First Northwest Bancorp — Q3 2023 Form 10-Q Summary
Business Context and Reporting Period
First Northwest Bancorp is a Washington-based bank holding company and financial holding company operating primarily through First Fed Bank, a community bank serving western Washington. The filing covers the three and nine months ended September 30, 2023. First Fed had 16 locations, including 12 full-service branches and four business centers. The former Quin Ventures controlling interest was closed out in June 2023 and is no longer included in the consolidated balance sheet.
Financial Condition and Key Metrics
| Metric | Q3 2023 / September 30, 2023 | Comparable period or prior year-end |
|---|---|---|
| Total assets | $2.154 billion | $2.042 billion at December 31, 2022 |
| Net loans receivable | $1.618 billion | $1.531 billion at December 31, 2022 |
| Deposits | $1.658 billion | $1.564 billion at December 31, 2022 |
| Borrowings | $300.4 million | $285.4 million at December 31, 2022 |
| Shareholders’ equity | $156.1 million | $158.3 million at December 31, 2022 |
| Cash and cash equivalents | $83.9 million | $45.6 million at December 31, 2022 |
| Net interest margin | 2.97% for Q3; 3.22% year to date | 3.88% and 3.73%, respectively, in 2022 |
| Book value per share | $16.20 | $16.31 at December 31, 2022 |
For the three months ended September 30, 2023, net income attributable to the parent was $2.5 million, or $0.28 per diluted share, compared with $4.3 million, or $0.47 per share, in the prior-year quarter. Net interest income was $15.0 million, provision for credit losses was $371,000, noninterest income was $2.9 million, and noninterest expense was $14.4 million.
For the nine months ended September 30, 2023, net income attributable to the parent was $7.8 million, or $0.87 per diluted share, compared with $9.6 million, or $1.04 per share, in the prior-year period. Net interest income was $47.2 million, provision for credit losses was $171,000, noninterest income was $6.9 million, and noninterest expense was $44.5 million.
Total interest income increased to $25.8 million in Q3 and $74.6 million year to date, but interest expense rose sharply to $10.9 million and $27.4 million, respectively. The Q3 average yield on interest-earning assets was 5.14%, while the average cost of interest-bearing liabilities was 2.60%. The resulting net interest margin declined to 2.97% from 3.88% in the prior-year quarter.
Net cash provided by operating activities was $15.3 million for the first nine months of 2023. Investing activities used $83.3 million, primarily due to an $89.6 million net increase in loans. Financing activities provided $106.3 million, including a $93.5 million increase in deposits and a $19.0 million net increase in short-term FHLB advances. Cash and cash equivalents increased by $38.3 million to $83.9 million.
Material Changes Versus Prior Comparable Period
- Net interest income declined 17.9% in Q3 and 7.2% year to date as funding costs rose faster than asset yields.
- Interest expense increased 310.6% in Q3 and 372.9% year to date, driven by higher deposit and borrowing rates and a shift toward certificates of deposit.
- Net loans increased 5.7% from year-end 2022. Multi-family loans rose 28.8% and commercial business loans rose 31.8%, while construction and land loans declined 25.9%.
- Deposits increased $93.5 million from year-end 2022, primarily through a $198.0 million increase in certificates of deposit, partly offset by declines in money market and demand deposits. Certificates of deposit carried a weighted-average rate of 3.93% at September 30, 2023.
- Noninterest expense decreased 6.5% in Q3 and 5.7% year to date, reflecting lower compensation, occupancy, advertising and former Quin Ventures expenses. Data processing, professional fees and FDIC insurance premiums increased.
- Noninterest income increased 24.4% in Q3 but was essentially unchanged year to date. Q3 included a $750,000 reclassification related to Splash loan charge-offs and $219,000 of referral fee income.
- Accumulated other comprehensive loss increased to $45.9 million from $40.5 million at year-end, primarily due to additional unrealized losses on available-for-sale securities.
