8-K: First Northwest Bancorp Reports Mixed Third Quarter Results Amidst Loan Provision Increases

First Northwest Bancorp reported a net loss for the third quarter of 2024, driven by increased loan loss provisions, despite progress in deposit gathering and the termination of an FDIC Consent Order.

Summary

• First Northwest Bancorp experienced a net loss of $2.0 million in the third quarter of 2024, compared to a loss of $2.2 million in the previous quarter and a profit of $2.5 million in the same quarter of 2023.
• The loss was primarily due to a $3.1 million provision for credit losses on loans, which included reserves on individually analyzed loans and increased loss factors for pooled commercial business and multi-family loans.
• The company's net interest margin decreased to 2.70%, down from 2.76% in the previous quarter and 2.97% in the third quarter of 2023.
• Total deposits increased slightly to $1.71 billion, with a shift from savings to money market accounts.
• The company completed a reduction in force impacting 9% of the workforce, expected to reduce compensation expenses by approximately $820,000 per quarter starting in the fourth quarter of 2024.
• The company repurchased 98,156 shares during the third quarter under a new share repurchase plan.
• Nonperforming loans increased to $30.4 million, and classified loans increased to $46.9 million.
• The company's year-to-date net loss was $3.8 million, primarily due to a $12.8 million provision for credit losses.

Sentiment

Score: 3

Explanation: The document presents a mixed picture with significant negatives outweighing the positives. The company reported a net loss, increased loan loss provisions, and a decrease in net interest margin. While there are some positive aspects such as deposit growth and the termination of the FDIC consent order, the overall tone is negative due to the financial losses and ongoing challenges.

Positives

• The company successfully terminated the FDIC Consent Order.
• The company achieved year-to-date deposit growth of $34.7 million, or 2.0%.
• The company's balance sheet restructuring contributed to an improved year-to-date yield on earning assets by 16 basis points to 5.44%.
• The company completed a sale-leaseback transaction resulting in a $7.9 million gain.
• The company is focused on building relationships with small businesses and individuals.
• The company is introducing new products and services to enhance customer experience.
• The company's capital levels remain in excess of regulatory requirements.
• The company continues to return capital to shareholders through dividends and share repurchases.

Negatives

• The company reported a net loss of $2.0 million for the third quarter of 2024.
• The company's provision for credit losses significantly impacted net income.
• The company identified a material weakness in the design of certain internal controls.
• The company is facing ongoing lawsuits from some Water Station equipment borrowers.
• The net interest margin decreased to 2.70% for the third quarter of 2024.
• Nonperforming assets increased $11.7 million year-to-date.
• Classified loans increased to 2.71% of total loans.
• The company's efficiency ratio was 100.31% for the third quarter of 2024.
• The company's return on average assets was -0.36% for the third quarter of 2024.
• The company's return on average equity was -4.91% for the third quarter of 2024.

Risks

• The company faces credit risks associated with lending activities, particularly with certain equity loans made to high net worth investors.
• The company is exposed to interest rate risk, with increased deposit and borrowing costs impacting net interest margin.
• The company is subject to litigation risk from lawsuits filed by Water Station equipment borrowers.
• The company's financial results are sensitive to changes in general economic conditions and securities markets.
• The company's internal controls have been identified as having a material weakness.
• The company faces the risk of inaccuracies in the reporting of its financial condition.
• The company is exposed to liquidity pressures, including potential deposit withdrawals.
• The company's performance is subject to legislative and regulatory changes.

Future Outlook

The company expects to complete the remaining BOLI policy restructures by the end of the first quarter of 2025 and anticipates that the fair value hedge on loans will add $1.3 million of annualized interest income in 2024 if rates remain unchanged. The company also expects a reduction in compensation expense of approximately $820,000 per quarter starting in the fourth quarter of 2024.

