FIRST NORTHWEST BANCORP Forward-Looking Statements
Certain matters discussed in this Quarterly Report on Form 10-Q constitute forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of historical fact, are based on certain assumptions and are generally identified by the use of words such as "believes," "expects," "anticipates," "estimates" or similar expressions. Forward-looking statements include, but are not limited to:
• statements of our goals, intentions and expectations;
• statements regarding our business plans, prospects, growth and operating
strategies;
• statements regarding the quality of our loan and investment portfolios;
• estimates of our risks and future costs and benefits; and
• statements concerning the continuing effects of the COVID-19 pandemic on
the Bank's business and financial results and conditions.
These forward-looking statements are based on current beliefs and expectations
of management and are inherently subject to significant business, economic and
competitive uncertainties and contingencies, many of which are beyond the
Company's control. Actual results may differ materially from those contemplated
by the forward-looking statements due to, among others, the following factors:
• the effects of the COVID-19 pandemic, including on our credit quality and
operations, as well as its impact on general economic conditions?
• legislative or regulatory changes, including actions taken by
governmental authorities in response to inflationary pressures, the
COVID-19 pandemic, and climate change;• the risks associated with lending and potential adverse changes in the
credit quality of loans in our portfolio, particularly with respect
to borrowers affected by the COVID-19 pandemic, natural disasters, or
climate change;
• a decrease in the market demand for loans that we originate for sale;
• our ability to control operating costs and expenses;
• whether our management team can implement our operational strategy,
including but not limited to our efforts to achieve loan and revenue
growth;
• our ability to successfully execute on merger and/or acquisition
strategies and integrate any newly acquired assets, liabilities,
customers, systems, and management personnel into our operations and our
ability to realize related cost savings within expected time frames;
• our ability to successfully execute on growth strategies related to our
entry into new markets;
• our ability to develop user-friendly digital applications to serve
existing customers and attract new customers;
• the use of estimates in determining fair value of certain of our assets,
which estimates may prove to be incorrect and result in significant
declines in valuation;
• changes in the levels of general interest rates, and the relative
differences between short and long-term interest rates, deposit interest
rates, our net interest margin and funding sources;
• increased competitive pressures among financial services companies,
particularly from non-traditional banking entities such as challenger
banks, fintech, and mega technology companies;
• our ability to attract and retain deposits;
• changes in consumer spending, borrowing and savings habits, resulting in
reduced demand for banking products and services;
• results of examinations of us by the Washington State Department of
Financial Institutions , Department of Banks , the Federal Deposit
Insurance Corporation , Federal Reserve Bank of San Francisco , or other
regulatory authorities, which could result in restrictions that may
adversely affect our liquidity and earnings;• legislative or regulatory changes that adversely affect our business;
• disruptions, security breaches, or other adverse events, failures or
interruptions in, or attacks on, our information technology systems or on
the third-party vendors who perform several of our critical processing
functions;
• any failure of key third-party vendors to perform their obligations to
us; and
• other economic, competitive, governmental, regulatory and technical
factors affecting our operations, pricing, products and services and
other risks described elsewhere in our filings with the Securities and
Exchange Commission , including this Form 10-Q and our Annual Report on
Form 10-K for the year ended December 31, 2021 .
Further, statements about the potential effects of the COVID-19 pandemic on the
Bank's businesses and financial results and condition may constitute
forward-looking statements and are subject to the risk that the actual effects
may differ, possibly materially, from what is reflected in those forward-looking
statements due to factors and future developments that are uncertain,
unpredictable and in many cases beyond the Bank's control, including the direct
and indirect impact of the ongoing pandemic on the Bank, its customers and third
parties. These developments could have an adverse impact on our financial
position and our results of operations.
Any of the forward-looking statements that we make in this report and in other
statements we make may turn out to be wrong because of inaccurate assumptions we
might make, because of the factors illustrated above or because of other factors
that we cannot anticipate or predict. Any forward-looking statements are based
upon management's beliefs and assumptions at the time they are made. We
undertake no obligation to publicly update or revise any forward-looking
statements included or incorporated by reference in this document or to update
the reasons why actual results could differ from those contained in such
statements, whether as a result of new information, future events or otherwise.
Due to these risks, uncertainties and assumptions, the forward-looking
statements discussed in this report might not occur, and you should not put
undue reliance on any forward-looking statements.
