FIRST NORTHWEST BANCORP Forward-Looking Statements
Certain matters discussed in this Quarterly Report on Form 10-Q constitute forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of historical fact, are based on certain assumptions and are generally identified by the use of words such as "believes," "expects," "anticipates," "estimates" or similar expressions. Forward-looking statements include, but are not limited to:
• statements of our goals, intentions and expectations;
• statements regarding our business plans, prospects, growth and operating
strategies;
• statements regarding the quality of our loan and investment portfolios;
• estimates of our risks and future costs and benefits; and
• statements concerning the potential effects of the COVID-19 pandemic on
the Bank's business and financial results and conditions.
35--------------------------------------------------------------------------------
Table of Contents
These forward-looking statements are based on current beliefs and expectations
of management and are inherently subject to significant business, economic and
competitive uncertainties and contingencies, many of which are beyond the
Company's control. Actual results may differ materially from those contemplated
by the forward-looking statements due to, among others, the following factors:
• the scope and duration of the COVID-19 pandemic;• the effects of the COVID-19 pandemic, including on our credit quality and
operations, as well as its impact on general economic conditions?
• legislative or regulatory changes, including actions taken by
governmental authorities in response to the COVID-19 pandemic;
• the risks associated with lending and potential adverse changes in the
credit quality of loans in our portfolio;
• a decrease in the market demand for loans that we originate for sale;
• our ability to control operating costs and expenses;
• whether our management team can implement our operational strategyincluding but not limited to our efforts to achieve loan and revenue
growth;
• our ability to successfully execute on merger and/or acquisition
strategies and integrate any newly acquired assets, liabilities,
customers, systems, and management personnel into our operations and our
ability to realize related cost savings within expected time frames;
• our ability to successfully execute on growth strategies related to our
entry into new markets;
• our ability to develop user-friendly digital applications to serve
existing customers and attract new customers;
• the use of estimates in determining fair value of certain of our assets,
which estimates may prove to be incorrect and result in significant
declines in valuation;
• changes in the levels of general interest rates, and the relative
differences between short and long-term interest rates, deposit interest
rates, our net interest margin and funding sources;
• increased competitive pressures among financial services companies,
particularly from non-traditional banking entities such as challenger
banks, fintech, and mega technology companies;
• our ability to attract and retain deposits;
• changes in consumer spending, borrowing and savings habits, resulting in
reduced demand for banking products and services;
• results of examinations of us by the Washington State Department of
Financial Institutions , Department of Banks , the Federal Deposit
Insurance Corporation , Federal Reserve Bank of San Francisco , or other
regulatory authorities, which could result in restrictions that may
adversely affect our liquidity and earnings;• legislative or regulatory changes that adversely affect our business;
• disruptions, security breaches, or other adverse events, failures or
interruptions in, or attacks on, our information technology systems or on
the third-party vendors who perform several of our critical processing
functions;
• any failure of key third-party vendors to perform their obligations to
us; and
• other economic, competitive, governmental, regulatory and technical
factors affecting our operations, pricing, products and services and
other risks described elsewhere in our filings with the Securities and
Exchange Commission , including this Form 10-Q and our Annual Report on
Form 10-K for the year ended December 31, 2020 .
Further, statements about the potential effects of the COVID-19 pandemic on the
Bank's businesses and financial results and condition may constitute
forward-looking statements and are subject to the risk that the actual effects
may differ, possibly materially, from what is reflected in those forward-looking
statements due to factors and future developments that are uncertain,
unpredictable and in many cases beyond the Bank's control, including the scope
and duration of the pandemic, actions taken by governmental authorities in
response to the pandemic, and the direct and indirect impact of the pandemic on
the Bank, its customers and third parties. These developments could have an
adverse impact on our financial position and our results of operations.
Any of the forward-looking statements that we make in this report and in other
statements we make may turn out to be wrong because of inaccurate assumptions we
might make, because of the factors illustrated above or because of other factors
that we cannot anticipate or predict. Any forward-looking statements are based
upon management's beliefs and assumptions at the time they are made. We
undertake no obligation to publicly update or revise any forward-looking
statements included or incorporated by reference in this document or to update
the reasons why actual results could differ from those contained in such
statements, whether as a result of new information, future events or otherwise.
Due to these risks, uncertainties and assumptions, the forward-looking
statements discussed in this report might not occur, and you should not put
undue reliance on any forward-looking statements.
General
First Northwest is a bank holding company that primarily engages in the business
activity of its subsidiary, First Fed. First Fed is a community-oriented
financial institution which has served customers and communities since 1923.
Currently, First Fed has 11 full-service branches and one lending center serving
Clallam , Jefferson , Kitsap , Whatcom , and King counties in Washington State . Our
business and operating strategy is focused on building sustainable earnings
through hiring experienced bankers, geographic expansion, diversifying our loan
product mix, expanding our deposit product offerings that deliver value-added
solutions, enhancing existing services and digital service delivery channels,
and enhancing our infrastructure to support the changing needs and expectations
of our customers.
