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First Northwest Bancorp Reports Results of Operations for the Quarter and Transition Period Ended December 31, 2017

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PORT ANGELES, Wash., Feb. 01, 2018 (GLOBE NEWSWIRE) -- First Northwest Bancorp (NASDAQ:FNWB) ("Company"), the holding company for First Federal Savings and Loan Association of Port Angeles ("Bank"), announced its operating results for the quarter and six month transition period ended December 31, 2017. The Company reported a net loss of $(114,000), or $(0.01) loss per basic and diluted share, for the quarter ended December 31, 2017, compared to net income of $1.8 million, or $0.17 earnings per basic and diluted share, for the quarter ended September 30, 2017, a decrease of $1.9 million. The current quarter's net income decreased $1.3 million compared to net income of $1.2 million for the same quarter in 2016. The decrease in net income compared to the previous quarter was mainly due to an estimated revaluation adjustment of the net deferred tax asset ("DTA revaluation") through the provision for income taxes as a result of the passage of the U.S. Tax Cuts and Jobs Act ("Tax Act") on December 22, 2017. The estimated DTA revaluation resulted in a $1.2 million increase to the Company's income tax expense and an $0.11 reduction in earnings per basic and diluted share for the quarter and six month transition period ended December 31, 2017. The reconciliation of net income eliminating the non-recurring DTA revaluation, which the Company believes facilitates an assessment of its banking operations, is included at the end of this release.

Larry Hueth, President and CEO, commented, "Earnings for the quarter were reduced due to the $1.2 million impact the Tax Act had on our provision for income taxes and the expenses related to the addition of our fourth branch location on Bainbridge Island, which opened on January 8, 2018.  Excluding the DTA revaluation, non-GAAP net income would have been $1.1 million for the quarter, or $0.10 earnings per basic and diluted share.

"We are also pleased with the growth in net loans and deposits of 12.8% and 11.5%, respectively, year over year and remain committed to further improving our earnings and increasing shareholder value."

Quarter highlights (at or for the quarter ended December 31, 2017)

  • Net income decreased $1.9 million compared to the quarter ended September 30, 2017, primarily due to a $1.2 million DTA revaluation through the provision for income taxes as a result of the passage of the Tax Act and, excluding the DTA revaluation, non-GAAP net income would have been $1.1 million for the quarter;
  • Basic and diluted earnings per share decreased to $(0.01) compared to $0.17 for the quarter ended September 30, 2017 and, excluding the DTA revaluation as a result of the Tax Act, would have been $0.10 for the quarter;
  • Loans receivable increased $52.2 million compared to the quarter ended September 30, 2017, primarily due to the purchase of a $28.0 million pool of one- to four-family loans;
  • Deposits increased $34.1 million during the quarter due to promotional and ongoing business development activities in new and existing markets;
  • The Company repurchased 39,800 shares of its common stock at an average price of $17.05 per share during the quarter under the 2017 stock repurchase plan approved in September 2017.

Balance Sheet Review

During the quarter ended December 31, 2017, total assets increased $65.4 million to $1.2 billion, primarily due to an increase in net loans receivable. Year to date total assets increased $171.8 million from $1.0 billion at December 31, 2016, primarily due to growth in net loans receivable and investment securities.

Investment securities decreased $803,000 during the quarter to $340.4 million at December 31, 2017, and increased $64.3 million as compared to $276.1 million at December 31, 2016.  We saw the results of our leverage strategy implemented in the prior quarter and continued to leverage our capital as we also continue to evaluate share repurchases and other capital management strategies. We continue to focus on growing our loan portfolio and improving our earning asset mix over the long term.

At December 31, 2017, U.S. government agency issued mortgage-backed securities ("MBS agency") comprised the largest portion of our investment portfolio at 53.0%, and totaled $180.3 million at December 31, 2017, an increase during the quarter of $5.7 million from $174.6 million at September 30, 2017. Other investment securities were $139.5 million at December 31, 2017, a decrease of $3.8 million from $143.3 million at September 30, 2017. Total investment securities increased $64.3 million at December 31, 2017 compared to $276.1 million at December 31, 2016, which included a $12.6 million increase in mortgage-backed securities and a $51.7 million increase in other investment securities. The year over year increase was the result of new investment purchases partially offset by sales, prepayment activity, and normal amortization. The estimated average life of the total investment securities portfolio was 5.3 years at December 31, 2017 and September 30, 2017, compared to 4.8 years at December 31, 2016. The average repricing term of our investment securities portfolio was approximately 3.5 years as of both December 31, 2017 and September 30, 2017 and 4.3 years as of December 31, 2016, based on the interest rate environment at those times. The reduction in time for rates to reset in our investment portfolio was the result of the purchase of adjustable rate securities as part of our leverage strategy coupled the reinvestment of cash flows from sales, prepayments, and amortization of certain longer-term fixed-rate investments. We also expect our investment portfolio will be used as a source of liquidity to fund our anticipated loan growth.

Total loans, excluding loans held for sale, increased $51.9 million to $786.1 million at December 31, 2017 from $734.2 million at September 30, 2017, a result of a pool purchase of one- to four-family residential loans and new loan originations partially offset by normal amortization, prepayment activity, and one- to four-family residential loan sales. One- to four-family residential, multi-family, commercial real estate, home equity and other consumer loans increased $31.7 million, $14.8 million, $8.1 million, $3.4 million, and $4.8 million, respectively, while construction and land and commercial business loans decreased $10.8 million and $82,000, respectively. We will remain focused on construction loan origination activity as real estate values and general economic conditions in our market areas continue to remain strong. There were $59.4 million in undisbursed construction loan commitments at December 31, 2017 as compared to $50.8 million at September 30, 2017, an increase of $8.6 million as we continued to originate loans for new construction projects as completed projects converted to permanent financing. Other consumer loans increased primarily as a result of auto loans originated as part of our indirect lending programs. Compared to December 31, 2016, total loans, excluding loans held for sale, increased $88.8 million attributable to increases in one-to four-family residential loans of $26.9 million, multi-family loans of $22.8 million, other consumer loans of $14.7 million, commercial real estate loans of $12.7 million, construction and land loans of $7.2 million, and home equity loans of $4.6 million, partially offset by a decrease in commercial business loans of $64,000.