35--------------------------------------------------------------------------------
Table of Contents GeneralFirst Northwest Bancorp , aWashington corporation, is the bank holding company forFirst Fed Bank . The Company also has a controlling interest inQuin Ventures, Inc. and limited partnership investments. First Northwest's business activities are generally limited to passive investment activities and oversight of its investments inFirst Fed and Quin Ventures .First Fed Bank is a community-oriented financial institution servingWestern Washington with offices inClallam ,Jefferson ,King ,Kitsap , andWhatcom counties. We have twelve full-service branches and two business centers. First Fed's business and operating strategy is focused on building sustainable earnings by delivering a fully array of financial products and services for individuals, small business, and commercial customers. Additionally, First Fed focuses on strategic partnerships with financial technology ("fintech") companies to develop and deploy digitally focused financial solutions to meet customers' needs on a broader scale. Lending activities include the origination of first lien one- to four-family mortgage loans, commercial and multi-family real estate loans, construction and land loans (including lot loans), commercial business loans, and consumer loans, consisting primarily of automobile loans as well as home equity loans and lines of credit. Over the last five years, we have significantly increased the origination of commercial real estate, multi-family real estate, construction, and commercial business loans, and more recently have increased our consumer loan portfolio through our manufactured home and auto loan purchase programs. We offer traditional consumer and business deposit products, including transaction accounts, savings and money market accounts and certificates of deposit for individuals and businesses. Deposits are our primary source of funding for our lending and investing activities.Quin Ventures is a fintech focused on financial wellness and lifestyle protection for consumers nationwide. First Northwest's limited partnership investments includeCanapi Ventures Fund, L.P. ,BankTech Ventures, L.P. , andJAM FINTOP Blockchain, L.P. , which invest in fintech-related business with a focus on developing digital solutions applicable to the banking industry. First Northwest is affected by prevailing economic conditions as well as government policies and regulations concerning, among other things, monetary and fiscal affairs, housing and financial institutions. Deposit flows are influenced by several factors, including interest rates paid on competing time deposits, alternative investment options available to our customers, account maturities, the number and quality of our deposit originators, digital delivery systems, branding and customer acquisition, and the overall level of personal income and savings in the markets where we do business. Lending activities are influenced by the demand for funds, our credit policies, the number and quality of our lenders and credit underwriters, digital delivery systems, branding and customer acquisition, and regional economic cycles. Our primary source of pre-tax income is net interest income. Net interest income is the difference between interest income earned on our loans and investments and interest expense paid on our deposits and borrowings. Changes in levels of interest rates and cash flows from existing assets and liabilities affect our net interest income. A secondary source of income is noninterest income, which includes revenue we receive from providing products and services, including service charges on deposit accounts, mortgage banking income, loan sales, interest rate swap fee income, earnings from bank-owned life insurance, investment services income, and gains and losses from sales of securities. An offset to net interest income is the provision for loan losses, which represents the periodic charge to operations that is required to adequately provide for losses inherent in our loan portfolio through our allowance for loan losses. A recapture of previously recognized provision for loan losses may be added to net income as credit metrics improve, such as a loan's risk rating, increased property values, improvements in the economic environment, or receipt of recoveries of amounts previously charged off. Noninterest expenses we incur in operating our business consist of salaries and employee benefit costs, occupancy and equipment expenses, federal deposit insurance premiums and regulatory assessments, data processing expenses, marketing and customer acquisition expenses, professional fees, expenses related to real estate and personal property owned, and other expenses. Impact of COVID-19 Pandemic. The COVID-19 pandemic and related restrictive measures taken by governments, businesses and individuals caused unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity inthe United States and globally, including the markets that we serve. We anticipate continued improvements in commercial and consumer activity and theU.S. economy. As ofSeptember 30, 2021 , the governor ofWashington removed restrictions initially set in place, allowing businesses to return to full capacity. We recognize that our business and consumer customers are experiencing varying degrees of financial distress, which is expected to continue through the remainder of 2022, as new COVID-19 variant infections increase and new restrictions are mandated. Commercial activity has improved but has not returned to the levels existing prior to the outbreak of the pandemic, which may result in our customers' inability to meet their loan obligations to us. In addition, the economic pressures and uncertainties related to the COVID-19 pandemic and resulting supply chain issues have resulted in changes in consumer spending behaviors, which may negatively impact the demand for loans and other services we offer. Our borrowing base includes customers in industries such as hospitality; restaurant and food services; and lessors of commercial real estate to hospitality, restaurant, and retail establishments, all of which have been significantly impacted by the COVID-19 pandemic. AtMarch 31, 2022 , the Company's exposure as a percent of the total loan portfolio to these industries was 4.0%, 0.3%, and 4.0%, respectively. We recognize that these industries may take longer to recover as consumers may be hesitant to return to full social interaction or may change their spending habits on a more permanent basis as a result of the pandemic. We continue to monitor these customers closely. 36
--------------------------------------------------------------------------------
Table of Contents
We have taken deliberate actions to ensure that we have the balance sheet strength to serve our clients and communities, including increases in liquidity and managing our assets and liabilities in order to maintain a strong capital position; however, future economic conditions are subject to significant uncertainty. Uncertainties associated with the pandemic include the duration of the COVID-19 outbreak and any related variant infections, the availability and effectiveness of COVID-19 vaccines, and the impact on our customers, employees, vendors and the economy. While uncertainty still exists, we believe we are well-positioned to operate effectively through the present economic environment. We continue to provide banking and financial services to our customers, having returned to regular lobby and drive-thru access at all our branch locations inMay 2021 . In addition, we continue to provide access to banking and financial services through online banking, Interactive Teller Machines ("ITMs"), Automated Teller Machines ("ATMs"), and by telephone. We continue to take additional precautions within all our locations, including providing personal protection equipment and enhanced cleaning procedures, to ensure the safety of our customers and our employees. We provided assistance to many small businesses applying for the SBA's Paycheck Protection Program ("PPP") funding. We processed$32.2 million of loans for 515 customers through the initial round of SBA PPP funding during 2020 with an average loan amount of$63,000 . We processed$35.0 million of loans for 427 customers during the second round of SBA PPP funding with an average loan amount of$82,000 . Payments by borrowers on these loans can be deferred up to sixteen months after the note date, and interest, at 1%, will continue to accrue during the deferment period. Loans can be forgiven in whole or part (up to full principal and any accrued interest). We partnered with a third-party financial technology provider to assist our borrowers with the loan forgiveness application process. As ofMarch 31, 2022 ,$32.1 million , or 99.7%, of the first-round loans were forgiven and$27.9 million , or 79.7%, of second-round loans were forgiven. Critical Accounting Policies EffectiveJanuary 1, 2022 , the Bank elected to measure servicing rights using the fair value method of accounting. We record servicing rights on loans originated and subsequently sold into the secondary market. We stratify our capitalized servicing rights based on the type, term and interest rates of the underlying loans. Servicing rights are measured at fair value at each reporting date with the change reported in earnings. The value is determined through a discounted cash flow analysis, which uses interest rates, prepayment speeds and delinquency rate assumptions as inputs. All of these assumptions require a significant degree of management judgment. If our assumptions prove to be incorrect, the value of our mortgage servicing rights could be negatively affected.