36--------------------------------------------------------------------------------
Table of Contents
We offer a wide range of products and services focused on the financial security and payment needs of the communities we serve. Lending activities include the origination of first lien one- to four-family mortgage loans, commercial and multi-family real estate loans, construction and land loans (including lot loans), commercial business loans, and consumer loans, consisting primarily of automobile loans as well as home equity loans and lines of credit. We continue to increase the origination of commercial real estate, multi-family real estate, construction, and commercial business loans. More recently we have increased our consumer loan portfolio through our manufactured home and auto loan purchase programs, in order to diversify our asset portfolio and increase interest income. We continue to originate one- to four-family residential mortgage loans and regularly sell conforming loans into the secondary market to increase noninterest income and manage interest rate risk. We also retain one- to four-family first and second lien loans in our portfolio to generate interest income. We offer traditional consumer and business deposit products, including transaction accounts, savings and money market accounts, and certificates of deposit for individuals, businesses, and nonprofit organizations. Deposits are our primary source of funds for lending and investing activities. We also borrow funds, typically from theFederal Home Loan Bank of Des Moines , as a way to provide cost effective liquidity and manage interest rate risk. First Northwest is affected by prevailing economic conditions as well as government policies and regulations concerning, among other things, monetary and fiscal affairs, housing and financial institutions. Deposit flows are influenced by several factors, including interest rates paid on competing time deposits, alternative investment options available to our customers, account maturities, the number and quality of our deposit originators, digital delivery systems, branding and customer acquisition, and the overall level of personal income and savings in the markets where we do business. Lending activities are influenced by the demand for funds, our credit policies, the number and quality of our lenders and credit underwriters, digital delivery systems, branding and customer acquisition, and regional economic cycles. Our primary source of pre-tax income is net interest income. Net interest income is the difference between interest income earned on our loans and investments and interest expense paid on our deposits and borrowings. Changes in levels of interest rates and cash flows from existing assets and liabilities affect our net interest income. A secondary source of income is noninterest income, which includes revenue we receive from providing products and services, including service charges on deposit accounts, mortgage banking income, interest rate swap fee income, earnings from bank-owned life insurance, investment services income, and gains and losses from sales of securities. An offset to net interest income is the provision for loan losses, which represents the periodic charge to operations that is required to adequately provide for losses inherent in our loan portfolio through our allowance for loan losses. A recapture of previously recognized provision for loan losses may be added to net income as credit metrics improve, such as a loan's risk rating, increased property values, improvements in the economic environment, or receipt of recoveries of amounts previously charged off. Noninterest expenses we incur in operating our business consist of salaries and employee benefit costs, occupancy and equipment expenses, federal deposit insurance premiums and regulatory assessments, data processing expenses, marketing and customer acquisition expenses, expenses related to real estate and personal property owned, and other expenses. Recent Developments. OnMarch 22, 2021 , the Company announced that First Fed had entered into an agreement withSterling Bank and Trust ofSouthfield, Michigan ("Sterling") to purchase itsBellevue, Washington branch, subject to applicable regulatory approvals and other customary closing conditions. The purchase was finalized onJuly 23, 2021 and included$65.4 million in deposits and a small amount of fixed assets. The Bank also assumed the lease for the branch location and welcomed the former Sterling retail staff as First Fed employees. Impact of COVID-19 Pandemic. The COVID-19 pandemic and related restrictive measures taken by governments, businesses and individuals caused unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity inthe United States and globally, including the markets that we serve. As initial restrictive measures were eased during 2020 and into 2021, theU.S. economy started to recover and, with the availability and distribution of a COVID-19 vaccine, we anticipate continued improvements in commercial and consumer activity and theU.S. economy. As ofJune 30, 2021 , the governor ofWashington removed restrictions initially set in place, allowing businesses to return to full capacity. We recognize that our business and consumer customers are experiencing varying degrees of financial distress, which is expected to continue through the remainder of 2021, especially if new COVID-19 variant infections increase and new restrictions are mandated. Commercial activity has improved but has not returned to the levels existing prior to the outbreak of the pandemic, which may result in our customers' inability to meet their loan obligations to us. In addition, the economic pressures and uncertainties related to the COVID-19 pandemic have resulted in changes in consumer spending behaviors, which may negatively impact the demand for loans and other services we offer. Our borrowing base includes customers in industries such as hospitality; restaurant and food services; and lessors of commercial real estate to hospitality, restaurant, and retail establishments, all of which have been significantly impacted by the COVID-19 pandemic. AtJune 30, 2021 , the Company's exposure as a percent of the total loan portfolio to these industries was 4.2%, 0.2%, and 4.2%, respectively. We recognize that these industries may take longer to recover as consumers may be hesitant to return to full social interaction or may change their spending habits on a more permanent basis as a result of the pandemic. We continue to monitor these customers closely. We have taken deliberate actions to ensure that we have the balance sheet strength to serve our clients and communities, including increases in liquidity and managing our assets and liabilities in order to maintain a strong capital position; however, future economic conditions are subject to significant uncertainty. Uncertainties associated with the pandemic include the duration of the COVID-19 outbreak and any related variant infections, the availability and effectiveness of COVID-19 vaccines, and the impact on our customers, employees, vendors and the economy. While uncertainty still exists, we believe we are well-positioned to operate effectively through the present economic environment. We continue to provide banking and financial services to our customers, with drive-thru access available at all our branch locations and in-person services available to walk-in customers or by appointment. Our branch locations are currently open and operating, having returned to normal business hours at the beginning ofMay 2021 . In addition, we continue to provide access to banking and financial services through online banking, Interactive Teller Machines ("ITMs"), Automated Teller Machines ("ATMs"), and by telephone. We continue to take additional precautions within all our locations, including providing personal protection equipment and enhanced cleaning procedures, to ensure the safety of our customers and our employees. 37
--------------------------------------------------------------------------------
Table of Contents
We provided assistance to many small businesses applying for the SBA's Paycheck
Protection Program ("PPP") funding. As of June 30, 2021 , we processed
$34.8 million of loans for 422 customers through the current round of SBA PPP
funding with an average loan amount of $83,000 . We processed $32.2 million of
loans for 515 customers through the initial round of SBA PPP funding during 2020
with an average loan amount of $63,000 . Payments by borrowers on these loans can
be deferred up to sixteen months after the note date, and interest, at 1%, will
continue to accrue during the deferment period. Loans can be forgiven in whole
or part (up to full principal and any accrued interest). We partnered with a
third-party financial technology provider to assist our borrowers with the loan
forgiveness application process. As of June 30, 2021 , $21.5 million , or 66.9%,
of the first-round loans were forgiven and $221,000 , or 0.6%, of second-round
loans were forgiven.
Critical Accounting Policies
There are no material changes to the critical accounting policies as disclosed
in the Company's Annual Report on Form 10-K for the year ended