Management Comments

• This was a quarter of mixed results.
• Progress on customer deposit gathering and the termination of the FDIC Consent Order was overshadowed by a quarterly loss driven by additional provisions primarily related to certain equity loans made to high net worth, accredited investors.
• The teamwork and collaboration between Staff, Management and the Board to address the matters identified in the Consent Order is demonstrative of the qualifications, determination and capabilities of the First Fed team.
• We appreciate that the FDIC acknowledged the planning, monitoring and execution required to comply with the Order and validation that all of these matters were properly addressed.
• I am very proud of this accomplishment, and I would like to thank all of the many people within the bank who worked tirelessly to reach this achievement less than one year after the Order was issued.
• Through an internal review of our loan portfolio and with consultation with our prudential regulators, it was determined that larger provisions were required in the second quarter of 2024.
• Management and the Board of Directors take the reported material weakness very seriously.
• We have taken corrective action to address the basis for the restatement and are working to promptly remediate.
• We also acknowledge the ongoing lawsuits filed by some of the Water Station equipment borrowers.
• We intend to vigorously defend against these claims, which we believe are meritless.
• We also intend to continue pursuing collection of all monies owed by the litigants using all available legal means.
• Moving forward, the highly capable bankers at First Fed are focused on continuing to build relationships with small businesses and individuals in the communities we serve.
• We continue to pursue inroads in SBA, treasury, maritime lending, first and second mortgage lending and community banking.
• We are introducing products and services to meet our customers where they are and to enhance their overall experience with First Fed.
• We believe that focusing on these fundamentals of Community Banking will improve our results and our overall franchise value.

Industry Context

The results reflect a challenging environment for regional banks, with increased pressure on net interest margins due to rising deposit costs and the need for higher loan loss provisions. The company's focus on community banking and strategic partnerships aligns with industry trends towards personalized service and digital innovation. The termination of the FDIC consent order is a positive step, but the ongoing legal challenges and internal control issues highlight the complexities of the current regulatory landscape.

Comparison to Industry Standards

• The company's net interest margin of 2.70% is below the average for many regional banks, which have been facing pressure from increased deposit costs and a flattening yield curve. For example, comparible banks such as Banner Corp (BANR) and Columbia Banking System (COLB) have reported net interest margins closer to 3.0% in recent quarters.
• The company's efficiency ratio of 100.31% is significantly higher than the industry average, indicating higher operating costs relative to income. Many well-performing regional banks target efficiency ratios below 60%. For example, Washington Federal (WAFD) has consistently maintained an efficiency ratio below 50%.
• The company's return on average assets (ROAA) of -0.36% is below the industry average, which is typically around 1%. Comparible banks such as Umpqua Holdings (UMPQ) have reported ROAA closer to 0.8% in recent quarters.
• The company's nonperforming assets to total assets ratio of 1.35% is higher than the industry average, which is typically below 1%. This indicates a higher level of credit risk compared to peers. For example, HomeStreet (HMST) has reported nonperforming assets to total assets ratio closer to 0.5%.
• The company's allowance for credit losses on loans to total loans ratio of 1.27% is within the range of industry standards, but the increase in this ratio indicates a growing concern about potential loan losses. Many banks are increasing their loan loss reserves in response to economic uncertainty.

Legal Proceedings

• The company acknowledges the ongoing lawsuits filed by some of the Water Station equipment borrowers.
• The company intends to vigorously defend against these claims, which they believe are meritless.
• The company intends to continue pursuing collection of all monies owed by the litigants using all available legal means.

Stakeholder Impact

• Shareholders are negatively impacted by the net loss and decreased profitability.
• Employees experienced a reduction in force impacting 9% of the workforce.
• Customers may benefit from new products and services, but may be concerned about the bank's financial performance.
• Suppliers and creditors may be impacted by the bank's financial performance and potential cost-cutting measures.

Next Steps

• The company will continue to focus on building relationships with small businesses and individuals.
• The company will continue to pursue inroads in SBA, treasury, maritime lending, first and second mortgage lending and community banking.
• The company will continue to introduce products and services to meet customer needs.
• The company will continue to work on resolution plans for all troubled borrowers.
• The company will continue to focus on controlling compensation expense and reducing discretionary spending.
• The company expects to complete the remaining BOLI policy restructures by the end of the first quarter of 2025.

Key Dates

Keywords

financial results, net loss, credit losses, loan provisions, net interest margin, FDIC Consent Order, deposit growth, share repurchase, nonperforming loans, classified loans, bank, community banking