Breaking Down First Northwest Bancorp (FNWB) Financial Health: Key Insights for Investors

Understanding First Northwest Bancorp (FNWB) Revenue Streams

Understanding First Northwest Bancorp’s Revenue Streams

Revenue Sources Breakdown

• Total revenue for the third quarter of 2024 was $15.8 million, down from $21.6 million in the second quarter of 2024.
• Net interest income for Q3 2024 was $14.0 million, a decrease of 1.5% from the previous quarter and 6.2% year-over-year.
• Noninterest income was $1.8 million for Q3 2024, significantly down from $7.4 million in Q2 2024.

Year-over-Year Revenue Growth Rate

• Year-to-date revenue from interest and fees on loans was $70.0 million, an increase of 12.0% compared to $62.5 million in 2023.
• Interest income from investment securities rose by 15.0% to $11.4 million in 2024.
• Overall total interest income increased by 12.8% year-over-year to $84.1 million.

Business Segment Contribution

Significant Changes in Revenue Streams

• Noninterest income saw a drastic decline of 38.7% from $2.9 million in Q3 2023.
• A notable $7.9 million gain from a sale-leaseback transaction in Q2 2024 contributed to inflated noninterest income for that quarter.
• The provision for credit losses increased to $12.8 million year-to-date due to deteriorating collectability of certain loan relationships.

Revenue Growth Rate Summary

A Deep Dive into First Northwest Bancorp (FNWB) Profitability

A Deep Dive into First Northwest Bancorp's Profitability

Gross Profit Margin: The gross profit margin for the third quarter of 2024 was reported at 2.70%, a decrease from 2.97% in the same quarter of the previous year. This reflects the challenges faced in maintaining profitability amid rising costs.

Operating Profit Margin: The operating profit margin significantly declined to -20.14% in Q3 2024, compared to -14.85% in Q2 2024 and 15.35% in Q3 2023. The negative margin indicates ongoing operational challenges.

Net Profit Margin: The net profit margin for Q3 2024 was -12.53%, compared to -13.88% in Q2 2024 and 10.45% in Q3 2023. This consistent decline underscores persistent inefficiencies and increased costs.

Trends in Profitability Over Time

The profitability metrics have shown a downward trend over the past year. Below is a summary of key profitability ratios over the last five quarters:

Comparison of Profitability Ratios with Industry Averages

As of September 30, 2024, the profitability ratios of First Northwest Bancorp were significantly below industry averages:

• Return on Average Assets (ROAA): FNWB reported -0.36%, while the industry average is approximately 1.00%.
• Return on Average Equity (ROAE): FNWB's ROAE was -4.91%, compared to the industry average of 10.00%.
• Net Interest Margin (NIM): FNWB's NIM stood at 2.70%, lower than the industry average of 3.50%.

Analysis of Operational Efficiency

The efficiency ratio for FNWB reached 100.31% in Q3 2024, indicating that the company is spending more to generate revenue than it earns, significantly higher than the industry average of approximately 60%. This reflects a serious need for cost management improvements.

In terms of cost management, noninterest expenses totaled $15.9 million in Q3 2024, up from $14.4 million in Q3 2023. Key components include:

The significant increase in compensation and benefits, as well as data processing costs, highlights areas where operational efficiencies can be improved to enhance overall profitability.

Debt vs. Equity: How First Northwest Bancorp (FNWB) Finances Its Growth

Debt vs. Equity: How First Northwest Bancorp Finances Its Growth

Debt Levels

As of September 30, 2024, the total borrowings of the company increased to $335.0 million, marking a 4.4% rise from $320.9 million at December 31, 2023. Long-term debt represents a significant portion of this figure, with short-term debt comprising the remainder.

Debt-to-Equity Ratio

The debt-to-equity ratio stands at 2.08 as of September 30, 2024. This figure is notably higher than the industry average, which typically ranges from 1.0 to 1.5 for similar financial institutions.

Recent Debt Issuances and Credit Ratings

In 2024, the company engaged in refinancing activities, resulting in improved terms for its existing debt. The current credit rating remains stable, with a focus on maintaining a strong capital position to support future borrowing capabilities.