There were no other material changes to the critical accounting policies as
disclosed in the Company's Annual Report on Form 10-K for the year ended
Comparison of Financial Condition at
Assets. Total assets increased to
Cash and cash equivalents decreased by$43.5 million , or 34.5%, to$82.5 million as ofMarch 31, 2022 , compared to$126.0 million as ofDecember 31, 2021 . Excess cash was deployed into the investment and loan portfolios as the Bank continued to build earning assets. Net loans, excluding loans held for sale, increased$20.3 million to$1.37 billion atMarch 31, 2022 , from$1.35 billion atDecember 31, 2021 . During the three months endedMarch 31, 2022 , multi-family loans increased$31.3 million as$16.6 million of acquisition-renovation construction and$13.6 million of commercial construction loans transitioned into amortizing loans. Auto and other consumer loans increased$23.4 million , as a result of a$16.0 million purchase of a pool of manufactured home loans,$5.9 million in individual manufactured home loan purchases, and a net increase in auto loans of$2.4 million offset by payment activity. One- to four-family residential loans decreased$3.9 million as payment of loans exceeded originations during the current quarter. Commercial business loans decreased$25.3 million , mainly as the result of a decrease in Northpointe Mortgage Participation Program of$26.3 million and Paycheck Protection Program ("PPP") loans paid off during the quarter totaling$7.3 million , offset by a$1.9 million SBA loan origination and draws on existing loans. Our participation in the Northpointe program is based on current funding needs of the program. Given the slowdown in the mortgage market, as well as recent funding raises by Northpointe, we do not anticipate significant activity in the near term. Construction and land loans decreased$15.3 million , or 6.8%, to$209.4 million atMarch 31, 2022 , from$224.7 million atDecember 31, 2021 . Our construction loans are geographically dispersed throughoutWestern Washington with one loan inOregon and two loans inIdaho . We manage our construction lending by utilizing a licensed third-party vendor to assist us in monitoring our construction projects. We continue to monitor the projects currently in our portfolio to determine the impact of COVID-19 on completion. As of the date of this report, we have no reason to believe that any of the projects in process will not be completed. AtMarch 31, 2022 , acquisition-renovation loans of$31.2 million were included in the construction loan total compared to$51.1 million atDecember 31, 2021 . These commercial acquisition-renovation loans represent financing primarily for the acquisition of multi-family properties with a construction component used for the renovation of common areas and specific units of the building. Given the construction component of these loans we are required to report them as construction under regulatory guidelines; however, we consider these loans to be lower risk than typical ground-up construction projects. We monitor real estate values and general economic conditions in our market areas, in addition to assessing the strength of our borrowers, including their equity contributions to a project, to prudently underwrite construction loans. We continually assess our lending strategies across all product lines and markets within which we do business to improve earnings while also prudently managing credit risk. 37
--------------------------------------------------------------------------------
Table of Contents
The following tables show our construction commitments by type and geographic concentrations at the dates indicated:
North Olympic Puget Sound
March 31, 2022 Peninsula (1) Region (2) Other Washington Oregon Idaho Total
(In thousands)
Construction
Commitment
One- to four-family
residential $ 36,886 $ 65,326 $ 4,983 $ - $ - $ 107,195
Multi-family
residential - 154,503 5,798 415 3,592 164,308
Commercial
acquisition-renovation 2,934 31,304 - - - 34,238
Commercial real estate 9,078 45,054 - - - 54,132
Total commitment $ 48,898 $ 296,187 $ 10,781 $ 415 $ 3,592 $ 359,873
Construction Funds
Disbursed
One- to four-family
residential $ 13,600 $ 31,015 $ 1,052 $ - $ - $ 45,667
Multi-family
residential - 80,953 2,438 8 1,805 85,204
Commercial
acquisition-renovation 2,445 28,742 - - - 31,187
Commercial real estate 5,883 30,682 - - - 36,565
Total disbursed $ 21,928 $ 171,392 $ 3,490 $ 8 $ 1,805 $ 198,623
Undisbursed Commitment
One- to four-family
residential $ 23,286 $ 34,311 $ 3,931 $ - $ - $ 61,528
Multi-family
residential - 73,550 3,360 407 1,787 79,104
Commercial
acquisition-renovation 489 2,562 - - - 3,051
Commercial real estate 3,195 14,372 - - - 17,567
Total undisbursed $ 26,970 $ 124,795 $ 7,291 $ 407 $ 1,787 $ 161,250
Land Funds Disbursed
One- to four-family
residential $ 3,870 $ 3,609 $ 190 $ - $ - $ 7,669
Commercial real estate - 3,103 - - - 3,103
Total disbursed for
land $ 3,870 $ 6,712 $ 190 $ - $ - $ 10,772
(1) Includes Clallam and Jefferson counties.
(2) Includes Kitsap, Mason , Thurston , Pierce , King , Snohomish , Skagit , Whatcom ,
and Island counties.
