First Northwest Bancorp 2020 Form 10-K Summary
Business context and reporting period
First Northwest Bancorp is the Washington-based holding company for First Federal Savings and Loan Association of Port Angeles. The filing covers the fiscal year ended December 31, 2020; it is an annual report, not a standalone fourth-quarter filing. First Federal operates 10 full-service branches and a Seattle lending center across Western Washington and focuses on residential, commercial real estate, construction, commercial business, and consumer lending.
Key financial metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Total assets | $1.654 billion | $1.307 billion | +26.5% |
| Total loans | $1.154 billion | $883.8 million | +30.6% |
| Net loans | $1.142 billion | $878.4 million | +30.0% |
| Total deposits | $1.334 billion | $1.002 billion | +33.1% |
| Investment securities, fair value | $364.3 million | $315.6 million | +15.4% |
| Shareholders’ equity | $186.4 million | $176.9 million | +5.4% |
| Net income | $10.34 million | $9.01 million | +14.7% |
| Diluted EPS | $1.10 | $0.91 | +20.9% |
| Net interest income | $43.96 million | $37.87 million | +16.1% |
| Net interest margin | 3.27% | 3.20% | +7 basis points |
| Provision for loan losses | $5.05 million | $669,000 | +654% |
| Noninterest income | $15.85 million | $7.01 million | +126.0% |
| Noninterest expense | $41.46 million | $33.12 million | +25.2% |
Cash and cash equivalents were $65.2 million at year-end, compared with $48.7 million in 2019. Operating activities generated $11.8 million of cash, while investing activities used $314.5 million, primarily for loan growth and securities purchases; financing activities provided $319.1 million, principally from deposit growth. Total borrowings were $110.0 million, including $50.0 million of long-term FHLB advances and approximately $60.0 million of overnight advances.
FHLB collateral supported borrowing capacity of $428.6 million, of which $318.6 million remained available at year-end. The Company also had $19.8 million of Federal Reserve discount-window borrowing capacity, with no borrowings outstanding. First Federal was categorized as well capitalized, with a 13.40% CET1 ratio, 14.59% total risk-based capital ratio, and 10.28% Tier 1 leverage ratio.
Material changes versus the prior comparable period
- Loan growth was concentrated in multi-family real estate, commercial real estate, construction and land, and commercial business lending. Construction and land loans increased 232.4% to $123.6 million.
- Commercial and multi-family real estate loans increased to $459.0 million, or 39.8% of total loans. Commercial loans, including commercial real estate, multi-family real estate, and commercial business loans, represented approximately 48.5% of total loans.
- Deposits increased $331.9 million, driven primarily by transaction and money-market accounts. Brokered certificates of deposit totaled $89.6 million.
- Mortgage loan sales increased sharply, contributing to net gains on loan sales of $6.43 million versus $1.08 million in 2019. The Company sold $184.4 million of residential mortgage loans in 2020 versus $58.0 million in 2019.
- Net gains on investment securities increased to $3.15 million from $836,000, and the increase in bank-owned life insurance cash surrender value rose to $1.83 million from $708,000.
- Lower deposit and borrowing costs offset lower asset yields. Average loan yield declined to 4.44% from 4.64%, while the average cost of interest-bearing liabilities declined to 0.75% from 1.26%.
- Shareholders’ equity benefited from $7.0 million of improvement in accumulated other comprehensive income, but was reduced by $7.4 million of share repurchases and $2.2 million of dividends. The Company repurchased 575,859 shares during 2020.
Guidance, outlook, management commentary, risks and unusual items
Management did not provide formal earnings or balance-sheet guidance. Its stated strategy is to continue growing higher-yielding commercial lending, expand core deposits and treasury-management capabilities, increase digital delivery, pursue selected loan purchases, and consider branch or whole-bank acquisitions. Management planned to launch digital deposit and consumer-loan origination platforms in the first half of 2021.
- The Company processed $32.2 million of SBA Paycheck Protection Program loans for 515 customers; $23.2 million remained outstanding at year-end. It recognized $643,000 of PPP fee income through accretion and payoff activity.
- The Bank granted COVID-19-related modifications on 357 loans totaling $177.6 million. At December 31, 2020, 19 loans totaling $2.3 million remained on deferral.
- Nonperforming assets increased to $2.3 million from $2.0 million but remained 0.1% of total assets. Nonaccrual loans were $2.27 million, or 0.2% of total loans. Classified loans increased to $7.5 million from $5.0 million, and special-mention loans totaled $24.0 million.
- The allowance for loan losses increased to $13.85 million, or 1.2% of total loans, from $9.63 million, or 1.1%. Management cited COVID-19 uncertainty and loan growth as key factors. The allowance estimation was identified as the audit’s critical audit matter.
- One-time or unusual items included a $210,000 FHLB prepayment penalty, pandemic-related employee payments, a BOLI early-surrender penalty estimate, securities-sale gains, and significant mortgage-loan-sale gains.
- Principal risks include COVID-19-related credit deterioration, concentration in commercial real estate and construction lending, rapid growth in less-seasoned portfolios, interest-rate and margin pressure, deposit retention and liquidity, reliance on FHLB funding, cybersecurity and third-party vendors, regulatory changes, LIBOR transition, and execution risk from expansion or acquisitions.
- CECL adoption was planned for January 1, 2023; management stated that the eventual effect on the financial statements could not yet be reasonably estimated.
Important facts for investors to verify
- Whether COVID-19 deferrals, PPP forgiveness outcomes, and economic conditions lead to higher nonaccrual loans, charge-offs, or provisions after year-end.
- The performance and concentration of the $459.0 million commercial and multi-family real estate portfolio and the $123.6 million construction and land portfolio, including $155.1 million of undisbursed construction commitments.
- The sustainability of 2020 mortgage-sale gains, securities-sale gains, BOLI income, and other noninterest-income increases.
- Deposit stability, particularly the renewal of $185.8 million of certificates maturing within one year and reliance on $89.6 million of brokered certificates.
- The effect of low interest rates, future rate changes, loan prepayments, and LIBOR replacement on net interest margin and asset values.
- The impact of CECL adoption, regulatory examinations, and any changes in capital or dividend restrictions.
- The Company’s ability to fund growth while maintaining its well-capitalized status and adequate liquidity.