Comparison of Financial Condition at
Assets. Total assets increased to
Net loans, excluding loans held for sale, increased$104.4 million to$1.25 billion atJune 30, 2021 , from$1.14 billion atDecember 31, 2020 . During the six months endedJune 30, 2021 , auto and other consumer loans increased$43.4 million , with$13.9 million in purchases of manufactured home loans and$34.5 million in purchased auto loans offset by prepayment activity. One- to four-family residential loans decreased$8.0 million as prepayment of loans exceeded originations during the period. Commercial business loans decreased$24.2 million as newly funded PPP loans were offset by PPP forgiveness payments received during the period for a net increase of$22.0 million and participation in the Northpointe Bank Mortgage Participation Program decreased to$0 atJune 30, 2021 , from$47.3 million atDecember 31, 2020 . Construction and land loans increased$60.1 million , or 48.6%, to$183.7 million atJune 30, 2021 , from$123.6 million atDecember 31, 2020 . Our construction loans are geographically dispersed throughoutWestern Washington (with one loan inOregon ) and, as a result, are susceptible to risks that may vary depending on the nature and location of the project. We manage our construction lending by utilizing a licensed third-party vendor to assist us in monitoring our construction projects. We continue to monitor the projects currently in our portfolio to determine the impact of COVID-19 on completion. As of this point in time, we have no reason to believe that any of the projects in process will not be completed. AtJune 30, 2021 ,$59.1 million was included in the construction loan total for commercial acquisition-renovation loans which have a small construction component included with a traditional real estate loan, compared to$39.3 million atDecember 31, 2020 . By investing in one- to four-family, multi-family and acquisition-renovation construction projects which increase housing options, we are doing our small part to address housing affordability. We monitor real estate values and general economic conditions in our market areas, in addition to assessing the strength of our borrowers, including their equity contributions to a project, to prudently underwrite construction loans. We continually assess our lending strategies across all product lines and markets within which we do business to improve earnings while also prudently managing credit risk. 38
--------------------------------------------------------------------------------
Table of Contents
The following tables show our construction commitments by type and geographic concentrations at the dates indicated:
North Olympic Puget Sound
June 30, 2021 Peninsula (1) Region (2) Other Washington Oregon Total
(In thousands)
Construction Commitment
One- to four-family
residential $ 23,702 $ 42,495 $ 1,059 $ - $ 67,256
Multi-family residential - 146,634 - 8,020 154,654
Commercial
acquisition-renovation 5,329 44,196 16,638 - 66,163
Commercial real estate 1,712 40,705 2,679 - 45,096
Total commitment $ 30,743 $ 274,030 $ 20,376 $ 8,020 $ 333,169
Construction Funds
Disbursed
One- to four-family
residential $ 7,952 $ 24,959 $ 538 $ - $ 33,449
Multi-family residential - 54,303 - 3,794 58,097
Commercial
acquisition-renovation 4,555 38,925 15,661 - 59,141
Commercial real estate 1,505 21,525 1,240 - 24,270
Total disbursed $ 14,012 $ 139,712 $ 17,439 $ 3,794 $ 174,957
Undisbursed Commitment
One- to four-family
residential $ 15,750 $ 17,536 $ 521 $ - $ 33,807
Multi-family residential - 92,331 - 4,226 96,557
Commercial
acquisition-renovation 774 5,271 977 - 7,022
Commercial real estate 207 19,180 1,439 - 20,826
Total undisbursed $ 16,731 $ 134,318 $ 2,937 $ 4,226 $ 158,212
Land Funds Disbursed
One- to four-family
residential $ 4,284 $ 2,840 $ 166 $ - $ 7,290
Commercial real estate - 1,438 - - 1,438
Total disbursed for land
166 $ -$ 8,728 (1) Includes Clallam andJefferson counties. (2) Includes Kitsap,Mason ,Thurston ,Pierce ,King ,Snohomish ,Skagit ,Whatcom , andIsland counties. North Olympic Puget Sound December 31, 2020 Peninsula (1) Region (2) Other Washington Oregon Total (In thousands) Construction Commitment One- to four-family residential$ 15,473 $ 29,827 $ 1,477 $ -$ 46,777 Multi-family residential - 117,524 - 8,020 125,544 Commercial acquisition-renovation 1,644 28,177 16,637 - 46,458 Commercial real estate 2,282 46,103 2,755 - 51,140 Total Commitment$ 19,399 $ 221,631 $ 20,869$ 8,020 $ 269,919 Construction Funds Disbursed One- to four-family residential$ 7,208 $ 15,976 $ 845 $ -$ 24,029 Multi-family residential - 33,217 - - 33,217 Commercial acquisition-renovation 1,297 24,045 15,300 - 40,642 Commercial real estate 1,677 14,812 429 - 16,918 Total disbursed$ 10,182 $ 88,050 $ 16,574 $ -$ 114,806 Undisbursed Commitment One- to four-family residential$ 8,265 $ 13,851 $ 632 $ -$ 22,748 Multi-family residential - 84,307 - 8,020 92,327 Commercial acquisition-renovation 347 4,132 1,337 - 5,816 Commercial real estate 605 31,291 2,326 - 34,222 Total undisbursed$ 9,217 $ 133,581 $ 4,295$ 8,020 $ 155,113 Land Funds Disbursed One- to four-family residential$ 4,350 $ 2,728 $ 347$ 53 $ 7,478 Commercial real estate - 1,343 - - 1,343 Total disbursed for land$ 4,350 $ 4,071 $ 347$ 53 $ 8,821 39
--------------------------------------------------------------------------------
Table of Contents
During the six months endedJune 30, 2021 , the Company originated$216.7 million of loans, of which$149.3 million , or 68.9%, were originated in thePuget Sound region,$63.1 million , or 29.1%, in theNorth Olympic Peninsula ,$1.0 million , or 0.5%, in other areas throughoutWashington State , and$3.2 million , or 1.5%, inOregon . The Company purchased an additional$34.5 million in auto loans and$13.9 million in manufactured home loans during the six months endedJune 30, 2021 . We will continue to evaluate opportunities to acquire assets through wholesale channels in order to supplement our organic originations and increase net interest income. Our allowance for loan losses increased$741,000 , or 5.4%, to$14.6 million atJune 30, 2021 , from$13.8 million atDecember 31, 2020 . The increase was due to a loan loss provision of$800,000 , offset by net charge-offs of$59,000 for the six-month period. The provision is to account for growth in the loan portfolio adjusted for qualitative factors. We continue to monitor the economic impact of the COVID-19 pandemic which is included in the qualitative factor adjustments. The allowance for loan losses as a percentage of total loans at bothJune 30, 2021 andDecember 31, 2020 was 1.2%. Nonperforming loans decreased$489,000 , or 21.5%, to$1.8 million atJune 30, 2021 , from$2.3 million atDecember 31, 2020 , mainly attributable to improvements in nonperforming one- to four-family loans of$128,000 , multi-family loans of$284,000 , commercial real estate loans of$74,000 and auto and other consumer loans of$18,000 . Nonperforming loans to total loans was 0.1% atJune 30, 2021 and 0.2% atDecember 31, 2020 . The allowance for loan losses as a percentage of nonperforming loans increased to 817.7% atJune 30, 2021 , from 609.2% atDecember 31, 2020 . AtJune 30, 2021 , there were$2.0 million in restructured loans, of which$1.8 million were performing in accordance with their modified payment terms and returned to accrual status. Classified loans increased$5.8 million to$13.3 million atJune 30, 2021 , from$7.5 million atDecember 31, 2020 , due to the addition of one commercial real estate loan that was downgraded during the period. Net loan charge-offs are concentrated mainly in our indirect auto loan portfolio. We stopped originating loans from one of our indirect auto loan product offerings in 2020 to reduce credit risk and future charge-off activity. We continue to monitor the program in order to prudently manage risk within the portfolio. The balance of indirect auto loans decreased to$15.1 million atJune 30, 2021 from$20.5 million atDecember 31, 2020 . We believe our allowance for loan losses is adequate to absorb the known and inherent risks of loss in the overall loan portfolio as ofJune 30, 2021 . Loans receivable, excluding loans held for sale, consisted of the following at the dates indicated: Increase (Decrease) June 30, 2021 December 31, 2020 Amount Percent (In thousands) Real Estate: One-to-four family$ 301,816 $ 309,828$ (8,012 ) (2.6 )% Multi-family 166,502 162,467 4,035 2.5 Commercial real estate 319,644 296,574 23,070 7.8 Construction and land 183,685 123,627 60,058 48.6 Total real estate loans 971,647 892,496 79,151 8.9 Consumer: Home equity 36,886 33,103 3,783 11.4 Auto and other consumer 171,617 128,233 43,384 33.8 Total consumer loans 208,503 161,336 47,167 29.2 Commercial business loans 75,995 100,201 (24,206 ) (24.2 ) Total loans 1,256,145 1,154,033 102,112 8.8 Less: Net deferred loan fees 5,610 4,346 1,264 29.1 Premium on purchased loans, net (10,393 ) (6,129 ) (4,264 ) 69.6 Allowance for loan losses 14,588 13,847 741 5.4 Loans receivable, net$ 1,246,340 $ 1,141,969$ 104,371 9.1 40
--------------------------------------------------------------------------------
Table of Contents
The following table represents nonperforming assets at the dates indicated.
