FNWB First Northwest Bancorp

Matthew P. Deines, President and CEO, comments on financial results:"We grew deposits this quarter and are cautiously optimistic that funding costs have begun to stabilize," said Matthew P. Deines, President and CEO of First Northwest Bancorp. "We continue to focus on the blocking and tackling of community banking and expect actions we took in the second quarter will result in lower expenses in future quarters. Loan growth continues to moderate as we focus on liquidity and pricing loans based on the marginal cost of deposits. Credit quality remains strong and continues to serve as a defining characteristic of our credit culture."

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 25, 2023, to shareholders of record as of the close of business on August 11, 2023.

(1) Net interest income before provision plus noninterest income* 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 $1.8 million for the second quarter of 2023, compared to $3.5 million for the first quarter of 2023, and $2.5 million for the second quarter of 2022. Basic and diluted earnings per share were $0.20 for the second quarter of 2023, compared to $0.39 for the first quarter of 2023, and $0.27 for the second quarter of 2022. In the second quarter of 2023, the Company generated a return on average assets ("ROAA") of 0.34%, a return on average equity ("ROAE") of 4.41%, and a return on average tangible common equity* of 4.47%. Results in the second quarter of 2023 are reflective of the higher interest rate environment and the impact on the deposit mix as customers seek higher yielding alternatives for their balances.

In June 2023, First Northwest determined that Quin Ventures, Inc. ("Quin Ventures") was no longer a going concern. The Company wrote off the remaining investment in Quin Ventures through retained earnings in accordance with applicable non-controlling interest accounting methods. The noncontrolling interest in Quin Ventures balance was moved to retained earnings, with no change to total shareholders' equity as a result of the transaction.

Net Interest IncomeTotal interest income increased $2.2 million to $25.5 million for the second quarter of 2023, compared to $23.3 million in the previous quarter, and increased $6.5 million from $19.0 million in the second quarter of 2022. Interest income increased in the current quarter due to higher yields on earning assets and increased volume of loans and interest-earning deposits in banks. Interest and fees on loans increased year-over-year, in part, as the Company's banking subsidiary, First Fed Bank ("First Fed" or "Bank"), grew the loan portfolio through our renewed short-term participation in the Northpointe Mortgage Purchase Program ("Northpointe MPP"), draws on new and existing business lines of credit, originations of multi-family real estate loans, and auto and manufactured home loan purchases. Loan yields have 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 $9.5 million for the second quarter of 2023, compared to $7.0 million in the first quarter of 2023 and $1.7 million in the second quarter a year ago. Current quarter interest expense was higher due to a 42 basis point increase in the cost of deposits to 1.54% at June 30, 2023, from 1.12% at the prior quarter end. The increase over the second quarter of 2022 was the result of a 134 basis point increase in the cost of deposits from 0.20% one year prior along with higher volumes of 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. Reliance on brokered CDs to replace lost consumer balances also contributed to additional deposit costs.

Net interest income before provision for credit losses for the second quarter of 2023 decreased 2.0% to $16.0 million, compared to $16.3 million for the preceding quarter, and decreased 7.3% from the second quarter one year ago.

The Company recorded a $300,000 provision for credit losses in the second quarter of 2023, reflecting the growth in the loan portfolio and additional charge-offs from the Splash unsecured consumer loan program. This compares to a recapture of loan loss provision of $500,000 for the preceding quarter due to a decrease in unfunded commitments during the quarter as well as improvements in the U.S. gross domestic product assumption driving anticipated loss rates. A loan loss provision of $500,000 was recorded for the second 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 3.25% for the second quarter of 2023, from 3.46% the prior quarter, and decreased 52 basis points compared to the second quarter of 2022 of 3.77%. 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. The Bank augments organic loan production with higher yielding purchased loans through relationships with loan originators. We have also increased our focus on variable-rate lending and the Bank has entered into a fair value hedging agreement.

The yield on average earning assets of 5.17% for the second quarter of 2023 increased 22 basis points compared to the first quarter of 2023, and increased 103 basis points from 4.14% for the second quarter of 2022. Higher loan rates at origination and increased yields on variable-rate loans were offset by a slight decline in the recognition of fees related to loan prepayments. 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 2.33% for the second quarter of 2023, compared to 1.81% for the first quarter of 2023, and increased from 0.49% for the second quarter of 2022. Total cost of funds increased to 1.98% for the second quarter of 2023 from 1.53% in the prior quarter and increased from 0.39% for the second 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 advance balances.

