First Northwest Bancorp — Form 10-Q Summary
Business context and reporting period
First Northwest Bancorp is a Washington-based financial holding company whose principal subsidiary, First Fed Bank, provides commercial and consumer banking services in western Washington. The company also consolidates its controlling interest in Quin Ventures, a fintech joint venture, and holds fintech and other investment interests. The filing covers the unaudited three and nine months ended September 30, 2022, compared with the comparable 2021 periods.
Financial performance and key metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Total interest income | $20.9 million | $16.8 million | $56.7 million | $46.5 million |
| Net interest income | $18.2 million | $15.4 million | $50.9 million | $42.5 million |
| Provision for loan losses | $0.8 million | $0.7 million | $1.3 million | $1.5 million |
| Noninterest income | $2.3 million | $4.3 million | $7.0 million | $10.9 million |
| Noninterest expense | $15.4 million | $13.9 million | $47.2 million | $39.7 million |
| Net income attributable to parent | $4.3 million | $4.2 million | $9.6 million | $10.3 million |
| Diluted EPS | $0.47 | $0.44 | $1.04 | $1.09 |
| Net interest margin | 3.88% | 3.58% | 3.73% | 3.48% |
- Total assets increased 8.9% from December 31, 2021, to $2.09 billion at September 30, 2022. Net loans increased 12.7% to $1.52 billion, driven mainly by multifamily real estate, residential real estate, consumer and auto-related lending.
- Deposits increased 1.6% to $1.61 billion. Certificates of deposit increased to $354.1 million, including $129.6 million of brokered CDs, while money-market and demand deposit balances declined.
- Borrowings increased to $292.3 million from $119.3 million, including $241.0 million of FHLB borrowings, a $12.0 million NexBank line of credit and $39.3 million of subordinated debt.
- Cash and cash equivalents totaled $103.7 million. The company reported $235.8 million of unpledged available-for-sale securities as additional liquidity.
- Nine-month operating cash flow was $13.7 million, compared with $11.5 million in the prior-year period. Investing cash flow was negative $230.3 million, primarily because of loan growth and securities purchases, while financing cash flow was positive $194.2 million, mainly from increased borrowings and deposits.
- Shareholders’ equity declined to $156.6 million, or 7.5% of assets, from $190.5 million at year-end. Book value per share declined to $15.69 from $19.10, primarily because of after-tax unrealized losses on available-for-sale securities.
- The Bank remained “well capitalized,” with a 10.5% Tier 1 leverage ratio, 12.6% common equity Tier 1 ratio and 13.6% total risk-based capital ratio.
Material changes versus prior comparable periods
- Q3 net interest income increased 18.6%, and the net interest margin expanded 30 basis points, as loan growth and higher asset yields more than offset higher deposit and borrowing costs.
- Q3 net income attributable to the parent increased modestly despite a $2.0 million decline in noninterest income and a $1.4 million increase in noninterest expense.
- Nine-month net income attributable to the parent declined 6.9% because the $8.5 million increase in net interest income after provision was more than offset by a $3.9 million reduction in noninterest income and a $7.4 million increase in noninterest expense.
- Mortgage loan sale gains declined to $0.8 million year to date from $3.0 million, and investment securities sale gains declined to $0.1 million from $2.4 million. Management attributed the mortgage decline to higher mortgage rates and weaker single-family borrowing demand.
- Nine-month noninterest expense increased 18.7%, partly because of Quin Ventures’ Credit Builder launch, related expense recognition, technology investments, new locations, staffing and higher advertising and professional costs. Management expects Quin Ventures-related expenses to decline in future quarters.
- Accumulated other comprehensive loss was $41.0 million at September 30, 2022, compared with accumulated other comprehensive income of $0.3 million at year-end, reflecting rising-rate-related unrealized losses on available-for-sale securities. The company stated that it did not expect to sell the securities before recovery or maturity and did not view the losses as credit-related.
Guidance, outlook, risks and unusual items
- No formal earnings or revenue guidance is provided. Management stated that it believes the company is positioned to operate through economic uncertainty while continuing to manage liquidity, capital and asset-liability exposures.
- Management expects continued effects from inflation, rising interest rates, potential recession, changing consumer and commercial activity, and slower mortgage demand. Higher rates may support asset yields but increase deposit and wholesale funding costs and extend securities duration.
- Nonperforming loans increased to $3.5 million, or 0.2% of total loans, from $1.4 million, or 0.1%, at year-end. The increase was primarily related to a $1.8 million speculative single-family construction loan and a $595,000 mortgage loan. A contract to sell the speculative property was signed after quarter-end, with payoff expected by year-end.
- The allowance for loan losses was $16.3 million, or 1.1% of gross loans, compared with $15.1 million at year-end. Net charge-offs were $0.1 million for the first nine months. Credit risk remains concentrated in real estate, construction and consumer lending, while the company continues to monitor supply-chain constraints, inflation and property values.
- The Quin CoreCard program was frozen in October 2022, stopping new originations associated with that program. Management stated that charge-offs had been concentrated primarily in Quin CoreCard and indirect auto lending.
- The company expects to adopt the current expected credit loss model on January 1, 2023. Parallel analysis initially indicated a moderate increase in reserves, but the final impact remained uncertain.
- On September 2, 2022, the company issued 115,777 shares and paid approximately $0.5 million in cash to acquire additional interests in The Meriwether Group, increasing its ownership to 33.33%. The company also disclosed an additional purchase in October 2022 that increased its interest in Meriwether Group Capital to 25%.
- At September 30, 2022, $242.6 million, or 68.5%, of certificates of deposit matured within one year. If not renewed, replacement funding could carry higher costs.
- Contractual obligations totaled $658.2 million, including certificates of deposit, FHLB advances, the NexBank line, subordinated debt, leases and other obligations. Off-balance-sheet commitments totaled $232.7 million, primarily unfunded loan commitments and standby letters of credit.
Most important facts for investors to verify
- Whether loan growth and higher asset yields continue to offset rising deposit and wholesale funding costs.
- The extent and duration of unrealized securities losses and their effect on tangible capital, liquidity and regulatory capital.
- Whether nonperforming loans, construction exposures and consumer charge-offs increase as economic conditions weaken.
- The final reserve impact of CECL adoption on January 1, 2023.
- The renewal rate and pricing of the $242.6 million of CDs maturing within one year, including brokered deposits.
- Whether Quin Ventures reaches management’s expectation for lower expenses and whether the frozen Quin CoreCard program reduces future credit losses.
- The financial contribution, valuation and integration risks associated with the Meriwether and other fintech-related investments.