Loans receivable consisted of the following at the dates indicated:

                   
  December 31,
2017
  September 30,
2017
  December 31,
2016
  Three
Month
Change
  One
Year
Change
  (Dollars in thousands)
Real Estate:                  
One-to four-family $ 355,391     $ 323,675     $ 328,456     9.8 %   8.2 %
Multi-family 73,767     58,989     50,977     25.1     44.7  
Commercial real estate 202,956     194,813     190,291     4.2     6.7  
Construction and land 71,145     81,985     63,902     (13.2 )   11.3  
Total real estate loans 703,259     659,462     633,626     6.6     11.0  
                   
Consumer:                  
Home equity 38,473     35,059     33,902     9.7     13.5  
Other consumer 28,106     23,329     13,410     20.5     109.6  
Total consumer loans 66,579     58,388     47,312     14.0     40.7  
                   
Commercial business loans 16,303     16,385     16,367     (0.5 )   (0.4 )
                   
Total loans 786,141     734,235     697,305     7.1     12.7  
Less:                  
Net deferred loan fees 724     858     1,190     (15.6 )   (39.2 )
Premium on purchased loans, net (2,454 )   (2,122 )   (2,366 )   15.6     3.7  
Allowance for loan losses 8,760     8,608     8,060     1.8     8.7  
Total loans receivable, net $ 779,111     $ 726,891     $ 690,421     7.2 %   12.8 %
                   

During the quarter ended December 31, 2017, total liabilities increased $66.2 million to $1.0 billion at December 31, 2017 from $972.4 million at September 30, 2017. The increase was primarily the result of an increase in customer deposits of $34.1 million to $885.0 million at December 31, 2017, from $850.9 million at September 30, 2017 and an increase in borrowings of $32.4 million to $144.1 million at December 31, 2017, from $111.7 million at September 30, 2017. We utilized short-term FHLB advances during the quarter to manage our cash flow needs and partially fund the purchase of a one- to four-family loan pool. Deposits grew as the result of an increase of $17.3 million in transaction accounts, $8.6 million in money market accounts, and $8.1 million in certificates of deposit.

Total liabilities increased $171.7 million over the last year, mainly attributable to an increase in deposits of $91.0 million compared to $794.1 million at December 31, 2016, and an increase in borrowings of $78.2 million compared to $65.9 million at December 31, 2016, primarily to leverage our balance sheet in advance of anticipated continued deposit and loan growth as part of our expansion efforts. Deposit account increases were primarily the result of our continuing efforts to expand commercial and consumer deposit relationships in our Kitsap and Whatcom County, Washington locations, as well as within our historic Clallam and Jefferson County, Washington locations.

Total shareholders' equity decreased $883,000 during the quarter to $177.0 million at December 31, 2017, mainly due to an increase in unrealized loss on investments of $856,000.

Operating Results

Net income decreased $1.9 million to a loss of $(114,000) for the quarter ended December 31, 2017 compared to earnings of $1.8 million for the quarter ended September 30, 2017, and decreased $1.3 million compared to the quarter ended December 31, 2016. The decreases were mainly due to the DTA revaluation of $1.2 million resulting from the passage of the Tax Act.

Net interest income after provision for loan losses decreased to $8.3 million for the quarter ended December 31, 2017 from $8.5 million for the preceding quarter due primarily to an increase in the provision for loan losses of $200,000. Net interest income after the provision for loan losses increased $1.1 million compared to $7.3 million for the quarter ended December 31, 2016, due to an increase in interest income of $862,000 coupled with a decrease in the provision for loan losses of $210,000. The increase in the provision for loan losses during the current quarter was due to total loan growth. Total interest income increased $200,000 during the quarter to $10.2 million for the quarter ended December 31, 2017 as compared to the previous quarter, primarily due to an increase in interest and fees on loans receivable and an increase due to higher average yields on investment securities. Total interest income increased $1.3 million as compared to $8.9 million for the quarter ended December 31, 2016, primarily due to an increase in the average balance of loans receivable.

Total interest expense increased $133,000 to $1.7 million for the quarter ended December 31, 2017 as compared to the quarter ended September 30, 2017, and increased $461,000 as compared to the quarter ended December 31, 2016, due to the combined effects of an increase in the average balances of interest-bearing customer deposits as we grow, an increase in interest paid on customer deposits as we compete to attract and retain deposits, and an increase in our utilization of short-term FHLB advances to fund our operations and purchase additional earning assets.

The net interest margin decreased nine basis points to 3.11% for the quarter ended December 31, 2017 compared to 3.20% for the prior quarter ended September 30, 2017, and decreased one basis point from 3.12% for the same period in 2016. The net interest margin was lower during the quarter ended December 31, 2017, as compared to the previous quarter due to discounts realized into income as certain investment securities were repaid, coupled with the prepayment of certain loans receivable that resulted in the early recapture of deferred fee revenue during the quarter ended September 30, 2017 that were not present in the quarter ended December 31, 2017. 

Noninterest income for the quarter ended December 31, 2017 decreased $341,000, to $1.4 million, from $1.7 million in the prior quarter ended September 30, 2017. The decreases were primarily due to reduced net gain on the sale of loans of $255,000, mortgage

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