Credit Quality, Liquidity, Debt and Capital
The allowance for credit losses on loans was $16.9 million, or approximately 1.0% of total loans, at September 30, 2023. The company adopted the CECL model on January 1, 2023, recording a $2.2 million pretax increase to the loan allowance and a $1.5 million increase to the allowance for unfunded commitments. Year-to-date gross charge-offs were $2.7 million, concentrated in purchased unsecured consumer and indirect auto loans; management identified Splash program charge-offs as a principal source of Q3 losses.
Nonaccrual loans increased to $2.4 million from $1.8 million at year-end, while nonaccrual and loans 90 days or more past due remained 0.1% of total loans. Classified loans increased to $23.0 million from $16.9 million, reflecting downgrades in commercial business, commercial real estate, construction, residential and consumer loans.
Available-for-sale securities had a fair value of $309.3 million and gross unrealized losses of $56.3 million. Management attributed the losses primarily to higher interest rates and stated that it did not intend, and did not expect, to be required, to sell the securities before recovery or maturity. No credit impairment was recorded.
Borrowings totaled $300.4 million, including $253.0 million of FHLB borrowings, an $8.0 million NexBank line of credit, and $39.4 million of subordinated debt. The company reported $83.9 million of cash, $279.1 million of unpledged available-for-sale securities, $269.0 million of remaining FHLB borrowing capacity, $8.5 million of Federal Reserve discount-window capacity, $18.3 million of BTFP capacity, and $12.0 million of remaining NexBank capacity.
Liquidity exposure includes $449.2 million of certificates of deposit maturing within one year, representing 77.5% of total certificates. Total contractual obligations were $891.5 million, and total off-balance-sheet commitments were $155.7 million, including $60.6 million of undisbursed construction commitments. First Fed exceeded all regulatory capital requirements and was considered well capitalized. Its total risk-based capital ratio was 14.4%, common equity tier 1 ratio was 13.4%, and tier 1 leverage ratio was 10.1%.
Guidance, Outlook, Management Commentary and Risks
The filing does not provide formal quantitative earnings or revenue guidance. Management indicated that funding-cost pressure is currently outpacing asset-yield growth, but described actions intended to limit margin compression, including higher-yielding purchased loans, market-priced new originations and a fair-value hedge.
Management expects construction projects in process to be completed but continues to monitor supply-chain challenges, inflation, consumer demand, real estate values and higher interest rates. The company is also monitoring deposit retention and pricing, particularly because of substantial near-term CD maturities and increased reliance on higher-cost CDs and brokered deposits.
- Interest-rate changes may further pressure net interest margin and the market value and duration of securities.
- Deposit withdrawals, deposit repricing and competition for funding could affect liquidity and earnings.
- Credit quality could deteriorate because of economic weakness, higher rates, inflation, construction risks, commercial real estate exposure or consumer loan losses.
- The CECL allowance depends on management estimates, economic forecasts and assumptions regarding GDP and unemployment; future provisions may differ materially.
- Mortgage loan sale demand remains weak because of higher mortgage rates and limited housing inventory, while SBA loan-sale activity has declined.
- Regulatory changes, examinations, cybersecurity events, third-party vendor failures, fintech competition and execution of growth, digital banking or acquisition strategies could adversely affect results.
- The company reported no material changes to previously disclosed risk factors, no material legal proceedings, and effective disclosure controls as of September 30, 2023.
Important Facts for Investors to Verify
- Whether deposit costs and the mix of certificates, brokered deposits and non-maturity deposits continue to pressure net interest margin.
- The maturity and renewal behavior of the $449.2 million of CDs due within one year and the company’s available borrowing capacity.
- Trends in classified loans, nonaccrual loans, charge-offs and the adequacy of the $16.9 million CECL allowance.
- Performance of purchased unsecured consumer, manufactured-home, auto and Bankers Healthcare Group loan portfolios.
- Potential further changes in the $56.3 million of unrealized securities losses and accumulated other comprehensive loss.
- Construction completion, collateral values and repayment performance for the $197.6 million of construction commitments.
- The sustainability of expense reductions following the wind-down of Quin Ventures and the effect of higher technology, professional and FDIC insurance costs.
- The company’s capacity to maintain well-capitalized status while paying dividends and repurchasing shares; 226,337 shares remained authorized for repurchase at September 30, 2023.