Introduction
First Northwest Bancorp (NASDAQ: FNWB) is a community-oriented financial institution that has been serving the Western Washington region for over a century. With a focus on commercial and consumer banking services, the company has navigated a challenging landscape in recent years, marked by changing economic conditions, evolving customer preferences, and heightened regulatory scrutiny.
Company History and Structure
Founded in 1923 as First Federal Savings and Loan Association of Port Angeles, the company has undergone a transformation in the past decade, converting from a mutual to a stock-based organization in 2015 and expanding its footprint across the Puget Sound region. Today, First Northwest Bancorp operates 18 locations, including 12 full-service branches, three business centers, and three administration centers, through its wholly-owned subsidiary, First Fed Bank. These locations span across Clallam, Jefferson, King, Kitsap, Snohomish, and Whatcom counties.
The company’s 2015 mutual to stock conversion was a significant milestone, with First Northwest issuing an aggregate of 12.17 million shares of common stock at an offering price of $10 per share. As part of this process, an additional 933,360 shares and $400,000 in cash were contributed to the First Federal Community Foundation. The company also established an employee stock ownership plan (ESOP) that acquired 8% of the common stock issued in the conversion.
Business Activities and Strategic Investments
Over the past decade, First Fed Bank has significantly expanded its lending portfolio, increasing its focus on commercial real estate, multi-family real estate, construction, and commercial business lending. The company has also grown its consumer loan portfolio through manufactured home and auto loan purchase programs. In addition to traditional banking services, First Northwest has made strategic investments in fintech-related businesses through limited partnership investments.
In 2022, the company further diversified its business activities by acquiring a 33.3% interest in Meriwether Group, a boutique investment bank and consulting firm, and a 25% equity interest as a general partner in Meriwether Group Capital. These strategic moves were aimed at broadening the company’s financial services offerings and exploring new revenue streams.
Financials
The company’s financial performance in recent years has been marked by both successes and challenges. For the fiscal year ended December 31, 2023, First Northwest Bancorp reported revenue of $65.45 million, net income of $2.29 million, operating cash flow of $17.88 million, and free cash flow of $16.30 million.
In the most recent quarter (Q3 2024), First Northwest Bancorp reported revenue of $15.799 million, a net loss of $1.980 million, operating cash outflow of $3.405 million, and free cash inflow of $2.735 million. This represents a year-over-year decrease in revenue, net income, and operating cash flow. The net loss in Q3 2024 was primarily driven by a $3.08 million provision for credit losses on loans and a $1.50 million increase in noninterest expense compared to the prior year quarter. The higher provision was due to reserves taken on individually evaluated loans and an increase in the estimated CECL loss factors applied to certain loan segments. The increase in noninterest expense was largely due to one-time severance payouts, higher payroll taxes, and additional occupancy costs.
The first nine months of 2023 saw continued pressure on the company’s financials, with First Northwest Bancorp reporting a net loss of $3.80 million for the period ended September 30, 2024. This was driven by a $17.70 million decrease in net interest income after provision for credit losses, as well as a $1.30 million increase in noninterest expense. However, the company was able to offset some of these challenges with a $4.40 million increase in noninterest income and a $3.20 million decrease in provision for income tax.
Net Interest Margin
One of the key drivers of First Northwest Bancorp’s recent performance has been the impact of rising interest rates on its loan and deposit portfolios. The company’s net interest margin, a crucial metric for community banks, decreased by 48 basis points to 2.74% for the nine-month period ended September 30, 2024, as the cost of interest-bearing liabilities outpaced the increase in yields on interest-earning assets.
Strategic Initiatives and Cost Management
In response to these headwinds, First Northwest Bancorp has undertaken a series of strategic initiatives aimed at improving its financial position and navigating the changing market landscape. In the second quarter of 2024, the company completed a sale-leaseback transaction for six of its branch properties, generating $14.70 million in cash proceeds and reducing its reliance on wholesale funding sources. Additionally, the company has been actively managing its investment portfolio, restructuring its bank-owned life insurance policies, and implementing hedging strategies to mitigate interest rate risk.
The company’s efforts to strengthen its operations have also included streamlining its organizational structure and reducing operating expenses. In the third quarter of 2024, First Northwest Bancorp implemented a reduction in force, impacting approximately 9% of its workforce, as part of its ongoing efforts to control costs and improve profitability.