North Olympic Puget Sound
December 31, 2021 Peninsula (1) Region (2) Other Washington Oregon Total
(In thousands)
Construction Commitment
One- to four-family
residential $ 32,785 $ 57,050 $ 4,430 $ - $ 94,265
Multi-family residential - 182,151 4,095 8,435 194,681
Commercial
acquisition-renovation 2,938 36,536 16,638 - 56,112
Commercial real estate 12,489 50,372 2,535 - 65,396
Total commitment $ 48,212 $ 326,109 $ 27,698 $ 8,435 $ 410,454
Construction Funds
Disbursed
One- to four-family
residential $ 10,242 $ 28,929 $ 562 $ - $ 39,733
Multi-family residential - 79,707 2,414 7,534 89,655
Commercial
acquisition-renovation 2,449 32,789 15,861 - 51,099
Commercial real estate 3,486 29,484 2,701 - 35,671
Total disbursed $ 16,177 $ 170,909 $ 21,538 $ 7,534 $ 216,158
Undisbursed Commitment
One- to four-family
residential $ 22,543 $ 28,121 $ 3,868 $ - $ 54,532
Multi-family residential - 102,444 1,681 901 105,026
Commercial
acquisition-renovation 489 3,747 777 - 5,013
Commercial real estate 9,003 20,888 (166 ) - 29,725
Total undisbursed $ 32,035 $ 155,200 $ 6,160 $ 901 $ 194,296
Land Funds Disbursed
One- to four-family
residential $ 3,502 $ 3,556 $ 191 $ - $ 7,249
Commercial real estate - 1,302 - - 1,302
Total disbursed for land $ 3,502 $ 4,858 $ 191 $ - $ 8,551
38--------------------------------------------------------------------------------
Table of Contents
During the three months endedMarch 31, 2022 , the Company originated$139.8 million of loans, of which$92.3 million , or 66.1%, were originated in thePuget Sound region,$27.2 million , or 19.4%, in theNorth Olympic Peninsula ,$9.4 million , or 6.7%, in other areas throughoutWashington State , and$10.9 million , or 7.8%, in other states. The Company purchased an additional$16.0 million in auto loans and$21.5 million in manufactured home loans during the three months endedMarch 31, 2022 . We will continue to evaluate opportunities to acquire assets through wholesale channels in order to supplement our organic originations and increase net interest income. Our allowance for loan losses remained$15.1 million atMarch 31, 2022 , as no loan loss provision was recorded for the three months endedMarch 31, 2022 . Net recoveries were$3,000 for the three-month period. The loan loss provision is made to account for growth in the loan portfolio adjusted for qualitative factors. We continue to monitor the economic impact of the COVID-19 pandemic, which is reflected in the qualitative factor adjustments. The allowance for loan losses as a percentage of total loans was 1.1% at bothMarch 31, 2022 andDecember 31, 2021 . Nonperforming loans decreased$148,000 , or 10.7%, to$1.2 million atMarch 31, 2022 , from$1.4 million atDecember 31, 2021 , reflecting improvements in nonperforming auto and other consumer loans of$106,000 , home equity loans of$29,000 , one- to four-family loans of$10,000 , and commercial real estate loans of$3,000 . Nonperforming loans to total loans was 0.1% at bothMarch 31, 2022 andDecember 31, 2021 . The allowance for loan losses as a percentage of nonperforming loans increased to 1227% atMarch 31, 2022 , from 1095% atDecember 31, 2021 . AtMarch 31, 2022 , there were$1.8 million in restructured loans, of which$1.79 million were performing in accordance with their modified payment terms and are accruing loans. Classified loans increased$1.7 million to$14.3 million atMarch 31, 2022 , from$12.6 million atDecember 31, 2021 , due to the addition of a single residential real estate loan that was downgraded in 2022. Loan charge-offs are concentrated mainly in our indirect auto loan portfolio. We stopped originating loans from one of our indirect auto loan product offerings in 2020 to reduce credit risk and future charge-off activity. We continue to monitor the program in order to prudently manage risk within the portfolio. The balance of indirect auto loans decreased to$8.8 million atMarch 31, 2022 from$10.6 million atDecember 31, 2021 . We believe our allowance for loan losses is adequate to absorb the known and inherent risks of loss in the overall loan portfolio as ofMarch 31, 2022 . Loans receivable, excluding loans held for sale, consisted of the following at the dates indicated: Increase (Decrease) March 31, 2022 December 31, 2021 Amount Percent (In thousands) Real Estate: One-to-four family$ 291,053 $ 294,965$ (3,912 ) (1.3 )% Multi-family 203,746 172,409 31,337 18.2 Commercial real estate 370,346 363,299 7,047 1.9 Construction and land 209,395 224,709 (15,314 ) (6.8 ) Total real estate loans 1,074,540 1,055,382 19,158 1.8 Consumer: Home equity 39,858 39,172 686 1.8 Auto and other consumer 206,140 182,769 23,371 12.8 Total consumer loans 245,998 221,941 24,057 10.8 Commercial business loans 54,506 79,838 (25,332 ) (31.7 ) Total loans 1,375,044 1,357,161 17,883 1.3 Less: Net deferred loan fees 4,144 4,772 (628 ) (13.2 ) Premium on purchased loans, net (14,816 ) (12,995 ) (1,821 ) 14.0 Allowance for loan losses 15,127 15,124 3 - Loans receivable, net$ 1,370,589 $ 1,350,260$ 20,329 1.5 39
--------------------------------------------------------------------------------
Table of Contents
The following table represents nonperforming assets at the dates indicated.
Increase (Decrease)
March 31, 2022 December 31, 2021 Amount Percent
(In thousands)
Nonperforming loans:
Real estate loans:
One- to four-family $ 484 $ 494 $ (10 ) (2.0 )%
Commercial real estate 68 71 (3 ) (4.2 )
Construction and land 22 22 - -
Total real estate loans 574 587 (13 ) (2.2 )
Consumer loans:
Home equity 253 282 (29 ) (10.3 )
Auto and other consumer 406 512 (106 ) (20.7 )
Total consumer loans 659 794 (135 ) (17.0 )
Total nonperforming assets $ 1,233 $ 1,381 $ (148 ) (10.7 )
Nonaccrual and 90 days or more
past due loans as a percentage
of total loans 0.1 % 0.1 % 0.0 % -
Investment securities increased $33.5 million , or 9.7%, to $377.7 million at
March 31, 2022 , from $344.2 million at December 31, 2021 , due to the purchase of
securities, partially offset by sales, normal payments and prepayment activity.
