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 Outlook for all long-term ratings is Stable.

Key Credit Considerations

FNWB’s profitability remains pressured, driven by elevated credit costs, higher professional and legal expenses associated with problem asset resolutions, and meaningful NIM compression through 2023 and 2024 following the rapid rise in interest rates. Positively, the margin improved to 3.00% in 4Q25, marking five consecutive quarters of expansion, primarily reflecting lower funding costs as rate cuts through 2024 and 2025 reduced deposit costs, higher-rate CDs matured, and wholesale borrowings were reduced. Additional time deposit repricing and loan repricing is expected to support modest margin expansion into the low ~3% range. Nevertheless, broader earnings momentum remains dependent on sustained margin expansion, disciplined expense management, and stable credit performance. The ratings consider elevated, though stabilizing, credit metrics, reflecting stress concentrated in select commercial construction, CRE, and commercial business relationships rather than broad-based portfolio weakness. Classified loans improved to 1.40% of total loans from 2.51% at year-end 2024, reflective of active resolution efforts. Remaining larger classified exposures include an office loan, a condominium construction relationship, and smaller sponsor-supported credits that have been marked to collateral value. While charge-offs remain elevated, the remaining problem credits are largely collateral-dependent and, in our view, reserved for appropriately.

Capital metrics have moderated from historical levels but remain adequate relative to the company’s risk profile, with a CET1 ratio of 10.9% at YE25. The company suspended its quarterly common dividend in 2Q25 and has not repurchased shares, reflecting a prioritization of capital preservation. We expect capital levels to remain near current levels over the medium term, with potential for gradual improvement as margin expansion continues, credit costs normalize, and loan growth remains controlled. The ratings are further underpinned by an experienced management team with deep banking and market knowledge. In September 2025, Curt Queyrouze was appointed President and Chief Executive Officer, and Phyllis Nomura was appointed Chief Financial Officer earlier in the year, marking a meaningful leadership transition. While execution risk remains as the company works through elevated credit costs and litigation-related expenses, we view the leadership transition and clearly articulated strategic priorities as supportive of improved operating stability over time.

Rating Sensitivities

Positive rating momentum over the medium term could result from improved profitability metrics, including stabilized core ROAA driven by an improved net interest margin, sound credit quality highlighted by the resolution of elevated NPAs, and capital levels maintained in line with or above peer averages. Conversely, continued operating losses, further deterioration in asset quality with significant credit losses, and capital levels declining below peer averages could negatively pressure the ratings.

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