First Northwest Bancorp: Q1 2023 Form 10-Q Summary
Business context and reporting period
First Northwest Bancorp is a Washington-based bank holding and financial holding company whose principal subsidiary, First Fed Bank, provides commercial and consumer banking services across western Washington. The company also consolidates its controlling interest in Quin Ventures. This unaudited Form 10-Q covers the three months ended March 31, 2023, with comparative results for the three months ended March 31, 2022 and balance-sheet comparisons with December 31, 2022.
Key financial metrics
| Metric | Q1 2023 | Comparable period or prior date |
|---|---|---|
| Total assets | $2.172 billion | $2.042 billion at December 31, 2022 |
| Total loans, net | $1.562 billion | $1.531 billion at December 31, 2022 |
| Deposits | $1.594 billion | $1.564 billion at December 31, 2022 |
| Borrowings | $379.4 million | $285.4 million at December 31, 2022 |
| Net interest income | $16.3 million | $15.5 million in Q1 2022 |
| Net income attributable to parent | $3.5 million | $2.8 million in Q1 2022 |
| Diluted earnings per share | $0.39 | $0.30 in Q1 2022 |
| Net interest margin | 3.46% | 3.53% in Q1 2022 |
| Net cash provided by operating activities | $6.8 million | $3.3 million in Q1 2022 |
| Cash and cash equivalents | $140.6 million | $45.6 million at December 31, 2022 |
| Total shareholders’ equity | $160.3 million | $158.3 million at December 31, 2022 |
Total interest income increased 37.8% to $23.3 million, while interest expense increased 393.1% to $7.0 million. The yield on average interest-earning assets rose to 4.95% from 3.86%, but the average cost of interest-bearing liabilities increased to 1.81% from 0.43%. The filing’s narrative states that net interest margin increased by 7 basis points, but the reported margins of 3.46% for 2023 and 3.53% for 2022 indicate a 7-basis-point decline.
Noninterest income decreased 2.9% to $2.3 million, while noninterest expense increased 0.3% to $14.9 million. Income before taxes was $4.3 million and the effective tax rate was 19.3%.
Material changes versus prior comparable period
- Net income attributable to the parent increased approximately 25.7%, primarily due to higher net interest income and a $500,000 recapture of credit-loss provisions.
- Average earning assets increased $131.6 million, led by loan growth and higher asset yields.
- Interest expense increased substantially as deposit and borrowing costs rose. Average certificate-of-deposit balances increased $205.1 million, and average advances increased $149.6 million.
- Net loans grew $30.6 million, or 2.0%, from year-end 2022. Multi-family loans increased $32.1 million and commercial business loans increased $23.1 million, while construction and land loans declined $32.0 million.
- Deposits increased $30.0 million, but the mix shifted toward higher-cost certificates of deposit and savings accounts. Certificates of deposit increased to $468.0 million, including $134.5 million of brokered CDs.
- FHLB borrowings increased $105.0 million, or 46.9%, to $329.0 million as the company increased liquidity in response to banking-industry stress.
- Nonperforming loans increased 46.8% to $2.6 million, although nonperforming loans remained 0.2% of total loans.
- The company repurchased 44,441 shares under its repurchase plan for $627,000, leaving 257,586 shares authorized for future repurchase.
Credit quality, liquidity, debt and capital
The company adopted the CECL model on January 1, 2023. The adoption increased the allowance for credit losses on loans by $2.2 million and the allowance for unfunded commitments by $1.5 million, reducing beginning retained earnings by $3.0 million after tax. The allowance for credit losses on loans was $17.4 million, or 1.1% of total loans, at March 31, 2023. Net charge-offs were $944,000, concentrated in purchased unsecured consumer loans, indirect auto loans and the Quin CoreCard program.
Liquidity was strengthened during the quarter. Cash and cash equivalents increased to $140.6 million, and the company held $237.6 million of unpledged available-for-sale securities. Remaining borrowing capacity was $190.8 million from the FHLB, $8.7 million from the Federal Reserve discount window and $9.0 million under the NexBank line of credit. The company reported $203.9 million of total off-balance-sheet commitments, including $98.5 million of undisbursed construction commitments.
At March 31, 2023, First Fed was considered well capitalized. Regulatory capital ratios were 10.4% for Tier 1 leverage, 13.3% for common equity Tier 1, 13.3% for Tier 1 risk-based capital and 14.4% for total risk-based capital.
Guidance, outlook, management commentary and risks
- No specific quantitative earnings or balance-sheet guidance was provided.
- Management intends to pursue loan and revenue growth through organic originations, purchased loans and expansion of digital, fintech and banking-as-a-service capabilities.
- Management expects construction projects in process to be completed, but continues to monitor supply-chain constraints, inflation, consumer demand, real-estate values and rising interest rates.
- The company adjusted underwriting requirements for future purchases from Splash after charge-offs increased. The Quin CoreCard program was frozen in October 2022, and the indirect auto program was discontinued in 2020.
- Management stated that the allowance for credit losses was adequate at March 31, 2023, while acknowledging that CECL estimates are sensitive to economic forecasts, including GDP and unemployment assumptions.
- Key risks include deposit attrition and repricing, reliance on FHLB and other borrowings, rising interest rates, unrealized losses on securities, loan and construction credit deterioration, recessionary conditions, regulatory developments, cybersecurity and third-party vendor risks, and execution of growth or acquisition strategies.
- The investment portfolio had $43.8 million of gross unrealized losses at March 31, 2023. Management attributed these losses primarily to interest-rate, liquidity and market factors rather than credit deterioration and recorded no credit impairment.
- The NexBank revolving credit facility matured May 19, 2023, with two possible 364-day extensions. The filing does not provide a subsequent renewal or repayment outcome.
Most important facts for investors to verify
- Reconcile the filing’s narrative statement regarding a 7-basis-point increase in net interest margin with the reported 3.46% versus 3.53% values.
- Monitor deposit pricing, the $317.0 million of certificates of deposit maturing within one year, brokered deposits and the effect of funding costs on future margins.
- Evaluate liquidity and interest-rate exposure, including $329.0 million of FHLB borrowings, the securities portfolio’s long duration and available collateral capacity.
- Track nonperforming loans, classified loans, net charge-offs and CECL assumptions, particularly in purchased consumer, manufactured-home, auto and construction portfolios.
- Confirm the status of the NexBank credit facility after its May 19, 2023 maturity date and any related effect on liquidity.
- Assess the sustainability of earnings given the $500,000 credit-loss recapture, a $436,000 medical-insurance premium refund, Employee Retention Credit-related payroll-tax benefits and other unusual items.