Overview of Financial Performance

First Northwest Bancorp, the parent company of First Fed Bank, reported a net loss of $6.6 million for the year ended December 31, 2024, compared to net income of $2.6 million in the prior year. This decline was primarily driven by a significant increase in the provision for credit losses on loans, which rose from $1.3 million in 2023 to $16.5 million in 2024. The higher provision was mainly due to loan balances charged off during the year, an increase in reserves for individually evaluated loans, and an increase in loss factors applied to certain loan portfolios.

Net interest income also declined by $5.1 million, or 8.3%, as the increase in interest expense outpaced the growth in interest income. Noninterest income, on the other hand, increased by $8.6 million, or 213.8%, largely due to a one-time gain on the sale of six branch properties and a BOLI death benefit payment, partially offset by a loss on the sale of investment securities. Noninterest expense decreased by $1.5 million, or 2.4%, as the company was able to reduce certain costs like advertising and professional fees.

As a result of these factors, the company reported a loss on average assets of -0.30% and a loss on average equity of -4.09% for 2024, compared to a return on average assets of 0.11% and a return on average equity of 1.43% in the prior year.

Revenue and Profit Trends

The company’s net interest income declined from $61.4 million in 2023 to $56.3 million in 2024, a decrease of 8.3%. This was primarily due to a $16.6 million, or 41.9%, increase in interest expense, which outpaced the $11.4 million, or 11.3%, increase in interest income.

The rise in interest expense was driven by higher funding costs, with the average cost of all interest-bearing deposit products increasing 94 basis points to 2.95% in 2024 from 2.01% in 2023. The average balances of money market and certificate of deposit accounts also increased year-over-year, while lower-cost transaction and savings account balances declined.

On the asset side, interest income grew due to a $92.7 million increase in the average balance of the loan portfolio, which yielded 5.56% in 2024 compared to 5.31% in 2023. The bank also saw a 64-basis point increase in the average yield on its investment securities portfolio, which contributed to the higher interest income.

The company’s noninterest income increased significantly, from $4.0 million in 2023 to $12.6 million in 2024, primarily due to a $7.9 million gain on the sale of six branch properties and a $1.5 million BOLI death benefit payment. These gains were partially offset by a $2.1 million loss on the sale of investment securities.

Noninterest expense decreased by $1.5 million, or 2.4%, to $60.0 million in 2024. This was mainly due to the absence of certain one-time expenses recorded in 2023, including a $1.5 million write-off of a QUIL commitment receivable, a $725,000 write-off of Fannie Mae and Freddie Mac investor accounting items, and a $718,000 accrual for a civil money penalty. Compensation and benefits expense increased, however, due to nonrecurring payments related to a reduction-in-force and higher incentives and commissions.

Strengths and Weaknesses

One of the company’s key strengths is its diversified deposit base, with approximately 61% of deposits held by consumers, 28% by businesses and public funds, and 11% in brokered deposits. This helps mitigate liquidity risk and provides a stable source of funding. The company also has a strong capital position, exceeding all regulatory capital requirements and maintaining a “well-capitalized” status.

Another strength is the company’s focus on growing its commercial loan portfolio, which now makes up 51.6% of total loans, up from 50.2% in the prior year. This shift towards higher-yielding commercial real estate and commercial business loans has helped to increase overall interest income. The company has also been successful in expanding its small-to-medium sized business relationships through its Treasury Management and Commercial Relationship teams.

However, the company’s asset quality has weakened, with nonperforming loans increasing 63.7% to $30.5 million, or 1.80% of total loans, at the end of 2024. This was primarily due to downgrades of several commercial real estate and commercial construction loans. The allowance for credit losses on loans also increased to 1.21% of total loans, up from 1.05% in the prior year, as the bank added reserves to address the deterioration in asset quality.

Another weakness is the company’s reliance on wholesale funding sources, such as brokered deposits and FHLB advances, which made up 31.1% of total funding at the end of 2024. While these sources have provided needed liquidity, they can be more volatile and expensive than core deposits.

Outlook and Future Strategies

Looking ahead, the company is focused on several key strategies to improve its financial performance:

1. Remixing the Loan Portfolio: The company plans to continue increasing the percentage of higher-yielding commercial real estate and commercial business loans in its portfolio. This should help boost interest income and improve risk-adjusted returns.

2. Increasing Noninterest Income: The company is targeting growth in fee-based revenue streams, such as SBA loan sales, assumable rate conversion programs, mortgage banking, and treasury management products. It also expects to generate more interchange fee income from its new consumer rewards programs.

3. Maintaining Asset Quality: The company is closely monitoring its loan portfolio and taking proactive steps to resolve nonperforming loans. It also retains independent firms to periodically review the loan portfolio and provide feedback on policies and procedures.

4. Attracting Core Deposits: The company is emphasizing relationship banking and digital delivery solutions to grow its base of low-cost core deposits, with a focus on primary transaction accounts.

5. Expanding Market Presence: The company plans to continue growing its franchise, both organically and potentially through acquisitions of individual branches or other banks, with a focus on its Western Washington market.

6. Improving Digital Capabilities: The company is investing in its online presence and digital strategies to better compete in the evolving financial services landscape, including through its partnership with Canapi Ventures to identify and invest in fintech companies.

7. Exploring Alternative Lending Opportunities: The company is looking to supplement organic loan originations by purchasing auto, manufactured home, and small business loans from third-party providers to improve interest income.

8. Creating Operating Leverage: The company is focused on improving operational efficiency through workforce reductions and technology investments, as well as developing new revenue channels to offset the impact of rising funding costs and declining noninterest income.

By executing on these strategies, the company aims to return to profitability, improve its asset quality, and enhance its long-term competitiveness in its markets.