First Northwest Bancorp — 2021 Third-Quarter Form 10-Q
Business context and reporting period
First Northwest Bancorp is the holding company for First Fed Bank, a community-oriented bank serving Western Washington. The unaudited filing covers the three and nine months ended September 30, 2021, with comparisons to the corresponding 2020 periods and balance-sheet comparisons to December 31, 2020. First Fed acquired a Sterling Bank branch in Bellevue on July 23, 2021, and converted to a state commercial bank charter and adopted the First Fed Bank name on October 31, 2021.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Total interest income | $16.8 million | $13.4 million | $46.5 million | $37.7 million |
| Net interest income | $15.4 million | $11.8 million | $42.5 million | $31.3 million |
| Provision for loan losses | $0.7 million | $1.4 million | $1.5 million | $4.1 million |
| Noninterest income | $4.3 million | $4.8 million | $10.9 million | $11.2 million |
| Noninterest expense | $13.9 million | $10.1 million | $39.7 million | $29.7 million |
| Net income attributable to parent | $4.2 million | $3.7 million | $10.3 million | $6.5 million |
| Diluted earnings per share | $0.45 | $0.40 | $1.11 | $0.69 |
| Net interest margin | 3.58% | 3.36% | 3.48% | 3.20% |
- Total assets were $1.85 billion at September 30, 2021, versus $1.65 billion at year-end 2020.
- Net loans increased 17.8% to $1.35 billion. Total loans increased 17.2% to $1.35 billion, led by construction and land loans, commercial real estate loans, and consumer loans.
- Deposits increased 14.2% to $1.52 billion, including growth in money market and demand deposits; certificates of deposit declined to $245.1 million.
- Allowance for loan losses was $15.2 million, or 1.1% of total loans, compared with $13.8 million, or 1.2%, at December 31, 2020.
- Nonperforming loans declined 48.0% to $1.2 million, or 0.1% of total loans. Classified loans increased to $12.7 million from $7.5 million, primarily due to one commercial real estate loan downgrade.
- Shareholders’ equity was $187.8 million, or 10.2% of total assets. Book value per share was $18.65, compared with $18.19 at year-end 2020.
- First Fed remained “well capitalized.” Actual capital ratios were 10.6% Tier 1 leverage, 13.4% common equity Tier 1, 13.4% Tier 1 risk-based capital, and 14.4% total risk-based capital.
Cash flow, debt and liquidity
- For the nine months ended September 30, 2021, operating activities generated $11.5 million of cash, investing activities used $108.3 million, and financing activities generated $107.8 million. Cash and cash equivalents increased $11.0 million to $76.1 million.
- The Company issued $40.0 million of 3.75% fixed-to-floating subordinated notes due 2031 in March 2021, receiving approximately $39.3 million net proceeds. The notes qualify as Tier 2 capital; $20.0 million was provided to the Bank as Tier 1 capital.
- FHLB advances were $60.0 million at September 30, 2021, compared with $110.0 million at year-end 2020. Subordinated debt was $39.3 million versus none at year-end 2020.
- Liquidity included $76.1 million of cash and cash equivalents and approximately $200.0 million of unpledged available-for-sale securities. FHLB collateral pledged was $446.8 million, and $23.5 million of securities were pledged under a Federal Reserve borrowing arrangement.
- Contractual obligations totaled $357.1 million, including $245.1 million of certificates of deposit, $60.0 million of FHLB advances, and $39.3 million of subordinated debt. Off-balance-sheet commitments totaled $259.4 million, including $256.1 million of unfunded loan commitments and lines of credit.
Material changes versus comparable periods
- Third-quarter net income attributable to the parent increased 13.7%, while nine-month net income increased 57.8%, primarily from higher net interest income and lower loan-loss provisions.
- Net interest income increased 30.5% in the quarter and 35.8% year to date, primarily from substantially higher average earning assets and loan balances. The net interest margin expanded 22 basis points in the quarter and 28 basis points year to date.
- Noninterest income declined 10.4% in the quarter and 3.1% year to date. Lower gains on mortgage loan sales were partly offset by higher loan-servicing income, investment-security gains, service fees, and other income.
- Noninterest expense increased 38.2% in the quarter and 33.6% year to date. Compensation, staffing, incentives, commissions, technology investments, branch expansion, the Bellevue acquisition, and Quin Ventures-related costs were significant contributors.
- The investment securities portfolio declined 10.5% to $325.9 million, while mortgage-backed securities increased 46.6% to $130.9 million. The portfolio had $1.8 million of gross unrealized losses at quarter-end, which management attributed principally to interest-rate and market factors rather than credit quality.
- During the quarter, the Company repurchased 149,087 shares at an average price of $17.85. The repurchase authorization had 715,935 shares remaining at September 30, 2021.
Guidance, outlook, risks and unusual items
- The filing does not provide formal quantitative earnings or revenue guidance. Management expects continued economic improvement but remains cautious regarding COVID-19 variants, supply-chain disruption, customer repayment capacity, loan demand, and commercial recovery.
- COVID-19 exposure was concentrated in hospitality, restaurant and food services, and commercial real estate lessors serving hospitality, restaurant, and retail businesses, representing 3.6%, 0.1%, and 4.2% of the loan portfolio, respectively.
- The Company had granted COVID-related temporary modifications on 357 loans totaling $175.0 million through September 30, 2021; no loans remained on deferral at quarter-end. Total troubled debt restructuring loans were $1.9 million.
- PPP lending included $35.0 million originated for 427 customers in the second round and $32.2 million originated in 2020. Forgiveness had reached 87.5% of first-round balances and 33.0% of second-round balances.
- The Sterling branch acquisition required $63.5 million of cash and generated $1.1 million of goodwill and $126,000 of core deposit intangible assets.
- The Company changed from a multi-employer to a single-employer defined benefit plan in March 2021. A $1.7 million after-tax prior-service cost was recorded in accumulated other comprehensive income and is expected to be amortized over 15 years.
- The Company anticipates adopting the CECL credit-loss model on January 1, 2023. It stated that the eventual financial statement impact cannot yet be reasonably estimated.
- Key risks include credit deterioration, interest-rate and net-interest-margin changes, deposit retention and repricing, competition, technology and cybersecurity, regulatory examinations, integration of acquisitions, and the continuing effects of COVID-19. No material legal proceedings were reported.
Important facts for investors to verify
- Whether rapid loan growth, particularly in construction, commercial real estate, and consumer lending, is sustained without deterioration in classified loans, charge-offs, or the allowance requirement.
- Whether deposit growth and the lower cost of deposits persist as $157.0 million of certificates of deposit mature within one year.
- The effect of higher compensation, technology, branch, acquisition, and Quin Ventures costs on future operating leverage and efficiency.
- The sustainability of mortgage banking income, investment-security gains, servicing income, and other noninterest revenue that partly offset weaker loan-sale gains.
- The final effect of CECL adoption, COVID-19 developments, supply-chain disruption, and economic conditions on credit quality and capital.
- The integration and financial performance of the Bellevue branch acquisition and the Company’s ability to fund its $15.0 million Quin Ventures commitment.