First Northwest Bancorp 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, and has a controlling interest in Quin Ventures, a financial-technology joint venture. The filing covers the unaudited three months ended March 31, 2022, compared primarily with the three months ended March 31, 2021 and December 31, 2021. Dollar amounts are in thousands unless otherwise stated.
Key Financial Metrics
| Metric | Q1 2022 | Comparable period or prior year-end | Change |
|---|---|---|---|
| Total assets | $1.944 billion | $1.921 billion at Dec. 31, 2021 | +1.2% |
| Total loans | $1.375 billion | $1.357 billion at Dec. 31, 2021 | +1.3% |
| Deposits | $1.549 billion | $1.581 billion at Dec. 31, 2021 | -2.0% |
| Net interest income | $15.5 million | $13.5 million in Q1 2021 | +14.9% |
| Net interest margin | 3.53% | 3.48% in Q1 2021 | +5 basis points |
| Net income attributable to parent | $2.8 million | $3.1 million in Q1 2021 | -10.1% |
| Basic and diluted EPS | $0.30 | $0.33 in Q1 2021 | Declined |
| Allowance for loan losses | $15.1 million | $15.1 million at Dec. 31, 2021 | Essentially unchanged |
| Nonperforming loans | $1.2 million | $1.4 million at Dec. 31, 2021 | -10.7% |
| Cash and cash equivalents | $82.5 million | $126.0 million at Dec. 31, 2021 | -$43.5 million |
Total interest income increased to $16.9 million from $14.6 million, while interest expense increased to $1.4 million from $1.2 million. The allowance for loan losses was 1.1% of total loans, and no provision for loan losses was recorded in Q1 2022, compared with a $500,000 provision in Q1 2021.
Noninterest income decreased 11.1% to $2.4 million. Gains on mortgage loan sales fell to $253,000 from $1.3 million, partly offset by higher loan and deposit fees, sold-loan servicing fees, and a $126,000 gain on securities sales. Noninterest expense increased 22.6% to $14.8 million, driven primarily by higher compensation, data processing, software, advertising, and infrastructure costs.
Net cash provided by operating activities was $3.3 million, compared with $2.8 million in Q1 2021. Investing activities used $80.7 million, principally for purchases of available-for-sale securities and loan growth. Financing activities provided $34.0 million, including a $65.0 million increase in short-term FHLB advances, partially offset by a $31.2 million decline in deposits. Cash and cash equivalents declined by $43.5 million during the quarter.
Total shareholders’ equity declined to $177.8 million from $190.5 million at year-end, primarily because of a $15.4 million after-tax decline in accumulated other comprehensive income from unrealized losses on available-for-sale securities. Equity represented 9.1% of total assets, and book value per share was $17.77, down from $19.10.
Material Changes Versus Prior Periods
- Net loans increased $20.3 million from year-end. Multifamily loans rose $31.3 million and consumer loans rose $24.1 million, while commercial business loans declined $25.3 million and construction and land loans declined $15.3 million.
- Loan growth included $16.0 million of purchased manufactured-home loans, $5.9 million of individual manufactured-home loan purchases, and a $2.4 million net increase in auto loans.
- Investment securities increased $33.5 million to $377.7 million, but gross unrealized losses rose substantially to $17.7 million from $2.5 million at year-end, reflecting higher interest rates and market volatility. Management did not consider the losses credit-related and reported no other-than-temporary impairment losses.
- Deposits declined $31.2 million, including a $44.1 million runoff in commercial and public-fund accounts, partly offset by a $13.0 million increase in consumer deposits. FHLB advances increased $65.0 million to $145.0 million to replace liquidity lost through deposit outflows.
- Nonperforming loans improved to $1.2 million, or 0.1% of total loans. Classified loans increased $1.7 million to $14.3 million, primarily because of one residential real estate loan downgrade.
- Effective January 1, 2022, the Bank elected fair-value accounting for loan servicing rights. Servicing rights were reported at $4.0 million at March 31, 2022.
Guidance, Outlook, Risks, and Unusual Items
The filing does not provide formal quantitative earnings or revenue guidance. Management stated that it expects continued improvement in commercial and consumer activity and the U.S. economy, while noting that COVID-19 effects, supply-chain pressures, inflation, and changing consumer behavior remain uncertain. Management believes the Company is well positioned to operate through the current environment.
COVID-19-exposed industries represented approximately 4.0% of total loans for hospitality, 0.3% for restaurant and food services, and 4.0% for lessors of commercial real estate to hospitality, restaurant, and retail establishments. No COVID-related loan modifications remained on deferral at March 31, 2022. PPP forgiveness was substantially progressed, with 99.7% of first-round loans and 79.7% of second-round loans forgiven.
Liquidity included $82.5 million of cash and cash equivalents and $272.0 million of unpledged available-for-sale securities. Certificates of deposit totaling $147.3 million matured within one year, creating potential future funding pressure if not renewed. The Company also had $145.0 million of FHLB advances and $39.3 million of subordinated debt.
At March 31, 2022, First Fed exceeded all regulatory capital requirements and was considered well capitalized. Its total risk-based capital ratio was 14.1%, common equity tier 1 ratio was 13.1%, and Tier 1 leverage ratio was 10.6%.
Key risks include interest-rate and duration exposure, unrealized securities losses, deposit attrition and funding costs, credit deterioration in commercial real estate, construction and consumer lending, technology and cybersecurity risks, dependence on third-party vendors, regulatory examinations, and execution of digital, fintech, growth, and acquisition strategies. The Company anticipates adopting the current expected credit loss model on January 1, 2023, but states that the impact cannot yet be reasonably estimated.
Investor Verification Checklist
- Verify whether deposit outflows persist and whether reliance on FHLB advances increases as certificates of deposit mature.
- Monitor the effect of rising interest rates on the $17.7 million unrealized securities loss, tangible capital, liquidity, and net interest margin.
- Assess whether the sharp decline in mortgage loan-sale gains is offset by loan growth, servicing income, and core banking revenue.
- Review classified loans, construction commitments, commercial real estate exposure, and trends in auto and manufactured-home credit performance.
- Evaluate whether elevated compensation, technology, fintech, and advertising expenses produce sustainable revenue growth.
- Confirm the eventual impact of CECL adoption scheduled for January 1, 2023, including the required adjustment to credit-loss reserves.
- Review the performance and funding obligations of Quin Ventures and the Company’s remaining commitment under the $15.0 million capital financing agreement.