First Northwest Bancorp — 2020 Q3 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 nine months ended September 30, 2020. The reporting period was materially affected by the COVID-19 pandemic, related government programs, low interest rates, loan deferrals, and increased liquidity.
Key financial metrics
| Metric | Three months ended September 30, 2020 | Nine months ended September 30, 2020 |
|---|---|---|
| Total interest income | $13.4 million | $37.7 million |
| Net interest income | $11.8 million | $31.3 million |
| Provision for loan losses | $1.4 million | $4.1 million |
| Noninterest income | $4.8 million | $11.2 million |
| Noninterest expense | $10.1 million | $29.7 million |
| Net income | $3.7 million | $6.5 million |
| Basic and diluted EPS | $0.40 | $0.69 |
| Net interest margin | 3.36% | 3.20% |
At September 30, 2020, total assets were $1.56 billion, net loans were $1.06 billion, deposits were $1.25 billion, borrowings were $109.2 million, and shareholders’ equity was $180.7 million. Book value per share was $17.65. The Bank reported regulatory capital ratios above well-capitalized thresholds, including a 10.5% Tier 1 leverage ratio and a 16.0% total risk-based capital ratio.
For the nine months, operating cash flow was $3.3 million, investing cash flow was negative $241.0 million, financing cash flow was $241.0 million, and cash and cash equivalents ended at $52.1 million. Additional liquidity included $281.9 million of unpledged available-for-sale securities. Contractual obligations totaled $410.0 million, including $293.5 million of certificates of deposit and $109.2 million of FHLB advances.
Material changes versus comparable periods
- Third-quarter net income increased 46.4% from $2.5 million to $3.7 million, while nine-month net income decreased 4.0% from $6.8 million to $6.5 million.
- Third-quarter net interest income increased $2.3 million, supported by asset growth and lower funding costs. The nine-month increase was $2.6 million.
- The third-quarter net interest margin increased 13 basis points to 3.36%; the nine-month margin declined 3 basis points to 3.20% as asset yields fell.
- Noninterest income increased 149.7% in the quarter and 144.2% year to date, primarily from mortgage loan sales, investment-security sales, bank-owned life insurance income, and loan-swap fees.
- Noninterest expense increased 19.7% in the quarter and 21.4% year to date, primarily from staffing, loan-production commissions, infrastructure, advertising, and pandemic-related compensation.
- Net loans increased 20.8% from year-end 2019. Total loans increased 21.4%, led by commercial business loans, construction and land loans, multifamily loans, and commercial real estate loans.
- Deposits increased 25.2% to $1.25 billion, largely reflecting stimulus payments, elevated unemployment benefits, tax-payment deferrals, and reduced consumer and business spending.
- The allowance for loan losses increased 35.1% to $13.0 million, or 1.2% of total loans, compared with 1.1% at December 31, 2019. Net charge-offs for the nine months were $737,000.
- Nonperforming loans increased 72.5% to $3.1 million, or 0.3% of total loans, from $1.8 million, or 0.2%, at year-end 2019. Total nonperforming assets increased 67.6% to $3.3 million.
- Common stock repurchases totaled $7.2 million for the first nine months. The company completed the December 2019 authorization to repurchase 535,097 shares; no shares remained available under that plan at September 30, 2020.
Guidance, outlook, commentary, risks, and unusual items
- No specific financial guidance was provided. Management stated that current-period results are not necessarily indicative of future results.
- The company granted COVID-19-related temporary modifications on 346 loans totaling $174.9 million, or 16.3% of total loans, through September 30. Loans remaining on deferral totaled $149.5 million across 183 loans.
- The Bank processed $32.2 million of Paycheck Protection Program loans for 515 customers and had received $1.4 million of SBA processing fees. Future interest income and net interest margin could increase when PPP loans are forgiven or repaid and deferred fees are recognized.
- COVID-19-sensitive exposures included hospitality at 4.9% of total loans, restaurants and food services at 0.2%, and commercial real estate lessors serving hospitality, restaurant, and retail businesses at 4.6%.
- Management increased the loan-loss provision and economic qualitative factor because of pandemic-related uncertainty and loan growth. The ultimate effects of the pandemic on credit quality, liquidity, earnings, and collateral values remain uncertain.
- Unusual or nonrecurring items included gains on investment-security sales, a bank-owned life insurance policy surrender and reinvestment that produced an upfront benefit, pandemic-related employee payments, and an FHLB prepayment penalty.
- The company plans to defer adoption of the current expected credit loss model until January 1, 2023. The filing states that the eventual impact cannot yet be reasonably estimated.
- Key risks include deterioration in residential and commercial real estate, construction-project delays, lower secondary-market demand for loans, deposit attrition or repricing, interest-rate changes, regulatory developments, technology and vendor disruptions, and continued pandemic effects.
Important facts for investors to verify
- Whether deferred COVID-19 loans return to performing status or generate elevated delinquencies, charge-offs, and future provisions.
- Whether the $13.0 million allowance remains adequate as pandemic assistance programs expire and economic conditions evolve.
- The sustainability of mortgage-sale gains, investment-security gains, BOLI income, and PPP fee recognition relative to recurring net interest income.
- Deposit retention and funding costs, particularly the $190.6 million of certificates of deposit maturing within one year and the $92.6 million of brokered CDs.
- Credit performance in commercial real estate, construction and land, hospitality-related borrowers, and the rapidly expanded commercial business loan portfolio.
- The effect of future CECL adoption, interest-rate movements, and securities-market changes on earnings, capital, and liquidity.