First Northwest Bancorp (NASDAQ:FNWB) is a community-oriented financial institution that has been serving the western Washington region for nearly a century. With a focus on delivering a full array of financial products and services to individuals, small businesses, and commercial customers, the company has established itself as a trusted partner in its local communities.
Business Overview
First Northwest Bancorp operates through its wholly-owned subsidiary, First Fed Bank, which has 18 locations, including 12 full-service branches, three business centers, and three administration centers, across Clallam, Jefferson, King, Kitsap, and Whatcom counties. The bank's lending activities include the origination of 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.Over the past five years, First Northwest has significantly increased its commercial real estate, multi-family real estate, construction, and commercial business loan originations, while also growing its consumer loan portfolio through manufactured home and auto loan purchase programs. On the deposit side, the company offers traditional consumer and business deposit products, including transaction accounts, savings and money market accounts, and certificates of deposit.
Financials
For the full year 2023, First Northwest reported annual net income of $2.29 million on total revenue of $104.92 million. The company's annual operating cash flow was $17.59 million, while its annual free cash flow reached $16.02 million. These financial results demonstrate the company's ability to generate consistent earnings and cash flow, even in the face of challenging market conditions.In the first quarter of 2024, the company reported net income of $396,000, a decrease from the $3.53 million reported in the same period of the prior year. This decline was primarily driven by a $2.38 million decrease in net interest income, as the company faced higher funding costs and margin compression. Noninterest income also decreased by $146,000, or 6.3%, year-over-year, due to lower mortgage banking revenue and a decrease in the fair value of the company's sold loan servicing rights.
Despite the quarterly earnings decline, First Northwest's balance sheet remains strong, with total assets of $2.24 billion as of March 31, 2024, up from $2.20 billion at the end of 2023. The company's loan portfolio grew by $51.4 million, or 3.1%, during the first quarter, driven by increases in commercial business loans, auto and other consumer loans, and multi-family real estate loans.
Asset Quality and Credit Metrics
First Northwest's asset quality metrics remain relatively stable, with nonaccrual loans increasing slightly to $19.5 million, or 1.14% of total loans, as of March 31, 2024, compared to $18.6 million, or 1.12%, at the end of 2023. The company's allowance for credit losses on loans stood at $18.0 million, or 1.05% of total loans, at the end of the first quarter, compared to $17.5 million, or 1.10%, at the end of 2023.During the first quarter of 2024, the company recorded a $1.2 million provision for credit losses on loans, primarily due to an increase in loss factors applied to residential real estate and commercial business loans, as well as growth in the commercial business loan portfolio. The company also recorded a $269,000 recapture of provision for credit losses on unfunded commitments.
Liquidity
First Northwest maintains a strong liquidity position, with cash and cash equivalents totaling $77.4 million and unpledged securities classified as available-for-sale with a market value of $284.8 million as of March 31, 2024. The company also has significant borrowing capacity, with $213.0 million available from the Federal Home Loan Bank and $17.4 million available from the Federal Reserve Bank of San Francisco.At the end of the first quarter, First Northwest's regulatory capital ratios remained well above the well-capitalized thresholds, with a Tier 1 leverage ratio of 9.7%, a common equity Tier 1 ratio of 12.6%, a Tier 1 risk-based capital ratio of 12.6%, and a total risk-based capital ratio of 13.6%.
Diversified Funding Sources and Deposit Base
First Northwest's deposit base is well-diversified, with approximately 59% of deposit account balances held by consumers, 29% held by business and public fund depositors, and 12% in brokered deposits. The average deposit account balance, excluding brokered and public fund accounts, was $27,000 as of March 31, 2024, indicating a stable retail deposit base.The company utilizes brokered CDs as an additional funding source to provide liquidity, manage cost of funds, reduce reliance on FHLB advances, and manage interest rate risk. As of the end of the first quarter, brokered deposits accounted for 12% of total deposits, down from 12.4% at the end of 2023.
Geographic Diversification and Loan Portfolio Composition
First Northwest's loan portfolio is geographically diversified, with the majority of its lending activities concentrated in the Puget Sound region, which includes Kitsap, Mason, Thurston, Pierce, King, Snohomish, Skagit, Whatcom, and Island counties. During the first quarter of 2024, the company added $50.0 million of organic loan originations and commitments to the portfolio, of which $36.1 million, or 72.1%, were located in the Puget Sound region, $10.4 million, or 20.8%, in the North Olympic Peninsula, $448,000, or 0.9%, in other areas throughout Washington State, and $3.1 million, or 6.1%, in other states.The company's loan portfolio is diversified across various asset classes, with real estate loans (one-to-four family, multi-family, commercial real estate, and construction and land) accounting for 72.1% of the total loan portfolio as of March 31, 2024. Consumer loans (home equity and auto and other consumer) made up 19.9% of the portfolio, while commercial business loans represented the remaining 8.0%.
Risks and Challenges
While First Northwest has demonstrated resilience in the face of challenging market conditions, the company faces several risks and challenges that warrant consideration. These include:1. Interest Rate Risk: The company's net interest margin has been under pressure due to the rising interest rate environment, as the cost of funding has increased at a faster pace than the yield on interest-earning assets. This could continue to impact the company's profitability if the yield curve remains inverted.
2. Competitive Landscape: First Northwest operates in a highly competitive banking environment, with both traditional and non-traditional financial institutions vying for customers. The company's ability to maintain its market share and attract new customers will be crucial to its long-term success.
3. Regulatory Compliance: As a financial institution, First Northwest is subject to a complex regulatory environment, which requires ongoing compliance efforts and can impact the company's operations and profitability.
4. Credit Risk: While the company's asset quality metrics remain relatively stable, a deterioration in economic conditions could lead to an increase in nonperforming loans and credit losses, which could adversely affect the company's financial performance.