First Northwest Bancorp 2021 Form 10-K Summary
Business context and reporting period
First Northwest Bancorp is the Washington-based holding company for First Fed Bank, a community-oriented commercial bank serving Western Washington through 12 full-service branches and two business centers. The Company also has a controlling interest in Quin Ventures, a digital financial wellness platform, and investments in fintech-related funds. This filing covers the fiscal year ended December 31, 2021; the source does not provide separate fourth-quarter results.
During 2021, First Fed converted from a state savings bank charter to a state commercial bank charter and completed the acquisition of a Sterling Bank and Trust branch in Bellevue, Washington. At year-end, the Company had 288 full-time equivalent employees.
Financial condition and operating metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Total assets | $1.921 billion | $1.654 billion | +16.1% |
| Total loans | $1.357 billion | $1.154 billion | +17.6% |
| Net loans | $1.350 billion | $1.142 billion | +18.2% |
| Total deposits | $1.581 billion | $1.334 billion | +18.5% |
| Investment securities, fair value | $344.2 million | $364.3 million | -5.5% |
| Total shareholders’ equity | $190.5 million | $186.4 million | +2.2% |
| Net income attributable to parent | $15.4 million | $10.3 million | +49.1% |
| Diluted EPS | $1.63 | $1.07 | +52.3% |
| Net interest income | $58.3 million | $44.0 million | +32.6% |
| Net interest margin | 3.51% | 3.27% | +24 basis points |
| Net cash from operating activities | $15.2 million | $13.3 million | +$1.9 million |
Total interest income increased to $63.7 million from $51.7 million, while total interest expense declined to $5.4 million from $7.7 million. The average cost of interest-bearing liabilities declined to 0.43% from 0.75%, primarily because of lower deposit costs and increased low-cost, non-maturity deposits.
Noninterest income was $15.6 million, down 1.3%, as lower mortgage-loan and securities-sale gains and lower bank-owned life insurance income offset higher servicing, service-fee and other income. Noninterest expense rose 31.2% to $54.4 million, driven primarily by compensation, technology, new locations, digital banking investments and expansion-related costs. Income before taxes was $18.2 million and income tax expense was $3.2 million.
Loan portfolio, credit quality and funding
- Real estate loans represented 77.7% of total loans. Commercial real estate was $363.3 million, multifamily was $172.4 million, and construction and land loans were $224.7 million.
- Construction and land loans increased 81.8% from 2020, and undisbursed construction commitments increased to $194.3 million from $155.1 million.
- Consumer loans increased 37.6% to $221.9 million, primarily from manufactured-home and specialty-auto loan purchases. Commercial business loans declined 20.3% to $79.8 million, partly because of Paycheck Protection Program payoffs and lower Northpointe Mortgage Participation Program balances.
- The allowance for loan losses was $15.1 million, or 1.1% of total loans, compared with $13.8 million, or 1.2%, in 2020. The 2021 provision was $1.35 million; management reported a negative provision of $150,000 in its discussion of results, while the financial statements report the full provision amount.
- Nonperforming assets were $1.4 million, or 0.1% of total assets, down from $2.3 million in 2020. Nonaccrual loans were $1.4 million, and no loans were 90 days or more past due and still accruing interest.
- Classified loans increased to $12.6 million from $7.5 million, primarily because of higher classified commercial real estate loans. Management also identified $12.3 million of special mention loans and $23.5 million of accruing loans requiring heightened attention.
- Deposits were the primary funding source. Transaction and savings deposits represented 84.4% of total deposits, while certificates of deposit declined to $247.2 million from $308.8 million. Brokered certificates totaled $65.7 million.
- Year-end FHLB borrowings were $80.0 million, down from $110.0 million. The Company had $481.2 million of FHLB borrowing capacity, with $400.4 million remaining after outstanding advances and a letter of credit.
- Cash and cash equivalents were $126.0 million, and available-for-sale securities had a fair value of $344.2 million. Off-balance-sheet commitments totaled $273.2 million, including $194.3 million of unfunded construction commitments.
