FNWB - First Northwest Bancorp Reports Third Quarter 2023 Earnings

PORT ANGELES, Wash., Oct. 26, 2023 (GLOBE NEWSWIRE) --

Matthew P. Deines, President and CEO, comments on financial results:

"The Company continues to manage through this historic interest rate environment by remaining focused on deepening existing relationships and acquiring new customers," said Matthew P. Deines, President and CEO. "We are also maintaining our commitment to reducing non-interest expense, which bore out in lower operating expenses and an improved efficiency ratio this quarter compared to the linked quarter. We celebrated our 100th anniversary in style during the quarter at an event in Port Angeles, which highlighted our history, strength and commitment to our communities. We also enjoyed great music, culture and food with friends and family."

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 November 24, 2023, to shareholders of record as of the close of business on November 10, 2023.

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

First Northwest Bancorp (Nasdaq: FNWB) ("First Northwest" or "Company") today reported quarterly net income of $2.5 million for the third quarter of 2023, compared to $1.8 million for the second quarter of 2023, and $4.3 million for the third quarter of 2022. Basic and diluted earnings per share were $0.28 for the third quarter of 2023, compared to $0.20 for the second quarter of 2023, and $0.47 for the third quarter of 2022. In the third quarter of 2023, the Company generated a return on average assets ("ROAA") of 0.46%, a return on average equity ("ROAE") of 6.17%, and a return on average tangible common equity* of 6.23%. Results in the third quarter of 2023 are reflective of higher noninterest income and lower noninterest expense, partially offset by higher funding costs. Income before provision for income taxes was $3.1 million for the current quarter, compared to $2.2 million for the preceding quarter, an increase of $931,000, or 42.8% and decreased $1.3 million compared to $4.4 million for the third quarter of 2022.

Net Interest Income
Total interest income increased $360,000 to $25.8 million for the third quarter of 2023, compared to $25.5 million in the previous quarter, and increased $5.0 million from $20.9 million in the third quarter of 2022. Interest income increased in the current quarter due to an increased volume of loans and higher yields on investments and interest-earning deposits in banks. Interest and fees on loans increased year-over-year, as the Company's banking subsidiary, First Fed Bank ("First Fed" or "Bank"), grew the loan portfolio through draws on new and existing lines of credit, originations of multi-family real estate loans and auto and manufactured home loan purchases. Northpointe Mortgage Purchase Program ("Northpointe MPP") participation also provided additional loan interest income. Loan yields increased over the prior year due to higher rates on new originations as well as the repricing of variable rate loans tied to the Prime Rate or other indices.

Total interest expense was $10.9 million for the third quarter of 2023, compared to $9.5 million in the second quarter of 2023 and $2.7 million in the third quarter a year ago. Current quarter interest expense was higher due to a 31 basis point increase in the cost of deposits to 1.85% at September 30, 2023, from 1.54% at the prior quarter end. The increase over the third quarter of 2022 was the result of a 153 basis point increase in the cost of deposits from 0.32% in the third quarter one year ago, along with higher volumes and rates paid on short-term FHLB advances and certificates of deposit ("CDs"). A shift in the deposit mix from transaction and money market accounts to a higher volume of savings accounts and CDs, primarily promotional, resulted in higher costs of deposits. Measured reliance on brokered CDs also contributed to additional deposit costs.

Net interest income before provision for credit losses for the third quarter of 2023 decreased 6.5% to $15.0 million, compared to $16.0 million for the preceding quarter, and decreased 17.9% from the third quarter one year ago.

The Company recorded a $371,000 provision for credit losses in the third quarter of 2023, reflecting additional charge-offs from the Splash unsecured consumer loan program, partially offset by a provision recovery due to lower unfunded commitments at quarter end. This compares to a credit loss provision of $300,000 for the preceding quarter. A loan loss provision of $750,000 was recorded for the third quarter of 2022, which was estimated using the incurred loss method based on historical loss trends combined with qualitative adjustments.

The net interest margin decreased to 2.97% for the third quarter of 2023, from 3.25% for the prior quarter, and decreased 91 basis points compared to 3.88% for the third quarter of 2022. Decreases from both the prior quarter and the prior year are due to higher funding costs for both deposits and borrowed funds. While increases in the cost of funding are currently outpacing the growth of the yield on interest-earning assets, the Company has taken measures to combat interest rate compression. Organic loan production is augmented with higher yielding purchased loans through established relationships with loan originators. The Bank's fair value hedging agreement has boosted interest income and new loan originations are priced to account for the increasing cost of funds.

