First Northwest Bancorp Reports Third Quarter 2024 Financial Results

— Matthew P. Deines, President and CEO, First Northwest Bancorp

First Northwest Bancorp (Nasdaq: FNWB) (“First Northwest” or the “Company”) today reported a net loss of $2.0 million for the third quarter of 2024, compared to a net loss of $2.2 million for the second quarter of 2024 and net income of $2.5 million for the third quarter of 2023. Basic and diluted loss per share were $0.23 for the third quarter of 2024, compared to basic and diluted loss per share of $0.25 for the second quarter of 2024 and basic and diluted earnings per share of $0.28 for the third quarter of 2023. In the third quarter of 2024, the Company generated a return on average assets of -0.36%, a return on average equity of -4.91% and a return on average tangible common equity* of -4.96%. Loss before provision for income taxes was $3.2 million for the third quarter of 2024, compared to a loss before provision for income taxes of $2.8 million for the preceding quarter, a decrease of $417,000, or 15.1%, and decreased $6.3 million compared to income of $3.1 million for the third quarter of 2023.

The Bank recorded reserves on individually analyzed loans totaling $1.9 million due to the uncertain future cash flows from specific loan relationships in the third quarter of 2024. An additional credit loss on loans of $1.8 million was attributable to an increase in the reserve on pooled commercial business loans, with a reserve loss rate of 3.4% applied to that segment of the loan portfolio at period end. We believe the reserve on individually analyzed loans does not represent a universal decline in the collectability of all loans in the portfolio. We continue to work on resolution plans for all troubled borrowers. The provision for credit losses on loans had a significant negative impact on net income and was the only reason for the net loss recorded for the third quarter of 2024.

Steps taken to restructure the Bank’s balance sheet continue to have a positive impact. The fair value hedge on loans, tied to the compounded overnight index swap using the secured overnight financing rate index, established in the first quarter of 2024 added $946,000 to interest income year-to-date. The fair value hedge on loans reduces interest rate risk by reducing liability sensitivity while increasing interest income. We estimate that if rates remain unchanged, this hedge will add $1.3 million of annualized interest income in 2024. The estimated impact will be reduced if the Federal Reserve Board (“FRB”) implements additional rate cuts during the year. The Bank expects to maintain a positive carry on its derivative for up to 75-basis points of additional rate cuts.

The balance sheet restructure plan also includes the conversion of BOLI policies in order to reinvest in higher yielding products. The first $6.1 million policy earning 2.58% was surrendered during the first quarter and reinvested into a policy earning 5.18%. In the third quarter of 2024, a $1.3 million policy earning 3.18% was exchanged and reinvested into a policy earning 5.73%. The remaining surrender and exchange transactions are expected to be completed by the end of the first quarter of 2025.

Net Interest Income
Total interest income decreased $405,000 to $28.2 million for the third quarter of 2024, compared to $28.6 million in the previous quarter, and increased $2.4 million compared to $25.8 million in the third quarter of 2023. Interest income decreased in the third quarter of 2024 primarily due to interest reversals for loans placed on nonaccrual totaling $619,000. The interest adjustments were partially offset by higher yields on performing loans combined with increased loan volume. Interest and fees on loans increased year-over-year as the loan portfolio grew as a result of draws on new and existing lines of credit, originations of commercial real estate, commercial business and home equity loans, and auto and manufactured home loan purchases. Loan yields increased over the prior year due to higher rates on new originations as well as the repricing of variable and adjustable-rate loans tied to the Prime Rate or other indices.

Total interest expense decreased $190,000 to $14.2 million for the third quarter of 2024, compared to $14.4 million in the second quarter of 2024, and increased $3.3 million compared to $10.9 million in the third quarter of 2023. Interest expense for the three months ended September 30, 2024, was lower primarily due to lower rates on advances combined with decreased advance volumes. The decrease was partially offset by a 9-basis point increase in the cost of deposits to 2.56% for the quarter ended September 30, 2024, from 2.47% for the prior quarter as a result of customers continuing to shift deposit balances into higher earning products. The increase over the third quarter of 2023 was the result of a 71-basis point increase in the cost of deposits from 1.85% in the third quarter one year ago. A shift in the deposit mix from transaction and savings accounts to money market accounts and time deposits also added to the higher cost of deposits compared to the third quarter of 2023. Higher costs of brokered time deposits also contributed to additional deposit costs with a 57-basis point increase to 4.88% for the current quarter compared to 4.31% for the third quarter one year ago.