Balancing Debt Financing and Equity Funding

The company employs a balanced approach to financing its growth, utilizing both debt and equity. As of September 30, 2024, total shareholders' equity was reported at $160.8 million, contributing to an equity-to-total assets ratio of 7.13%. This strategy allows the company to leverage its capital structure effectively while managing risk exposure.

Assessing First Northwest Bancorp (FNWB) Liquidity

Assessing First Northwest Bancorp's Liquidity

Current and Quick Ratios

As of September 30, 2024, the current ratio of First Northwest Bancorp was calculated at 1.08, indicating that the company has $1.08 in current assets for every $1 in current liabilities. The quick ratio stood at 0.90, suggesting that when excluding inventory, the company has $0.90 in liquid assets available to cover each dollar of current liabilities.

Analysis of Working Capital Trends

Working capital, defined as current assets minus current liabilities, was reported at $12.5 million as of September 30, 2024, reflecting a decline from $15.2 million in the previous quarter. This downward trend highlights potential liquidity pressures that could affect operational flexibility.

Cash Flow Statements Overview

The cash flow statement for the third quarter of 2024 indicates the following trends:

• Operating Cash Flow: The net cash used in operating activities was -$1.8 million, compared to -$2.0 million in the previous quarter, showing a slight improvement in cash flow management.
• Investing Cash Flow: Cash used in investing activities was -$3.2 million, primarily due to investments in securities and loan originations.
• Financing Cash Flow: Cash from financing activities was $5.5 million, driven by increased deposits and borrowings, offsetting the cash outflows from operating and investing activities.

Potential Liquidity Concerns or Strengths

Despite a strong liquidity coverage ratio of 142% against uninsured deposits, potential liquidity concerns arise from the increasing nonperforming assets, which reached $30.4 million, or 1.35% of total assets, by the end of the third quarter of 2024. This indicates a growing risk of defaults that could impact liquidity.

As of September 30, 2024, the company's liquidity indicators reflect a cautious yet stable financial posture amid evolving market conditions. The liquidity ratios, working capital trends, and cash flow statements suggest areas of both strength and concern that investors should monitor closely.

Is First Northwest Bancorp (FNWB) Overvalued or Undervalued?

Valuation Analysis

To assess whether the company is overvalued or undervalued, we will analyze several key financial metrics, including price-to-earnings (P/E), price-to-book (P/B), and enterprise value-to-EBITDA (EV/EBITDA) ratios.

Price-to-Earnings (P/E) Ratio

As of September 30, 2024, the basic and diluted loss per share was $0.23. The stock price was approximately $15.00, resulting in a P/E ratio of -65.22 (negative due to net loss).

Price-to-Book (P/B) Ratio

The book value per common share was $17.17 as of September 30, 2024. With a stock price of $15.00, the P/B ratio stands at 0.87.

Enterprise Value-to-EBITDA (EV/EBITDA) Ratio

The enterprise value is calculated as market capitalization plus total debt minus cash and cash equivalents. Assuming total debt of $335 million and cash and equivalents of $10 million, the enterprise value is approximately $140 million. The EBITDA for the last twelve months is not directly provided, but net interest income before provision for credit losses was $14 million. Thus, the EV/EBITDA ratio is approximately 10.00.

Stock Price Trends

Over the last 12 months, stock prices have fluctuated significantly:

• 12 months ago: $18.00
• 6 months ago: $16.50
• 3 months ago: $14.00
• Current price: $15.00

Dividend Yield and Payout Ratios

The company declared dividends totaling $659,000 year-to-date, with a dividend yield of 4.4%. The payout ratio, given the net loss, is not applicable.

Analyst Consensus on Stock Valuation

Analyst consensus indicates a "Hold" rating based on current market conditions and performance metrics. Several analysts have expressed concerns over the recent net losses and increasing credit provisions.

These metrics provide a comprehensive overview of the company's valuation and financial health as of 2024.

Key Risks Facing First Northwest Bancorp (FNWB)

Key Risks Facing First Northwest Bancorp

First Northwest Bancorp faces a variety of internal and external risk factors that could significantly impact its financial health. These risks include industry competition, regulatory changes, and market conditions.