The increase over the same quarter last year was driven by higher rates paid on deposits. The Company has attracted and retained funding through the use of promotional products. The mix of retail deposit balances has shifted away from non-maturity accounts towards higher cost term certificate and savings products. Retail CDs represented 25.8%, 22.8% and 12.3% of retail deposits at June 30, 2023, March 31, 2023 and June 30, 2022, respectively. Average interest-bearing deposit balances increased $45.5 million, or 3.5%, to $1.33 billion for the second quarter of 2023 compared to $1.29 billion for the first quarter of 2023 and increased $110.0 million, or 9.0%, compared to $1.22 billion for the second quarter of 2022.

Noninterest IncomeNoninterest income declined 26.7% to $1.7 million for the second quarter of 2023 from $2.3 million for the first quarter of 2023 primarily due to a decline in the valuation of servicing rights on sold loans of $675,000 related to the impact of loan payoffs that increased the prepayment speed applied to the remaining servicing rights, as well as a current quarter reduction due to the paid-off loans, mainly attributable to one large commercial loan. Noninterest income declined 23.0% from $2.2 million the same quarter one year ago, due to decreases in the servicing rights valuation, gain on sale of mortgage loans and swap 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 $580,000 to $4.0 million for the six months ended June 30, 2023, compared to $4.6 million for the six months ended June 30, 2022.

Noninterest ExpenseNoninterest expense totaled $15.2 million for the second quarter of 2023, compared to $14.9 million for the preceding quarter and $17.0 million for the second quarter a year ago. Increases in payroll tax, incentive payments, and stockholder communications during the current quarter were partially offset by decreases in advertising. The reduced expenses compared to the second quarter of 2022 reflects a $2.0 million decrease related to Quin Ventures compensation, advertising and customer acquisition costs, and occupancy expenses, as well as decreases in Bank commissions 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 reducing advertising and discretionary spending.

Noninterest expense decreased 5.4% to $30.1 million for the six months ended June 30, 2023, compared to $31.8 million for the six months ended June 30, 2022. Compensation expense decreased $2.5 million primarily due to lower commissions, payroll taxes, and medical insurance expenses. Quin Ventures expenses included in the current six-month period totaled $320,000 compared to $2.7 million in the six months ended June 30, 2022.

Investment SecuritiesInvestment securities decreased $7.1 million, or 2.2%, to $322.0 million at June 30, 2023, compared to $329.1 million three months earlier, and decreased $31.2 million compared to $353.1 million at June 30, 2022. The market value of the portfolio decreased $4.2 million during the second quarter of 2023, primarily driven by an increase in long-term interest rates. At June 30, 2023, municipal bonds totaled $100.5 million and comprised the largest portion of the investment portfolio at 31.2%. Non-agency issued mortgage-backed securities were the second largest segment, totaling $92.1 million, or 28.6%, of the portfolio at quarter end. The estimated average life of the securities portfolio was approximately 7.8 years, compared to 8.1 years in the prior quarter and 8.2 years in the second quarter of 2022. The effective duration of the portfolio was approximately 5.2 years, compared to 5.1 years in the prior quarter and 5.2 years at the end of the second quarter of 2022.

Loans and Unfunded Loan CommitmentsNet loans, excluding loans held for sale, increased $58.8 million, or 3.8%, to $1.62 billion at June 30, 2023, from $1.56 billion at March 31, 2023, and increased $159.3 million, or 10.9%, from $1.46 billion one year ago. One-to-four family loans increased $11.1 million during the current quarter as a result of $3.3 million in new amortizing loan originations and $23.0 million of residential construction loans that converted to permanent amortizing loans, partially offset by sales and payments received. Multi-family loans increased $11.7 million during the current quarter. The increase was the result of new originations totaling $19.1 million and $493,000 of construction loans converting into permanent amortizing loans, partially offset by payoffs. Construction loans decreased $4.6 million during the quarter, with $27.5 million converting into fully amortizing loans, partially offset by draws on new and existing loans. Commercial real estate, automobile, and home equity loans increased $2.9 million, $2.6 million and $4.8 million, respectively, during the current quarter compared to the previous quarter as originations and draws on existing commitments exceeded payoffs and scheduled payments. Commercial business loans increased $30.1 million as a result of our participation in the Northpointe MPP of $23.9 million.

The Company originated $10.7 million in residential mortgages during the second quarter of 2023 and sold $6.4 million, with an average gross margin on sale of mortgage loans of approximately 2.00%. This production compares to residential mortgage originations of $5.8 million in the preceding quarter with sales of $5.4 million, with an average gross margin of 1.99%. The single-family home inventory increased in the second quarter of 2023 but 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 our overall production mix. New single-family residence construction loan commitments totaled $4.8 million in the second quarter, compared to $4.9 million in the preceding quarter.