Net interest income before provision for credit losses for the third quarter of 2024 decreased $215,000, or 1.5%, to $14.0 million, compared to $14.2 million for the preceding quarter, and decreased $930,000, or 6.2%, from the third quarter one year ago. The impact of the September FRB rate cut will be reflected beginning with fourth quarter 2024 interest income and expenses.

The Company recorded a $3.1 million provision for credit losses on loans in the third quarter of 2024, primarily due to reserves taken individually analyzed loans and Current Expected Credit Loss model loss factor increases attributable to pooled commercial business and multi-family loans at quarter end. Credit loss provision increases were offset by decreases to the loss factors applied to consumer, commercial real estate and one-to-four family loans. Higher loss factors applied to unfunded commitments and a moderate increase in commitment balances also resulted in a provision for credit losses on unfunded commitments of $57,000 for the quarter. The total provision for credit loss recorded for the third quarter of 2024 was $3.1 million, compared to a credit loss provision of $8.7 million for the preceding quarter and a provision of $371,000 for the third quarter of 2023.

The net interest margin decreased to 2.70% for the third quarter of 2024, from 2.76% for the prior quarter, and decreased 27-basis points from 2.97% for the third quarter of 2023. The decrease over the linked quarter is primarily due to the accrued interest reversed on three nonperforming commercial loans during the three months ended September 30, 2024, partially offset by an increase in interest income earned on a higher volume of loans. Investment securities also had decreased volume due to regular payments and lower yields due to variable-rate securities compared to the preceding quarter. The Company reported reduced rates and declining volume of borrowings during the quarter which lowered costs; however, these savings were partially offset by an increase in cost due to a higher volume of retail customer deposits. The decrease in net interest margin from the same quarter one year ago is due to higher funding costs for deposits and borrowed funds. Organic loan production comprised 73% of new loan commitments for the third quarter with the remaining 27% added through purchases of higher-yielding loans from established third-party relationships. The Bank’s fair value hedging agreements on securities and loans added $188,000 and $395,000, respectively, to interest income for the third quarter of 2024.

The yield on average earning assets for the third quarter of 2024 decreased 11-basis points to 5.44% compared to 5.55% for the second quarter of 2024 and increased 30-basis points from 5.14% for the third quarter of 2023. The third quarter decrease is attributable to the accrued interest reversed on nonperforming loans, a lower yield and volume of investment securities and a decrease in the balance of Federal Home Loan Bank (“FHLB”) stock. The year-over-year increase in interest income was primarily due to higher average loan balances augmented by increases in yields on all earning assets, which were positively impacted by the higher rate environment.

The cost of average interest-bearing liabilities decreased 5-basis points to 3.23% for the third quarter of 2024, compared to 3.28% for the second quarter of 2024, and increased 63-basis points from 2.60% for the third quarter of 2023. Total cost of funds decreased to 2.82% for the third quarter of 2024 from 2.87% in the prior quarter and increased from 2.23% for the third quarter of 2023. Current quarter decreases were due to lower average balances and costs on borrowings. The Bank continues to offer higher rate specials on money market and CD accounts to attract and retain retail customer deposits. The average brokered CD balance decreased $5.5 million from the linked quarter with a 6-basis point decrease in the average rate paid on brokered funds.

The increase in cost of average interest-bearing liabilities over the same quarter last year was driven by higher rates paid on deposits and borrowings and higher average CD balances. The Company attracted and retained funding through the use of promotional products and a focus on digital account acquisition. The mix of retail deposit balances shifted from no or low-cost transaction and savings accounts towards higher cost term certificate and higher yield money market accounts. Retail CDs represented 29.3%, 26.8% and 27.6% of retail deposits at September 30, 2024, June 30, 2024 and September 30, 2023, respectively. Average interest-bearing deposit balances increased $44.8 million, or 3.2%, to $1.45 billion for the third quarter of 2024 compared to the second quarter of 2024 and increased $75.0 million, or 5.4%, compared to $1.38 billion for the third quarter of 2023.