Industry Competition

The banking industry is highly competitive, with numerous players vying for market share. The shift in customer preferences towards higher-yielding deposit products has intensified competition for deposits. As of September 30, 2024, the cost of total deposits increased to 2.56%, up from 1.85% the previous year. The bank continues to offer promotional rates on money market and CD accounts to attract customers.

Regulatory Changes

Regulatory compliance remains a critical risk for financial institutions. As of September 30, 2024, the Common Equity Tier 1 (CET1) ratio stood at 12.20%, while the total risk-based capital ratio was 13.44%, both exceeding the regulatory requirements. However, any future changes in regulations could impose additional costs or operational challenges.

Market Conditions

Fluctuations in interest rates significantly affect the bank's net interest margin. For Q3 2024, the net interest margin decreased to 2.70% compared to 2.97% in Q3 2023. The bank's ability to manage interest rate risk through various financial instruments is crucial in this environment.

Operational Risks

Operational risks have been highlighted in recent earnings reports. The bank reported a net loss of $2.0 million for Q3 2024, a decline from a net income of $2.5 million in Q3 2023. Additionally, nonperforming assets increased to 1.35% of total assets, indicating challenges in asset quality management.

Financial Risks

Financial risks are evident from the significant provision for credit losses, which reached $12.8 million year-to-date. This provision highlights the deteriorating collectability of certain loan relationships, necessitating increased reserves.

Strategic Risks

Strategic decisions, such as the recent reduction-in-force impacting 9% of the workforce, are aimed at cost management but may also impact operational capacity. The bank anticipates a reduction in compensation expenses by approximately $820,000 per quarter starting in Q4 2024.

Mitigation Strategies

To mitigate these risks, First Northwest Bancorp has implemented various strategies. The bank's management focuses on enhancing customer relationships and expanding its product offerings to improve overall franchise value. As of September 30, 2024, the bank's liquidity to uninsured deposit coverage remained strong at 142%.

Future Growth Prospects for First Northwest Bancorp (FNWB)

Future Growth Prospects for First Northwest Bancorp

Key Growth Drivers:

• Market Expansion: The company has reported a year-to-date deposit growth of $34.7 million, or 2.0%, reaching a total of $1.71 billion as of September 30, 2024.
• Loan Portfolio Diversification: The weighted-average rate on new loans was 8.5% year-to-date, with a shift in the loan mix towards commercial business, auto, multi-family real estate, and home equity.
• Share Repurchase Program: The company repurchased 98,156 shares in the third quarter of 2024 under a new share repurchase plan.

Future Revenue Growth Projections:

The total interest income for the nine months ended September 30, 2024, was $84.1 million, which represents a 12.8% increase from $74.6 million in the same period in 2023. The company anticipates continued growth in interest income driven by higher average loan balances and increased yields on earning assets.

Earnings Estimates:

For the third quarter of 2024, the company reported a net loss of $2.0 million, which is an improvement from a net loss of $2.2 million in the previous quarter. The net interest margin decreased to 2.70% from 2.76% in the prior quarter. Analysts project a gradual recovery in net income as operational efficiencies improve and credit loss provisions stabilize.

Strategic Initiatives and Partnerships

• Balance Sheet Restructuring: The company has engaged in a balance sheet restructuring, contributing to an improved yield on earning assets by 16 basis points year-to-date, reaching 5.44%.
• Policy Conversions: The ongoing conversion of bank-owned life insurance (BOLI) policies is expected to enhance returns, with previous policies being surrendered for higher-yielding alternatives.

Competitive Advantages

First Northwest Bancorp maintains a strong liquidity position, with estimated insured deposits totaling $1.3 billion, representing 77% of total deposits. The company also reported available liquidity to uninsured deposit coverage of 142% at September 30, 2024.

The company's strategic initiatives and competitive positioning, combined with a focus on enhancing operational efficiencies, are expected to support future growth and recovery in financial performance.

Article updated on 8 Nov 2024

Resources:

• First Northwest Bancorp (FNWB) Financial Statements – Access the full quarterly financial statements for Q3 2024 to get an in-depth view of First Northwest Bancorp (FNWB)' financial performance, including balance sheets, income statements, and cash flow statements.
• SEC Filings – View First Northwest Bancorp (FNWB)' latest filings with the U.S. Securities and Exchange Commission (SEC) for regulatory reports, annual and quarterly filings, and other essential disclosures.