Northrim BanCorp, Inc. — Q1 2023 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2023, with balance-sheet comparisons to December 31, 2022. Northrim operates Community Banking and Home Mortgage Lending, primarily in Alaska.
Key financial results
| Metric | Q1 2023 | Comparable / prior date |
|---|---|---|
| Net interest income | $25.0 million | $19.3 million in Q1 2022; up 30% |
| Net interest margin | 4.22% | 3.18% in Q1 2022 |
| Net income | $4.8 million | $7.2 million in Q1 2022 |
| Diluted earnings per share | $0.84 | $1.20 in Q1 2022 |
| Return on average assets | 0.76% | 1.12% in Q1 2022 |
| Return on average equity | 8.73% | 12.36% in Q1 2022 |
| Total assets | $2.580 billion | $2.674 billion at Dec. 31, 2022 |
| Loans | $1.535 billion | $1.502 billion at Dec. 31, 2022; up 2% |
| Deposits | $2.296 billion | $2.387 billion at Dec. 31, 2022; down 4% |
| Cash and cash equivalents | $139.2 million | $259.4 million at Dec. 31, 2022 |
| Allowance for credit losses on loans | $14.2 million | $13.8 million at Dec. 31, 2022 |
| Shareholders’ equity | $224.4 million | $218.6 million at Dec. 31, 2022 |
- Interest and dividend income rose to $29.8 million from $20.1 million in Q1 2022; interest expense increased to $4.8 million from $0.8 million, principally reflecting higher deposit costs.
- Average cost of interest-bearing deposits was 1.20%, versus 0.15% a year earlier. The average rate on new loans booked during the quarter was 6.35%, versus 4.48%.
- Q1 operating cash flow was $4.3 million; investing cash outflow was $28.7 million and financing cash outflow was $95.8 million. The financing outflow principally reflected deposit withdrawals, dividends and share repurchases.
- Total liabilities were $2.356 billion, including $14.0 million of borrowings and $10.3 million of junior subordinated debentures. The Bank had no discount-window advances outstanding.
- At March 31, regulatory capital ratios were above well-capitalized thresholds: Bank total risk-based capital 11.45%, common equity tier 1 10.60%, and leverage 7.79%.
Material changes and management commentary
- Net income fell 33% year over year. Management attributed the decline mainly to lower Home Mortgage Lending earnings and higher personnel costs, partly offset by stronger Community Banking net interest income. Q1 2022 included $2.0 million of nonrecurring keyman life-insurance proceeds.
- Mortgage banking income declined to $2.0 million from $7.0 million as higher mortgage rates reduced production and yields on loans sold. The Home Mortgage Lending segment reported a $2.7 million net loss, compared with $0.8 million of net income in Q1 2022.
- Other operating expense increased 11% to $23.5 million, including higher personnel expense and costs associated with branch and mortgage-office expansion. The company opened its 19th Alaska branch in Kodiak in Q1.
- Uninsured deposits were $981.3 million, or 43% of deposits, at quarter-end, down from 46% at year-end. Sixteen customers each holding more than $10 million accounted for $346.9 million, or 15% of deposits. Management reported no unusual deposit activity in Q1.
- Management reported $502.0 million of liquid assets, investments and loans maturing within one year, plus $1.201 billion available under existing borrowing lines. It said liquidity sources were sufficient for the foreseeable future and that it had not borrowed under the Bank Term Funding Program in Q1.
- Available-for-sale securities had $34.2 million of gross unrealized losses at quarter-end; held-to-maturity securities had $4.2 million of gross unrealized losses. Management attributed these losses primarily to interest rates, said it did not intend to sell the securities, and did not expect to need to sell them before recovery or maturity.
Credit, risks, outlook and contingencies
- Credit-loss provision was $360,000, versus a $150,000 benefit in Q1 2022. Net nonperforming loans were $6.1 million and total nonperforming assets, net of government guarantees, were $6.4 million. Classified loans totaled $37.2 million before government guarantees; potential problem loans were $1.4 million.
- Management cited risks from further interest-rate changes, borrower stress, economic and real-estate weakness, and the Alaska economy. It specifically warned that negative developments and customer confidence concerns affecting regional banks could prompt deposit outflows, affecting liquidity, loan funding, margins, capital and earnings.
- The filing warns that a forced sale of securities could crystallize losses and impair capital. Management also anticipated increased regulatory scrutiny and possible new requirements for regional banks, which could raise costs.
- Management provided no specific earnings or revenue guidance. It expects continued Bank dividends to the holding company during the remainder of 2023, subject to regulatory limits, and intends to maintain Bank capital ratios above well-capitalized requirements.
- The company repurchased 27,887 shares for $1.3 million during Q1 and had 257,113 shares remaining under its authorization. Routine debtor-creditor litigation was not expected to materially affect the company.
Most important facts for investors to verify
- Whether deposit trends, uninsured balances and large-account concentrations remain stable after quarter-end.
- Whether higher deposit costs continue to pressure net interest margin as rates and funding competition change.
- Liquidity availability and collateral requirements for reported borrowing lines, especially under stressed conditions.
- Market value and potential realized impact of securities losses if liquidity needs require asset sales.
- Credit quality trends in commercial real estate and other concentrated lending exposures, including nonperforming and classified loans.
- Whether mortgage production, mortgage banking income and expanded operating costs improve or continue to weigh on earnings.