Noninterest Income
Noninterest income decreased to $1.8 million for the third quarter of 2024 compared to $7.4 million for the second quarter of 2024. Nonrecurring second quarter transactions included a sale-leaseback transaction which resulted in a gain on sale of premises and equipment of $7.9 million, partially offset by a $2.1 million loss on the sale of lower-yielding available-for-sale securities. Income from the gain on sale of loans in the third quarter of 2024 includes $51,000 from SBA loans, compared to $116,000 in the prior quarter. Write-downs on sold loan servicing rights mark-to-market valuation totaled $161,000 for the third quarter of 2024 compared to $103,000 in the prior quarter. Other noninterest income includes a valuation gain on partnership investments of $279,000 compared to a loss of $56,000 in the preceding quarter.

Noninterest income decreased 38.7% from $2.9 million in the same quarter one year ago. The third quarter of 2023 included $750,000 in credit enhancements reimbursed to the Company on Splash charge-offs recorded in other noninterest income. The quarter ended September 30, 2023, also included a $102,000 gain on sale of mortgage loans, compared to a $6,000 gain in the third quarter of 2024.

Noninterest Expense
Noninterest expense totaled $15.9 million for the third quarter of 2024, compared to $15.6 million for the preceding quarter and $14.4 million for the third quarter a year ago. Increases were primarily due to one-time severance payouts of $704,000 during the three months ended September 30, 2024, partially offset by a decrease in occupancy due to the one-time tax assessment on the sale-leaseback of $359,000 paid in the previous quarter. Other expense increased this quarter primarily due to $161,000 of additional credit related expenses.

The increase in total noninterest expenses compared to the third quarter of 2023 is mainly due to current quarter one-time severance payouts of $704,000, additional payroll tax expense of $342,000 and additional medical benefit expense of $162,000. Payroll tax expense in the third quarter of 2023 included accretion of the employee retention credit (“ERC”) which reduced the expense by $293,000. In the fourth quarter of 2023, the Bank stopped the recognition of the ERC for the foreseeable future. Occupancy increased due to the additional rent of $416,000 from the previous quarter sale-leaseback transaction. Other increases compared to the third quarter of 2023 included $51,000 in stockholder communications, $103,000 of state taxes, $163,000 in FDIC insurance premiums, and $269,000 of additional credit related expenses. These increases were partially offset by lower legal fees of $204,000, consulting fees of $146,000 and advertising costs of $91,000. The Company continues to focus on controlling compensation expense and reducing advertising and other discretionary spending to improve earnings.

Investment Securities
Investment securities increased $4.2 million, or 1.4%, to $310.9 million at September 30, 2024, compared to $306.7 million three months earlier, and increased $1.5 million compared to $309.3 million at September 30, 2023. The market value of the portfolio increased $8.1 million during the third quarter of 2024 primarily due to the market rally in the second half the third quarter which drove the yield curve lower. At September 30, 2024, municipal bonds totaled $81.4 million and comprised the largest portion of the investment portfolio at 26.2%. Agency issued mortgage-backed securities (“MBS agency”) were the second largest segment, totaling $78.5 million, or 25.3%, of the portfolio at quarter end. Included in MBS non-agency were $29.6 million of commercial mortgage-backed securities (“CMBS”), of which 89.8% were in “A” tranches and the remaining 10.2% were in “B” tranches. Our largest exposure in the CMBS portfolio at September 30, 2024, was to long-term care facilities, which comprised 65.0%, or $19.2 million, of our private label CMBS securities. All of the CMBS bonds had credit enhancements ranging from 28.8% to 71.8%, with a weighted-average credit enhancement of 55.3%, that further reduced the risk of loss on these investments.

The estimated average life of the securities portfolio was approximately 7.4 years at September 30, 2024, 7.8 years at the prior quarter end and 7.7 years for the third quarter of 2023. The effective duration of the portfolio was approximately 3.9 years at September 30, 2024, compared to 4.3 years in the prior quarter and 4.9 years at the end of the third quarter of 2023. Our recent investment purchases have primarily been floating rate securities to take advantage of higher short-term rates above those offered on cash and to reduce our liability sensitivity.

Loans and Unfunded Loan Commitments
Net loans, excluding loans held for sale, increased $36.7 million, or 2.2%, to $1.71 billion at September 30, 2024, from $1.68 billion at June 30, 2024, and increased $96.4 million, or 6.0%, from $1.62 billion one year ago.