Increase (Decrease)
June 30, 2021 December 31, 2020 Amount Percent
(In thousands)
Nonperforming loans:
Real estate loans:
One- to four-family $ 784 $ 912 $ (128 ) (14.0 )%
Multi-family - 284 (284 ) (100.0 )
Commercial real estate 83 157 (74 ) (47.1 )
Construction and land 24 26 (2 ) (7.7 )
Total real estate loans 891 1,379 (488 ) (35.4 )
Consumer loans:
Home equity 90 73 17 23.3
Auto and other consumer 803 821 (18 ) (2.2 )
Total consumer loans 893 894 (1 ) (0.1 )
Commercial business - - - 100.0
Total nonperforming loans 1,784 2,273 (489 ) (21.5 )
Real estate owned:
Land - 2 (2 ) (100.0 )
Total real estate owned - 2 (2 ) (100.0 )
Repossessed assets - - - 100.0
Total nonperforming assets $ 1,784 $ 2,275 Nonaccrual and 90 days or more past due loans as a percentage of total loans 0.1 % 0.2 % (0.1 )% (50.0 ) Investment securities increased$6.2 million , or 1.7%, to$370.5 million atJune 30, 2021 , from$364.3 million atDecember 31, 2020 , due to the purchase of securities, offset by sales, normal payments and prepayment activity. Other investment securities, including municipal bonds and other asset-backed securities, were$239.6 million atJune 30, 2021 , or 64.7% of the total investment securities portfolio, a decrease of$35.4 million from$275.0 million atDecember 31, 2020 . Mortgage-backed securities totaled$130.9 million atJune 30, 2021 , or 35.3% of the investment securities portfolio, an increase during the year of$41.6 million , or 46.6%, from$89.3 million atDecember 31, 2020 . The investment portfolio, including mortgage-backed securities, had an estimated projected average life of 7.3 years as ofJune 30, 2021 , andDecember 31, 2020 , and had an estimated average repricing term of 6.6 years as ofJune 30, 2021 , and 5.0 years as ofDecember 31, 2020 , based on the interest rate environment at those times. The investment portfolio was composed of 45.0% in amortizing securities atJune 30, 2021 and 48.0% atDecember 31, 2020 . The projected average life of our securities may vary due to prepayment activity, which, particularly in the mortgage-backed securities portfolio, is impacted by prevailing mortgage interest rates. Management maintains a focus on enhancing the mix of earning assets by originating loans as a percentage of earning assets; however, we continue to purchase investment securities as a source of additional interest income. For additional information, see Note 2 of the Notes to Consolidated Financial Statements contained in Item 1 of this Form 10-Q. 41
--------------------------------------------------------------------------------
Table of Contents
Liabilities. Total liabilities increased to$1.6 billion atJune 30, 2021 , from$1.47 billion atDecember 31, 2020 , primarily due to an increase in deposits of$108.2 million and the issuance of subordinated debt of$40.0 million inMarch 2021 . Deposit balances increased 8.1%, to$1.44 billion atJune 30, 2021 , from$1.33 billion atDecember 31, 2020 . There was a$51.9 million increase in demand deposit accounts, a$81.9 million increase in money market accounts, and a$21.3 million increase in savings accounts during the period, while the balance of certificates of deposits decreased$46.9 million . The increase in deposits is in large part due to organic growth, the Federal government's continued response to the pandemic including stimulus payments, and deposit of additional PPP funding. We strategically increased noninterest-bearing and other core deposits to manage overall funding costs. In addition to collecting customer deposits, we utilize brokered certificates of deposit ("brokered CDs") as an additional funding source in order to manage our cost of funds, reduce our reliance on public funds deposits, and allow flexibility when competing on retail rates. AtJune 30, 2021 , we had$74.0 million in brokered CDs included in the$261.8 million balance of certificates of deposit compared to$86.0 million in brokered CDs atDecember 31, 2020 . OnMarch 25, 2021 , the Company completed a private placement of$40.0 million of 3.75% fixed-to-floating rate subordinated notes due 2031 (the "Notes") to certain qualified institutional buyers and institutional accredited investors. The net proceeds to the Company from the sale of the Notes were approximately$39.3 million after deducting placement agent fees and other offering expenses. The Notes have been structured to qualify as Tier 2 capital for the Company for regulatory capital purposes. The Company intends to use the net proceeds of the offering for general corporate purposes and has provided$20.0 million to the Bank as Tier 1 capital. Equity. Total shareholders' equity increased$2.4 million to$188.8 million for the six months endedJune 30, 2021 . The Company recorded year-to-date net income of$6.1 million and an after-tax increase in unrealized gain on available-for-sale investments of$706,000 . Increases were partially offset by$2.5 million in repurchases of shares of common stock, a$1.7 million adjustment in other comprehensive income reflecting the recognition of prior service cost related to the transfer out of participation in a multiemployer pension plan into a single employer plan, and an$888,000 decrease for realized gains on securities sold.
Comparison of Results of Operations for the Three Months Ended
General. Net income increased$1.0 million , or 51.6%, to$3.0 million for the three months endedJune 30, 2021 , compared to net income of$2.0 million for the three months endedJune 30, 2020 , due to an increase in net interest income after provision for loan losses compared to the same period in 2020 and a modest increase in noninterest income, partially offset by an increase in noninterest expense. Net Interest Income. Net interest income increased$3.5 million to$13.6 million for the three months endedJune 30, 2021 , from$10.1 million for the three months endedJune 30, 2020 . This increase was mainly the result of an increase in average earning assets of$334.4 million . The yield on average interest-earning assets decreased 11 basis points to 3.68% for the three months endedJune 30, 2021 , compared to 3.79% for the same period in the prior year due to a decrease in reinvestment loan and investment securities rates. The average cost of interest-bearing liabilities decreased to 0.46% for the three months endedJune 30, 2021 , compared to 0.89% for the same period last year, due primarily to a decrease in rates on interest-bearing deposits of 58 basis points combined with an increase in borrowing volume of$20.0 million and higher borrowing rates due to the issuance of subordinated debt. Total cost of funds decreased 37 basis points to 37 basis points for the three months endedJune 30, 2020 , from 74 basis points for the same period in 2020. The net interest margin increased 24 basis points to 3.34% for the three months endedJune 30, 2021 , from 3.10% for the same period in 2020. Interest Income. Total interest income increased$2.7 million , or 21.8%, to$15.0 million for the three months endedJune 30, 2021 , from$12.4 million for the comparable period in 2020, primarily due to an increase in the average balances on interest-earning assets. Interest and fees on loans receivable increased$2.6 million , to$12.9 million for the three months endedJune 30, 2021 , from$10.2 million for the three months endedJune 30, 2020 , related to an increase in the average balance of net loans receivable of$268.9 million compared to the prior year. Average loan yields decreased 10 basis points to 4.30% for the three months endedJune 30, 2021 , compared to the three months endedJune 30, 2020 .
