected borrowers. Approximately 70% of employees could work remotely, and branch lobby access was restricted beginning March 20, 2020.
- As of May 7, 2020, the Bank had processed approximately $29.1 million of Paycheck Protection Program loans for more than 377 customers. PPP loans carry a 1% interest rate, with payments beginning after six months, and may be forgiven in whole or in part.
- Management identified credit deterioration, commercial and residential real estate values, interest-rate changes, deposit retention, liquidity, PPP administration, cybersecurity, regulatory changes, and the duration and severity of COVID-19 as material risks.
- The Company plans to defer adoption of the current expected credit loss standard until January 1, 2023. The filing states that the eventual impact cannot yet be reasonably estimated.
- The quarter included a $210,000 one-time FHLB prepayment penalty related to prepayment of $25.0 million of higher-cost advances.
- Subsequent to quarter-end, shareholders approved a 2020 equity incentive plan authorizing awards for up to 520,000 shares.
- Management reported no material legal proceedings, no material change in market-risk disclosures, and effective disclosure controls as of March 31, 2020.
Important Facts for Investors to Verify
- Whether COVID-19-related payment deferrals, PPP loan forgiveness, and economic deterioration lead to higher delinquencies, charge-offs, provisions, or CECL-related adjustments.
- The sustainability of the 3.11% net interest margin after the sharp decline in market interest rates and the increased use of brokered CDs.
- The maturity and renewal risk associated with $289.7 million of certificates of deposit due within one year and $100.0 million of FHLB advances due within one year.
- The valuation and credit performance of the available-for-sale securities portfolio, which had $14.6 million of gross unrealized losses at March 31, 2020.
- The performance and concentration risk of construction, commercial real estate, hospitality-related, and indirect auto lending.
- The extent to which the $605,000 securities gain and other nonrecurring items affect comparisons with future periods.
- The ultimate effect of PPP processing fees, loan forgiveness timing, and related interest recognition on future interest income and margins.