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 Western Washington. The filing covers the unaudited three and six months ended June 30, 2021, compared with the corresponding 2020 periods. The company had 11 full-service branches and one lending center at quarter-end.
Key Financial Metrics
| Metric | Q2 2021 | Q2 2020 | Six Months 2021 | Six Months 2020 |
|---|---|---|---|---|
| Total interest income | $15.1 million | $12.4 million | $29.7 million | $24.3 million |
| Net interest income | $13.6 million | $10.1 million | $27.1 million | $19.5 million |
| Provision for loan losses | $0.3 million | $1.5 million | $0.8 million | $2.8 million |
| Noninterest income | $3.9 million | $4.1 million | $6.6 million | $6.4 million |
| Noninterest expense | $13.7 million | $10.3 million | $25.8 million | $19.7 million |
| Net income attributable to parent | $3.0 million | $2.0 million | $6.1 million | $2.8 million |
| Diluted earnings per share | $0.32 | $0.21 | $0.66 | $0.30 |
| Net interest margin | 3.34% | 3.10% | 3.43% | 3.11% |
- Total assets were $1.79 billion at June 30, 2021, up from $1.65 billion at December 31, 2020.
- Net loans were $1.25 billion, up $104.4 million, or 9.1%, from year-end. Total loans increased 8.8% to $1.26 billion.
- Deposits rose 8.1% to $1.44 billion, while FHLB advances declined to $90.0 million from $110.0 million.
- The company reported $39.2 million of subordinated debt at quarter-end, compared with none at December 31, 2020. The debt was issued in March 2021 at a 3.75% fixed-to-floating rate and is intended to qualify as Tier 2 capital.
- Cash and cash equivalents were $80.7 million. Unpledged available-for-sale securities provided an additional $255.4 million of liquidity.
- Net cash provided by operating activities was $5.1 million; investing activities used $113.3 million, primarily from loan growth and securities purchases; financing activities provided $123.8 million, principally from deposit growth and subordinated debt issuance.
- Shareholders’ equity was $188.8 million, or 10.6% of assets. Book value per share was $18.48.
- First Fed remained well capitalized, with a 10.9% Tier 1 leverage ratio, 14.5% common equity Tier 1 ratio, 14.5% Tier 1 risk-based capital ratio, and 15.6% total risk-based capital ratio.
Material Changes Versus Prior Comparable Period
- Q2 net income attributable to the parent increased 51.6%, while six-month net income attributable to the parent increased 114.7%.
- Net interest income increased $3.5 million in Q2 and $7.6 million year to date, driven primarily by growth in average earning assets and lower deposit funding costs. The net interest margin expanded 24 basis points in Q2 and 32 basis points year to date.
- Interest expense declined 37.5% in Q2 and 47.0% year to date, mainly because of lower deposit rates and a shift toward lower-cost transaction and money-market deposits.
- Noninterest expense increased 33.3% in Q2 and 31.2% year to date. Compensation and benefits rose substantially because of additional staffing, higher production commissions, and $0.5 million of equity-related compensation associated with the Quin Ventures joint venture. Software, occupancy, professional fees, advertising, and FDIC insurance costs also increased.
- Noninterest income declined 5.8% in Q2 but increased 2.3% year to date. Q2 mortgage loan sale gains declined $1.1 million, partially offset by higher securities-sale gains and service fees.
- Construction and land loans increased 48.6% to $183.7 million, commercial real estate loans increased 7.8% to $319.6 million, and auto and other consumer loans increased 33.8% to $171.6 million. Commercial business loans decreased 24.2% to $76.0 million.
- The allowance for loan losses increased to $14.6 million from $13.8 million, but remained 1.2% of total loans. Nonperforming loans declined 21.5% to $1.8 million, or 0.1% of total loans.
Guidance, Outlook, Risks, and Unusual Items
- The filing does not provide quantitative earnings or revenue guidance. Management expects continued economic improvement as pandemic restrictions ease but notes that commercial activity had not fully returned to pre-pandemic levels.
- COVID-19 remains a significant risk, particularly for hospitality, restaurants, and commercial real estate serving hospitality, restaurant, and retail customers. Exposure was approximately 4.2% of total loans to hospitality, 0.2% to restaurants and food services, and 4.2% to lessors of commercial real estate to affected businesses.
- The company had granted COVID-related temporary modifications on 357 loans totaling $175.0 million through June 30, 2021. Only two commercial real estate loans totaling $7.1 million remained on deferral at quarter-end.
- PPP activity included $34.8 million of second-round loans to 422 customers. Of first-round loans, $21.5 million, or 66.9%, had been forgiven; $221,000, or 0.6%, of second-round loans had been forgiven.
- Classified loans increased to $13.3 million from $7.5 million, primarily because one commercial real estate loan was downgraded.
- On July 23, 2021, after quarter-end, First Fed completed the purchase of a Bellevue branch from Sterling Bank and Trust. The transaction added $65.4 million of deposits and $459,000 of fixed assets.
- The company transferred from a multi-employer defined benefit plan to a single-employer plan in March 2021. The transfer resulted in $1.7 million of after-tax prior service cost in accumulated other comprehensive income and a $2.7 million cash contribution.
- The company expects to adopt the current expected credit loss model on January 1, 2023. Management had not yet estimated the financial statement impact.
- Principal risks include credit deterioration, interest-rate and funding-cost changes, deposit retention, loan demand, competition, technology and cybersecurity events, regulatory actions, acquisition integration, and continuing pandemic effects.
Important Facts for Investors to Verify
- Whether rapid loan growth, particularly in construction, commercial real estate, and consumer lending, produces higher future credit losses.
- Whether noninterest expense growth moderates sufficiently to preserve earnings and operating efficiency.
- The sustainability of lower deposit costs and the effect of future rate changes on the 3.43% year-to-date net interest margin.
- The renewal or runoff of $172.8 million of certificates of deposit maturing within one year and the company’s future reliance on brokered deposits or borrowings.
- The performance of the Bellevue branch acquisition and the Quin Ventures investment.
- The eventual effect of CECL adoption on the allowance for loan losses, capital, and earnings.
- The potential credit and liquidity consequences of COVID-19 variants, changing government support programs, and weakness in affected commercial sectors.