The following table compares average earning asset balances, associated yields, and resulting changes in interest income for the periods shown:
Three Months Ended June 30,
2021 2020
Average Average Increase
Balance Balance (Decrease) in
Outstanding Yield Outstanding Yield Interest Income
(Dollars in thousands)
Loans receivable, net $ 1,200,273 4.30 % $ 931,344 4.40 % $ 2,630
Investment securities 273,014 2.17 213,141 2.47 164
Mortgage-backed securities 122,671 2.11 135,604 2.18 (96 )
FHLB stock 4,074 4.53 4,426 4.97 (9 )
Interest-bearing deposits in banks 39,750 0.15 20,922 0.15 7
Total interest-earning assets $ 1,639,782 3.68 % $ 1,305,437 3.79 % $ 2,696
42--------------------------------------------------------------------------------
Table of Contents
Interest Expense. Total interest expense decreased$840,000 , or 37.5%, to$1.4 million for the three months endedJune 30, 2021 , compared to$2.2 million for the three months endedJune 30, 2020 , due to a decrease in interest expense on deposits of$1.2 million resulting from a 58 basis point decrease in the average cost of interest-bearing deposits. The average balance of interest-bearing deposits increased$196.5 million , or 21.0%, to$1.13 billion for the three months endedJune 30, 2021 , from$937.0 million for the three months endedJune 30, 2020 , as we grew deposits in new and existing market areas. Additionally, the growth was supported by Government programs put in place to support the economy during the COVID-19 pandemic. During the three months endedJune 30, 2021 , interest expense on certificates of deposit decreased due to a decrease in the average balance of$72.4 million and a decrease of 84 basis points in the average rate paid, compared to the three months endedJune 30, 2020 . During the same period, the average balances of savings, demand deposit, and money market accounts increased$12.5 million ,$46.7 million and$209.7 million , respectively. The average cost of interest-bearing deposit products decreased to 0.29% for the three months endedJune 30, 2021 , from 0.87% for the three months endedJune 30, 2020 , due in large part to the expiration of promotional rates and a shift in balances to demand deposit accounts. Borrowing costs increased due to the subordinated debt issued inMarch 2021 .
The following table details average balances, cost of funds and the change in interest expense for the periods shown:
Three Months Ended June 30,
2021 2020
Increase
Average Average (Decrease)
Balance Balance in Interest
Outstanding Rate Outstanding Rate Expense
(Dollars in thousands)
Savings accounts $ 185,336 0.07 % $ 172,833 0.62 % $ (235 )
Transaction accounts 169,681 0.02 122,951 0.01 6
Money market accounts 501,237 0.22 291,526 0.55 (125 )
Certificates of deposit 277,218 0.73 349,658 1.57 (862 )
FHLB advances 51,917 1.41 71,170 1.13 (18 )
Subordinated debt 39,276 4.02 - - 394
Total interest-bearing liabilities
Provision for Loan Losses. The provision for loan losses was$300,000 for the three months endedJune 30, 2021 , primarily due to growth in the loan portfolio, and was$1.5 million for the three months endedJune 30, 2020 , due to the uncertainty in economic conditions created by the COVID-19 pandemic and growth in the loan portfolio.
The following table details activity and information related to the allowance for loan losses for the periods shown:
Three Months Ended June 30,
2021 2020
(Dollars in thousands)
Provision for loan losses $ 300 $ 1,500
Net recoveries (charge-offs) 23 (221 )
Allowance for loan losses 14,588 12,109Allowance for losses as a percentage of total gross loans receivable at period end
1.2 % 1.2 %
Total nonaccrual loans 1,784 3,356
Allowance for loan losses as a percentage of nonaccrual loans at period end
817.7 % 360.8 %
Nonaccrual and 90 days or more past due loans as a
percentage of total loans 0.1 % 0.3 %
Total loans $ 1,256,145 $ 996,401
Noninterest Income. Noninterest income decreased $237,000 , or 5.8%, to $3.9
million for the three months ended June 30, 2021 , from $4.1 million for the
three months ended June 30, 2020 , mainly due to a decrease in gain on sale of
mortgage loans of $1.1 million . Gain on sale of investments was $1.1 million for
the second quarter of 2021, compared to gain on sale of investments of $661,000
for the same period in 2020.
The following table provides a detailed analysis of the changes in the components of noninterest income for the periods shown:
Three Months Ended June 30, Increase (Decrease)
2021 2020 Amount Percent
(Dollars in thousands)
Loan and deposit service fees $ 1,001 $ 765 $ 236 30.8 %
Mortgage servicing fees, net of
amortization 13 (172 ) 185 (107.6 )
Net gain on sale of loans 921 2,001 (1,080 ) (54.0 )
Net gain on sale of investment
securities 1,124 661 463 70.0
Increase in cash surrender value of
bank-owned life insurance 242 627 (385 ) (61.4 )
Other income 571 227 344 151.5
Total noninterest income $ 3,872 $ 4,109 $ (237 ) (5.8 )%
43--------------------------------------------------------------------------------
Table of Contents
Noninterest Expense. Noninterest expense increased$3.4 million , or 33.3%, to$13.7 million for the three months endedJune 30, 2021 , compared to$10.3 million for the three months endedJune 30, 2020 , primarily as a result of an increase in compensation and benefits as we added staff to manage the company and generate additional revenue. Compensation and benefits was also higher due to a$160,000 increase in commissions paid on increased mortgage and commercial loan production and a$500,000 increase related to equity awarded to the principal owners of POM Peace ofMind, Inc. ("POM") as part of theQuin Ventures, Inc. ("Quin" or "Quin Ventures ") joint venture agreement. Occupancy and equipment increased as a result of new software implementation.
The following table provides an analysis of the changes in the components of noninterest expense for the periods shown:
Three Months Ended June 30, Increase (Decrease)
2021 2020 Amount Percent
(Dollars in thousands)
Compensation and benefits $ 8,559 $ 5,966 $ 2,593 43.5 %
Data processing 726 769 (43 ) (5.6 )
Occupancy and equipment 1,803 1,345 458 34.1
Supplies, postage, and telephone 355 284 71 25.0
Regulatory assessments and state taxes 301 223 78 35.0
Advertising 492 377 115 30.5
Professional fees 644 354 290 81.9
FDIC insurance premium 168 70 98 140.0
Other expense 659 894 (235 ) (26.3 )
Total $ 13,707 $ 10,282 $ 3,425 33.3 %
Provision for Income Tax. An income tax expense of $663,000 was recorded for the
three months ended June 30, 2021 , compared to $464,000 for the three months
ended June 30, 2020 , due to an increase in income before taxes of $1.1 million .
For additional information, see Note 5 of the Notes to Consolidated Financial
Statements contained in Item 1 of this Form 10-Q.
