First Northwest Bancorp (NASDAQ: FNWB) is a community-oriented financial institution that has weathered its fair share of storms over the years. With a history dating back to 1923, this bank has seen its fair share of ups and downs, and the last few years have been no exception. However, through it all, First Northwest has demonstrated its resilience and its commitment to serving the communities in which it operates.
Business Overview and History First Northwest Bancorp, the holding company for First Fed Bank, was formed in 2015 through the conversion of First Fed from a mutual to a stock-based organization. This transition allowed the bank to raise $121.7 million in capital, which it used to fund its growth and expansion efforts. Over the years, First Northwest has strategically expanded its footprint, adding 18 locations across western Washington, including 12 full-service branches, three business centers, and three administration centers.
In connection with the conversion, First Northwest established an employee stock ownership plan (ESOP) and contributed 8% of the common stock issued in the conversion to the ESOP. The company also established the First Federal Community Foundation, a charitable foundation, to which it contributed 4% of the common stock issued in the conversion.
Prior to the conversion, First Fed Bank was known as First Federal Savings and Loan Association of Port Angeles and had been serving the local community since 1923. In 2021, the company converted from a state savings bank charter to a state commercial bank charter and was renamed First Fed Bank.
The bank's business model is focused on delivering a full array of financial products and services to individuals, small businesses, and commercial customers. Lending activities include originating first-lien one-to-four family mortgage loans, commercial and multi-family real estate loans, residential and commercial construction and land loans, commercial business loans, SBA loans, and consumer loans, primarily home equity loans and lines of credit. On the deposit side, First Northwest offers traditional consumer and business deposit products, including transaction accounts, savings and money market accounts, and certificates of deposit.
In recent years, First Northwest has made a concerted effort to diversify its revenue streams and balance sheet. The company has significantly increased its origination of commercial real estate, multi-family real estate, construction, and commercial business loans, while also growing its consumer loan portfolio through manufactured home and auto loan purchase programs. Additionally, First Northwest has made strategic investments in fintech-related businesses through limited partnership agreements, broadening its reach and exposure to emerging trends in the financial services industry.
In 2022, First Northwest encountered some challenges when it faced regulatory issues that led to a consent order being issued to its subsidiary, First Fed Bank. The company worked diligently to remediate the deficiencies identified and was able to have the consent order terminated in 2024, a notable accomplishment for the organization. Despite this regulatory obstacle, First Northwest has remained focused on serving its local communities through its community banking model.
Financial Performance and Ratios First Northwest's financial performance has been mixed in recent years. In the 2023 fiscal year, the company reported net income of $2.29 million, or $0.26 per diluted share, on total revenue of $65.45 million. This represents a decline from the prior year's net income of $15.64 million, or $1.71 per diluted share, on revenue of $80.19 million. The decrease in profitability was primarily driven by a rise in interest expense, as the cost of funding outpaced the growth in interest-earning assets.
Looking at key financial ratios, First Northwest's return on assets (ROA) stood at 0.10% in 2023, down from 0.80% in 2022. Similarly, the company's return on equity (ROE) declined from 9.70% in 2022 to 1.40% in 2023. The net interest margin, a critical metric for banks, also contracted from 3.55% in 2022 to 3.05% in 2023, as the cost of deposits and borrowings increased at a faster pace than the yield on interest-earning assets.
In the most recent quarter (Q3 2024), First Northwest reported revenue of $28.2 million, up 9.2% year-over-year. However, net income declined 38.4% to $1.54 million compared to the same period last year. The decrease in net income was primarily due to a $2.25 million increase in the provision for credit losses as the company recorded higher reserves on individually evaluated loans and increased loss factors on certain loan portfolios. This was partially offset by a $1.12 million decrease in noninterest income.
Financials In terms of solvency, First Northwest maintained a strong capital position, with a Tier 1 leverage ratio of 9.40% and a total risk-based capital ratio of 13.40% as of September 30, 2024, well above the regulatory minimums required to be considered "well-capitalized."
As of September 30, 2024, First Northwest reported total assets of $2.26 billion, up 2.4% from the prior year-end. Net loans, excluding loans held for sale, grew 4.4% to $1.71 billion, driven by increases in commercial business loans, consumer auto and manufactured home loans, and multi-family loans. The allowance for credit losses on loans stood at $21.97 million, or 1.27% of total loans.
The company's loan portfolio composition as of September 30, 2024, included $1.22 billion in total real estate loans, with $395.79 million in one-to-four family residential mortgages and $76.96 million in home equity loans and lines of credit. The consumer loan portfolio, which includes $281.20 million in auto and other consumer loans, represented a significant portion of the bank's overall loan book. Commercial real estate loans totaled $376.01 million, multi-family loans stood at $353.81 million, and construction and land development loans amounted to $95.71 million. The commercial business loan portfolio totaled $155.33 million.
