First Northwest Bancorp: Q2 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-oriented lender serving western Washington. First Fed provides commercial, consumer, mortgage, real estate, construction and deposit services through 16 locations. The filing covers the three and six months ended June 30, 2023; financial statements are unaudited and presented in accordance with interim GAAP. The company ceased including Quin Ventures in its operations after determining in June 2023 that Quin was no longer a going concern.
Key financial metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net income attributable to parent | $1.8 million | $2.5 million | $5.3 million | $5.3 million |
| Basic and diluted EPS | $0.20 | $0.27 | $0.59 | $0.58 |
| Net interest income | $16.0 million | $17.2 million | $32.3 million | $32.7 million |
| Net interest margin | 3.25% | 3.77% | 3.35% | 3.65% |
| Net interest income after credit-loss provision | $15.7 million | $16.7 million | $32.5 million | $32.2 million |
| Noninterest income | $1.7 million | $2.2 million | $4.0 million | $4.6 million |
| Noninterest expense | $15.2 million | $17.0 million | $30.1 million | $31.8 million |
| Net cash provided by operating activities | Not separately disclosed | Not separately disclosed | $17.8 million | $9.3 million |
At June 30, 2023, total assets were $2.16 billion, up 5.9% from December 31, 2022. Net loans were $1.62 billion, up 5.8%, while deposits were $1.65 billion, up 5.7%. Borrowings were $303.4 million, including $253.0 million of FHLB borrowings, an $11.0 million line of credit and $39.4 million of subordinated debt. Cash and cash equivalents totaled $78.3 million, and available-for-sale securities totaled $322.0 million.
Shareholders’ equity was $159.6 million, or 7.4% of assets, and book value per share was $16.56. First Fed exceeded all regulatory capital requirements and was classified as well capitalized. Reported regulatory ratios included a 10.2% Tier 1 leverage ratio, 13.1% common equity Tier 1 ratio and 14.1% total risk-based capital ratio.
Material changes versus comparable periods
- Q2 net income attributable to the parent declined 28.6% year over year, primarily because higher funding costs reduced net interest income and noninterest income declined. Lower noninterest expense partially offset these effects.
- Six-month parent-attributable net income was broadly unchanged year over year. Net interest income after provision increased modestly, and lower operating expenses offset reduced noninterest income.
- Interest income increased substantially, but interest expense rose faster. Q2 interest income increased 34.3% to $25.5 million, while interest expense increased 452.5% to $9.5 million. Six-month interest expense increased 425.7% to $16.5 million.
- The Q2 net interest margin contracted 52 basis points to 3.25%; the six-month margin contracted 30 basis points to 3.35%. Management attributed the pressure primarily to higher deposit and borrowing costs outpacing asset-yield increases.
- Loan growth was concentrated in commercial business loans, multi-family loans, consumer loans and one-to-four-family loans. Construction and land loans declined 18.9% to $157.1 million, while commercial business loans increased 69.2% to $130.1 million.
- Nonperforming loans increased 42.4% to $2.6 million, or 0.2% of total loans, from $1.8 million, or 0.1%, at December 31, 2022. Classified loans increased to $22.7 million from $16.9 million.
- The allowance for credit losses on loans was $17.3 million, or 1.1% of gross loans. Net charge-offs were $1.3 million for the first six months, concentrated primarily in purchased unsecured consumer and indirect auto loans.
- The company adopted CECL on January 1, 2023, recording a $3.7 million pretax cumulative-effect adjustment and a $3.0 million after-tax reduction to beginning retained earnings. The company also adopted new troubled-borrower modification guidance; no modified loans to troubled borrowers were reported during the period.
- Noninterest expense declined 10.3% in Q2 and 5.4% for the first six months, partly because Quin Ventures recorded no comparable compensation, marketing or professional-fee expenses. Quin Ventures’ noncontrolling interest was eliminated in June 2023 without changing total shareholders’ equity.
Cash flow, liquidity, outlook and risks
For the first six months, operating activities provided $17.8 million, investing activities used $88.9 million, and financing activities provided $104.2 million. The resulting increase in cash and cash equivalents was $33.1 million, bringing ending cash and cash equivalents to $78.6 million in the cash flow statement. Management increased liquidity in response to stress in the banking industry and concerns regarding deposit retention.
At June 30, 2023, unpledged available-for-sale securities had a market value of approximately $290.9 million. Remaining borrowing capacity included $311.3 million at the FHLB, $8.7 million through the Federal Reserve discount window, $18.7 million through the Bank Term Funding Program and $9.0 million under the NexBank line of credit. CDs maturing within one year totaled $422.5 million, creating potential future deposit-retention and funding-cost pressure. Management stated that it believes existing liquidity sources and operating cash flows are adequate, but no formal earnings or margin guidance was provided.
The securities portfolio had $48.0 million of gross unrealized losses, which management attributed primarily to interest rates, liquidity and market volatility rather than credit deterioration. The company does not intend to sell the securities in loss positions and reported no credit impairment. Key risks include further interest-rate increases, deposit outflows or repricing, margin compression, deterioration in real estate and consumer credit, construction-project delays, liquidity constraints, regulatory actions, cybersecurity and third-party vendor disruptions, and volatility in fair-value estimates.
Important facts for investors to verify
- Whether elevated deposit and FHLB funding costs continue to compress net interest margin.
- The trend in nonperforming and classified loans, especially construction, commercial real estate, commercial business and purchased consumer portfolios.
- Future charge-offs and allowance adequacy under the newly adopted CECL methodology.
- Renewal rates and pricing for the $422.5 million of CDs maturing within one year, including brokered CDs.
- The liquidity impact of pledged collateral, available borrowing capacity and the $169.4 million of undisbursed loans and standby letters of credit.
- The magnitude and duration of unrealized losses in the $322.0 million available-for-sale securities portfolio.
- The financial and collection status of amounts previously associated with Quin Ventures and the related repayment arrangements.
- Whether loan growth and cost reductions can offset lower mortgage-sale activity and ongoing funding-cost pressure.