Comparison of Results of Operations for the Six Months Ended
General. Net income increased$3.3 million , or 114.7%, to$6.1 million for the six months endedJune 30, 2021 , compared to net income of$2.8 million for the six months endedJune 30, 2020 , due to an increase in net interest income after provision for loan losses compared to the same period in 2020 and a modest increase in noninterest income partially offset by an increase in noninterest expense. Net Interest Income. Net interest income increased$7.6 million to$27.1 million for the six months endedJune 30, 2021 , from$19.5 million for the six months endedJune 30, 2020 . This increase was mainly the result of an increase in average earning assets of$337.8 million . The yield on average interest-earning assets decreased 12 basis points to 3.75% for the six months endedJune 30, 2021 , compared to 3.87% for the same period in the prior year due to a decrease in reinvestment loan and investment securities rates. The average cost of interest-bearing liabilities decreased to 0.43% for the six months endedJune 30, 2021 , compared to 0.99% for the same period last year, due primarily to a decrease in rates on interest-bearing deposits of 62 basis points offset by an increase in borrowing rates of 45 basis points related to the issuance of subordinated debt. Total cost of funds decreased 49 basis points to 35 basis points for the six months endedJune 30, 2021 , from 84 basis points for the same period in 2020. The net interest margin increased 32 basis points to 3.43% for the six months endedJune 30, 2021 , from 3.11% for the same period in 2020. Interest Income. Total interest income increased$5.4 million , or 22.0%, to$29.7 million for the six months endedJune 30, 2021 , from$24.3 million for the comparable period in 2020, primarily due to an increase in the average balances on interest-earning assets. Interest and fees on loans receivable increased$5.3 million , to$25.4 million for the six months endedJune 30, 2021 , from$20.1 million for the six months endedJune 30, 2020 , related to an increase in the average balance of net loans receivable of$265.3 million compared to the prior year. Average loan yields decreased 6 basis points to 4.39% for the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 . 44
--------------------------------------------------------------------------------
Table of Contents
The following table compares average earning asset balances, associated yields, and resulting changes in interest income for the periods shown:
Six Months Ended June 30,
2021 2020
Average Average Increase
Balance Balance (Decrease) in
Outstanding Yield Outstanding Yield Interest Income
(Dollars in thousands)
Loans receivable, net $ 1,166,422 4.39 % $ 901,116 4.45 % $ 5,335
Investment securities 274,610 2.24 181,586 2.63 665
Mortgage-backed securities 107,673 2.08 148,593 2.29 (591 )
FHLB stock 3,942 4.66 4,573 4.46 (11 )
Interest-bearing deposits in
banks 42,150 0.13 21,110 0.72 (48 )
Total interest-earning
assets $ 1,594,797 3.75 % $ 1,256,978 3.87 % $ 5,350
Interest Expense. Total interest expense decreased $2.3 million , or 47.0%,
to $2.6 million for the six months ended June 30, 2021 , compared to $4.8 million
for the six months ended June 30, 2020 , due to a decrease in interest expense on
deposits of $2.4 million resulting from a 62 basis point decrease in the average
cost of interest-bearing deposits. The average balance of interest-bearing
deposits increased $219.9 million , or 24.6%, to $1.11 billion for the six months
ended June 30, 2021 , from $893.0 million for the six months ended June 30, 2020 ,
as we grew deposits in new and existing market areas. Additionally, the growth
was supported by many of the Government programs put in place to support the
economy during the COVID-19 pandemic.
During the six months ended June 30, 2021 , interest expense on cost of
certificates of deposit decreased due to a decrease in the average balance of
$46.1 million and a decrease of 90 basis points in the average rate paid,
compared to the six months ended June 30, 2020 . During the same period, the
average balances of savings, demand deposit, and money market accounts increased
$10.2 million , $46.6 million and $209.2 million , respectively. The average cost
of all deposit products decreased to 0.25% for the six months ended June 30,
2021 , from 0.78% for the six months ended June 30, 2020 , due in large part to
the expiration of promotional rates and a shift in balances to transaction
accounts. Borrowing costs increased due to the issuance of subordinated debt in
March 2021 , partially offset by a decrease in the average balance and cost of
FHLB advances compared to the same period in 2020.
The following table details average balances, cost of funds and the change in interest expense for the periods shown:
Six Months Ended June 30,
2021 2020
Average Increase
Balance Average Balance (Decrease) in
Outstanding Rate Outstanding Rate Interest Expense
(Dollars in thousands)
Savings accounts $ 179,524 0.08 % $ 169,371 0.72 % $ (535 )
Transaction accounts 165,562 0.02 118,963 0.04 (6 )
Money market accounts 481,269 0.24 272,030 0.56 (195 )
Certificates of deposit 286,552 0.78 332,674 1.68 (1,684 )
FHLB advances 53,667 1.41 75,574 1.68 (261 )
Subordinated debt 21,334 3.96 - - 419
Total interest-bearing
liabilities $ 1,187,908 0.43 % $ 968,612 0.99 % $ (2,262 )
Provision for Loan Losses. The provision for loan losses was $800,000 for the
six months ended June 30, 2021 , primarily due to growth in the loan portfolio,
and was $2.8 million for the six months ended June 30, 2020 , due to the
uncertainty in economic conditions created by the COVID-19 pandemic as well as
growth in the loan portfolio.
45--------------------------------------------------------------------------------
Table of Contents
The following table details activity and information related to the allowance for loan losses for the periods shown:
Six Months Ended June 30,
2021 2020
(Dollars in thousands)
Provision for loan losses $ 800 $ 2,766
Net charge-offs (59 ) (285 )
Allowance for loan losses 14,588 12,109
Allowance for losses as a percentage of total
gross loans receivable at period end 1.2 % 1.2 %
Total nonaccrual loans 1,784 3,356
Allowance for loan losses as a percentage of nonaccrual loans at period end 817.7 % 360.8 % Nonaccrual and 90 days or more past due loans as a percentage of total loans 0.1 % 0.3 % Total loans$ 1,256,145 $ 996,401 Noninterest Income. Noninterest income increased$149,000 , or 2.3%, to$6.6 million for the six months endedJune 30, 2021 , from$6.4 million for the six months endedJune 30, 2020 . Interchange fee income on deposit accounts increased$241,000 , mortgage servicing fee income increased$200,000 , and loan swap fee income increased$315,000 over the same period in 2020. The cash surrender value of bank-owned life insurance (BOLI) decreased$469,000 due to a BOLI restructure that occurred during the six months endedJune 30, 2020 , which resulted in the recognition of additional market gains.
The following table provides a detailed analysis of the changes in the components of noninterest income for the periods shown:
Six Months Ended June 30, Increase (Decrease)
2021 2020 Amount Percent
(Dollars in thousands)
Loan and deposit service fees $ 1,838 $ 1,646 $ 192 11.7 %
Mortgage servicing fees, net of
amortization 43 (157 ) 200 (127.4 )
Net gain on sale of loans 2,258 2,384 (126 ) (5.3 )
Net gain on sale of investment
securities 1,124 1,266 (142 ) (11.2 )
Increase in cash surrender value of
bank-owned life insurance 486 955 (469 ) (49.1 )
Other income 827 333 494 148.3
Total noninterest income $ 6,576 $ 6,427 $ 149 2.3 %
Noninterest Expense. Noninterest expense increased $6.1 million , or 31.2%,
to $25.8 million for the six months ended June 30, 2021 , compared to $19.7
million for the six months ended June 30, 2020 , primarily as a result of an
increase in compensation and benefits as we added staff to manage the company
and generate additional revenue. Compensation and benefits was also higher due
to a $672,000 increase in commissions paid on increased mortgage and commercial
loan production and a $500,000 increase related to equity awarded to the
principal owners of POM as part of the Quin joint venture agreement. Costs
related to software increased $619,000 as we implemented more robust systems to
support digital initiatives and Company growth. Increases in advertising and
professional fees were related to the purchase of the Bellevue branch, our
investment in Quin, and the relocation of our Fairhaven branch. The increase in
FDIC insurance over the prior year was due to a combination of a small
bank assessment credit issued in September 2019 that resulted in no FDIC
insurance payment during the first quarter of 2020 and an increase in average
assets of $347.2 million which resulted in a higher assessment base.