The yield on average earning assets of 5.14% for the third quarter of 2023 decreased 3 basis points compared to the second quarter of 2023 and increased 69 basis points from 4.45% for the third quarter of 2022. Higher loan rates at origination and increased yields on variable-rate loans were offset by a reclassification from interest income to noninterest income of funds recognized in the second quarter of 2023. The year-over-year increase was primarily due to higher average loan balances augmented by increases in yields, which were positively impacted by the rising rate environment and overall improvements in the mix of interest-earning assets.

The cost of average interest-bearing liabilities increased to 2.60% for the third quarter of 2023, compared to 2.33% for the second quarter of 2023, and increased from 0.73% for the third quarter of 2022. Total cost of funds increased to 2.23% for the third quarter of 2023 from 1.98% in the prior quarter and increased from 0.59% for the third quarter of 2022. Current quarter increases were due to higher costs on interest-bearing deposits and advances in addition to increases in average CD and savings balances.

The increase over the same quarter last year was driven by higher rates paid on deposits and borrowings. The Company attracted and retained funding through the use of promotional products and a focus on outbound sales efforts. The mix of retail deposit balances shifted from no or low-cost transaction accounts towards higher cost term certificate and savings products. Retail CDs represented 27.6%, 25.8% and 15.2% of retail deposits at September 30, 2023, June 30, 2023 and September 30, 2022, respectively. Average interest-bearing deposit balances increased $43.7 million, or 3.3%, to $1.38 billion for the third quarter of 2023 compared to $1.33 billion for the second quarter of 2023 and increased $153.1 million, or 12.5%, compared to $1.22 billion for the third quarter of 2022.

Noninterest Income
Noninterest income increased 69.7% to $2.9 million for the third quarter of 2023 from $1.7 million for the second quarter of 2023, primarily due to a $750,000 reclassification of funds recouped on Splash charge-offs and an increase in the valuation of servicing rights on sold loans of $239,000. Noninterest income increased 24.4% from $2.3 million the same quarter one year ago, due to the Splash reclassification, offset by decreases in the servicing rights valuation, gain on sale of Small Business Administration ("SBA") loans and loan fee income. Saleable mortgage loan production continues to be hindered by reduced refinancing activity due to rising market rates on mortgage loans compared to the prior year.

Noninterest income declined $10,000 to $6.95 million for the nine months ended September 30, 2023, compared to $6.96 million for the nine months ended September 30, 2022.

Noninterest Expense
Noninterest expense totaled $14.4 million for the third quarter of 2023, compared to $15.2 million for the preceding quarter and $15.4 million for the third quarter a year ago. Decreases in marketing, payroll tax, medical insurance, software licensing and shareholder communications during the current quarter were partially offset by losses due to fraud. The decrease in expenses compared to the third quarter of 2022 reflects a $1.1 million reduction related to Quin Ventures, Inc. ("Quin Ventures") compensation, advertising and customer acquisition costs, and occupancy expenses, as well as decreases in Bank incentive compensation paid and non-recurring compensation expense, partially offset by higher Bank professional fees and FDIC insurance premiums. The Company continues to focus on managing expenses, with a focus on controlling compensation expense, and reducing advertising and other discretionary spending.

Noninterest expense decreased 5.7% to $44.5 million for the nine months ended September 30, 2023, compared to $47.2 million for the nine months ended September 30, 2022. Compensation expense decreased $3.8 million primarily due to lower commissions, payroll taxes, and medical insurance expenses. Quin Ventures expenses included for the nine months ended September 30, 2023, totaled $320,000 compared to $3.9 million in the nine months ended September 30, 2022.

Investment Securities
Investment securities decreased $12.6 million, or 3.9%, to $309.3 million at September 30, 2023, compared to $322.0 million three months earlier, and decreased $20.1 million compared to $329.4 million at September 30, 2022. The market value of the portfolio decreased $8.3 million during the third quarter of 2023, primarily driven by an increase in long-term interest rates. At September 30, 2023, municipal bonds totaled $94.0 million and comprised the largest portion of the investment portfolio at 30.4%. Non-agency issued mortgage-backed securities ("MBS non-agency") were the second largest segment, totaling $90.0 million, or 29.1%, of the portfolio at quarter end. Included in MBS non-agency are $58.7 million of commercial mortgaged-backed securities ("CMBS"), of which 85.6% are in "A" tranches. The majority of the remaining 14.4% are in "B" tranches with one investment in a "C" tranche. Our largest exposure is to long-term care facilities, which makes up 53.9%, or $31.7 million, of our private label CMBS securities. All of the CMBS bonds have credit enhancements that further reduce risk of loss on these investments.

