First Northwest Bancorp 2023 Form 10-K Summary
Business context and reporting period
First Northwest Bancorp is a Washington-based financial and bank holding company operating primarily through First Fed Bank. First Fed serves western Washington through 12 full-service branches, three business centers and three administration centers. The company provides commercial, residential real estate, consumer and commercial business lending, deposit products, treasury services and digital banking solutions. The filing covers the fiscal year ended December 31, 2023, with comparative information for 2022.
At December 31, 2023, the company reported $2.20 billion of assets, $1.66 billion of gross loans, $1.68 billion of deposits and $163.3 million of shareholders’ equity. First Fed was categorized as well capitalized.
Key financial metrics
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Total assets | $2.20 billion | $2.04 billion | +7.8% |
| Gross loans | $1.66 billion | $1.55 billion | +7.3% |
| Net loans | $1.64 billion | $1.53 billion | +7.3% |
| Deposits | $1.68 billion | $1.56 billion | +7.2% |
| Total borrowings | $320.9 million | $285.4 million | +12.5% |
| Shareholders’ equity | $163.3 million | $158.3 million | +3.2% on total equity |
| Net income attributable to parent | $2.3 million | $15.6 million | -85.4% |
| Diluted EPS | $0.26 | $1.71 | -84.8% |
| Net interest income | $61.4 million | $69.9 million | -12.1% |
| Net interest margin | 3.13% | 3.79% | -66 basis points |
| Provision for credit losses | $1.3 million | $1.5 million | Lower by $0.2 million |
| Noninterest income | $4.0 million | $10.3 million | -61.1% |
| Noninterest expense | $61.5 million | $62.3 million | -1.4% |
| Cash and cash equivalents | $123.2 million | $45.6 million | +170.1% |
Revenue, profit, cash flow, margins, debt and liquidity
- Interest income: Increased 25.5% to $100.9 million, driven by loan growth and higher asset yields. Average loan yield increased to 5.31% from 4.74%.
- Funding costs: Interest expense increased 275.3% to $39.5 million. The average cost of interest-bearing liabilities increased to 2.42% from 0.73%, while the average cost of interest-bearing deposits increased to 2.01% from 0.42%.
- Profitability: Net income attributable to the parent fell to $2.3 million. Return on average assets declined to 0.11% from 0.79%, and return on average equity declined to 1.43% from 9.09%.
- Noninterest income: Included a $5.4 million loss on the sale of investment securities. Loan and deposit fees, servicing income and loan-sale gains also declined. Other income included a $470,000 gain on Visa Class B shares and a $950,000 reimbursement from the Splash unsecured-loan program.
- Cash flow: Operating activities generated $17.9 million of cash, investing activities used $84.2 million and financing activities provided $143.9 million. Cash increased $77.6 million during the year.
- Securities: Available-for-sale securities declined to $295.6 million from $326.6 million. The company sold $44.8 million of lower-yielding securities at a $5.4 million loss and purchased $21.1 million of securities with a reported yield of 6.7%.
- Debt and liquidity: Year-end borrowings included $275.0 million of FHLB advances, a $6.5 million NexBank line-of-credit balance and $39.4 million of subordinated debt. FHLB collateral supported $589.5 million of borrowing capacity, with $253.8 million remaining after advances and letters of credit. The company also had unused Federal Reserve discount-window and Bank Term Funding Program capacity.
- Deposits: Deposit growth was concentrated in certificates of deposit. CDs increased to $651.0 million, or 38.8% of deposits, from $381.7 million, or 24.4%. Brokered CDs increased to $207.6 million. Approximately $363.7 million of deposits were estimated to be uninsured.
Material changes versus the prior comparable period
- Loan growth shifted the portfolio toward commercial and multi-family real estate and commercial business lending. Commercial, multi-family and commercial business loans totaled $833.4 million, or 50.2% of loans, versus $718.6 million, or 46.4%, in 2022.
- Multi-family loans increased $80.4 million, while construction and land loans decreased $64.0 million as projects converted to permanent loans. Undisbursed construction commitments declined to $55.4 million from $120.7 million.
- Nonperforming loans increased to $18.6 million, or 1.12% of loans, from $1.8 million, or 0.12%. A $15.0 million commercial construction loan accounted for most of the increase; management stated that a third-party appraisal indicated no significant expected loss.