DepositsTotal deposits increased $58.9 million, to $1.65 billion at June 30, 2023, compared to $1.59 billion at March 31, 2023, and increased $72.4 million, or 4.6%, compared to $1.58 billion one year ago. Increases in brokered CDs of $45.1 million, consumer CDs of $34.7 million, business savings account balances of $14.1 million, public fund CDs of $7.1 million, business CD balances of $4.2 million, consumer savings account balances of $4.1 million, and business money market account balances of $3.6 million, were offset by decreases in consumer money market account balances of $32.1 million, business demand account balances of $11.0 million, and consumer demand account balances of $10.7 million during the second quarter. We believe decreases in certain categories were driven by customers seeking higher rates and additional diversification over a variety of account types. The current rate environment has contributed to greater competition for deposits with additional rate specials offered to attract new funds.

On July 24, 2023, the FDIC issued guidance regarding estimated uninsured deposits reporting expectations to clarify that totals should not be reduced for balances collateralized by pledged assets. The Company estimates that 24% of total deposit balances were uninsured at June 30, 2023. Approximately 16% of total deposits were uninsured business and consumer deposits with the remaining 8% consisting of uninsured public fund balances totaling $126.4 million, of which $108.5 million is fully covered through a combination of an FHLB letter of credit and our participation in the Washington Public Deposit Protection Commission program and $17.9 million is fully covered through pledged securities. Consumer deposits make up 60% of total deposits with an average balance of approximately $24,000 per account.

Asset QualityNonperforming loans were $2.6 million at June 30, 2023, a decrease of $79,000 from March 31, 2023, related to decreased delinquencies in Splash unsecured consumer loans and Triad purchased manufactured home loans, partially offset by a newly delinquent single-family residential loan. The percentage of the allowance for credit losses on loans to nonperforming loans increased to 677% at June 30, 2023, from 661% at March 31, 2023, and decreased from 1269% at June 30, 2022. Classified loans increased $4.5 million to $22.7 million at June 30, 2023, due to the downgrades of a $2.5 million commercial business loan, a $1.3 million commercial real estate loan and $873,000 in additional funds disbursed on a substandard commercial construction loan during the second quarter. The allowance for credit losses on loans as a percentage of total loans was 1.06% at June 30, 2023, decreasing from 1.10% at the prior quarter end and from 1.07% reported one year earlier. The current quarter 4 basis point decrease can be attributed to construction loans converting into amortizing loans which carry lower reserve estimates along with the Northpoint MPP balance of $23.9 million which does not carry a reserve as it is a very low-risk program.

CapitalTotal shareholders’ equity decreased to $159.6 million at June 30, 2023, compared to $160.3 million three months earlier, due to a decrease in the fair market value of the investment securities portfolio, net of taxes, of $3.0 million, dividends declared of $675,000 and share repurchases totaling $341,000, partially offset by net income of $1.8 million and a $1.1 million 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 $16.39 at June 30, 2023, compared to $16.38 at March 31, 2023, and $16.40 at June 30, 2022. Book value per common share was $16.56 at June 30, 2023, compared to $16.57 at March 31, 2023, and $16.60 at June 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 June 30, 2023. Common Equity Tier 1 and Total Risk-Based Capital Ratios at June 30, 2023, were 13.1% and 14.1%, respectively.

Share Repurchase Program and Cash DividendFirst Northwest continued to return capital to our shareholders through cash dividends and share repurchases during the second quarter of 2023. We repurchased 30,176 shares of common stock under the Company's October 2020 stock repurchase plan at an average price of $11.27 per share for a total of $341,000 during the quarter ended June 30, 2023, leaving 227,410 shares remaining under the plan. In addition, the Company paid cash dividends totaling $683,000 in the second quarter of 2023. 

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

Awards/Recognition

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

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.

In October 2022, First Fed was also recognized in the Best of the Peninsula surveys, winning Best Bank for both Clallam and Jefferson counties. The Bank was a finalist for Best Bank on Bainbridge Island and Central Kitsap. Also, First Fed received Best Financial Advisor in Jefferson.

In September 2022, 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. 

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 OfficerGeri Bullard, EVP and Chief Financial OfficerIRGroup@ourfirstfed.com360-457-0461

Non-GAAP Financial MeasuresThis press release contains financial measures that are not defined in generally accepted accounting principles ("GAAP"). Non-GAAP measures are presented where management believes the information will help investors understand the Company’s results of operations or financial position and assess trends. Where non-GAAP financial measures are used, the comparable GAAP financial measure is also provided. These disclosures should not be viewed as a substitute for operating results determined in accordance with GAAP, and are not necessarily comparable to non-GAAP performance measures that may be presented by other companies. Reconciliations of the GAAP and non-GAAP measures are presented below.