Liquidity
As of September 30, 2024, First Northwest Bancorp had a debt-to-equity ratio of 2.08. The company had $82.72 million in cash and cash equivalents, and available borrowing capacity of $226.10 million from the Federal Home Loan Bank (FHLB) and $18.70 million from the Federal Reserve Bank discount window. The company also has a $20 million revolving line of credit with NexBank, with $14.50 million in remaining capacity as of September 30, 2024. The current ratio was 2.40 and the quick ratio was 2.40 at the end of the third quarter of 2024.
Despite the challenges faced in recent years, First Northwest Bancorp remains committed to its community-oriented mission and its focus on serving the diverse financial needs of individuals and businesses in its market area. The company’s management team has emphasized the importance of digital transformation and innovation, with the recent additions of a Chief Strategy Officer and a Chief Innovation Officer to its executive ranks.
Business Segments
First Northwest Bancorp operates through the following main business segments:
Real Estate Loans: This segment consists of loans secured by one-to-four family residential properties, multi-family residential properties, commercial real estate, and construction and land loans. As of September 30, 2024, the real estate loan portfolio totaled $1.22 billion, comprising 70% of the total loan portfolio. Within the real estate segment, one-to-four family residential loans increased by 4.6% to $395.79 million, multi-family loans grew by 6.2% to $353.81 million, commercial real estate loans decreased by 3.1% to $376.01 million, and construction and land loans declined by 26.2% to $95.71 million compared to the prior year end. The decrease in construction and land loans was primarily due to $66.5 million in loans converting to fully amortizing loans during the period.
Consumer Loans: This segment includes home equity loans and lines of credit as well as auto and other consumer loans. As of September 30, 2024, the consumer loan portfolio totaled $358.16 million, comprising 20.7% of the total loan portfolio. Home equity loans and lines increased by 10.9% to $76.96 million, while auto and other consumer loans grew by 12.9% to $281.20 million, driven by $32.6 million in auto loan purchases and $27.8 million in manufactured home loan pool purchases.
Commercial Business Loans: This segment consists of commercial and industrial loans. The commercial business loan portfolio increased by 38.3% to $155.33 million as of September 30, 2024, accounting for 9.0% of total loans. The growth was attributable to a $28.7 million increase in the Northpointe Bank Mortgage Purchase Program participation, $26.9 million in organic originations, $9.5 million in purchased loans, and $6.4 million of draws on existing line of credit commitments.
Overall, FNWB’s total loan portfolio grew by 4.5% to $1.73 billion as of September 30, 2024, with the largest increases in the consumer and commercial business segments offsetting the decline in construction and land loans. The allowance for credit losses on loans increased to $21.97 million, or 1.27% of total loans, as the company recorded a $13.0 million provision for credit losses on loans during the nine-month period. Nonaccrual loans increased by 62.9% to $30.38 million, representing 1.75% of total loans, primarily due to downgrades in the commercial construction, commercial real estate, and commercial business loan portfolios.
Geographic Markets
First Northwest Bancorp operates primarily in the state of Washington, with the majority of its business concentrated in the Puget Sound region and the North Olympic Peninsula. The company does not have a significant presence outside of its core Washington markets.
Risks and Future Outlook
Looking ahead, First Northwest Bancorp faces a number of key risks and uncertainties, including the continued impact of rising interest rates, ongoing regulatory scrutiny, and the potential for increased competition from both traditional and non-traditional financial service providers. The company’s ability to navigate these challenges and capitalize on emerging opportunities will be crucial in determining its long-term success.
First Northwest Bancorp’s net interest margin decreased by 48 basis points to 2.74% for the nine months ended September 30, 2024, as the 89 basis point increase in the cost of interest-bearing liabilities outpaced the 38 basis point rise in yields on interest-earning assets. The company has continued to focus on growing its higher-yielding loan portfolios, such as commercial business and consumer loans, to offset margin compression from the rising interest rate environment.
Conclusion
Overall, First Northwest Bancorp’s story is one of a community bank striving to adapt and thrive in a rapidly changing industry. With a strong commitment to its local communities, a focus on operational efficiency, and a willingness to embrace technological innovation, the company is positioned to continue serving as a trusted financial partner for individuals and businesses in the Puget Sound region. However, the recent financial challenges, particularly the net loss reported in the third quarter of 2024, highlight the ongoing difficulties faced by the company in the current economic environment. The management’s strategic initiatives, including cost-cutting measures and portfolio diversification, will be critical in steering the company back to profitability and sustainable growth.
Disclaimer: This article is for informational purposes only. It does not constitute financial, legal, or other types of advice. While every effort has been made to ensure the accuracy of the information presented here, the author and the publisher do not make any guarantees about the completeness, reliability, and accuracy of this information.