First Northwest Bancorp — 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, and has a controlling interest in fintech joint venture Quin Ventures. The filing covers the unaudited quarter and six months ended June 30, 2022. First Fed operated 12 full-service branches and two business centers. The company reported 9,926,501 common shares outstanding as of August 5, 2022.
Key Financial Metrics
| Metric | Three months ended June 30, 2022 | Three months ended June 30, 2021 | Six months ended June 30, 2022 | Six months ended June 30, 2021 |
|---|---|---|---|---|
| Total interest income | $19.0 million | $15.1 million | $35.9 million | $29.7 million |
| Net interest income | $17.2 million | $13.6 million | $32.7 million | $27.1 million |
| Provision for loan losses | $0.5 million | $0.3 million | $0.5 million | $0.8 million |
| Noninterest income | $2.2 million | $3.9 million | $4.6 million | $6.6 million |
| Noninterest expense | $17.0 million | $13.7 million | $31.8 million | $25.8 million |
| Net income attributable to parent | $2.5 million | $3.0 million | $5.3 million | $6.1 million |
| Basic and diluted EPS | $0.27 | $0.32 | $0.58 | $0.64 |
| Net interest margin | 3.77% | 3.34% | 3.65% | 3.43% |
- Total assets increased to $2.03 billion at June 30, 2022, from $1.92 billion at December 31, 2021.
- Total loans increased 8.0% to $1.47 billion; net loans increased 8.2% to $1.46 billion. Loan growth was led by multifamily real estate, auto and other consumer, home equity, and one-to-four-family loans.
- Investment securities available for sale totaled $353.1 million, with $33.8 million of gross unrealized losses, primarily reflecting higher interest rates and market volatility.
- Deposits were essentially unchanged at $1.58 billion. Borrowings increased to $249.3 million from $119.3 million, including $202.0 million of FHLB borrowings and an $8.0 million NexBank line of credit.
- Cash and cash equivalents declined to $87.8 million from $126.0 million. Six-month operating cash flow was $9.3 million; investing cash flow was negative $175.0 million, principally from loan growth and securities purchases; financing cash flow was positive $127.5 million.
- The allowance for loan losses was $15.7 million, or 1.1% of gross loans. Nonperforming loans were $1.2 million, or 0.1% of total loans.
- Shareholders’ equity declined to $165.2 million from $190.5 million, mainly because of a $28.7 million after-tax decline in accumulated other comprehensive income from securities valuation losses. Equity represented 8.1% of total assets, and book value per share was $16.60 versus $19.10 at year-end.
- First Fed remained well capitalized, with a 10.4% Tier 1 leverage ratio, 12.7% common equity Tier 1 ratio, and 13.7% total risk-based capital ratio.
Material Changes Versus Prior Comparable Period
- Second-quarter net interest income increased $3.6 million, or approximately 26%, as average earning assets grew and the yield on those assets increased to 4.14% from 3.68%. The net interest margin expanded 43 basis points to 3.77%.
- Six-month net interest income increased $5.6 million, while the six-month net interest margin increased 22 basis points to 3.65%.
- Quarterly net income attributable to the parent decreased $0.5 million, or approximately 17%, despite stronger net interest income. Six-month net income declined $0.8 million, or approximately 13%.
- Noninterest income declined 42.6% in the quarter and 29.7% year to date. Lower mortgage loan-sale gains and lower securities-sale gains more than offset higher service fees and servicing income.
- Noninterest expense increased 23.8% in the quarter and 23.2% year to date. The increase included higher compensation, technology and data-processing costs, branch expansion, advertising, and expenses associated with Quin Ventures’ Credit Builder product.
- Quin Ventures generated a $0.953 million net loss attributable to the noncontrolling interest in the second quarter and a $1.255 million loss for the first six months. Quin-related expenses totaled $2.1 million in the quarter and $2.7 million year to date.
- Loan growth was funded primarily through increased FHLB advances because deposit growth was limited. Commercial and public-fund deposits declined, partially offset by consumer deposits and brokered certificates of deposit.
- Nonperforming loans improved from $1.4 million at year-end, while classified loans increased to $13.8 million from $12.6 million, primarily because of deterioration in two construction relationships.
Outlook, Commentary, Risks and Unusual Items
- The filing provides no formal earnings or revenue guidance. Management stated that it expects continued improvement in commercial and consumer activity as COVID-19 restrictions ease, but emphasized continued uncertainty.
- Management expects loan growth and changing economic conditions to require continued allowance provisioning. The company anticipates adopting the CECL accounting model on January 1, 2023; preliminary parallel analysis indicated a modest potential increase in reserves, but the final impact had not been determined.
- Management cited inflation, supply-chain disruption, rising interest rates, recession risk, deposit competition, funding costs, mortgage-market weakness, credit deterioration, and changing consumer behavior as material risks.
- Construction commitments totaled $362.6 million, including $158.5 million of undisbursed construction commitments. Management stated that it had no reason to believe current projects would not be completed but continues to monitor inflation and supply-chain effects.
- Liquidity included $87.8 million of cash and $252.0 million of unpledged available-for-sale securities. Certificates of deposit totaling $169.6 million mature within one year, creating potential refinancing or deposit-retention needs.
- The company had $254.2 million of commitments, including unfunded loan commitments and standby letters of credit, and total contractual obligations of $529.4 million.
- Effective January 1, 2022, the company elected fair-value accounting for sold loan servicing rights. The asset was $3.9 million at June 30, 2022, and valuation depends on assumptions regarding prepayments, discount rates, and delinquencies.
- The company repurchased 52,618 shares under its publicly announced plan during the quarter for approximately $0.9 million. As of June 30, 2022, 605,752 shares remained available for repurchase.
- The filing states that there were no material changes to previously disclosed market risks or risk factors, no material legal proceedings, and effective disclosure controls as of June 30, 2022.
Important Facts for Investors to Verify
- Whether higher interest rates continue to expand the net interest margin or instead increase deposit and borrowing costs faster than asset yields.
- The sustainability and credit quality of rapid loan growth, particularly in multifamily, commercial real estate, construction, auto, manufactured housing, and other consumer lending.
- The final CECL adoption adjustment and any related effect on reserves, capital, earnings, and regulatory ratios.
- The magnitude and duration of unrealized securities losses and their effect on tangible and reported equity if securities must be sold.
- Deposit retention and refinancing requirements for the $169.6 million of certificates of deposit maturing within one year, as well as reliance on FHLB and other borrowings.
- Whether Quin Ventures’ Credit Builder product can generate sufficient revenue to offset its increased operating expenses and losses.
- The effect of mortgage-market weakness on loan-sale gains, servicing income, and related production volumes.
- Execution and funding of the $158.5 million of undisbursed construction commitments and any deterioration in classified or nonperforming loans.