- First Fed was categorized as well capitalized. Its year-end CET1, total risk-based capital and Tier 1 leverage ratios were 13.79%, 14.88% and 10.56%, respectively.
Material changes versus the prior comparable period
- Loan growth accelerated, led by construction and land, commercial real estate, multifamily and consumer lending.
- Deposit growth funded balance-sheet expansion and reduced reliance on short-term FHLB borrowings.
- The Company issued $40.0 million of 3.75% fixed-to-floating subordinated notes due 2031, receiving approximately $39.3 million of net proceeds. $20.0 million was contributed to First Fed as Tier 1 capital.
- The Company acquired a Bellevue branch for $63.5 million in cash. The transaction added approximately $64.9 million of deposits, $1.1 million of goodwill and $126,000 of core deposit intangible assets.
- First Northwest entered into an amended Quin Ventures joint venture agreement, issued 29,719 common shares valued at $500,000 to POM, and partially funded a commitment to extend up to $15.0 million to Quin.
- The Company withdrew from a multi-employer pension plan and established a frozen single-employer defined benefit plan. The plan was overfunded by approximately $493,000 at year-end, but accumulated other comprehensive income included $1.9 million of related prior service cost.
- Common-share repurchases totaled 349,497 shares during 2021 at an average cost of $17.07 per share. The Board’s repurchase authorization had 658,370 shares remaining at year-end.
- No loans remained on COVID-19 payment deferral at December 31, 2021. The Company had modified 357 loans totaling $177.6 million during 2020.
Cash flow, outlook, commentary and risks
Operating cash flow was $15.2 million. Investing activities used $136.9 million, primarily because of loan growth and securities purchases, partially offset by securities sales and $63.5 million of cash acquired in the branch transaction. Financing activities provided $182.6 million, principally from deposit growth and subordinated-debt issuance. Cash and cash equivalents increased by $60.9 million to $126.0 million.
Management intends to continue growing commercial real estate, multifamily, construction and commercial business lending; attract core deposits; expand digital and fintech capabilities; increase SBA and loan-servicing activity; and pursue additional branch, acquisition and banking-as-a-service opportunities. The filing does not provide formal earnings, revenue or balance-sheet guidance.
Key risks include the concentration of lending in Washington real estate markets; rapid growth in construction and commercial real estate loans; large borrower and geographic concentrations; uncertain COVID-19 effects; rising interest rates and funding-cost pressure; deposit retention; reduced mortgage-sale volumes; the transition away from LIBOR; cybersecurity and third-party vendor risk; regulatory and compliance changes; natural disasters and climate-related events; and execution risk associated with acquisitions, new markets and fintech investments.
The Company expects to adopt the current expected credit loss model on January 1, 2023, but states that the financial impact cannot yet be reasonably estimated. The filing also reports $2.5 million of unrealized losses on 76 investment securities at year-end, with no other-than-temporary impairment recognized.
Most important facts for an investor to verify
- Whether the rapid growth in construction, commercial real estate and consumer lending can be maintained without materially higher delinquencies, charge-offs or loan-loss provisions.
- The composition and performance of the $23.5 million of accruing loans identified as requiring management attention, the $12.6 million of classified loans and the $12.3 million of special mention loans.
- The renewal and pricing behavior of the $153.5 million of certificates of deposit maturing within one year, including the $65.7 million of brokered certificates.
- The effect of rising interest rates on net interest margin, deposit costs, securities values and borrower repayment capacity.
- The eventual impact of CECL adoption in 2023 and the adequacy of the existing $15.1 million allowance for loan losses.
- The financial performance, funding obligations and potential losses associated with Quin Ventures, Canapi Ventures, BankTech Ventures and other fintech investments.
- The realization of expected benefits from the Bellevue branch acquisition and continued expansion and technology spending.
- The Company’s ability to maintain well-capitalized status while funding growth, repurchasing shares and paying dividends.