First Northwest Bancorp quarterly report, Q2 FY2020

First Northwest Bancorp: Q2 2020 Form 10-Q Summary

Business context and reporting period

First Northwest Bancorp is a Washington bank holding company whose principal operating subsidiary, First Federal Savings and Loan Association of Port Angeles, provides commercial and consumer banking services in Western Washington. The unaudited report covers the three and six months ended June 30, 2020, with comparisons to the corresponding 2019 periods and to December 31, 2019 for balance-sheet measures.

The reporting period was materially affected by the COVID-19 pandemic, including government stimulus programs, elevated deposit balances, loan payment deferrals, and participation in the Small Business Administration Paycheck Protection Program.

Financial performance and key metrics

Metric	Three months ended June 30	Six months ended June 30
Net interest income	$10.1 million	$19.5 million
Provision for loan losses	$1.5 million	$2.8 million
Noninterest income	$4.1 million	$6.4 million
Noninterest expense	$10.3 million	$19.7 million
Net income	$2.0 million	$2.8 million
Diluted earnings per share	$0.21	$0.30
Net interest margin	3.10%	3.11%

All dollar amounts above are approximate and based on the filing’s reported amounts in thousands. Net income declined 4.9% year over year in the second quarter and 33.5% for the first six months. The filing does not provide a consolidated net profit margin.

Total assets were $1.48 billion at June 30, 2020, compared with $1.31 billion at December 31, 2019.
Total loans were $996.4 million, up from $883.8 million, while net loans receivable were $986.4 million.
Deposits were $1.17 billion, up from $1.00 billion. Borrowings were $112.4 million.
Available-for-sale securities were $364.3 million, up from $315.6 million.
Cash and cash equivalents were $49.6 million; unpledged available-for-sale securities provided an additional $250.7 million of liquidity.
Shareholders’ equity was $176.3 million, or 11.9% of total assets. Book value per share was $17.07.
The Bank was categorized as well capitalized. Its total risk-based capital ratio was 16.4%, compared with a 10.0% minimum required to be well capitalized.

Cash flow, credit quality, and liquidity

For the six months ended June 30, 2020, operating cash flow was $1.9 million, investing cash flow was negative $162.9 million, and financing cash flow was $161.8 million. Cash increased by $849,000 from year-end 2019.
Investing cash outflows primarily reflected a $110.3 million net increase in loans, $166.3 million of securities purchases, and $6.5 million of bank-owned life insurance purchases.
The allowance for loan losses increased 25.8% to $12.1 million, equal to 1.2% of total loans, from $9.6 million, or 1.1%, at year-end. The six-month provision was $2.8 million, primarily reflecting COVID-19 economic uncertainty and loan growth.
Nonperforming loans increased to $3.4 million from $1.8 million, while total nonperforming assets increased to $3.6 million from $2.0 million. Nonperforming loans were 0.3% of total loans.
The Company had approved COVID-19 payment modifications for 297 loans totaling $128.4 million, or 12.9% of loans receivable. These modifications were generally not classified as troubled debt restructurings under applicable CARES Act guidance.
At June 30, 2020, $49.6 million of cash and cash equivalents, $250.7 million of unpledged securities, and borrowing arrangements supported liquidity. FHLB borrowings totaled $112.4 million.
Contractual obligations totaled $444.0 million, including $325.2 million of certificates of deposit and $112.4 million of FHLB advances. Certificates of deposit totaling $240.1 million matured within one year.

Material changes versus prior comparable periods

Second-quarter net interest income increased $437,000, or 4.5%, despite a 13-basis-point decline in net interest margin to 3.10%. Lower borrowing costs more than offset lower asset yields.
Six-month net interest income increased $244,000, or 1.3%, while the net interest margin declined 11 basis points to 3.11%.
Second-quarter and six-month provisions for loan losses increased from $255,000 and $590,000, respectively, in 2019, reflecting pandemic-related qualitative adjustments and portfolio growth.
Noninterest income increased 188.8% in the second quarter and 140.4% for the first six months. The principal drivers were higher gains on mortgage loan sales, investment securities sales, and bank-owned life insurance.
Noninterest expense increased 24.3% in the second quarter and 22.3% for the first six months. Compensation and benefits rose with staffing, commissions, and pandemic-related employee payments. The six-month period also included a $210,000 FHLB prepayment penalty.
Commercial business loans increased $57.9 million from year-end, partly due to PPP loans and mortgage participation activity. Construction and land loans increased 56.4% to $58.2 million.
The Company repurchased 130,237 shares during the second quarter for $1.7 million. At June 30, 2020, 141,793 shares remained authorized for repurchase under the applicable plan.

Outlook, management commentary, risks, and unusual items

The filing provides no formal earnings or revenue guidance. Management described its strategy as expanding geographically, growing commercial and multifamily lending, diversifying consumer and business loans, expanding deposit products, and enhancing digital delivery and infrastructure.

The Company processed approximately $30.6 million of PPP loans for 440 customers and had received $1.3 million of SBA processing fees. Remaining deferred fees may be recognized in interest income if loans are forgiven or repaid early.
Management identified hospitality, restaurant and food services, and commercial real estate serving hospitality, restaurant, and retail businesses as particularly affected sectors. Exposure was 5.1%, 0.2%, and 4.9% of total loans, respectively.
Key risks include the duration and severity of COVID-19, borrower repayment capacity, real estate and construction values, loan delinquencies and charge-offs, deposit retention, interest-rate and margin pressure, PPP administration and forgiveness, competition, regulatory changes, and technology or third-party service disruptions.
The Company expects to defer adoption of the current expected credit loss model until January 1, 2023. It stated that the eventual impact cannot yet be reasonably estimated.
Investment securities had $6.0 million of unrealized losses at June 30, 2020. Management attributed the losses primarily to interest-rate, market-demand, and volatility factors rather than credit quality and reported no other-than-temporary impairment losses.
Management stated that construction projects had largely resumed by June 30 and that it had no reason to believe projects in process would not be completed, but continued monitoring was required.
Disclosure controls and procedures were deemed effective as of June 30, 2020, with no material changes in internal control over financial reporting during the quarter.

Most important facts for investors to verify

Whether COVID-19 loan modifications totaling $128.4 million transition into delinquencies, nonaccrual loans, charge-offs, or additional allowance requirements.
Whether the $12.1 million allowance for loan losses remains adequate as pandemic-related credit losses emerge and CECL adoption approaches.
The sustainability of unusually high mortgage loan-sale gains, securities-sale gains, BOLI income, and PPP-related fee income.
The renewal or replacement cost of the $240.1 million of certificates of deposit maturing within one year, including brokered CDs.
Future net interest margin performance as asset yields decline, PPP loans earn 1% interest, and deposits remain elevated.
Exposure to commercial real estate, construction, hospitality, retail, and other sectors affected by economic restrictions.
The timing and impact of PPP loan forgiveness, SBA fee recognition, and changing federal program rules.
Future share repurchases, dividends, and capital levels relative to regulatory requirements and pandemic-related restrictions.