8-K: Northrim BanCorp Reports $6.6 Million Profit in Q4 2023, Cites Loan Growth and Market Share Gains

Northrim BanCorp announced a net income of $6.6 million for the fourth quarter of 2023, driven by loan and deposit growth, but impacted by decreased mortgage lending income.

Summary

• Northrim BanCorp reported a net income of $6.6 million, or $1.19 per diluted share, for the fourth quarter of 2023, a decrease from $8.4 million in the previous quarter and $8.6 million in the same quarter of the prior year.
• The full year 2023 net income was $25.4 million, or $4.49 per diluted share, down 17% from $30.7 million in 2022.
• The decrease in Q4 profitability was primarily due to lower net income in the Home Mortgage Lending segment, driven by a decline in mortgage originations and a decrease in the fair value of mortgage servicing rights.
• Increased interest expenses, partially offset by higher interest income, and increased personnel costs also contributed to the decrease in Q4 profits compared to the same quarter of the prior year.
• Loan and deposit growth in the Community Banking segment supported 2023 earnings, but were offset by increased operating expenses and a higher provision for credit losses.
• The Home Mortgage Lending segment experienced a $2.5 million loss in 2023, compared to a $897,000 loss in 2022.
• Dividends per share remained at $0.60 in Q4 2023, a 20% increase from $0.50 in Q4 2022.
• Net interest income increased 1% to $26.7 million in Q4 2023 compared to the previous quarter, but decreased 2% compared to the same quarter of the prior year.
• The net interest margin on a tax equivalent basis (NIMTE) was 4.12% for Q4 2023, a decrease from 4.21% in the previous quarter and 4.36% in the same quarter of the prior year.
• Portfolio loans were $1.79 billion at the end of 2023, up 4% from the previous quarter and 19% from the previous year.
• Total deposits were $2.49 billion at the end of 2023, up 2% from the previous quarter and 4% from the previous year.
• The average cost of interest-bearing deposits was 2.00% in Q4 2023, up from 1.75% in the previous quarter and 0.56% in the same quarter of the prior year.
• The net unrealized loss on the available for sale investment portfolio was $17.4 million at the end of 2023, down from $26.5 million in the previous quarter.

Sentiment

Score: 5

Explanation: The sentiment is neutral to slightly negative. While the company shows growth in loans and deposits, the decrease in net income and net interest margin, along with losses in the mortgage segment, temper the positive aspects. The company is facing challenges due to rising interest rates and increased expenses.

Positives

• Northrim experienced solid loan and deposit growth, supporting earnings in the Community Banking segment.
• The company's deposit market share in Alaska increased to 15.04%, indicating successful expansion efforts.
• The weighted average interest rate for new loans increased to 8.03%, improving loan yields.
• The company maintained enhanced liquidity to ensure stability in various economic scenarios.
• The net unrealized loss on the available for sale investment portfolio decreased by $9.1 million in Q4 2023.
• The company continues to maintain capital levels in excess of the requirements to be categorized as well-capitalized.
• The company has a consistent lending approach throughout the economic cycles.

Negatives

• Net income decreased in Q4 2023 compared to both the previous quarter and the same quarter of the prior year.
• The Home Mortgage Lending segment experienced a $2.5 million loss for the full year 2023.
• The net interest margin (NIMTE) decreased in Q4 2023 compared to both the previous quarter and the same quarter of the prior year.
• The average cost of interest-bearing deposits increased significantly, impacting profitability.
• Mortgage originations declined, negatively affecting the Home Mortgage Lending segment.
• Other operating expenses increased in Q4 2023, primarily due to increased salaries and personnel expenses.
• Nonperforming assets increased slightly to $5.8 million at the end of 2023.

Risks

• Potential further increases in interest rates could impact profitability.
• The value of securities held in the investment portfolio could fluctuate.
• Declines in the value of commercial and residential real estate markets could affect loan quality.
• High unemployment rates, inflationary pressures, and slowdowns in economic growth could impact the company's performance.
• Changes in banking regulations or actions by bank regulators could pose challenges.
• Financial stress on borrowers due to higher rates or an uncertain economic environment could increase credit losses.
• The general condition of the Alaska economy could impact the company's performance.
• Cyber-security risks, including security breaches, denial of service attacks, hacking, and identity theft, could pose a threat.
• The company's ability to maintain or expand its market share or net interest margin is not guaranteed.

Future Outlook

The company expects its net interest margin to remain relatively stable, with increases in earning-asset yields offset by increases in deposit costs. Management anticipates that the volume of mortgages that the Bank will purchase from Residential Mortgage will continue to decrease, as they look to sell a larger percentage of production on the secondary market going forward.

Management Comments

• Joe Schierhorn, President and Chief Executive Officer, stated that they are pleased with the 2023 results and have continued to gain market share.
• Joe Schierhorn noted that market share gains have fueled solid loan and deposit growth and allowed them to maintain enhanced liquidity.
• Jed Ballard, Chief Financial Officer, expects the net interest margin to remain relatively stable.
• Jed Ballard noted that purchases of mortgages by Northrim Bank was a long-term, strategic decision to deploy excess liquidity, reduce asset sensitivity, and provide products to loan originators to market for increased production in this rising interest rate environment.
• Jed Ballard added that they are at their target for these mortgages of approximately 10% of their loan portfolio.

Industry Context

The report highlights the challenges faced by the banking industry, including rising interest rates and their impact on net interest margins and deposit costs. The company's focus on expanding its branch network and gaining market share reflects a competitive strategy in the regional banking sector. The company's performance is also influenced by the economic conditions in Alaska, particularly in the oil and gas and real estate sectors.

Comparison to Industry Standards

• Northrim's NIMTE of 4.12% in Q4 2023 is above the peer average of 3.23% posted by the S&P U.S. Small Cap Bank Index as of September 30, 2023, for banks with total market capitalization between $250 million and $1 billion.
• The company's loan growth of 19% year-over-year is significant, suggesting a strong performance compared to industry averages.
• The increase in the average cost of interest-bearing deposits to 2.00% reflects a broader trend in the banking industry due to rising interest rates.
• The decrease in mortgage originations and the loss in the Home Mortgage Lending segment are consistent with industry trends, as higher interest rates have dampened mortgage activity.
• The company's focus on expanding its branch network and gaining market share is a common strategy among regional banks to increase deposits and loan volumes.

Stakeholder Impact

• Shareholders may be concerned about the decrease in net income and the loss in the mortgage segment.
• Employees may be affected by the increase in salaries and other personnel expenses.
• Customers may benefit from the company's expansion efforts and increased market share.
• Creditors may be impacted by the company's loan growth and asset quality.

Next Steps

• The company plans to open a branch in Homer later this year.
• Management anticipates that the volume of mortgages that the Bank will purchase from Residential Mortgage will continue to decrease, as they look to sell a larger percentage of production on the secondary market going forward.

Key Dates

Keywords

Northrim BanCorp, Earnings, Net Income, Mortgage Lending, Community Banking, Loan Growth, Deposit Growth, Interest Rates, Alaska Economy, Financial Results