The investment portfolio, including mortgage-backed securities, had an estimated
projected average life of 7.0 years as of March 31, 2022 , and 5.7 years as
of December 31, 2021 , and had an estimated average repricing term of 7.0 years
as of March 31, 2022 , and 5.4 years as of December 31, 2021 , based on the
interest rate environment at those times.
The investment portfolio was composed of 45.0% in amortizing securities at March
31, 2022 and 43.0% at December 31, 2021 . The projected average life of our
securities may vary due to prepayment activity, which, particularly in the
mortgage-backed securities portfolio, is impacted by prevailing mortgage
interest rates. Management maintains a focus on enhancing the mix of earning
assets by originating loans as a percentage of earning assets; however, we
continue to purchase investment securities as a source of additional interest
income. Securities are sold to provide liquidity, improve long-term portfolio
yields, reduce LIBOR risk, and manage duration in the portfolio. For additional
information, see Note 2 of the Notes to Consolidated Financial Statements
contained in Item 1 of this Form 10-Q.
40--------------------------------------------------------------------------------
Table of Contents
Liabilities. Total liabilities increased to
Deposit balances decreased 2.0%, to$1.55 billion atMarch 31, 2022 , from$1.58 billion atDecember 31, 2021 . There was a$2.7 million increase in savings accounts offset by a$16.0 million decrease in money market accounts and a$9.7 million decrease in demand deposit accounts, and certificates of deposits decreased$8.2 million during the period. A runoff in commercial and public fund account balances of$44.1 million was partially offset by an increase in consumer account balances of$13.0 million . We also utilize brokered certificates of deposit ("brokered CDs") as an additional funding source in order to manage our cost of funds, reduce our reliance on public funds deposits, and manage interest rate risk. Brokered CDs totaling$65.7 million were included in the$239.0 million balance of certificates of deposit atMarch 31, 2022 .
FHLB advances increased 81.3% to
Equity. Total shareholders' equity decreased$12.4 million to$177.8 million for the three months endedMarch 31, 2022 . The Company recorded year-to-date net income of$2.8 million . The net income increase was offset by an after-tax decrease in unrealized gain on available-for-sale investments of$15.3 million . All categories of the investment portfolio have been significantly impacted by the rising rate environment.
Comparison of Results of Operations for the Three Months Ended
General. Net income was$2.8 million for the three months endedMarch 31, 2022 , and compared to$3.1 million for the three months endedMarch 31, 2021 . A$2.5 million increase in net interest income after provision for loan loss was offset by a$301,000 decrease in noninterest income and a$2.7 million increase in noninterest expense. Net Interest Income. Net interest income increased$2.0 million to$15.5 million for the three months endedMarch 31, 2022 , from$13.5 million for the three months endedMarch 31, 2021 . This increase was mainly the result of an increase in average earning assets of$228.4 million . The yield on average interest-earning assets increased 8 basis points to 3.86% for the three months endedMarch 31, 2022 , compared to 3.78% for the same period in the prior year, due to an increase in yields earned on investment securities. The average cost of interest-bearing liabilities increased to 0.43% for the three months endedMarch 31, 2022 , compared to 0.40% for the same period last year, due primarily to an increase in borrowing rates of 85 basis points related to the issuance of subordinated debt offset by a decrease in rates on interest-bearing deposits of 10 basis points. Total cost of funds increased 2 basis points to 0.34% for the three months endedMarch 31, 2022 , from 0.32% for the same period in 2021. The net interest margin increased 5 basis points to 3.53% for the three months endedMarch 31, 2022 , from 3.48% for the same period in 2021. Interest Income. Total interest income increased$2.3 million , or 15.5%, to$16.9 million for the three months endedMarch 31, 2022 , from$14.6 million for the comparable period in 2021, primarily due to an increase in the average balances on interest-earning assets. Interest and fees on loans receivable increased$2.0 million , to$14.5 million for the three months endedMarch 31, 2022 , from$12.5 million for the three months endedMarch 31, 2021 , related to an increase in the average balance of net loans receivable of$198.0 million compared to the prior year. Average loan yields were 4.43% for each of the three months endedMarch 31, 2022 and 2021. 41
--------------------------------------------------------------------------------
Table of Contents
The following table compares average earning asset balances, associated yields, and resulting changes in interest income for the periods shown:
Three Months Ended March 31,
2022 2021
Average Average Increase
Balance Balance (Decrease) in
Outstanding Yield Outstanding Yield Interest Income
(Dollars in thousands)
Loans receivable, net $ 1,330,177 4.43 % $ 1,132,194 4.43 % $ 1,995
Investment securities 359,436 2.57 368,737 2.21 241
FHLB stock 5,311 3.97 3,809 4.73 7
Interest-earning deposits in
banks 82,780 0.19 44,576 0.12 25
Total interest-earning
assets $ 1,777,704 3.86 % $ 1,549,316
3.78 % $ 2,268
Interest Expense. Total interest expense increased $265,000 , or 23.0%, to $1.4
million for the three months ended March 31, 2022 , compared to $1.2 million for
the three months ended March 31, 2021 , due to an increase in borrowing costs of
$428,000 primarily related to the subordinated debt issued in 2021, offset by a
decrease in interest expense on deposits of $217,000 resulting from a 10 basis
point decrease in the average cost of interest-bearing deposits. The average
balance of interest-bearing deposits increased $129.2 million , or 11.8%,
to $1.22 billion for the three months ended March 31, 2022 , from $1.09 billion
for the three months ended March 31, 2021 , due to core deposit growth in new and
existing market areas as well as purchasing the Bellevue branch in July of 2021.