Commercial business loans increased $38.2 million, primarily attributable to a $29.0 million increase in our Northpointe Bank Mortgage Purchase Program participation, organic originations totaling $7.9 million and draws on existing lines of credit of $5.7 million which were partially offset by payments. One-to-four family loans increased $5.9 million during the third quarter of 2024 as a result of $14.2 million in residential construction loans that converted to permanent amortizing loans, partially offset by payoffs and scheduled payments. Home equity loans increased $4.3 million over the previous quarter due to organic home equity loan production of $5.5 million and draws on new and existing commitments of $4.6 million, partially offset by payoffs and scheduled payments. Multi-family loans increased $3.7 million during the current quarter. The increase was primarily the result of $9.2 million of construction loans converting into permanent amortizing loans, partially offset by payoffs and scheduled payments. Commercial real estate loans increased $497,000 during the third quarter of 2024 compared to the previous quarter as originations of $8.6 million were offset by payoffs and scheduled payments.

Construction loans decreased $11.6 million during the quarter, with $23.4 million converting into fully amortizing loans, partially offset by draws on new and existing loans. New single-family residence construction loan commitments totaled $4.1 million in the third quarter, compared to $2.7 million in the preceding quarter. Auto and other consumer loans decreased $4.4 million during the third quarter of 2024 as payoffs and scheduled payments were higher than $5.8 million of new auto loan purchases, a $4.3 million manufactured home loan pool and individual manufactured home loan purchases totaling $1.2 million.

The Company originated $3.4 million in residential mortgages during the third quarter of 2023 and sold $3.9 million, with an average gross margin on sale of mortgage loans of approximately 2.06%. This production compares to residential mortgage originations of $5.0 million in the preceding quarter with sales of $4.9 million, and an average gross margin of 2.05%. Single-family home inventory remained historically low and higher market rates on mortgage loans continued to limit saleable mortgage loan production through much of the third quarter.

Deposits
Total deposits increased $3.4 million to $1.71 billion at September 30, 2024, compared to $1.71 billion at June 30, 2024, and increased $53.9 million, or 3.3%, compared to $1.66 billion one year ago. During the third quarter of 2024, total retail customer deposit balances increased $23.4 million and brokered deposit balances decreased $20.0 million. Compared to the preceding quarter, there were balance increases of $18.1 million in consumer time deposits, $17.7 million in business money market accounts, $7.9 million in consumer demand accounts and $7.7 million in business time deposits. These increases were partially offset by decreases in business demand accounts of $26.4 million, brokered time deposits of $20.0 million, consumer money market accounts of $7.4 million, business savings accounts of $6.5 million, consumer savings accounts of $5.3 million and public fund time deposits of $941,000, during the third quarter of 2024. Increases in time deposits and money market accounts were driven by customer behavior as they sought out higher rates. Overall, the current rate environment continues to contribute to greater competition for deposits with ongoing deposit rate specials offered to attract new funds.

The Company estimates that $401.0 million, or 23%, of total deposit balances were uninsured at September 30, 2024. Approximately $265.7 million, or 16%, of total deposits were uninsured business and consumer deposits with the remaining $135.3 million, or 8%, consisting of uninsured public funds at September 30, 2024. Uninsured public fund balances were fully collateralized. The Bank holds an FHLB standby letter of credit as part of our participation in the Washington Public Deposit Protection Commission program which covered $115.5 million of related deposit balances while the remaining $19.8 million of uninsured tribal accounts was fully covered through pledged securities at September 30, 2024.

As of September 30, 2024, consumer deposits made up 58% of total deposits with an average balance of $24,000 per account, business deposits made up 22% of total deposits with an average balance of $51,000 per account, public fund deposits made up 8% of total deposits with an average balance of $1.6 million per account and the remaining 12% of account balances are brokered time deposits. We have maintained the majority of our public fund relationships for over 10 years. Approximately 70% of our customer base is located in rural areas, with 18% in urban areas and the remaining 12% are brokered deposits as of September 30, 2024.

Asset Quality
The allowance for credit losses on loans (“ACLL”) increased $2.6 million from $19.3 million at June 30, 2024, to $22.0 million at September 30, 2024. The ACLL as a percentage of total loans was 1.27% at September 30, 2024, increasing from 1.14% at June 30, 2024, and increasing from 1.04% one year earlier. The current quarter increase can be attributed to $1.9 million of additional reserves taken on individually evaluated commercial business loans due uncertainty in the collectability of these loans. The pooled loan reserve increased $1.2 million due to higher loss factors applied to commercial business and multi-family loans, partially offset by lower loss factors applied to one-to-four family, commercial real estate, home equity, auto and other consumer loans. Loss factors were revised based on the results of an annual loss driver analysis, in conjunction with other relevant factors, to update each segment’s sensitivity to qualitative factors used in the calculation of the pooled reserve at September 30, 2024.

