10-Q: First Northwest Bancorp Reports Net Loss in Q3 2024 Amidst Rising Interest Expenses

First Northwest Bancorp reported a net loss for the third quarter of 2024, primarily due to increased interest expenses and a higher provision for credit losses.

Summary

• First Northwest Bancorp experienced a net loss of $1.98 million for the third quarter of 2024, a significant downturn compared to the $2.5 million net income in the same period last year.
• The company's net interest income decreased to $14.02 million, down from $14.95 million year-over-year, due to higher interest expenses on deposits and borrowings.
• A substantial provision for credit losses of $3.13 million was recorded, compared to $371,000 in the prior year, reflecting increased concerns about loan quality.
• Noninterest income also declined to $1.78 million from $2.9 million, while noninterest expenses rose to $15.85 million from $14.38 million.
• The company's total assets increased to $2.26 billion, up from $2.20 billion at the end of 2023, with growth in loans and investment securities.
• Total liabilities also increased to $2.09 billion, up from $2.04 billion at the end of 2023, driven by higher deposit and borrowing balances.
• The company's net interest margin decreased to 2.70% for the quarter, down from 2.97% in the same period last year.
• The allowance for credit losses on loans increased to $21.97 million, up from $17.51 million at the end of 2023.

Sentiment

Score: 3

Explanation: The document presents a negative outlook due to the net loss, decreased net interest margin, and increased credit loss provisions. The material weakness in internal controls also adds to the negative sentiment. While there are some positives, such as asset growth, the overall tone is concerning from an investment perspective.

Positives

• Total assets increased to $2.26 billion, up from $2.20 billion at the end of 2023.
• Net loans increased to $1.71 billion at September 30, 2024, from $1.64 billion at December 31, 2023.
• Investment securities increased to $310.9 million at September 30, 2024, from $295.6 million at December 31, 2023.

Negatives

• The company experienced a net loss of $1.98 million for Q3 2024.
• Net interest income decreased by $930,000 year-over-year.
• The provision for credit losses increased significantly to $3.13 million.
• Noninterest income decreased by $1.1 million.
• Noninterest expenses increased by $1.5 million.
• The net interest margin decreased to 2.70% for the quarter.
• Nonaccrual loans increased by $11.7 million to $30.4 million.
• The allowance for credit losses as a percentage of nonaccrual loans decreased to 72%.

Risks

• The company faces risks associated with lending and potential adverse changes in the credit quality of loans.
• Legislative or regulatory changes, including increased insurance rates and assessments, could adversely affect the company's business.
• Continued depressed market demand for mortgage and Small Business Administration loans could impact revenue.
• Changes in monetary and fiscal policies, including interest rate policies of the Federal Reserve, could affect the company's net interest margin.
• The company's ability to control operating costs and expenses is a risk.
• There is a risk that the company may not be able to successfully execute on growth strategies related to new markets and delivery channels.
• The company's ability to attract and retain deposits at a reasonable cost is a risk.
• The company has identified a material weakness in its internal controls, which could result in inaccuracies in financial reporting.
• Disruptions, security breaches, or other adverse events in the company's information technology systems are a risk.
• Overall economic conditions, including the impact of an elevated interest rate environment and geopolitical instability, pose risks to the company.

Future Outlook

The company is focused on controlling compensation expense and reducing advertising and other discretionary spending to improve earnings. A reduction-in-force is expected to result in a decrease to prior levels of compensation expense by approximately $820,000 per quarter starting in the fourth quarter of 2024.

Management Comments

• Management believes that the unrealized losses on our investment securities relate principally to the general change in interest rates, market liquidity and demand, and market volatility that has occurred since the initial purchase.
• Management believes that the ACLL is adequate to absorb the known and inherent risks of loss in the overall loan portfolio as of September 30, 2024.
• Management regularly adjusts our investments in liquid assets based upon an assessment of expected loan demand, expected deposit flows, yields available on interest-earning deposits and securities, and the objectives of our liquidity management, interest-rate risk and investment policies.

Industry Context

The results reflect the challenges faced by many financial institutions in the current environment of rising interest rates and economic uncertainty. The increase in the provision for credit losses and the decrease in net interest margin are consistent with trends seen across the banking sector.

Comparison to Industry Standards

• The decrease in net interest margin to 2.70% is below the average for many regional banks, which have been able to maintain margins closer to 3.0% or higher.
• The increase in nonaccrual loans to 1.75% of total loans is higher than the industry average, indicating potential credit quality issues.
• The company's reliance on brokered deposits, which represent 12% of total deposits, is higher than some peers, which may increase funding costs.
• The company's capital ratios remain above regulatory requirements, but the decrease in shareholders' equity is a concern.
• The company's loan portfolio is heavily weighted towards real estate loans, which may expose it to greater risk in a downturn compared to banks with more diversified portfolios.
• The company's investment portfolio has a duration of 3.9 years, which is lower than some peers, indicating a more conservative approach to interest rate risk.

Stakeholder Impact

• Shareholders will be negatively impacted by the net loss and the decrease in book value per share.
• Employees may be affected by the reduction-in-force and changes in compensation.
• Customers may be impacted by changes in deposit rates and loan terms.
• Creditors may be concerned about the increase in nonaccrual loans and the decrease in profitability.

Next Steps

• The company intends to continually review and evaluate the design and effectiveness of its disclosure controls and procedures and to improve its controls and procedures over time.
• The company is focused on controlling compensation expense and reducing advertising and other discretionary spending to improve earnings.
• The company will continue to strategically evaluate opportunities to acquire assets through wholesale channels in order to supplement organic originations and increase net interest income.

Key Dates

Keywords

net loss, interest expense, credit losses, net interest income, noninterest income, noninterest expense, loans, deposits, investment securities, net interest margin, nonaccrual loans, material weakness, internal controls, FHLB advances, stock repurchase