The estimated average life of the securities portfolio was approximately 7.7 years, compared to 7.8 years in the prior quarter and 8.4 years in the third quarter of 2022. The effective duration of the portfolio was approximately 4.9 years, compared to 5.2 years in the prior quarter and 5.1 years at the end of the third quarter of 2022.

Loans and Unfunded Loan Commitments
Net loans, excluding loans held for sale, decreased $2.8 million, or 0.2%, to $1.62 billion at September 30, 2023, from $1.62 billion at June 30, 2023, and increased $96.9 million, or 6.4%, from $1.52 billion one year ago. Multi-family loans increased $28.9 million during the current quarter. The increase was the result of new originations totaling $17.2 million and $13.0 million of construction loans converting into permanent amortizing loans, partially offset by scheduled payments. One-to-four family loans increased $4.4 million during the current quarter as a result of $14.9 million in residential construction loans that converted to permanent amortizing loans, partially offset by payments received. Commercial real estate increased $5.5 million during the current quarter compared to the previous quarter as originations exceeded payoffs and scheduled payments. Home equity loans also increased $5.5 million over the previous quarter due to draws on new and existing commitments. Commercial business loans decreased $28.8 million, mainly from a reduction in our Northpointe MPP participation from $23.9 million three months prior to $162,000 at the current quarter end along with repayment on existing lines of credit. Construction loans decreased $13.6 million during the quarter, with $25.4 million converting into fully amortizing loans, partially offset by draws on new and existing loans. Auto and other consumer loans decreased $5.2 million during the current quarter as payoffs and scheduled payments exceeded originations.

The Company originated $8.3 million in residential mortgages during the third quarter of 2023 and sold $9.7 million, with an average gross margin on sale of mortgage loans of approximately 2.02%. This production compares to residential mortgage originations of $10.7 million in the preceding quarter with sales of $6.4 million, with an average gross margin of 2.00%. While single-family home inventory increased in the third quarter of 2023, higher market rates on mortgage loans continued to hinder saleable mortgage loan production. We have expanded our secondary market outlets and changed our portfolio pricing in an effort to improve saleable loan production. New single-family residence construction loan commitments totaled $6.5 million in the third quarter, compared to $4.8 million in the preceding quarter.

Deposits
Total deposits increased $4.6 million, to $1.66 billion at September 30, 2023, compared to $1.65 billion at June 30, 2023, and increased $52.5 million, or 3.3%, compared to $1.61 billion one year ago. Increases in consumer CDs of $27.7 million, business money market account balances of $12.1 million, business CD balances of $4.0 million, and consumer savings account balances of $2.1 million, were offset by decreases in consumer money market account balances of $13.7 million, brokered CDs of $10.0 million, business savings account balances of $9.2 million, business demand account balances of $7.3 million, public fund CDs of $1.0 million, and consumer demand account balances of $741,000 during the third quarter of 2023. Decreases in certain categories were driven by customers seeking higher rates and spending of excess savings accumulated in 2020 and 2021. The current rate environment has contributed to greater competition for deposits with additional deposit rate specials offered to attract new funds.

The Company estimates that 23% of total deposit balances were uninsured at September 30, 2023. Approximately 15% of total deposits were uninsured business and consumer deposits with the remaining 8% consisting of uninsured public fund balances totaling $123.9 million. Uninsured public fund balances are fully collateralized. The Bank holds an FHLB letter of credit as part of our participation in the Washington Public Deposit Protection Commission program which covers $104.7 million of related deposit balances. The remaining $19.2 million is fully covered through pledged securities. Consumer deposits make up 61% of total deposits with an average balance of approximately $24,000 per account.

