Business context and reporting period
Northrim BanCorp, Inc. filed this unaudited Form 10-Q for the quarter ended September 30, 2023. The Alaska-based bank holding company operates Community Banking, with 19 branches in Alaska, and Home Mortgage Lending.
Financial results and key metrics
| Metric | Q3 2023 / Sep. 30, 2023 | Comparison |
|---|---|---|
| Net income | $8.4 million; diluted EPS $1.48 | Q3 2022: $10.1 million; $1.76 |
| Net interest income | $26.4 million | Q3 2022: $26.3 million |
| Net interest margin | 4.15% | Down 7 basis points year over year |
| Total assets | $2.79 billion | $2.67 billion at Dec. 31, 2022 |
| Loans | $1.72 billion | Up 15% from Dec. 31, 2022 |
| Deposits | $2.43 billion | Up 2% from Dec. 31, 2022 |
| Borrowings | $63.8 million | $14.1 million at Dec. 31, 2022 |
| Shareholders’ equity | $225.3 million | $218.6 million at Dec. 31, 2022 |
For the nine months ended September 30, net income was $18.8 million (diluted EPS $3.30), versus $22.1 million ($3.79) in 2022. Net interest income rose 13% to $76.5 million and net interest margin increased 48 basis points to 4.17%. Return on average assets was 0.95% and return on average equity was 11.11% for the nine-month period.
Q3 total interest and dividend income was $34.4 million, compared with $27.6 million a year earlier; interest expense increased to $8.1 million from $1.2 million. Q3 other operating income declined to $8.0 million from $8.7 million, while operating expense rose to $22.9 million from $22.3 million. The nine-month provision for credit losses was $3.0 million, versus a $40,000 benefit in 2022.
Cash and cash equivalents were $111.2 million, down from $259.4 million at year-end 2022. For the first nine months, operating cash flow was negative $11.1 million, investing cash flow negative $210.7 million, and financing cash flow positive $73.7 million. Management reported $517.8 million in liquid assets, investments and loans maturing within one year, plus $717.2 million available to borrow under existing credit lines.
Loan allowance for credit losses was $16.5 million. Nonperforming assets, net of government guarantees, were $5.2 million; net nonperforming loans were $5.1 million. Regulatory capital ratios exceeded well-capitalized thresholds: the Bank reported total risk-based capital of 10.97%, common equity tier 1 of 10.07%, and a leverage ratio of 7.76%.
Material changes versus prior periods
- Q3 net income fell about 17% year over year, primarily reflecting a $1.5 million increase in credit-loss provision, lower mortgage banking income and higher personnel costs; an OREO-related gain partly offset these items.
- Nine-month net income declined about 15%. Lower mortgage banking income and higher credit-loss expense were partly offset by higher net interest income and purchased-receivable income. The 2022 comparison also included $2.0 million of keyman life-insurance proceeds.
- Mortgage banking income was $4.4 million in Q3 versus $5.7 million; for nine months it was $10.3 million versus $18.6 million, reflecting lower mortgage production amid higher rates.
- Loan growth supported interest income, but deposit repricing significantly raised funding costs. The average cost of interest-bearing deposits was 1.75% in Q3, versus 0.28% a year earlier.
- Available-for-sale securities had $37.1 million of gross unrealized losses at September 30, primarily attributed by management to interest-rate changes. Accumulated unrealized losses on available-for-sale securities, net of tax, were $26.5 million.
- Uninsured deposits were $999.5 million, or 41% of deposits, down from $1.1 billion, or 46%, at year-end 2022. Certificates of deposit increased to $290.9 million, with $182.0 million scheduled to mature within 12 months.
Outlook, commentary and risks
The filing provides no specific earnings or financial guidance. Management said available liquidity is sufficient for the foreseeable future and expects the Bank to continue meeting applicable well-capitalized requirements. A $50 million FHLB advance bearing a fixed 5.49% rate was due November 14, 2023. Management noted that approximately 74% of loans are variable-rate and that 18% of earning assets were subject to rate increases in Q4 when relevant indices rose.
Risks highlighted include further interest-rate changes and effects on securities values and deposit costs; borrower stress, credit quality and allowance estimates; real-estate values and economic growth; Alaska’s economic conditions and industry exposures; deposit withdrawals and commitment draws; regulatory changes; and cybersecurity and geopolitical risks. Unfunded loan and letter-of-credit commitments totaled $460.3 million. Potential problem loans were $2.2 million, compared with $1.6 million at year-end 2022. The company reported no material change in market-risk disclosures, no material change in internal controls, and no legal proceedings expected to materially affect its business or financial results.
Important facts for investors to verify
- Whether loan growth and asset quality remain sound, particularly given higher provisions, classified loans and potential problem loans.
- How deposit pricing, certificate maturities and uninsured-deposit levels affect funding costs and liquidity; monitor repayment of the $50 million FHLB advance.
- Whether interest-rate changes improve net interest income or instead pressure margins, securities values and mortgage activity.
- Whether mortgage banking income stabilizes after the marked year-over-year decline and whether personnel and expansion costs remain elevated.
- How the sizable securities unrealized losses and available borrowing capacity evolve, including collateral availability and any need to sell securities.
- Whether the company continues share repurchases and dividends while maintaining capital and liquidity buffers.