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KBRA Assigns Ratings to First Northwest Bancorp

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Kroll Bond Rating Agency (KBRA) assigns a senior unsecured debt rating of BBB, a subordinated debt rating of BBB-, and a short-term debt rating of K3 for Port Angeles, Washington-based First Northwest Bancorp (NASDAQ:FNWB) ("the company"). In addition, KBRA assigns deposit and senior unsecured debt ratings of BBB+, a subordinated debt rating of BBB, and short-term deposit and debt ratings of K2 for the subsidiary bank, First Federal Savings and Loan Association of Port Angeles. The Outlook for all long-term ratings is Stable.

FNWB's ratings are supported by its solid management team, which has extensive industry knowledge within its key geographic footprint. Management has further demonstrated success in executing growth in its commercial banking, comparatively newer endeavor, and mortgage banking business lines, which KBRA considers favorably. While profitability has come under pressure given the low interest rate environment, FNWB has improved its funding profile, with substantial growth in core deposit funding. Meanwhile, recent NIM improvement in recent periods has been driven by deposit repricing (total cost of deposits was 33 bps during 4Q20), while loan yields have held relatively constant. Moreover, FNWB reflects solid noninterest income levels (22% of revenues in 2020), enhanced by the conducive mortgage banking environment; noting that the company's fee income levels were adequate in years past as well, accounting for ~15% of revenues. The company has generated solid asset quality metrics over time, aided by a low risk profile that reflects appropriate credit structures and monitoring, as demonstrated by the bank's contained credit loss history. We recognize that the company has also deployed capital into loan growth as represented by a continued increase in risk weighted density. With that said, KBRA acknowledges that there has not been meaningful degradation in asset quality measures, despite the abrupt COVID-led turn in credit markets. FNWB is focused on shifting the loan portfolio mix through organic multifamily loan growth while decreasing lower yielding residential mortgages as a percentage of total loans. Relatedly, we note First Federal's risk profile is trending higher than some peers reflected by increasing RWA density, primarily driven by a shift in asset mix to include a higher concentration in commercial lending. However, the company has typically maintained solid core capital and KBRA expects the company to maintain a minimum TCE ratio of 10%; a TCE ratio of below 10% could result in negative ratings action. Management's commitment to building and maintaining capital across all metrics represents a key ratings consideration.

Click here to view the report. To access ratings and relevant documents, click here.

The ratings are based on KBRA's Bank and Bank Holding Company Global Rating Methodology published on October 16, 2019.

Disclosures

Further information on key credit considerations, sensitivity analyses that consider what factors can affect these credit ratings and how they could lead to an upgrade or a downgrade, and ESG factors (where they are a key driver behind the change to the credit rating or rating outlook) can be found in the full rating report referenced above.

A description of all substantially material sources that were used to prepare the credit rating and information on the methodology(ies) (inclusive of any material models and sensitivity analyses of the relevant key rating assumptions, as applicable) used in determining the credit rating is available in the Information Disclosure Form(s) located here.

Information on the meaning of each rating category can be located here.

Further disclosures relating to this rating action are available in the Information Disclosure Form(s) referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.

About KBRA

Kroll Bond Rating Agency, LLC (KBRA) is a full-service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. Kroll Bond Rating Agency Europe Limited is registered as a CRA with the European Securities and Markets Authority. Kroll Bond Rating Agency UK Limited is registered as a CRA with the UK Financial Conduct Authority pursuant to the Temporary Registration Regime. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider.

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