First Northwest Bancorp: Q1 2024 Form 10-Q Summary
Business context and reporting period
First Northwest Bancorp is the holding company for First Fed Bank, a community-oriented bank serving western Washington. The filing covers the unaudited quarter ended March 31, 2024. First Fed operates 18 locations and provides commercial, real estate, consumer, deposit, investment and loan-servicing products. The Company reports one operating segment.
Financial position and key metrics
| Metric | Q1 2024 or March 31, 2024 | Comparable period or December 31, 2023 |
|---|---|---|
| Total assets | $2.240 billion | $2.202 billion |
| Net loans receivable | $1.693 billion | $1.643 billion |
| Deposits | $1.667 billion | $1.677 billion |
| Total borrowings | $371.5 million | $320.9 million |
| Shareholders’ equity | $160.5 million | $163.3 million |
| Net interest income | $13.9 million | $16.3 million in Q1 2023 |
| Net income attributable to parent | $396,000 | $3.528 million in Q1 2023 |
| Diluted EPS | $0.04 | $0.39 in Q1 2023 |
| Net interest margin | 2.76% | 3.46% in Q1 2023 |
| Provision for credit losses | $970,000 | $500,000 recapture in Q1 2023 |
Total interest income increased 17.4% to $27.3 million, but interest expense increased 92.0% to $13.4 million as deposit and borrowing costs rose. The average yield on interest-earning assets increased to 5.42% from 4.95%, while the rate on interest-bearing liabilities increased to 3.14% from 1.81%. The net interest rate spread narrowed to 2.28% from 3.14%.
Noninterest income declined 6.3% to $2.2 million, principally due to lower servicing-rights valuation income and loan-sale gains. Noninterest expense declined 3.8% to $14.3 million, helped by lower advertising costs and a reduction in the FDIC civil money penalty accrual. The effective tax rate was 53.0%, including an estimated tax penalty associated with the early surrender of a bank-owned life insurance contract.
Cash flow, liquidity, debt and capital
- Cash and cash equivalents declined to $77.3 million from $123.2 million at year-end as funds were deployed into loans and higher-yielding securities.
- Operating activities used $4.9 million of cash, investing activities used $78.5 million, and financing activities provided $37.5 million. Cash decreased $45.8 million during the quarter.
- Available-for-sale securities increased $30.3 million to $326.0 million. First-quarter purchases totaled $45.3 million at a stated weighted-average yield of 6.3%.
- FHLB borrowings increased $47.0 million to $322.0 million. The Bank had $213.0 million of remaining FHLB borrowing capacity and $17.4 million of Federal Reserve discount-window capacity, which had not been drawn.
- The Company had $10.0 million outstanding under its NexBank line of credit, with $10.0 million of remaining capacity. The line matures May 18, 2024, subject to an extension option.
- Unpledged available-for-sale securities had a market value of $284.8 million. CDs totaling $493.5 million, or 80.8% of total CDs, mature within one year.
- First Fed was “well capitalized” at March 31, 2024, with a 9.7% Tier 1 leverage ratio, 12.6% common equity Tier 1 ratio, 12.6% Tier 1 risk-based capital ratio and 13.6% total risk-based capital ratio.
Material changes versus prior comparable periods
- Loans increased 3.1% from year-end to $1.711 billion. Commercial business loans rose 21.4%, auto and other consumer loans rose 7.9%, and total consumer loans rose 7.1%.
- Deposits declined $10.3 million, while retail deposits increased $5.2 million and brokered deposits declined $15.4 million. The deposit mix remained costly, with total deposits carrying a 2.40% weighted-average rate at quarter-end.
- The allowance for credit losses on loans increased to $18.0 million from $17.5 million, while the allowance-to-loans ratio declined to 1.05% from 1.10% because of loan growth.
- Nonaccrual loans increased 4.5% to $19.5 million, or 1.14% of total loans. Nonaccrual and loans 90 days or more past due totaled 1.64% of loans, compared with 1.12% at year-end.
- Classified loans increased to $36.2 million from $35.1 million. Two relationships represented approximately 66% of classified loans, and the Bank is pursuing receivership and foreclosure actions against related collateral.
- The Company repurchased 214,132 shares for $3.0 million during the quarter. In April 2024, the Board authorized a new repurchase plan covering up to 10% of shares outstanding.
Outlook, unusual items and risks
The filing does not provide formal earnings or margin guidance. Management is focused on loan growth, purchasing higher-yielding assets, controlling expenses and managing funding costs while net interest margin remains under pressure. Management expects the interest-rate environment, deposit competition and the inverted yield curve to continue affecting profitability.
On January 30, 2024, the Bank classified six branch properties as held for sale. The sale closed May 7, 2024, for $14.7 million, and management expects to record an estimated $7.9 million pretax gain in the second quarter. The Bank entered into 15-year leaseback arrangements, expected to add approximately $1.0 million of rent expense in 2024, partially offset by approximately $204,000 of eliminated annual depreciation. Right-of-use assets and lease liabilities of approximately $12.2 million each will be recorded in the second quarter.
Key risks include continued deposit repricing and withdrawals, reliance on FHLB and other borrowings, unrealized losses in the securities portfolio, credit deterioration in commercial real estate and construction loans, consumer-loan charge-offs, changes in interest rates, regulatory requirements and the FDIC consent order referenced by management. The filing states that there were no material changes to previously disclosed risk factors, and no material legal proceedings were pending.
Most important facts for investors to verify
- Whether deposit costs stabilize and the net interest margin recovers from 2.76%.
- The renewal or replacement of the $493.5 million of CDs maturing within one year and the May 2024 NexBank line maturity.
- Credit performance of the $19.5 million nonaccrual portfolio, $36.2 million of classified loans and collateral-dependent relationships.
- The timing and final pretax gain from the six-property sale, together with the ongoing leaseback expense.
- The effect of additional share repurchases on capital, book value per share and future earnings per share.
- The status and financial impact of the FDIC consent order, civil money penalty and related regulatory requirements.