During the three months ended March 31, 2022 , interest expense decreased on
certificates of deposit due to a decrease in the average balances of $53.4
million , along with a decrease in the average rates paid of 18 basis points,
compared to the three months ended March 31, 2021 . During the same period, the
average balances of money market and savings accounts increased $126.7 million
and $21.1 million , respectively, while the average rate paid decreased 4 basis
points for both categories, resulting in comparatively minor changes to interest
expense. Interest-bearing demand account average balances increased $34.8
million and the average rate paid increased 2 basis points, resulting in a minor
increase to interest expense. The average cost of interest-bearing deposit
products decreased to 0.24% for the three months ended March 31, 2022 ,
from 0.34% for the three months ended March 31, 2021 , due in large part to the
expiration of promotional rates and a shift in deposit mix to higher levels of
transaction accounts. Borrowing costs increased due to the issuance of
subordinated debt in March 2021 and increases in both the average balance and
cost of FHLB advances compared to the same period in 2021.
The following table details average balances, cost of funds and the change in interest expense for the periods shown:
Three Months Ended March 31,
2022 2021
Increase
Average Average (Decrease)
Balance Balance in Interest
Outstanding Rate Outstanding Rate Expense
(Dollars in thousands)
Transaction accounts $ 196,154 0.04 % $ 161,398 0.02 % $ 10
Money market accounts 587,806 0.21 461,080 0.25 12
Savings accounts 194,721 0.05 173,647 0.09 (14 )
Certificates of deposit 242,642 0.63 295,989 0.81 (225 )
FHLB advances 82,611 1.49 55,437 1.38 113
Subordinated debt 39,282 4.07 3,192 3.13 369
Total interest-bearing
liabilities $ 1,343,216 0.43 % $ 1,150,743 0.40 % $ 265 Provision for Loan Losses. The Company recorded no loan loss provision during
the first quarter of 2022. This compares to a provision for loan losses of
42--------------------------------------------------------------------------------
Table of Contents
The following table details activity and information related to the allowance for loan losses for the periods shown:
Three Months Ended March 31,
2022 2021
(Dollars in thousands)
Provision for loan losses $ - $ 500
Net recoveries (charge-offs) 3 (82 )
Allowance for loan losses 15,127 14,265
Allowance for losses as a percentage of total
gross loans receivable at period end 1.1 % 1.2 %
Total nonaccrual loans 1,233 2,135
Allowance for loan losses as a percentage of nonaccrual loans at period end 1226.8 % 668.1 % Nonaccrual and 90 days or more past due loans as a percentage of total loans 0.1 % 0.2 % Total loans$ 1,375,044 $ 1,168,340 Noninterest Income. Noninterest income decreased$301,000 , or 11.1%, to$2.4 million for the three months endedMarch 31, 2022 , from$2.7 million for the three months endedMarch 31, 2021 . Loan and deposit service fees increased over the same period in 2021 due to$120,000 of commercial loan late fees received during the quarter. Servicing fee income on sold loans increased$200,000 due to the fair value accounting election and a$63,000 increase in Main Street Lending Program servicing fee income. Investment securities with low yields driven by high levels of prepayment activity were sold for a gain of$126,000 during the quarter, allowing the Company to reallocate funds into higher yielding assets. Other income decreased due to a valuation decrease of$67,000 recorded on our joint venture fintech investments compared to a gain of$208,000 in the same period in 2021, offset by adjustable-rate conversion ("ARC") loan fee income of$149,000 in the current period compared to no ARC fee income during the same period in 2021. These increases were offset by a decline in gain on sales of mortgage loans of$1.1 million over the same period in 2021 as rising mortgage loan rates and lack of single family home inventory have resulted in a decline in mortgage loan production.
The following table provides a detailed analysis of the changes in the components of noninterest income for the periods shown:
Three Months Ended March 31, Increase (Decrease)
2022 2021 Amount Percent
(Dollars in thousands)
Loan and deposit service fees
40.1 %
Sold loan servicing fees 432 30 402 1,340.0
Net gain on sale of loans 253 1,337 (1,084 ) (81.1 )
Net gain on sale of investment
securities 126 - 126 100.0
Increase in cash surrender value of
bank-owned life insurance 252 244 8 3.3
Other income 167 256 (89 ) (34.8 )
Total noninterest income $ 2,403 $ 2,704 $ (301 ) (11.1 )%
Noninterest Expense. Noninterest expense increased $2.7 million , or 22.6%,
to $14.8 million for the three months ended March 31, 2022 , compared to $12.1
million for the three months ended March 31, 2021 , primarily as a result of an
increase in compensation and benefits as we added staff to manage the company
and build up data and fintech infrastructures. Costs related to software
increased $423,000 as we implemented more robust systems to support digital
initiatives and implement customer relationship management tools. Increases in
advertising were related to Quin Ventures and online initiatives. The increase
in regulatory assessments and state taxes was due to an increase in taxable
income compared to the same period in 2021 combined with an accrual for
regulatory exams in the current year.
