FNWB - First Northwest Bancorp Reports Second Quarter 2022 Financial Results

PORT ANGELES, Wash., July 27, 2022 (GLOBE NEWSWIRE) -- First Northwest Bancorp (Nasdaq: FNWB)

CEO Commentary

“Our commercial bank shined this quarter as loan growth combined with increasing yields and stable deposit costs to drive increases in net interest income and net interest margin,” said Matthew P. Deines, President and CEO of First Northwest Bancorp. “Expenses were impacted by investments in our fintech initiatives and partnerships, which we expect to moderate in the coming quarters. We are also pleased to have been recognized as one of the Top 100 Best Workplaces in Washington by Puget Sound Business Journal for the second year in a row.”

The Board of Directors of First Northwest Bancorp declared a quarterly cash dividend of $0.07 per common share. The dividend will be payable on August 26, 2022, to shareholders of record as of the close of business on August 12, 2022.

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* See reconciliation of Non-GAAP Financial Measures later in this release.

Balance Sheet Review

Total assets increased $87.4 million, or 4.5%, to $2.03 billion at June 30, 2022, compared to $1.94 billion at March 31, 2022, and increased $244.2 million, or 13.7%, compared to $1.79 billion at June 30, 2021.

Cash and cash equivalents increased by $5.3 million, or 6.4%, to $87.8 million as of June 30, 2022, compared to $82.5 million as of March 31, 2022.

Investment securities decreased $24.6 million, or 6.5%, to $353.1 million at June 30, 2022, compared to $377.7 million three months earlier, and decreased $17.4 million compared to $370.5 million at June 30, 2021. The market value of the portfolio declined an additional $16.8 million during the second quarter of 2022 as rates continue to rise as the Federal Reserve Bank responds to significant inflation trends. Principal and interest payments received of $12.0 million were used to fund loan growth. At June 30, 2022, municipal bonds totaled $104.0 million and comprised the largest portion of the investment portfolio at 29.5%. Corporate mortgage-backed securities are the second largest segment, totaling $101.1 million, or 28.6%, of the portfolio at quarter end. The estimated average life of the securities portfolio was approximately 8.2 years, compared to 7.0 years in the prior quarter and 6.6 years in the second quarter of 2021. The effective duration of the portfolio was approximately 5.2 years, compared to 5.0 years in the prior quarter and 5.6 years in the second quarter of 2021.

Investment securities consisted of the following at the dates indicated:

Net loans, excluding loans held for sale, increased $91.0 million, or 6.6%, to $1.46 billion at June 30, 2022, from $1.37 billion at March 31, 2022, and increased $215.2 million, or 17.3%, from $1.25 billion a year ago. Multi-family loans increased $17.6 million during the current quarter. The increase was the result of new loans totaling $34.3 million and $3.7 million of acquisition-renovation construction loans converting into amortizing loans. Consumer loan increases included $5.1 million from quin Credit Builder loans, a product developed through our joint venture partnership with Quin Ventures, which are fully secured by funds on deposit; a net increase in auto loans of $5.4 million; and $1.4 million in manufactured home loan purchases net of repayment. Construction loans increased $5.7 million as the result of disbursements on new and existing projects offset by payoffs and conversions to permanent loans. Commercial business loans increased $16.7 million during the quarter due in part to $6.2 million in new equipment loans and new SBA loans totaling $6.3 million, offset by Paycheck Protection Program (“PPP”) loan payoffs and payments received during the quarter of $5.5 million.

The Company originated $18.4 million in residential mortgages during the second quarter and sold $6.3 million, with an average gross margin on sale of mortgage loans of approximately 2.30%. This production compares to residential mortgage originations of $13.3 million in the preceding quarter with sales of $10.3 million, with an average gross margin of 2.69%. Rising mortgage loan rates and a lack of single-family home inventory have resulted in a decline in saleable mortgage loan production. New single-family residence construction loan commitments totaled $30.7 million in the second quarter of 2022, compared to $23.6 million in the preceding quarter.

Loans receivable consisted of the following at the dates indicated:

Prepaid expenses and other assets increased $13.7 million to $46.1 million at June 30, 2022, compared to $32.5 million at March 31, 2022, and increased $27.4 million compared to $18.7 million a year ago. The increase in the current quarter is mainly due to increases in joint venture investments of $6.6 million and deferred tax assets of $3.5 million resulting from the fair market value decrease of the investment portfolio, along with an increase in other prepaid expenses of $3.3 million which includes long-term sponsorship agreements with local organizations. In addition to the changes recorded during the current quarter, the increase from a year ago also reflects an increase in the operating lease right-of-use assets related to branch expansion during the prior twelve months of $2.8 million and investments in affiliated entities providing financial-related services and a loan investment fund during the second quarter of 2022 totaling $6.6 million.