The following table provides an analysis of the changes in the components of noninterest expense for the periods shown:
Six Months Ended June 30, Increase (Decrease)
2021 2020 Amount Percent
(Dollars in thousands)
Compensation and benefits $ 15,854 $ 11,327 $ 4,527 40.0 % Data processing 1,465 1,459 6 0.4 Occupancy and equipment 3,426 2,696 730 27.1 Supplies, postage, and telephone 597 495 102 20.6 Regulatory assessments and state taxes 562 397 165 41.6 Advertising 937 649 288 44.4 Professional fees 1,166 754 412 54.6 FDIC insurance premium 316 70 246 351.4 FHLB prepayment penalty - 210 (210 ) (100.0 ) Other expense 1,478 1,607 (129 ) (8.0 ) Total$ 25,801 $ 19,664 $ 6,137 31.2 % Provision for Income Tax. An income tax expense of$1.1 million was recorded for the six months endedJune 30, 2021 , compared to$668,000 for the six months endedJune 30, 2020 , due to an increase in income before taxes of$3.6 million . For additional information, see Note 5 of the Notes to Consolidated Financial Statements contained in Item 1 of this Form 10-Q. 46
--------------------------------------------------------------------------------
Table of Contents
Average Balances, Interest and Average Yields/Cost
The following table set forth, for the periods indicated, information regarding average balances of assets and liabilities as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities, resultant yields, interest rate spread, net interest margin (otherwise known as net yield on interest-earning assets), and the ratio of average interest-earning assets to average interest-bearing liabilities. Also presented is the weighted average yield on interest-earning assets, rates paid on interest-bearing liabilities and the net spread as ofJune 30, 2021 and 2020. Income and all average balances are monthly average balances, which management deems to be not materially different than daily averages. Nonaccrual loans have been included in the table as loans carrying a zero yield. Three Months EndedJune 30 ,
Six Months Ended
At June
30, 2021 2021 2020 2021 2020
Average Interest Average Interest Average Interest Average Interest
Yield/ Balance Earned/ Yield/ Balance Earned/ Yield/ Balance Earned/ Yield/ Balance Earned/ Yield/
Rate Outstanding Paid Rate Outstanding Paid Rate Outstanding Paid Rate Outstanding Paid Rate
(Dollars in thousands) (Dollars in thousands)
Interest-earning
assets:
Loans
receivable, net
(1) 4.26 % $ 1,200,273 $ 12,866 4.30 % $ 931,344 $ 10,236 4.40 % $ 1,166,422 $ 25,407 4.39 %
2.62 273,014 1,480 2.17 213,141 1,316 2.47 274,610 3,050
2.24 181,586 2,385 2.63 Mortgage-backed securities
2.18 122,671 644 2.11 135,604 740 2.18 107,673 1,108 2.08 148,593 1,699 2.29 FHLB dividends
4.93 4,074 46 4.53 4,426 55 4.97 3,942 91 4.66 4,573 102 4.46
Interest-bearing
deposits in banks 0.07 39,750 15 0.15 20,922 8 0.15 42,150 28 0.13 21,110 76 0.72 Total
interest-earning
assets (2) 3.71 1,639,782 15,051 3.68
1,305,437 12,355 3.79 1,594,797 29,684
3.75 1,256,978 24,334 3.87
Interest-bearing
liabilities:
Interest-bearing
demand deposits 0.01 $ 169,681 $ 10 0.02 $ 122,951 $ 4 0.01 $ 165,562 $ 17 0.02 $ 118,963 $ 23 0.04
Money market
accounts 0.21 501,237 275 0.22 291,526 400 0.55 481,269 561 0.24 272,030 756 0.56
Savings accounts 0.06 185,336 34 0.07 172,833 269 0.62 179,524 74 0.08 169,371 609 0.72
Certificates of
deposit 0.76 277,218 506 0.73 349,658 1,368 1.57 286,552 1,107 0.78 332,674 2,791 1.68
Total deposits 0.22 1,133,472 825 0.29 936,968 2,041 0.87 1,112,907 1,759 0.32 893,038 4,179 0.94
FHLB borrowings 0.83 51,917 183 1.41 71,170 201 1.13 53,667 374 1.41 75,574 635 1.68
Subordinated
debt 4.07 39,276 394 4.02 - - - 21,334 419 3.96 - - -
Total
interest-bearing
liabilities 0.35 1,224,665 1,402 0.46 1,008,138 2,242 0.89 1,187,908 2,552 0.43 968,612 4,814 0.99
Net interest
income $ 13,649 $ 10,113 $ 27,132 $ 19,520
Net interest
rate spread 3.36 3.22 2.90 3.32 2.88
Net earning
assets $ 415,117 $ 297,299 $ 406,889 $ 288,366
Net interest
margin (3) 3.34 3.10 3.43 3.11
Average
interest-earning
assets to
average
interest-bearing
liabilities 133.9 % 129.5 % 134.3 % 129.8 %
(1) The average loans receivable, net balances include nonaccrual loans. (2) Includes interest-bearing deposits (cash) at other financial institutions. (3) Net interest income divided by average interest-earning assets.
47--------------------------------------------------------------------------------
Table of Contents
Rate/Volume Analysis
The following table presents the dollar amount of changes in interest income and
interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the changes related to
outstanding balances and changes in interest rates. For each category of
interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to (i) changes in volume (i.e., changes in
volume multiplied by old rate) and (ii) changes in rate (i.e., changes in rate
multiplied by old volume). For purposes of this table, changes attributable to
both rate and volume, which cannot be segregated, have been allocated
proportionately to the change due to volume and the change due to rate.