Asset Quality
Nonperforming loans were $2.4 million at September 30, 2023, a decrease of $180,000 from June 30, 2023, related to decreased delinquencies in Triad purchased manufactured home loans and home equity lines of credit, partially offset by a newly delinquent single-family residential loan and a Woodside auto loan. The percentage of the allowance for credit losses on loans to nonperforming loans increased to 714% at September 30, 2023, from 677% at June 30, 2023, and from 463% at September 30, 2022. Classified loans increased $245,000 to $23.0 million at September 30, 2023, due to the downgrades of a $119,000 commercial business loan, a $110,00 home equity loan and $196,000 in additional funds disbursed on a substandard commercial construction loan during the third quarter.

The allowance for credit losses on loans as a percentage of total loans was 1.04% at September 30, 2023, decreasing from 1.06% at the prior quarter end and from 1.06% reported one year earlier. The current quarter 2 basis point decrease can be attributed to changes in the loan mix with a shift in balances to amortizing loans, which carry lower reserve estimates, and a decrease in the qualitative factor adjustment applied to Woodside auto loans. The decrease in reserve calculation for the allowance for credit losses on loans was offset by net charge-offs.

Capital
Total shareholders’ equity decreased to $156.1 million at September 30, 2023, compared to $159.6 million three months earlier, due to a decrease in the fair market value of the available-for-sale investment securities portfolio, net of taxes, of $6.5 million, dividends declared of $675,000 and share repurchases totaling $12,000, partially offset by net income of $2.5 million and a $727,000 increase in the fair market value of derivatives, net of taxes. Bond values continue to be impacted by the higher rate environment.

Tangible book value per common share* was $16.03 at September 30, 2023, compared to $16.39 at June 30, 2023, and $15.50 at September 30, 2022. Book value per common share was $16.20 at September 30, 2023, compared to $16.56 at June 30, 2023, and $15.69 at September 30, 2022.

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 September 30, 2023. Common Equity Tier 1 and Total Risk-Based Capital Ratios at September 30, 2023, were 13.4% and 14.4%, respectively.

Share Repurchase Program and Cash Dividend
First Northwest continued to return capital to our shareholders through cash dividends and share repurchases during the third quarter of 2023. We repurchased 1,073 shares of common stock under the Company's October 2020 stock repurchase plan at an average price of $11.10 per share for a total of $12,000 during the quarter ended September 30, 2023, leaving 226,337 shares remaining under the plan. In addition, the Company paid cash dividends totaling $671,000 in the third quarter of 2023.

^{__________________
*} See reconciliation of Non-GAAP Financial Measures later in this release.

Awards/Recognition

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

In October 2023, the First Fed team was honored to bring home the Gold for Best Bank in the Best of the Northwest survey hosted by Bellingham Alive for the second year in a row.

In September 2023, the First Fed team was recognized in the 2023 Best of Olympic Peninsula surveys, winning Best Bank and Best Financial Advisor in Clallam County. First Fed was also a finalist for Best Bank in Jefferson County, Best Employer in Kitsap County, and Best Bank and Best Financial Institution in Bainbridge.

In June 2023, 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.

In May 2023, 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 #1 in the medium-sized company category in 2023 and was ranked #3 in the same category in 2022.

In March 2023, First Fed won “Best Bank” in Cascadia Daily News 2023 Readers' Choice. It was the first year that First Fed had participated in this Whatcom County poll.

First Fed has been rated a 5-star bank by Bauer Financial, a leading independent bank and credit union rating and research firm. This top rating indicates that First Fed is one of the strongest banks in the nation based on capital, loan quality and other detailed performance criteria.

About the Company

First Northwest Bancorp (Nasdaq: FNWB) is a financial holding company engaged in investment activities including the business of its subsidiary, First Fed Bank. First Fed is a Pacific Northwest-based financial institution which has served its 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 businesses, non-profit organizations, and commercial customers. In 2022, First Northwest made an investment in The Meriwether Group, LLC, a boutique investment banking and accelerator firm. Additionally, First Northwest focuses on strategic partnerships to provide modern financial services such as digital payments and marketplace lending. First Northwest Bancorp was incorporated in 2012 and completed its initial public offering in 2015 under the ticker symbol FNWB. The Company 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; pressures on liquidity, including as a result of withdrawals of deposits or declines in the value of our investment portfolio; 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 2023 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.

For More Information Contact:
Matthew P. Deines, President and Chief Executive Officer
Geri Bullard, EVP, Chief Financial Officer and Chief Operating Officer
IRGroup@ourfirstfed.com
360-457-0461

FIRST NORTHWEST BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data) (Unaudited)

FIRST NORTHWEST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data) (Unaudited)