Total deposits increased $31.3 million, to $1.58 billion at June 30, 2022, compared to $1.55 billion at March 31, 2022, and increased $139.0 million, or 9.6%, compared to $1.44 billion a year ago. Increases in business money market account balances of $10.4 million, public fund certificates of deposits ("CDs") of $10.1 million, and brokered CDs of $20.0 million, were offset by decreases in consumer money market account balances of $5.1 million, business demand account balances of $3.0 million, and consumer savings account balances of $2.3 million during the second quarter.

Demand deposits increased 9.4% compared to a year ago to $528.4 million at June 30, 2022, and represented 33.4% of total deposits; money market accounts increased 9.2% compared to a year ago to $587.7 million, and represented 37.2% of total deposits; savings accounts increased 5.0% compared to a year ago to $195.0 million at June 30, 2022, and represented 12.3% of total deposits; and certificates of deposit increased 2.9% compared to a year ago to $269.5 million at quarter-end, and represented 17.1% of total deposits.

The total cost of deposits was 0.20% for the second quarter of 2022 compared to 0.19% for the first quarter of 2022, and improved from 0.23% for the second quarter of 2021.

Deposits consisted of the following at the dates indicated:

Total shareholders’ equity decreased to $165.2 million at June 30, 2022, compared to $177.8 million three months earlier, and decreased from $188.6 million a year earlier, due to declines in the fair market value of the investment securities portfolio of $13.3 million and $32.0 million, respectively. Bond values have decreased across the board as rates and credit spreads rise in response to sustained inflationary pressures. Tangible book value per common share* was $16.40 at June 30, 2022, compared to $17.56 at March 31, 2022, and $18.49 at June 30, 2021. Book value per common share was $16.60 at June 30, 2022, compared to $17.77 at March 31, 2022, and $18.48 at June 30, 2021. The current quarter decline in investment securities fair market value had an 8.1% negative impact on tangible book value. We repurchased 52,618 shares of common stock under the October 2020 Plan at an average price of $16.29 per share for a total of $857,000 during the quarter ended June 30, 2022, leaving 605,752 shares remaining in the share repurchase program.

Income Statement Results

In the second quarter of 2022, the Company generated a return on average assets ("ROAA") of 0.51%, and a return on average equity ("ROAE") of 5.75%, compared to 0.60% and 6.01%, respectively, in the first quarter of 2022, and 0.69% and 6.46%, respectively, in the second quarter of 2021. Year-to-date, the Company generated an ROAA of 0.55%, and an ROAE of 5.88%, compared to 0.73% and 6.63%, respectively, for the six months ended June 30, 2021.

Total interest income increased $2.1 million to $19.0 million for the second quarter of 2022, compared to $16.9 million in the previous quarter, and increased $3.9 million from $15.1 million in the second quarter of 2021. Interest and fees on loans increased during the quarter as we grew the loan portfolio through new originations in multi-family and construction loans, as well as adding higher yielding purchased manufactured home loans and purchased auto loans. Loan yields are trending up as the result of higher rates on new originations as well as from the repricing of variable rate loans tied to the Prime Rate or other indices. Total interest expense was $1.7 million for the second quarter of 2022, compared to $1.4 million in the first quarter of 2022 and second quarter a year ago. The increase was a result of a higher volume of interest-costing liabilities, primarily from FHLB borrowings which are more sensitive to Federal Reserve Bank and other rate increases in the market.

Total interest income for the six months ended June 30, 2022, increased $6.2 million to $35.9 million, compared to $29.7 million for the six months ended June 30, 2021.Total interest expense increased $581,000 for the six months ended June 30, 2022, to $3.1 million, compared to $2.6 million for the six months ended June 30, 2021.

Net interest income, before provision for loan losses, for the second quarter of 2022 increased 11.3% to $17.2 million, compared to $15.5 million for the preceding quarter, and increased 26.3% from the second quarter a year ago. Net interest income, before provision for loan losses, for the six months ended June 30, 2022, increased $5.6 million to $32.7 million, compared to $27.1 million for the six months ended June 30, 2021.

The positive impact of PPP loan forgiveness on interest income is declining, as most of these loans have already been forgiven. As of June 30, 2022, we received SBA proceeds on forgiven loans totaling $64.9 million. Approximately $122,000 of the income recognized during the second quarter of 2022 was related to deferred fees associated with PPP loan payoffs, compared to $231,000 in the first quarter of 2022. At June 30, 2022, there was approximately $71,000 of PPP loan fee income remaining to be recognized in income.