The following table provides an analysis of the changes in the components of noninterest expense for the periods shown:
Three Months Ended March 31, Increase (Decrease)
2022 2021 Amount Percent
(Dollars in thousands)
Compensation and benefits $ 8,803 $ 7,295 $ 1,508 20.7 %
Data processing 1,772 1,333 439 32.9
Occupancy and equipment 1,167 1,029 138 13.4
Supplies, postage, and telephone 313 242 71 29.3
Regulatory assessments and state taxes 361 261 100 38.3
Advertising 752 445 307 69.0
Professional fees 559 522 37 7.1
FDIC insurance premium 223 148 75 50.7
Other expense 881 819 62 7.6
Total noninterest expense $ 14,831 $ 12,094 $ 2,737 22.6 %
Provision for Income Tax. An income tax expense of $554,000 was recorded for the
three months ended March 31, 2022 , compared to $473,000 for the three months
ended March 31, 2021 . There was a year-over-year decrease in income before taxes
of $535,000 ; however, the expense recorded for the three months ended March 31,
2021 , included a tax accrual true-up. For additional information, see Note 5 of
the Notes to Consolidated Financial Statements contained in Item 1 of this Form
10-Q.
43--------------------------------------------------------------------------------
Table of Contents
Average Balances, Interest and Average Yields/Cost
The following tables set forth, for the periods indicated, information regarding average balances of assets and liabilities as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities, resultant yields, interest rate spread, net interest margin (otherwise known as net yield on interest-earning assets), and the ratio of average interest-earning assets to average interest-bearing liabilities. Also presented is the weighted average yield on interest-earning assets, rates paid on interest-bearing liabilities and the net spread as ofMarch 31, 2022 and 2021. Income and all average balances are monthly average balances, which management deems to be not materially different than daily averages. Nonaccrual loans have been included in the table as loans carrying a zero yield. Three Months Ended March 31, 2022 2021 Average Interest Average Interest Balance Earned/ Yield/ Balance Earned/ Yield/ Outstanding Paid Rate Outstanding Paid Rate (Dollars in thousands) Interest-earning assets: Loans receivable, net (1)$ 1,330,177 $ 14,536 4.43 %$ 1,132,194 $ 12,541 4.43 % Investment securities 359,436 2,275 2.57 368,737 2,034 2.21 FHLB dividends 5,311 52 3.97 3,809 45 4.73 Interest-earning deposits in banks 82,780 38 0.19 44,576 13 0.12 Total interest-earning assets (2) 1,777,704 16,901 3.86 1,549,316 14,633 3.78 Noninterest-earning assets 122,013 96,490 Total average assets$ 1,899,717 $ 1,645,806 Interest-bearing liabilities: Interest-bearing demand deposits$ 196,154 $ 17 0.04$ 161,398 $ 7 0.02 Money market accounts 587,806 298 0.21 461,080 286 0.25 Savings accounts 194,721 26 0.05 173,647 40 0.09 Certificates of deposit 242,642 376 0.63 295,989 601 0.81 Total deposits 1,221,323 717 0.24 1,092,114 934 0.34 FHLB borrowings 82,611 304 1.49 55,437 191 1.38 Subordinated debt 39,282 394 4.07 3,192 25 3.13 Total interest-bearing liabilities 1,343,216 1,415 0.43 1,150,743 1,150 0.40 Noninterest-bearing deposits 328,304 283,204 Other noninterest-bearing liabilities 38,742 25,688 Total average liabilities 1,710,262 1,459,635 Average equity 189,455 186,171 Total average liabilities and equity$ 1,899,717 $ 1,645,806 Net interest income$ 15,486 $ 13,483 Net interest rate spread 3.43 3.38 Net earning assets$ 434,488 $ 398,573 Net interest margin (3) 3.53 3.48 Average interest-earning assets to average interest-bearing liabilities 132.3 % 134.6 %
(1) The average loans receivable, net balances include nonaccrual loans. (2) Includes interest-earning deposits (cash) at other financial institutions. (3) Net interest income divided by average interest-earning assets.
44--------------------------------------------------------------------------------
Table of Contents
Rate/Volume Analysis
The following table presents the dollar amount of changes in interest income and
interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the changes related to
outstanding balances and changes in interest rates. For each category of
interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to (i) changes in volume (i.e., changes in
volume multiplied by old rate) and (ii) changes in rate (i.e., changes in rate
multiplied by old volume). For purposes of this table, changes attributable to
both rate and volume, which cannot be segregated, have been allocated
proportionately to the change due to volume and the change due to rate.
Three Months Ended
March 31, 2022 vs. 2021
Increase (Decrease) Due to
Total Increase
Volume Rate (Decrease)
(In thousands)
Interest-earning assets:
Loans receivable, net $ 1,995 $ - $ 1,995
Investments (64 ) 305 241
FHLB stock 17 (10 ) 7
Other (1) 11 14 25
Total interest-earning assets $ 1,959 $ 309 $ 2,268
Interest-bearing liabilities: Interest-bearing demand deposits $ 1 $ 9 $ 10 Money market accounts 76 (64 ) 12 Savings accounts 4 (18 ) (14 ) Certificates of deposit (111 ) (114 ) (225 ) FHLB advances 91 22 113 Subordinated debt 278 91 369 Total interest-bearing liabilities $ 339$ (74 ) $ 265 Net change in interest income $ 1,620$ 383 $ 2,003
(1) Includes interest-earning deposits (cash) at other financial institutions.
