First Northwest Bancorp — 2021 First-Quarter Form 10-Q
Business context and reporting period
First Northwest Bancorp is the holding company for First Federal Savings and Loan Association of Port Angeles, a community bank serving Western Washington. The filing covers the unaudited three months ended March 31, 2021, with comparisons to March 31, 2020 and December 31, 2020. Dollar amounts are in thousands unless otherwise indicated.
Financial condition and key metrics
| Metric | Q1 2021 | Comparable period or prior year-end |
|---|---|---|
| Total assets | $1.736 billion | $1.654 billion at December 31, 2020 |
| Net loans receivable | $1.156 billion | $1.142 billion at December 31, 2020 |
| Deposits | $1.435 billion | $1.334 billion at December 31, 2020 |
| Shareholders’ equity | $182.1 million | $186.4 million at December 31, 2020 |
| Net interest income | $13.5 million | $9.4 million in Q1 2020 |
| Net income | $3.1 million | $873,000 in Q1 2020 |
| Basic and diluted EPS | $0.34 | $0.09 in Q1 2020 |
| Net interest margin | 3.48% | 3.11% in Q1 2020 |
| Net cash from operating activities | $2.8 million | $(1.8) million in Q1 2020 |
| Cash and cash equivalents at period-end | $99.3 million | $107.2 million at March 31, 2020 |
Interest income increased 22.2% to $14.6 million, while interest expense declined 55.3% to $1.2 million. The average yield on interest-earning assets declined to 3.78% from 3.97%, but the average cost of interest-bearing liabilities declined to 0.40% from 1.11%, supporting margin expansion. The provision for loan losses was $500,000, compared with $1.3 million in Q1 2020.
Noninterest income increased 16.7% to $2.7 million, primarily from a $1.337 million net gain on loan sales. Noninterest expense increased 28.9% to $12.1 million, led by compensation and benefits, including higher staffing and commissions. The effective tax rate was 13.2%, compared with 18.9% in the prior-year quarter.
Material changes versus prior comparable periods
- Net income increased 257.4% to $3.1 million, primarily due to higher net interest income, lower funding costs and a smaller loan-loss provision.
- Average interest-earning assets increased $341.0 million, including average net loans growth of $261.5 million.
- Loans increased 1.2% from year-end. Construction and land loans increased 27.3% to $157.3 million, consumer loans increased 7.1% to $172.8 million, and commercial business loans declined 17.1% to $83.0 million.
- Deposits increased 7.6% from year-end, driven by money market, transaction and savings accounts; certificates of deposit declined $21.5 million.
- Investment securities increased 8.0% to $393.5 million. Unrealized after-tax losses on available-for-sale securities reduced accumulated other comprehensive income and contributed to a $4.2 million decline in shareholders’ equity.
- The company issued $40.0 million of 3.75% fixed-to-floating subordinated notes due 2031, receiving approximately $39.3 million net. The notes qualify as Tier 2 capital.
- Nonperforming loans declined 6.1% to $2.1 million, or 0.2% of total loans. The allowance for loan losses increased to $14.3 million, or 1.2% of total loans.
Liquidity, capital and cash flow
Liquidity consisted of $99.3 million of cash and cash equivalents and $284.0 million of unpledged available-for-sale securities. The company had $50.0 million of FHLB advances and $39.3 million of subordinated debt at March 31, 2021. The bank was considered well capitalized, with a Tier 1 leverage ratio of 11.2%, common equity Tier 1 ratio of 15.1% and total risk-based capital ratio of 16.3%.
Operating activities generated $2.8 million of cash. Investing activities used $47.4 million, primarily for purchases of available-for-sale securities and net loan growth. Financing activities provided $78.7 million, driven by a $101.3 million increase in deposits and subordinated-debt proceeds, partly offset by reduced FHLB advances, dividends and share repurchases.
Guidance, outlook, commentary and risks
- Management expects continued economic improvement as restrictions ease and vaccines become available, but states that commercial and consumer activity had not returned to pre-pandemic levels at quarter-end.
- COVID-19 exposure remains concentrated in hospitality, restaurants and food services, and commercial real estate lessors serving hospitality, restaurant and retail businesses. Exposure represented 4.4%, 0.2% and 4.3% of total loans, respectively.
- The company had granted pandemic-related temporary modifications on 357 loans totaling $175.0 million; only four loans totaling $8.1 million remained on deferral at March 31, 2021.
- Classified loans increased $6.6 million to $14.1 million, primarily because of one deteriorating commercial real estate loan. Management believes the allowance is adequate but continues to incorporate pandemic uncertainty into its qualitative assumptions.
- First Fed agreed to purchase Sterling Bank and Trust’s Bellevue, Washington branch, including approximately $77.7 million of deposits as of the announcement date. Closing was anticipated by the end of the second quarter of 2021, subject to regulatory approval and other conditions.
- After quarter-end, the company committed to extend $15.0 million to Quin Ventures for a digital financial wellness platform and issued 29,719 shares to POM Peace of Mind valued at approximately $500,000.
- Key risks include COVID-19 effects, credit deterioration, interest-rate and funding-cost changes, competition, deposit retention, cybersecurity and third-party systems, regulatory examinations, construction-loan performance, and the uncertain impact of adopting the CECL credit-loss standard. The company plans to defer CECL adoption until January 1, 2023 and cannot yet reasonably estimate its impact.
Investor verification points
- Verify whether the improved net interest margin and lower funding costs remain sustainable as deposit balances, rates and liquidity conditions change.
- Monitor classified loans, construction and commercial real estate exposures, indirect auto performance, charge-offs and the adequacy of the allowance for loan losses.
- Assess the closing, integration and deposit retention effects of the Bellevue branch acquisition.
- Review the subordinated notes’ fixed-to-floating terms, capital treatment and future interest expense.
- Evaluate the financial commitments, execution risks and potential returns associated with the Quin digital-platform joint venture.
- Track unrealized securities losses, accumulated other comprehensive income and sensitivity to interest-rate movements.
- Confirm the timing and balance-sheet impact of CECL adoption in 2023.