The Company recorded a $500,000 loan loss provision during the second quarter of 2022. This compares to no provision for loan losses for the preceding quarter and a provision for loan losses of $300,000 for the second quarter of 2021. The provision reflects loan growth and changing economic conditions, offset by stable credit quality metrics. The loan loss provision for the six months ended June 30, 2022, was $500,000, compared to $800,000 for the six months ended June 30, 2021.

The net interest margin increased 24 basis points to 3.77% for the second quarter of 2022, from 3.53% the prior quarter, and increased 43 basis points over the second quarter of 2021 of 3.34%. Increases over both the prior quarter and the prior year are primarily due to an improvement in our earning asset mix and loan fee income recognized from loan payoffs during the second quarter of 2022, as well as higher market rates for both fixed and variable rate assets. The net interest margin increased 22 basis points to 3.65% for the six months ended June 30, 2022, from 3.43% for the six months ended June 30, 2021.

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* See reconciliation of Non-GAAP Financial Measures later in this release.

The yield on earning assets increased 28 basis points to 4.14% for the second quarter of 2022, compared to 3.86% for the first quarter of 2022, and increased 46 basis points from 3.68% for the second quarter of 2021. The increase over the prior quarter was due to higher yields on the investment portfolio along with higher average loan balances coupled with an increase on the loan portfolio yield to 4.48% for the second quarter of 2022, compared to 4.43% for the first quarter of 2022, primarily due to the impact of the rising rate environment. The year-over-year increase was primarily due to the higher volume of average loan balances augmented by increases in yields which were positively impacted by the rising rate environment.

The yield on earning assets increased 25 basis points to 4.00% for the six months ended June 30, 2022, from 3.75% for the six months ended June 30, 2021.

The cost of interest-bearing liabilities increased 6 basis points to 0.49% for the second quarter of 2022, compared to 0.43% for the first quarter of 2022, and increased 3 basis points from 0.46% for the second quarter of 2021. Total cost of funds increased 5 basis points to 0.39% for the second quarter of 2022 from 0.34% in the prior quarter, and increased 2 basis points from 0.37% for the second quarter of 2021. Current quarter increases were mainly due to higher average FHLB advances along with a small impact from higher costs on interest-bearing deposits. The increase over the same quarter in 2021 was also driven by higher average FHLB advances but was partially offset by a year-over-year decrease in the average cost of interest-bearing deposits.

The cost of interest-bearing liabilities increased 3 basis points to 0.46% for the six months ended June 30, 2022, from 0.43% for the six months ended June 30, 2021. The total cost of funds increased 2 basis points to 0.37% for the six months ended June 30, 2022, from 0.35% for the six months ended June 30, 2021.

Noninterest income decreased 7.5% to $2.2 million for the second quarter of 2022 from $2.4 million for the first quarter of 2022, and decreased 42.6% compared to $3.9 million for the second quarter a year ago. Decreases for the quarter were mainly the result of lower gain on sale of mortgage loans, a decline in the value of the servicing asset due to loan payoffs, and lower gains on investment security sales, partially offset by an increase in gain on sale of SBA loans and swap contract fee income. Quin Ventures recorded subscription income of $118,000 during the second quarter of 2022 and $126,000 for the six months ended June 30, 2022.

Noninterest income decreased 29.7% to $4.6 million for the six months ended June 30, 2022, from $6.6 million for the six months ended June 30, 2021.

Noninterest expense totaled $17.0 million for the second quarter of 2022, compared to $14.8 million for the preceding quarter and $13.7 million for the second quarter a year ago. Quin Ventures launched the Credit Builder product in the second quarter of 2022 and, as a result, costs that were previously capitalized during the development phase due to software capitalization rules are now being expensed. Additional Quin Ventures expenses totaling $1.5 million were recorded in advertising, compensation, depreciation and data processing during the second quarter of 2022. The increase over the second quarter of 2021 was also impacted by the increase in Quin Ventures expenses, and reflects increases at the Bank in compensation expense as well as other costs associated with expanding our footprint with two new locations, technology enhancements for core and digital banking products and higher FDIC insurance premiums.

Noninterest expense increased 23.2% to $31.8 million for the six months ended June 30, 2022, from $25.8 million for the six months ended June 30, 2021.

The provision for income tax decreased to $467,000 for the second quarter of 2022, compared to $554,000 for the first quarter of 2022 and $663,000 for the second quarter of 2021, reflecting differences in pre-tax income. The provision for income tax decreased to $1.0 million for the six months ended June 30, 2022, compared to $1.1 million for the six months ended June 30, 2021. The effective tax rate increased over prior periods as we started accruing for state income tax in the second quarter of 2022 for states where we have nexus mainly due to loan collateral.

