First Northwest Bancorp — 2022 Form 10-K Summary
Business context and reporting period
First Northwest Bancorp is a Washington-based financial and bank holding company operating primarily through First Fed Bank, a community-oriented commercial bank serving Western Washington. The filing covers the fiscal year ended December 31, 2022, with comparisons principally to 2021. First Fed operated 12 full-service branches and four business centers and had 285 full-time equivalent employees at year-end.
The Company focuses on commercial and multifamily real estate, construction and land, residential mortgage, consumer, and commercial business lending. Deposits are its primary funding source. It also holds fintech and other strategic investments, including interests in The Meriwether Group and related entities.
Key financial metrics
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Total assets | $2.042 billion | $1.921 billion | +6.3% |
| Total loans | $1.534 billion | $1.357 billion | +13.1% |
| Net loans | $1.531 billion | $1.350 billion | +13.4% |
| Total deposits | $1.564 billion | $1.581 billion | -1.0% |
| Total borrowings | $285.4 million | $119.3 million | +139.2% |
| Total shareholders’ equity | $158.3 million | $190.5 million | -16.9% |
| Net interest income | $69.9 million | $58.3 million | +19.8% |
| Net income attributable to parent | $15.6 million | $15.4 million | +1.5% |
| Basic and diluted EPS | $1.71 | $1.63 | +4.9% |
| Net interest margin | 3.79% | 3.51% | +28 basis points |
| Return on average assets | 0.79% | 0.87% | Down |
| Return on average equity | 9.09% | 8.19% | Up |
Interest income increased 26.2% to $80.4 million as average loan balances and yields increased. Interest expense rose 95.7% to $10.5 million as borrowing and deposit costs increased. The provision for loan losses was $1.5 million, compared with $1.4 million in 2021.
Noninterest income declined 34.0% to $10.3 million, primarily because net gains on loan sales fell to $824,000 from $5.3 million and gains on securities sales fell to $118,000 from $2.4 million. Noninterest expense increased 14.5% to $62.3 million, driven by compensation, data processing, occupancy, advertising, professional fees, and expenses associated with Quin Ventures and geographic expansion.
Net cash provided by operating activities was $15.9 million, compared with $15.2 million in 2021. Investing activities used $237.6 million, primarily because of $183.7 million of net loan growth and $78.4 million of securities purchases. Financing activities provided $141.3 million, primarily through increased short-term FHLB borrowings and a $12.0 million corporate line of credit. Cash and cash equivalents declined 63.8% to $45.6 million.
Balance-sheet composition, liquidity, and capital
- Real estate loans were $1.182 billion, or 77.1% of total loans. Commercial and multifamily real estate loans totaled $643.8 million, or 42.0% of total loans.
- Consumer loans increased 23.9% to $275.1 million, primarily through purchased auto and manufactured-home loans.
- Certificates of deposit increased 54.4% to $381.7 million, including $133.9 million of brokered certificates. Money-market and transaction balances declined.
- FHLB borrowings totaled $234.0 million, consisting of $80.0 million of long-term advances, $10.0 million of short-term advances, and $144.0 million of overnight borrowings. Total borrowings, including subordinated debt and the corporate line of credit, were $285.4 million.
- The Bank had pledged collateral supporting $533.4 million of FHLB borrowing capacity, with $298.6 million of remaining capacity after outstanding advances and a letter of credit.
- Available-for-sale securities had a fair value of $326.6 million. Unrealized losses were $48.6 million, principally attributed by management to higher interest rates and market liquidity rather than credit deterioration. No other-than-temporary impairment was recorded.
- First Fed was categorized as well capitalized. Its year-end CET1, Tier 1 risk-based, total risk-based, and Tier 1 leverage ratios were 13.40%, 13.40%, 14.42%, and 10.41%, respectively.
Material changes versus the prior comparable period
- Loan growth was concentrated in multifamily and commercial real estate, residential mortgages, and consumer loans. Construction and land loans declined 13.4% to $194.6 million as projects converted to permanent loans.
- Funding shifted from lower-cost transaction and money-market accounts toward higher-cost certificates of deposit and wholesale borrowings, increasing interest-rate and liquidity sensitivity.