Off-Balance Sheet Activities
In the normal course of operations, First Fed engages in a variety of financial transactions that are not recorded in the financial statements. These transactions involve varying degrees of off-balance sheet credit, interest rate and liquidity risks. These transactions are used primarily to manage customers' requests for funding and take the form of loan commitments and lines of credit. For the three months endedMarch 31, 2022 and the year endedDecember 31, 2021 , we engaged in no off-balance sheet transactions likely to have a material effect on our financial condition, results of operations or cash flows. 45
--------------------------------------------------------------------------------
Table of Contents Contractual Obligations AtMarch 31, 2022 , our scheduled maturities of contractual obligations were as follows: After 3 After 1 Year Years Within Through Through Beyond Total 1 Year 3 Years 5 Years 5 Years Balance (In thousands) Certificates of deposit$ 147,258 $ 71,091 $ 20,672 $ -$ 239,021 FHLB advances 75,000 35,000 25,000 10,000 145,000 Subordinated debt obligation - - - 39,250 39,250 Operating leases 803 1,691 1,777 4,601 8,872 Borrower taxes and insurance 2,138 - - - 2,138 Deferred compensation 123 383 78 497 1,081 Total contractual obligations$ 225,322 $ 108,165 $ 47,527 $ 54,348 $ 435,362
Commitments and Off-Balance Sheet Arrangements
The following table summarizes our commitments and contingent liabilities with
off-balance sheet risks as of
Amount of Commitment Expiration
After 3
After 1 Year Years
Within Through Through Beyond Total Amounts
1 Year 3 Years 5 Years 5 Years Committed
(In thousands)
Commitments to originate
loans:
Fixed-rate $ 3,028 $ - $ - $ - $ 3,028
Variable-rate 9,795 - - - 9,795
Unfunded commitments under
lines of credit or existing
loans 95,067 30,986 10,666 123,672 260,391
Standby letters of credit 212 - - - 212
Total commitments $ 108,102 $ 30,986 $ 10,666 $ 123,672 $ 273,426
Liquidity Management
Liquidity is the ability to meet current and future financial obligations of a
short-term and long-term nature. Our primary sources of funds consist of deposit
inflows, loan repayments, maturities and sales of securities, and borrowings
from the FHLB. While maturities and scheduled amortization of loans and
securities are usually predictable sources of funds, deposit flows, calls of
investment securities and borrowed funds, and prepayments on loans and
investment securities are greatly influenced by general interest rates, economic
conditions and competition, which can cause those sources of funds to fluctuate.
Management regularly adjusts our investments in liquid assets based upon an assessment of expected loan demand, expected deposit flows, yields available on interest-earning deposits and securities, and the objectives of our interest-rate risk and investment policies.
Our most liquid assets are cash and cash equivalents followed by available-for-sale securities. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. AtMarch 31, 2022 , cash and cash equivalents totaled$82.5 million , and unpledged securities classified as available-for-sale with a market value of$272.0 million provided additional sources of liquidity. We pledged collateral of$475.7 million to support borrowings from the FHLB and have an established borrowing arrangement with theFederal Reserve Bank of San Francisco , for which available-for-sale securities with a market value of$9.7 million were pledged as ofMarch 31, 2022 .
At
46
--------------------------------------------------------------------------------
Table of Contents
Certificates of deposit due within one year as ofMarch 31, 2022 totaled$147.3 million , or 61.6% of certificates of deposit with a weighted-average rate of 0.40%. We believe the large percentage of certificates of deposit that mature within one year reflects customers' hesitancy to invest their funds for longer periods as market interest rates were in decline. If these maturing deposits are not renewed, however, we will be required to seek other sources of funds, including other certificates of deposit, non-maturity deposits, and borrowings. We have the ability to attract and retain deposits by adjusting the interest rates offered as well as through sales and marketing efforts in the markets we serve. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on certificates of deposit. In addition, we believe that our branch network, and the general cash flows from our existing lending and investment activities, will provide us more than adequate long-term liquidity. For additional information, see the Consolidated Statements of Cash Flows in Item 1 of this Form 10-Q. The Company is a separate legal entity from the Bank and provides for its own liquidity. AtMarch 31, 2022 , the Company, on an unconsolidated basis, had liquid assets of$7.8 million . In addition to its operating expenses, the Company is responsible for paying dividends declared, if any, to its shareholders, funds paid for Company stock repurchases, payments on subordinated notes held at the Company level, and commitments to joint ventures. The Company has the ability to receive dividends or capital distributions from the Bank, although there are regulatory restrictions on the ability of the Bank to pay dividends. First Northwest has partially fulfilled its commitment to extend$15.0 million toQuin Ventures, Inc. under a capital financing agreement and related promissory note. Capital Resources AtMarch 31, 2022 , shareholders' equity totaled$177.8 million , or 9.1% of total assets. Our book value per share of common stock was$17.77 atMarch 31, 2022 , compared to$19.10 atDecember 31, 2021 .
At
The following table provides the capital requirements and actual results for First Fed atMarch 31, 2022 . Minimum Capital Minimum Required to be Actual Requirements Well-Capitalized Amount Ratio Amount Ratio Amount Ratio (Dollars in thousands) Tier I leverage capital (to average assets)$ 200,865 10.6 %$ 75,735 4.0 %$ 94,669 5.0 % Common equity tier I (to risk-weighted assets) 200,865 13.1 69,014 4.5 99,687 6.5 Tier I risk-based capital (to risk-weighted assets) 200,865 13.1 92,019 6.0 122,692 8.0 Total risk-based capital (to risk-weighted assets) 216,321 14.1 122,692 8.0 153,365 10.0 In order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses, the Bank must maintain common equity tier 1 capital ("CET1") at an amount greater than the required minimum levels plus a capital conservation buffer of 2.5%.
Effect of Inflation and Changing Prices
The consolidated financial statements and related financial data presented in this report have been prepared according to generally accepted accounting principles inthe United States , which require the measurement of financial and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs and the effect that general inflation may have on both short-term and long-term interest rates. Unlike companies in many other industries, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution's performance than do general levels of inflation. Although inflation expectations do affect interest rates, interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services. 47
--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source