Capital Ratios and Credit Quality

Capital levels for both the Company and its operating bank, First Fed, remain in excess of applicable regulatory requirements and the Bank was categorized as "well-capitalized" at June 30, 2022. Common Equity Tier 1 and Total Risk-Based Capital Ratios at June 30, 2022, were 12.7% and 13.6%, respectively.

Nonperforming loans were $1.2 million at June 30, 2022, an increase of $8,000 from March 31, 2022, related to an increase in mortgage loans offset by decreases in brokered auto loans. The percentage of the allowance for loan losses to nonperforming loans increased to 1269% at June 30, 2022, from 1227% at March 31, 2022, and increased from 818% at June 30, 2021. Classified loans decreased $480,000 during the second quarter to $13.8 million at June 30, 2022, due to an improvement in commercial real estate offset by declines in two construction relationships. The allowance for loan losses as a percentage of total loans was 1.07% at June 30, 2022, a decrease from 1.10% reported for the prior quarter and from 1.16% reported one year earlier.

Awards/Recognition

The Company has received several accolades as a leader in the community.

In April 2022, First Fed was recognized as a Top Corporate Citizen by the Puget Sound Business Journal. The Corporate Citizenship Awards honors local corporate philanthropists and companies making significant contributions in the region. The top 25 small, medium and large-sized companies were recognized in addition to nine other honorees last year. First Fed was ranked #3 in the medium-sized company category in 2022 and was ranked #4 in the same category in 2021.

In June 2022, First Fed was named to the Middle Market Fast 50 List by the Puget Sound Business Journal. First Fed also made the Fast 50 list for 2020 and 2021, which recognizes the region's fastest-growing middle market companies.

Additionally, in June 2022 First Fed was named on the Puget Sound Business Journal’s Best Workplaces list. First Fed has been recognized as one the top 100 workplaces in Washington, as voted for two years in row by each company’s own employees.

About the Company

First Northwest Bancorp (Nasdaq: FNWB) is a bank holding company engaged in investment activities including the business activity of its subsidiary, First Fed Bank. First Fed is a community-oriented financial institution which has served customers and communities since 1923. Currently First Fed has 16 locations in Washington state including 12 full-service branches. First Fed’s business and operating strategy is focused on building sustainable earnings by delivering a full 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. FNWB also invests in fintech companies directly as well as through select venture capital partners. In 2021, the Company entered a joint venture to found Quin, a fintech focused on financial wellness and lifestyle protection for consumers nationwide. Other fintech partnership initiatives include banking-as-a-service, digital payments and marketplace lending. FNWB was incorporated in 2012 and is headquartered in Port Angeles, Washington.

Forward-Looking Statements

Certain matters discussed in this press release may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements relate to, among other things, expectations of the business environment in which we operate, projections of future performance, perceived opportunities in the market, potential future credit experience, and statements regarding our mission and vision. These forward-looking statements are based upon current management expectations and may, therefore, involve risks and uncertainties. Our actual results, performance, or achievements may differ materially from those suggested, expressed, or implied by forward-looking statements as a result of a wide variety of factors including, but not limited to: increased competitive pressures; changes in the interest rate environment; the credit risks of lending activities; changes in general economic conditions and conditions within the securities markets; legislative and regulatory changes; and other factors described in the Company ’ s latest Annual Report on Form 10-K and other filings with the Securities and Exchange Commission ("SEC")-which are available on our website at www.ourfirstfed.com and on the SEC ’ s website at www.sec.gov .

Any of the forward-looking statements that we make in this Press Release and in the other public statements we make may turn out to be incorrect because of the inaccurate assumptions we might make, because of the factors illustrated above or because of other factors that we cannot foresee. Because of these and other uncertainties, our actual future results may be materially different from those expressed or implied in any forward-looking statements made by or on our behalf and the Company's operating and stock price performance may be negatively affected. Therefore, these factors should be considered in evaluating the forward-looking statements, and undue reliance should not be placed on such statements. We do not undertake and specifically disclaim any obligation to revise any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. These risks could cause our actual results for 2022 and beyond to differ materially from those expressed in any forward-looking statements by, or on behalf of, us and could negatively affect the Company ’ s operations and stock price performance.

FIRST NORTHWEST BANCORP AND SUBSIDIARY
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FIRST NORTHWEST BANCORP AND SUBSIDIARY
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FIRST NORTHWEST BANCORP AND SUBSIDIARY
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FIRST NORTHWEST BANCORP AND SUBSIDIARY
Selected Financial Ratios and Other Data
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