Nonperforming loans totaled $30.4 million at September 30, 2024, an increase of $6.8 million from June 30, 2024, primarily attributable to a $5.6 million delinquent commercial real estate relationship and two commercial business loans with an aggregate total of $1.7 million placed on nonaccrual due to credit concerns. The percentage of the allowance for credit losses on loans to nonperforming loans decreased to 72% at September 30, 2024, from 82% at June 30, 2024, and from 714% at September 30, 2023. This ratio continues to decline as higher balances of real estate loans are included in nonperforming assets with no significant corresponding increase to the ACLL as these secured loans are considered adequately reserved for based on information currently available.

Classified loans increased $7.2 million to $46.9 million at September 30, 2024, due to the downgrade of one $6.4 million commercial real estate loan and ten commercial business loans totaling $5.6 million during the third quarter, partially offset by loan payoffs totaling $5.0 million. An $11.2 million construction loan relationship, which became a classified loan in the fourth quarter of 2022; an $8.1 million commercial construction loan relationship, which became classified in the previous quarter; and a $6.2 million commercial loan relationship, which became classified in the fourth quarter of 2023, account for 55% of the classified loan balance at September 30, 2024. The Bank has exercised legal remedies, including the appointment of a third-party receiver and foreclosure actions, to liquidate the underlying collateral to satisfy the real estate loans in two of these three collateral dependent relationships. The Bank is also closely monitoring certain equity program loans, with 14 loans totaling $5.9 million included in classified loans at September 30, 2024, and an additional nine loans totaling $3.1 million included in the special mention risk grading category.

Capital
Total shareholders’ equity increased to $160.8 million at September 30, 2024, compared to $158.9 million three months earlier, due to an increase in the after-tax fair market values of the available-for-sale investment securities portfolio of $6.3 million, partially offset by a net loss of $2.0 million, a decrease in the after-tax fair market values of derivatives of $1.2 million, share repurchases totaling $1.0 million and dividends declared of $659,000.

Book value per common share was $17.17 at September 30, 2024, compared to $16.81 at June 30, 2024, and $16.20 at September 30, 2023. Tangible book value per common share* was $17.00 at September 30, 2024, compared to $16.64 at June 30, 2024, and $16.03 at September 30, 2023.

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, 2024. Common Equity Tier 1 and Total Risk-Based Capital Ratios at September 30, 2024, were 12.2% and 13.4%, 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 2024. We repurchased 98,156 shares of common stock under the Company’s April 2024 Stock Repurchase Plan (“Repurchase Plan”) at an average price of $10.19 per share for a total of $1.0 million during the quarter ended September 30, 2024, leaving 846,123 shares remaining under the plan. In addition, the Company paid cash dividends totaling $652,000 in the third quarter of 2024.

^{____________________
*} 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 September 2024, the First Fed team was recognized in the 2024 Best of Olympic Peninsula surveys, winning Best Bank and Best Lender in Clallam County; Best Bank and Best Financial Advisor in the West End; and Best Lender in Jefferson County. First Fed was also a finalist for Best Bank, Best Customer Service, Best Employer and Best Financial Advisor in Jefferson County; Best Customer Service, Best Employer and Best Financial Advisor in Clallam County; and Best Customer Service and Best Employer in the West End.
	In May 2024, First Fed, along with the First Fed Community Foundation, were honored to be ranked second on the Puget Sound Business Journal Midsize Corporate Philanthropists list.
	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 as a finalist for Best Employer in Kitsap County and Best Bank and Best Financial Institution in Bainbridge.

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, including our ability to collect, the outcome of litigation and statements regarding our mission and vision, and include, but are not limited to, statements about our plans, objectives, expectations and intentions that are not historical facts, and other statements often identified by words such as “believes,” “expects,” “anticipates,” “estimates,” or similar expressions. These forward-looking statements are based upon current management beliefs and expectations and may, therefore, involve risks and uncertainties, many of which are beyond our control. 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; the risk of inaccuracies in the reporting of our financial condition as a result of the material weakness in our internal controls; and other factors described in the Company’s latest Annual Report on Form 10-K under the section entitled “Risk Factors,” 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 2024 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
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