NRIM - Northrim BanCorp: Q3 2023 Shows Strong Resilience

2023-11-03 09:03:27 ET

Summary

• Northrim BanCorp released a strong Q3 2023 earnings report, beating EPS estimates by $0.23.
• The loan portfolio grew by 3.67% over the previous quarter and 22% over last year despite the challenging macroeconomic environment.
• The bank's net interest margin is high thanks to a geographic competitive advantage.

Northrim BanCorp (NRIM) released a strong Q3 2023 where EPS reached $1.48 , a whopping $0.23 above estimates. The net interest margin rebounded after a series of struggling quarters, and shareholders were rewarded through both dividends and buybacks.

Compared to many other regional banks, Northrim has shown more resilience.

Loan portfolio

The loan portfolio reached $1.71 billion in Q3 2023 showing a growth of 3.67% over the previous quarter and 22% over last year. Although the macroeconomic environment is unfavorable for both businesses and families to take on debt, this has not stopped Northrim's growth.

The most important segments of this portfolio are commercial, non-owner occupied CRE, and owner occupied CRE; weighing 39%, 27%, and 15%, respectively. Among the three segments, the one of greatest concern is non-owner occupied CRE being typically very cyclical. In any case, Northrim has reduced the riskiness of this segment by diversifying as much as possible the markets in which it has lent.

Overall, the average yield of the loan portfolio has gradually increased and reached 6.61% this quarter.

This is a rather high figure, justified by the geographic location in which this bank operates. In fact, Northrim operates primarily in Alaska and has a dominant market share. Suffice it to say that, together with three other banks, Northrim has 90% of the deposit market share . So, given this competitive advantage, these banks can afford to charge higher interest rates than a bank operating in a large city where there is a lot of competition. Be that as it may, they are almost obliged to charge high interest rates, since they face higher operating costs than a bank operating under normal conditions. To give you an idea, there are six branches that can only be reached by boat or plane.

So far, asking for higher rates has not resulted in any increase in nonperforming loans; on the contrary, since 2021 the quality of loans has improved more and more.

Finally, let us now look at portfolio loan maturities.

• 33% of loans expire or reprice in the next three months.
• 12% of loans mature or reprice within three to 12 months.
• 17% of loans mature or reprice within one to two years.
• 18% of income-earning assets reprice immediately if the prime index or other rates change.

So, within a year almost half of the loans will mature, and Northrim will have the opportunity to reinvest the principal at a higher interest rate, assuming the Fed holds interest rates constant. This is a potentially important catalyst for net interest margin growth.

Deposits and net interest margin

Total deposits reached $2.42 billion, up 5.47% from the previous quarter and virtually unchanged from last year. Again, as with loan yield, there is a competitive advantage here, reflected in the low cost of deposits. In fact, the YTD cost of interest-bearing deposits is only 1.51%.

What's more, non-interest-bearing deposits, although decreased since 2022, still have a very high weight in total deposits, 31%. Overall, a low cost of funds and high yield on loans are the two components that allow this bank to have an outlier net interest margin.

In the last quarter, it was 4.15%, up one basis point from the previous quarter. This is a very positive result, not so much because of the improvement itself, but because it could mean that the bottom of the net interest margin has already been reached. While most regional banks hope to improve profitability by early 2024, in Northrim's case this process seems to have already begun.

Equity and shareholder remuneration

In addition to a high net interest margin, this bank has also been able to ensure a steady increase in tangible book value per share. Today we are at $37.72, a marked improvement from $35.24 at the end of 2022. Let us now look at shareholder remuneration.

The current dividend yield is 5.78%, and over the past 10 years, the dividend has achieved gradual growth that has accelerated in recent years. The 3 Y dividend growth rate ((CAGR)) has been 19.14% and does not seem to be slowing down. This year a dividend of $2.40 per share is expected; last year it was only $1.82. In short, while many regional banks are thinking about preserving as much liquidity as possible to weather a difficult period, Northrim seems to be operating in the opposite way. But there is more.

Over the past four years, 20% of outstanding shares have been bought back, and the buyback has not stopped this quarter either. Coupled with the 100% increase in dividend per share over the past four years, Northrim shareholders should be more than satisfied.

Conclusion

While everyone is worried about a possible recession, Northrim continues to grow and increasingly remunerate its shareholders. Its geographic location gives it a strategic competitive advantage that in a sense is giving it an edge over banks operating in larger cities. Its customers cannot get too high of interest on deposits since there is very little competition, so they are almost forced to accept the terms of the four major banks.

Yields on loans continue to increase but nonperforming loans continue to decline. The net interest margin is very high and is already catching up. Finally, the dividend continues to rise very fast and the buybacks are not stopping. Overall, I evaluate this Q3 2023 in a positive way.

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