KBRA Affirms Ratings for First Northwest Bancorp

KBRA affirms the senior unsecured debt rating of BBB-, the subordinated debt rating of BB+, and the short-term debt rating of K3 for First Northwest Bancorp (NASDAQ: FNWB) (“the company”). In addition, KBRA affirms the deposit and senior unsecured debt ratings of BBB, the subordinated debt rating of BBB-, and the short-term deposit and debt ratings of K3 for its bank subsidiary, First Fed Bank ("the bank"). The Outlook for all long-term ratings is Stable.

Key Credit Considerations

FNWB’s profitability remains pressured largely due to higher provision expenses related to elevated charge-off activity mainly driven by commercial business loans. That said, we believe that the increase in NCOs is largely idiosyncratic and is not reflective of systematic issues. Elsewhere, earnings have also been adversely impacted by the company’s elevated funding base with a greater reliance on higher cost time deposits and wholesale borrowings comprising ~50% of the total funding base. As such, FNWB’s cost of funding has increased to 2.72% as of 4Q24, contributing to the 36 bps of NIM compression through 2024. That said, we believe the company’s liability sensitive balance sheet is well positioned to benefit from declining interest rates with a significant portion of time deposits expected to price ~75 bps lower in the first half of 2025 which should reduce NIM pressures. The ratings also consider FNWB’s elevated levels of NPAs and classified assets at 1.80% and 2.5% of total loans, respectively. The largest classified loans include a $11.4 million condo construction loan, $8.4 million in warehouse/equipment loans, $8.1 million commercial construction loan for a townhome project, and a $6.4 million office loan. Overall, the bank is closely monitoring these loans and aggressively working out any problem loans. Outside of the largest six classified loans, management noted that classified assets have trended down in recent periods. The bank carries adequate loan loss reserves totaling 1.21% of total loans - which we recognize does not fully cover nonperforming assets, though FNWB does not anticipate any significant increase in the allowance for loan losses as the loans are largely collateral dependent and viewed as adequately reserved for as of 4Q24. As a result of the company’s operating loss for 2024, capital ratios have trended lower, though remain in line with peers with a consolidated CET1 ratio of 10.9% as of 4Q24. Going forward. we expect capital metrics to remain near current levels with management targeting bank level CET1 between 12.5% and 13.0%. That ratings are underpinned by FNWB’s management team, which has extensive market knowledge within its key geographic footprint.

Rating Sensitivities

Improved profitability metrics, including stabilized core ROAA and an improved NIM with a reduced dependence on borrowings and time (retail and brokered) deposits, along with sound credit quality including a resolution of higher NPA levels, and the maintenance of capital in line with or better than peer averages could result in positive rating momentum over the medium term. Continued operating losses as well as further deterioration in asset quality metrics with significant credit losses resulting in capital levels falling below peer averages could negatively pressure ratings.

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Methodologies