April 02, 2015 - 3:10pm EST by
2015 2016
Price: 12.32 EPS 0 0
Shares Out. (in M): 13 P/E 0 0
Market Cap (in $M): 161 P/FCF 0 0
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT 0 0

Sign up for free guest access to view investment idea with a 45 days delay.

  • Community Bank
  • Discount to Tangible Book
  • Management Change
  • Potential Buybacks
  • Potential Dividend Initiation
  • Potential Takeover Target


Background Standard Demutualization
FNWB completed its standard demutualization on 1/29/15. The bank raised $121.7 million gross proceeds at $10 per share in an over-subscribed offering that was at the super-max of the offering range. The offering resulted in shares outstanding of 13.1 million, capital ratio (TCE/TA) of 19% and TBVPS of $15.33. Today’s market price of $12.32 represents 0.81x P/TBV.
Franchise & Strategy
FNWB is the holding company for First Federal Savings & Loan Association of Port Angeles, a 90-year old community savings bank that serves the North Olympic Peninsula region of Washington via nine full-  service branches and one lending production office in Bellingham, which opened in July 2012.
Source: FNWB S-1
Given its thrift roots, the franchise has historically been a residential lender. Changes in market conditions have led to changes in business strategy the bank is transitioning into a more robust commercial lending platform to better service its consumer and business clients.
FNWB is executing its organic growth plans via a de novo branching strategy. It plans to open four new branches in the Puget Sound market over the next three years post conversion. The bank
is also growing its lending exposure outside core markets via new originations and loan purchases and participations, given slower growth in the primary market. The bank has no immediate plans to grow via acquisitions.
The franchise is well situated with nine branches and one LPO in a deposit-rich and economically improving marketplace. The state of WA has 80 institutions and $122 billion in total deposits, signifying considerable organic growth potential for the franchise (increasing scarcity value) as well as future consolidation activity.
Moreover, large, stable employer bases in relatively non-cyclical industries characterize the markets in which the bank conducts business.
There are no restrictions or orders in place regarding capital management or M&A apart from standard capital adequacy rules. The company is subject to the standard post conversion 1 year restriction on
dividends and share repurchases and 3 year restriction on being acquired.
Loan Portfolio & Credit Quality
The loan portfolio is predominately 1-4 Family and CRE today (see portfolio complexion below as of 12/31/14, source: SNL Financial). The bank has been adding 30-year fixed rate mortgages to the portfolio
in an effort to enhance NIM. Going forward, the vision is to better diversify the mix into commercial lending (C&I and CRE).
The bank has improved credit quality over time. Credit performance has improved post crisis, as legacy management has completely turned over since 2011. Legacy credit metrics are shown below from 2008-2014. Nonperforming assets have declined over 22% from their peak in 2011 and are now under 2% of assets as of YE2014. This has been driven by the decline in real estate nonaccruals, the major category, which have dropped over 50% since their peak. Reserve coverage has steadily increased from ~30% of NPLs in 2009-2011 to over 50% at YE2014.

Source: SNL Financial.
Deposit Base
The bank has an excellent deposit franchise with > 90% core deposits and relatively shorter-duration CDs. The all-in average cost is 25 basis points. We expect this to only improve as the bank executes on its commercial banking strategy.
Source: SNL Financial.
Sensitivity to Market Risk
The B/S is liability sensitive. Management is actively trying to reposition the B/S into more commercial loans (from 20% in 2010 to 38% in 2014, +$100M). However, they have been adding 30-year fixed-rate mortgages since 2012 to the portfolio in an effort to boost Net Interest Income. Good deposit franchise with 90% core, all-in weighted average rate 25bps, most CDs are short term due 2015. Management is thus using B/S tools to manage market risk as it executes on its commercial banking strategy.
The Puget Sound economy is characterized by less boomand bust than other parts of the country, given the region’s large employer base in basic industries and less cyclical businesses. Key demographic data points are shown below by county:
The branch network is located in high household income areas of the market:

Source: SNL Financial.
Competitive Positioning
The top 30 competitors by deposit market share in the state of Washington are presented in the table below. This is a fragmented market with 80 total institutions and $122B in total deposits. FNWB ranks 23rd on this list. There are many regional acquirers looking for bolt on transactions including: Washington Federal (WAFD), Banner (BANR), Columbia (COLB), Heritage Financial (HFWA), Umpqua (UMPQ), and HomeStreet (HMST.)