Liquidity The company's liquidity position remained robust, with a loan-to-deposit ratio of 0.97 as of September 30, 2024. First Northwest reported $82.72 million in cash and cash equivalents, providing a solid liquidity buffer. The bank has a $35 million committed line of credit with the Federal Home Loan Bank (FHLB), of which $226.1 million was available as of September 30, 2024. Additionally, the bank maintains a $20 million revolving credit facility with NexBank, with $14.5 million available as of the same date.
Deposits increased 2.1% to $1.71 billion, with growth in money market accounts partially offset by declines in savings accounts and retail certificates of deposit. Commercial deposits represented around 22% of the bank's total deposit base, reflecting the company's efforts to diversify its funding sources.
The company's debt-to-equity ratio stood at 1.96x, indicating a manageable level of leverage. Shareholders' equity totaled $160.79 million at the end of the third quarter of 2024.
Business Segments First Northwest operates through two main business segments: Retail Banking and Commercial Banking.
The Retail Banking segment encompasses the bank's deposit-gathering activities and consumer lending operations. This includes offering traditional consumer deposit products such as checking accounts, savings accounts, money market accounts, and certificates of deposit. On the lending side, the Retail Banking segment originates one-to-four family residential mortgage loans, home equity loans and lines of credit, and consumer loans like auto loans and manufactured home loans.
The Commercial Banking segment focuses on providing credit and depository services to small and medium-sized businesses. This includes originating commercial real estate loans, multi-family loans, construction and land development loans, and commercial and industrial loans. The bank also offers deposit products tailored to business customers, such as checking accounts, money market accounts, and commercial certificates of deposit.
Challenges and Strategic Initiatives First Northwest has faced several challenges in recent years, including increasing competition from both traditional and non-traditional financial institutions, rising interest rates, and a changing regulatory landscape. The company's reliance on net interest income, which accounted for 92.5% of total revenue in 2023, has made it particularly vulnerable to the effects of interest rate fluctuations and margin compression.
To address these challenges, First Northwest has implemented a multi-faceted strategic plan aimed at diversifying its revenue streams, improving efficiency, and enhancing its competitive position. Key initiatives include:
1. Expansion of Commercial and Consumer Lending: As part of its strategy to reduce its reliance on net interest income, First Northwest has significantly increased its origination of commercial real estate, multi-family, construction, and commercial business loans, as well as its consumer loan portfolio through manufactured home and auto loan purchase programs.
2. Fintech Partnerships and Investments: The company has made strategic investments in fintech-related businesses through limited partnership agreements, broadening its exposure to emerging trends and technologies in the financial services industry.
3. Balance Sheet Restructuring: In 2024, First Northwest executed a sale-leaseback transaction for six of its branch properties, which generated $14.7 million in proceeds. The company also restructured its bank-owned life insurance policies and executed several securities transactions to improve its net interest margin and overall profitability.
4. Expense Management: First Northwest has taken steps to control operating expenses, including a recent reduction-in-force that impacted 9% of its workforce. The company has also reduced discretionary spending in areas such as advertising and professional fees.
Outlook and Risks Looking ahead, First Northwest faces a challenging operating environment, with continued pressure on its net interest margin and the potential for further increases in interest rates. The company's reliance on net interest income and its exposure to the commercial real estate and construction lending sectors also present risks that must be carefully managed.
However, the strategic initiatives implemented by the management team, combined with the bank's strong capital and liquidity positions, provide reasons for cautious optimism. If successful, these efforts could help First Northwest navigate the current challenges and position the company for long-term success.
Risks to the investment thesis include: - Continued margin compression and interest rate volatility - Potential deterioration in asset quality, particularly in the commercial real estate and construction lending portfolios - Heightened competition from both traditional and non-traditional financial institutions - Regulatory changes that could adversely impact the company's operations - Successful execution of the company's strategic initiatives
The company has identified a material weakness in its internal controls related to the allowance for credit losses determination, which it is actively working to remediate. This issue will require close monitoring as it could impact the bank's financial reporting and risk management processes.
First Northwest operates primarily in the western Washington state region, with a focus on the Puget Sound area and the Olympic Peninsula. While this geographic concentration allows the bank to leverage its deep local knowledge and relationships, it also exposes the company to regional economic fluctuations and limits its diversification opportunities.
Overall, First Northwest Bancorp is a community bank with a long history and a commitment to serving its local markets. While the company has faced its fair share of challenges in recent years, the management team's proactive approach and the bank's strong financial foundation suggest that First Northwest may be well-positioned to weather the current storm and emerge as a stronger, more diversified institution. The bank's focus on relationship banking and its ability to grow its loan portfolio at a compound annual growth rate of 8.2% over the past three years demonstrate its resilience in a competitive market. As First Northwest continues to execute its strategic initiatives and navigate the evolving financial landscape, investors and stakeholders will be closely watching the company's progress in improving profitability, managing risk, and capitalizing on growth opportunities in its core markets.