- Shareholders’ equity declined primarily because accumulated other comprehensive loss increased by $40.8 million after tax from the decline in available-for-sale securities. Share repurchases and dividends also reduced equity.
- Asset quality remained low-risk by reported nonperforming-asset measures, but classified loans increased 34.3% to $16.9 million, primarily after a $14.0 million multifamily construction loan was downgraded in the fourth quarter.
- Nonperforming loans increased to $1.8 million from $1.4 million, while nonperforming assets remained 0.1% of total assets. The allowance for loan losses increased to $16.1 million, but declined to 1.05% of total loans from 1.11%.
- Quin Ventures sold substantially all assets in December 2022, terminated its joint venture agreement, and transferred assets to Quil Ventures. First Northwest received a 5% interest in Quil valued at $225,000 and recorded a $1.5 million commitment receivable. Management expects future Quin-related expenses to be immaterial.
- The Company acquired additional interests in The Meriwether Group and related investment vehicles and invested $6.0 million in the Meriwether Group Capital Hero Fund.
Guidance, outlook, management commentary, risks, and unusual items
The filing does not provide formal earnings or revenue guidance. Management expects to pursue loan and deposit growth, expand commercial lending and digital capabilities, improve noninterest income through SBA, treasury, payments, fintech, and banking-as-a-service initiatives, and maintain well-capitalized status. Management also intends to emphasize core customer deposits and operating efficiency.
Management reported that the Federal Reserve increased the federal funds rate seven times during 2022, by a cumulative 425 basis points. Although asset yields initially repriced faster than funding costs, management warns that deposit and borrowing costs may increase faster than asset yields, pressuring net interest margin. The filing’s sensitivity analysis indicates that a 400-basis-point rate increase would reduce projected one-year net interest income by 11.8% under stated assumptions.
- Credit concentration: Commercial and multifamily real estate represented 42.0% of loans, and construction and land lending was $194.6 million with $120.7 million of undisbursed construction commitments. Regional real estate weakness, higher rates, vacancies, or project delays could increase losses.
- Funding and liquidity: Deposits declined while borrowings rose materially. Approximately $262.2 million of certificates of deposit mature within one year, creating renewal and repricing risk.
- Investment securities: The securities portfolio had substantial unrealized losses that reduced accumulated other comprehensive income and shareholders’ equity. Realization could occur if securities must be sold before recovery or maturity.
- CECL adoption: The Company adopted the current expected credit loss model effective January 1, 2023 and estimated that the combined allowance for credit losses and unfunded commitments could increase 15% to 30%, with a related reduction in equity.
- Fintech and strategic investments: Investments in early-stage fintech companies and partnerships may produce losses, require additional funding, or fail to generate anticipated revenue.
- Operational and regulatory risk: Cybersecurity incidents, third-party vendor failures, regulatory changes, consumer-protection requirements, and examinations could increase costs or restrict operations.
- Unusual items: The Company recorded $1.5 million of income from a bank-owned life insurance death benefit and recognized a $2.1 million net loss attributable to the noncontrolling interest in Quin Ventures.
- Legal matters: The Company reports ordinary-course claims and proceedings but states that no current matter is expected to have a material adverse effect on consolidated financial position, results of operations, or liquidity.
Most important facts for an investor to verify
- Whether commercial real estate, multifamily, and construction exposures continue to perform as interest rates remain elevated.
- The effect of CECL adoption on the allowance for credit losses, equity, provisions, and regulatory capital in 2023.
- Deposit retention and pricing, particularly for the $262.2 million of certificates maturing within one year and the $133.9 million of brokered certificates.
- Borrowing levels, collateral availability, the May 2023 maturity of the $20.0 million NexBank line, and continuing access to FHLB funding.
- Whether the $48.6 million of unrealized securities losses remain temporary and whether further changes in accumulated other comprehensive income affect capital.
- Progress and profitability of the Company’s fintech, digital banking, banking-as-a-service, and Meriwether-related initiatives.
- The cause and resolution of the $14.0 million multifamily construction loan downgrade and the trend in classified loans and special mentions.
- The filing contains differing references to year-end equity: consolidated shareholders’ equity was $158.3 million, while parent shareholders’ equity was $161.6 million; investors should distinguish consolidated equity from parent equity and noncontrolling interest.