NORTHRIM BANCORP INC annual report, FY2022

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Northrim BanCorp, Inc. — FY2022 Form 10-K

Reporting period: Year ended December 31, 2022; filed March 6, 2023. Northrim is an Alaska-based bank holding company operating Community Banking and Home Mortgage Lending businesses. It reported $2.67 billion in assets and $2.39 billion in deposits at year-end.

Financial and operating results

  • Earnings: Net income was $30.7 million, down 18% from $37.5 million in 2021. Diluted EPS was $5.27 versus $6.00. Return on average assets was 1.16% (1.54% in 2021); return on average equity was 13.68% (15.68%).
  • Revenue and margin: Net interest income increased 18% to $95.1 million from $80.8 million; net interest margin rose to 3.85% from 3.58%. Total other operating income fell 35% to $34.1 million, principally as mortgage banking income declined 49% to $21.6 million.
  • Segment results: Community Banking net income increased 16% to $31.6 million, supported by higher core loan and investment yields. Home Mortgage Lending recorded a $0.9 million loss, versus $10.3 million income in 2021; mortgage production fell to $585.5 million from $1.12 billion as rates rose.
  • Credit: Provision for credit losses was $1.8 million, compared with a $4.1 million benefit in 2021. Nonperforming loans, net of government guarantees, declined to $6.4 million from $10.7 million; net charge-offs were negative $1.1 million (net recoveries). The loan allowance was $13.8 million, or 0.92% of portfolio loans, versus $11.7 million, or 0.83%.
  • Balance sheet and liquidity: Total assets declined 2% to $2.67 billion. Loans increased 6% to $1.50 billion; loans excluding PPP grew 15%. Deposits declined 1% to $2.39 billion. Cash and cash equivalents fell to $259.4 million from $645.8 million. Management reported $570.7 million of liquid assets and $1.24 billion of borrowing capacity, and considered liquidity sufficient for the foreseeable future.
  • Cash flow: Operating activities provided $78.1 million, down from $112.0 million. Investing activities used $405.6 million, mainly for securities purchases; financing activities used $59.0 million, including deposit outflows, dividends and share repurchases.
  • Capital and debt: The Bank remained “well capitalized”; its year-end common equity Tier 1 ratio was 10.59%, total risk-based capital ratio 11.42%, and leverage ratio 7.42%. Borrowings were $14.1 million and junior subordinated debentures were $10.3 million. Shareholders’ equity was $218.6 million, down from $237.8 million, partly reflecting a $27.4 million decline in the fair value of available-for-sale securities and $14.2 million of repurchases.

Material changes and notable items

  • Rising interest rates lifted asset yields and net interest margin, but reduced mortgage originations and mortgage banking income. Average interest-bearing asset yield increased to 4.06% from 3.74%; interest expense also rose.
  • Available-for-sale securities increased to $677.0 million fair value from $426.7 million. Their $42.1 million gross unrealized loss at year-end was attributed to noncredit factors, primarily rate changes; management said it did not expect to sell the securities before recovery or maturity. Accumulated other comprehensive loss, net of tax, was $29.1 million.
  • PPP loans outstanding fell to $7.1 million from $118.2 million; the company reported that 99% of originated PPP loans had been forgiven by year-end.
  • COVID-related loan accommodations declined to $1.0 million from $49.2 million at year-end 2021; the remaining accommodation was scheduled to resume normal payments in Q1 2023.
  • The company paid $10.6 million in dividends in 2022 and repurchased 333,724 shares at an average $42.42. In January 2023, the board authorized repurchases of up to an additional 285,000 shares; in February it declared a $0.60-per-share dividend.

Outlook, risks and contingencies

  • Management said it intends to grow market share and the balance sheet in 2023, particularly through commercial lending and customer deposit relationships. It expected elevated liquidity to persist into 2023 and potentially beyond, and intended to maintain Bank capital above well-capitalized thresholds. The filing gives no quantified earnings or revenue guidance.
  • Key risks include concentrated exposure to Alaska and real estate (about 69% of loans excluding PPP were real-estate secured; commercial real estate was about 55% of the Bank’s portfolio), large borrower relationships, interest-rate and deposit-cost sensitivity, inflation and borrower stress, and mortgage-market volatility. Oil, tourism, fishing and other regional industries are relevant credit exposures.
  • Unfunded commitments totaled $497.7 million, including $465.0 million of commitments to extend credit. Management did not expect all commitments to be drawn at once. A government guarantee related to an OREO property sold in December was not recognized because the amount was uncertain; proceeds were expected in 2023.
  • Homestate Mortgage, in which Northrim held a 30% interest, ceased operations in February 2023. Northrim reported a $556,000 investment at year-end and expected recovery of its book value through liquidation; it considered the matter not material to consolidated results.
  • Management considered pending banking regulation, cybersecurity and third-party service-provider risks, climate and severe-weather events, and the transition from LIBOR among material uncertainties. Legal proceedings were not expected to have a material effect. The auditor issued unqualified opinions on the financial statements and internal control; the allowance for credit losses was identified as a critical audit matter.

Important facts for investors to verify

  • Whether deposit balances, funding costs and liquidity remain stable as rates and competition evolve.
  • Whether loan growth and credit quality hold up, especially in commercial real estate and concentrated Alaska industries; review allowance assumptions and classified loans.
  • Whether securities unrealized losses remain recoverable without forced sales and how they affect capital and tangible book value.
  • Whether mortgage production and Home Mortgage Lending profitability recover, and the financial effect of Homestate’s wind-down.
  • How actual 2023 results compare with management’s stated growth and capital intentions; confirm future dividends and repurchases remain supported by capital and regulatory limits.