Three Months Ended Six Months Ended
June 30, 2021 vs. 2020 June 30, 2021 vs. 2020
Increase (Decrease) Due to Increase (Decrease) Due to
Total Increase Total Increase
Volume Rate (Decrease) Volume Rate (Decrease)
(In thousands) (In thousands)
Interest earning
assets:
Loans
receivable, net $ 2,939 $ (309 ) $ 2,630 $ 5,768 $ (433 ) $ 5,335
Investments 296 (228 ) 68 731 (657 ) 74
FHLB stock (5 ) (4 ) (9 ) (15 ) 4 (11 )
Other(1) 7 - 7 74 (122 ) (48 )
Total
interest-earning
assets $ 3,237 $ (541 ) $ 2,696 $ 6,558 $ (1,208 ) $ 5,350
Interest-bearing
liabilities:
Interest-bearing
demand deposits $ 2 $ 4 $ 6 $ 9 $ (15 ) $ (6 )
Money market
accounts 286 (411 ) (125 ) 573 (768 ) (195 )
Savings accounts 19 (254 ) (235 ) 34 (569 ) (535 )
Certificates of
deposit (284 ) (578 ) (862 ) (396 ) (1,288 ) (1,684 )
FHLB advances (55 ) 37 (18 ) (185 ) (76 ) (261 )
Subordinated
debt - 394 394 - 419 419
Total
interest-bearing
liabilities $ (32 ) $ (808 ) $ (840 ) $ 35 $ (2,297 ) $ (2,262 )
Net change in
interest income $ 3,269 $ 267 $ 3,536 $ 6,523 $ 1,089 $ 7,612 (1) Includes interest-bearing deposits (cash) at other financial institutions.
Off-Balance Sheet Activities
In the normal course of operations, First Fed engages in a variety of financial transactions that are not recorded in the financial statements. These transactions involve varying degrees of off-balance sheet credit, interest rate and liquidity risks. These transactions are used primarily to manage customers' requests for funding and take the form of loan commitments and lines of credit. For the six months endedJune 30, 2021 and the year endedDecember 31, 2020 , we engaged in no off-balance sheet transactions likely to have a material effect on our financial condition, results of operations or cash flows. 48
--------------------------------------------------------------------------------
Table of Contents Contractual Obligations AtJune 30, 2021 , our scheduled maturities of contractual obligations were as follows: After 3 After 1 Year Years Within Through Through Beyond Total 1 Year 3 Years 5 Years 5 Years Balance (In thousands) Certificates of deposit$ 172,770 $ 76,415 $ 12,646 $ -$ 261,831 FHLB advances 40,000 25,000 25,000 - 90,000 Subordinated debt obligation - - - 39,241 39,241 Operating leases 458 887 926 3,230 5,501 Borrower taxes and insurance 1,143 - - - 1,143 Deferred compensation 381 235 80 500 1,196 Total contractual obligations$ 214,752 $ 102,537 $ 38,652 $ 42,971 $ 398,912
Commitments and Off-Balance Sheet Arrangements
The following table summarizes our commitments and contingent liabilities with
off-balance sheet risks as of
Amount of Commitment Expiration
After 1 Year After 3 Years
Within Through Through Beyond Total Amounts
1 Year 3 Years 5 Years 5 Years Committed
(In thousands)
Commitments to originate
loans:
Fixed-rate $ 3,582 $ - $ - $ - $ 3,582
Variable-rate 175 - - - 175
Unfunded commitments under
lines of credit or existing
loans 66,240 45,456 9,781 113,945 235,422
Standby letters of credit 124 58 - - 182
Total commitments $ 70,121 $ 45,514 $ 9,781 $ 113,945 $ 239,361
Liquidity Management
Liquidity is the ability to meet current and future financial obligations of a
short-term and long-term nature. Our primary sources of funds consist of deposit
inflows, loan repayments, maturities and sales of securities, and borrowings
from the FHLB. While maturities and scheduled amortization of loans and
securities are usually predictable sources of funds, deposit flows, calls of
investment securities and borrowed funds, and prepayments on loans and
investment securities are greatly influenced by general interest rates, economic
conditions and competition, which can cause those sources of funds to fluctuate.
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 interest-rate risk and investment policies.
Our most liquid assets are cash and cash equivalents followed by available for sale securities. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. AtJune 30, 2021 , cash and cash equivalents totaled$80.7 million , and unpledged securities classified as available-for-sale with a market value of$255.4 million provided additional sources of liquidity. We pledged collateral to support borrowings from the FHLB of$427.1 million and have an established borrowing arrangement with theFederal Reserve Bank of San Francisco , for which available-for-sale securities with a market value of$24.3 million were pledged as ofJune 30, 2021 . AtJune 30, 2021 , we had$3.8 million in loan commitments outstanding and$235.6 million in undisbursed loans and standby letters of credit, including$158.2 million in undisbursed construction loan commitments. 49
--------------------------------------------------------------------------------
Table of Contents
Certificates of deposit due within one year as ofJune 30, 2021 totaled$172.8 million , or 66.0% of certificates of deposit with a weighted-average rate of 0.76%. We believe the large percentage of certificates of deposit that mature within one year reflects customers' hesitancy to invest their funds for longer periods as market interest rates have recently declined. If these maturing deposits are not renewed, however, we will be required to seek other sources of funds, including other certificates of deposit, non-maturity deposits, and borrowings. We have the ability to attract and retain deposits by adjusting the interest rates offered as well as through sales and marketing efforts in the markets we serve. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on certificates of deposit. In addition, we believe that our branch network, and the general cash flows from our existing lending and investment activities, will provide us more than adequate long-term liquidity. For additional information, see the Consolidated Statements of Cash Flows in Item 1 of this Form 10-Q. The Company is a separate legal entity from the Bank and provides for its own liquidity. AtJune 30, 2021 , the Company, on an unconsolidated basis, had liquid assets of$20.7 million . In addition to its operating expenses, the Company is responsible for paying dividends declared, if any, to its shareholders, funds paid for Company stock repurchases, and payments on subordinated notes held at the Company level. The Company has the ability to receive dividends or capital distributions from the Bank, although there are regulatory restrictions on the ability of the Bank to pay dividends. First Northwest has partially fulfilled its commitment to extend$15.0 million toQuin Ventures, Inc. under a capital financing agreement and related promissory note. Capital Resources AtJune 30, 2021 , shareholders' equity totaled$188.8 million , or 10.6% of total assets. Our book value per share of common stock was$18.48 atJune 30, 2021 , compared to$18.20 atDecember 31, 2020 .
At
The following table provides the capital requirements and actual results for First Fed atJune 30, 2021 . Minimum Capital Minimum Required to be Actual Requirements Well-Capitalized Amount Ratio Amount Ratio Amount Ratio (Dollars in thousands) Tier I leverage capital (to average assets)$ 187,564 10.9 %$ 69,071 4.0 %$ 86,339 5.0 % Common equity tier I (to risk-weighted assets) 187,564 14.5 58,367 4.5 84,308 6.5 Tier I risk-based capital (to risk-weighted assets) 187,564 14.5 77,822 6.0 103,763 8.0 Total risk-based capital (to risk-weighted assets) 202,490 15.6 103,763 8.0 129,704 10.0 In order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses, the Bank must maintain common equity tier 1 capital ("CET1") at an amount greater than the required minimum levels plus a capital conservation buffer of 2.5%.
Effect of Inflation and Changing Prices
The consolidated financial statements and related financial data presented in this report have been prepared according to generally accepted accounting principles inthe United States , which require the measurement of financial and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs and the effect that general inflation may have on both short-term and long-term interest rates. Unlike companies in many other industries, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution's performance than do general levels of inflation. Although inflation expectations do affect interest rates, interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services. 50
--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source
