Business context and reporting period
Northrim BanCorp, Inc., an Alaska bank holding company with Community Banking and Home Mortgage Lending segments, reported unaudited results for the three months ended March 31, 2024. Comparisons below are with the first quarter of 2023 for income and cash flow, and December 31, 2023 for balance-sheet measures. Dollar amounts are in millions unless stated otherwise.
Financial performance and condition
- Earnings: Net income was $8.2 million, up from $4.8 million; diluted EPS was $1.48 versus $0.84. Annualized return on average assets was 1.19% (0.76% prior year) and return on average equity was 13.84% (8.73%).
- Interest and margins: Net interest income rose 6% to $26.4 million. Net interest margin was 4.16%, compared with 4.22%; the MD&A also describes the decline as 8 basis points, while those stated rates imply 6 basis points. Average interest-bearing deposit cost increased to 2.13% from 1.20%.
- Other income and expenses: Other operating income increased 60% to $7.8 million, including mortgage banking income of $4.0 million versus $2.0 million. Total operating expenses were $23.6 million versus $23.5 million. Provision for credit losses was $0.15 million versus $0.36 million. Effective tax rate was 21.94%, versus 20.44%.
- Loans and credit: Loans were $1.811 billion, up 1% from year-end, mainly on commercial real estate and consumer mortgage growth. Allowance for credit losses was $17.5 million, or 0.97% of loans. Net nonperforming loans were $5.3 million; nonperforming assets were $5.4 million. Management identified $1.9 million of potential problem loans, unchanged from year-end.
- Deposits, liquidity and debt: Deposits fell 2% to $2.434 billion, which management attributed primarily to seasonality. Uninsured deposits were approximately $989.5 million, or 41% of deposits; 19 customers held $459.9 million, or 19% of deposits. Cash and cash equivalents were $80.4 million. The company reported $515.6 million of liquid assets, including investments and loans maturing within one year, plus $712.3 million available under existing borrowing lines. Borrowings were $13.6 million; junior subordinated debentures were $10.3 million.
- Capital and securities: Company and Bank total risk-based capital ratios were 12.47% and 11.02%; leverage ratios were 9.01% and 7.87%. Management stated both met applicable capital requirements for a well-capitalized institution. Available-for-sale securities had $17.2 million of accumulated unrealized losses, net of tax; held-to-maturity securities had $2.4 million of unrealized losses, net of tax, not recorded in equity.
- Cash flow and shareholder returns: Operating cash flow was negative $5.5 million, investing cash flow positive $22.6 million and financing cash flow negative $55.2 million. Cash declined $38.2 million during the quarter. The quarterly dividend was $0.61 per share; the company repurchased 15,034 shares.
Material changes versus comparable periods
- Net income increased $3.4 million year over year, principally due to higher mortgage banking income and net interest income, lower credit-loss provision, a favorable change in marketable equity securities, and a $0.392 million gain related to an OREO sale.
- Loan interest income rose, but higher deposit interest expense partly offset that benefit; net interest margin declined despite higher net interest income.
- Mortgage lending improved: the Home Mortgage Lending segment reported net income of $0.16 million, compared with a $2.73 million loss in Q1 2023. Community Banking net income was $8.04 million versus $7.56 million.
- Available-for-sale securities declined to $592.5 million from $637.9 million at year-end, primarily reflecting maturities and calls. Total deposits decreased $51.0 million; loans increased $21.6 million.
Outlook, commentary and risks
No numerical earnings or growth guidance is provided. Management expects liquidity sources to be sufficient for the foreseeable future and expects the Bank to continue paying dividends to the holding company during the remainder of 2024, subject to regulatory requirements. Management does not expect securities with unrealized losses to need to be sold before recovery or maturity. It notes that actual results may differ materially from forward-looking statements.
Key stated risks include higher interest rates and funding costs, deposit withdrawals or draws on unfunded commitments, changes in securities values, borrower stress, credit quality and allowance-estimation uncertainty, commercial and residential real estate conditions, Alaska’s economy and industry exposures, regulatory changes, competition, and cybersecurity threats. Unfunded commitments to fund loans and letters of credit totaled $483.0 million; $324.2 million of certificates of deposit were due to mature within 12 months. Management reported no material change in risk factors or market-risk disclosures. Routine legal proceedings are not expected to have a material effect.
Important facts for investors to verify
- Reconcile the reported net interest margin change: the 4.16% and 4.22% figures imply a 6-basis-point decline, while one MD&A passage says 8 basis points.
- Track deposit retention and pricing, especially the 41% uninsured-deposit share, concentrated large-account balances, and certificates maturing within a year.
- Monitor loan performance, classified and nonaccrual exposures, and whether the allowance remains adequate as economic forecasts and portfolio composition change.
- Assess the effect of securities unrealized losses and low-yield securities maturing over the next two years on capital, liquidity and future interest income.
- Compare subsequent mortgage banking results and net interest margin with Q1, given mortgage production’s contribution to earnings and rising deposit costs.