- Classified loans increased to $35.1 million from $16.9 million. A $9.3 million commercial relationship and the $15.0 million construction loan represented 69% of classified loans.
- Net charge-offs increased to $3.2 million from $543,000, primarily due to consumer loans. The allowance for credit losses ended at $17.5 million, or 1.05% of gross loans, compared with $16.1 million, or 1.04%.
- The company adopted CECL on January 1, 2023, increasing the allowance for loan losses by $2.2 million and the allowance for unfunded commitments by $1.5 million, producing a $3.0 million after-tax reduction to beginning retained earnings.
- The company closed out its former Quin Ventures investment in 2023. In the fourth quarter, it wrote off a $225,000 Quil investment and a $1.5 million commitment receivable after determining Quil was no longer a going concern.
- Shareholders’ equity benefited from a $7.9 million improvement in accumulated other comprehensive loss as securities values recovered. The company paid $2.7 million in dividends and repurchased 87,895 shares for $1.1 million.
Outlook, management commentary, risks and unusual items
Management did not provide formal numerical earnings or revenue guidance. Its strategy emphasizes higher-yielding commercial real estate and commercial business loans, core deposit growth, digital banking, treasury and payment services, mortgage and SBA loan sales, fintech partnerships and operating efficiency. Management expects interest-rate conditions, deposit pricing and funding costs to remain important drivers of results.
- Interest-rate risk: The balance sheet became more liability-sensitive. Management’s modeled one-year net interest income declined 20.2% under an immediate 400-basis-point rate increase and 5.5% under a 400-basis-point decrease.
- Credit risk: The portfolio is concentrated in real estate, including $721.1 million of commercial and multi-family loans and $129.7 million of construction and land loans. Management also identified risks in unsecured consumer and commercial lending programs.
- Consumer-loan losses: Splash unsecured consumer loans generated $3.4 million of losses to date. The company changed underwriting criteria, reduced the maximum loan size and obtained additional first-payment-default protection.
- Liquidity and deposit risk: Approximately $495.6 million of CDs matured within one year, including $146.2 million of brokered CDs. Failure to renew deposits could require more expensive borrowings or brokered funding.
- Regulatory matter: First Fed entered into an FDIC consent order on November 21, 2023, requiring improvements to compliance management, consumer-protection controls, third-party oversight, staffing, training and independent audit coverage. The company accrued a $718,000 civil money penalty proposed by the FDIC.
- Investment portfolio: The company reported $38.3 million of unrealized losses on available-for-sale securities at year-end and recorded no credit-loss allowance for those securities. Future forced sales or credit deterioration could affect earnings and capital.
- Subsequent event: In January 2024, the Bank agreed to sell up to six branch properties for aggregate proceeds of approximately $14.7 million and lease them back under 15-year triple-net leases. Closing was expected, if completed, by the second quarter of 2024; the transaction remained subject to due diligence and other conditions.
- Cybersecurity: Management reported no current cybersecurity threat reasonably likely to materially affect strategy, results or financial condition, while identifying cyberattacks, vendor failures and technology interruptions as ongoing risks.
Most important facts for investors to verify
- Whether nonperforming and classified loans, especially the $15.0 million construction loan and $9.3 million commercial relationship, stabilize or generate additional provisions and charge-offs.
- Whether deposit growth can be retained as approximately $495.6 million of CDs mature within one year and funding costs remain elevated.
- The sustainability of the 3.13% net interest margin and the effect of future Federal Reserve rate changes on deposits, borrowings and loan yields.
- Whether the company can rebuild recurring noninterest income after the $5.4 million securities-sale loss and the decline in mortgage-related activity.
- The status, requirements and financial consequences of the FDIC consent order and proposed civil money penalty.
- The adequacy of the $17.5 million allowance for credit losses under CECL, given higher nonperforming assets, commercial real estate concentration and unsecured lending exposure.
- Completion terms, proceeds, lease costs and accounting gain associated with the proposed sale-leaseback of up to six properties.
- Regulatory capital and liquidity levels, including reliance on FHLB borrowings, brokered CDs and remaining borrowing capacity.