Northrim BanCorp, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Unaudited consolidated results cover Community Banking and Home Mortgage Lending. Unless otherwise indicated, amounts below are in U.S. dollars.
Financial performance and position
- Q3 earnings: Net income was $10.1 million, up 14% from $8.9 million a year earlier; diluted EPS was $1.76 versus $1.42. Nine-month net income was $22.1 million, down 25% from $29.4 million; diluted EPS was $3.79 versus $4.69.
- Revenue and margins: Q3 total revenue (net interest income plus other operating income) rose 6% to $35.0 million. Nine-month revenue fell 7% to $95.1 million. Net interest income increased 29% to $26.3 million in Q3 and 15% to $67.8 million for nine months. Net interest margin was 4.22% for Q3 and 3.69% for nine months, up 77 and 9 basis points year over year, respectively.
- Drivers: Higher interest income on loans, investments, and bank deposits supported net interest income. Mortgage banking income declined to $5.7 million in Q3 from $9.9 million, and to $18.6 million for nine months from $34.9 million, amid higher mortgage rates and lower production. Nine-month results included $2.0 million of key-person life insurance proceeds.
- Credit costs: The company recorded a benefit for credit losses of $353,000 in Q3 and $40,000 for nine months, compared with benefits of $1.1 million and $3.0 million, respectively, in 2021. The loan allowance was $12.0 million at September 30, 2022. Management cited a higher forecast unemployment rate as a factor in the Q3 allowance increase.
- Balance sheet: Total assets were $2.72 billion, down slightly from year-end 2021. Loans were $1.41 billion, down 0.5%; excluding PPP loans, they grew 8% to $1.40 billion. Deposits rose 1% to $2.44 billion. Shareholders’ equity was $210.7 million, versus $237.8 million at year-end, reflecting large securities-related accumulated comprehensive losses and share repurchases, partly offset by earnings.
- Liquidity and debt: Cash and cash equivalents were $406.9 million, down from $645.8 million at year-end as funds shifted into securities. Borrowings were $14.2 million, plus $10.3 million of junior subordinated debentures. The company reported $651.5 million of liquid assets and $1.263 billion available under borrowing lines; no Federal Reserve discount-window advances were outstanding. Management said liquidity was sufficient for foreseeable needs.
- Cash flow and capital: For the first nine months, operating cash flow was $40.8 million, investing cash outflow was $275.4 million, and financing cash outflow was $4.4 million. The investing outflow primarily reflected securities purchases. The Bank’s total risk-based, Tier 1, common equity Tier 1, and leverage ratios were 11.72%, 10.96%, 10.97%, and 7.55%, respectively; management said the company and Bank exceeded applicable requirements.
Material changes and notable items
- Q3 earnings improved year over year as higher Community Banking net interest income outweighed lower Home Mortgage Lending earnings. Nine-month earnings declined primarily because of lower mortgage production.
- Available-for-sale securities grew to $651.9 million from $426.7 million at year-end. Their gross unrealized losses were $45.4 million at September 30, compared with $4.5 million at year-end; accumulated other comprehensive loss, net of tax, reached $31.4 million. Management attributed the losses primarily to interest-rate and market changes, said it did not intend to sell the securities, and expected not to need to sell before recovery.
- Nonperforming assets, net of government guarantees, fell 28% to $10.8 million from $15.0 million at year-end. Net nonperforming loans declined to $6.5 million from $10.7 million. Classified loans, net of government guarantees, were $13.4 million.
- COVID-related loan accommodations declined to $8.4 million from $49.2 million at year-end; the remaining accommodations were scheduled to return to normal principal and interest payments in Q4 2022. TDRs totaled $8.1 million; no newly restructured loans were reported in the first nine months of 2022.
- The company repurchased 333,724 shares during the first nine months; no repurchases occurred in Q3. It paid a Q3 dividend of $0.50 per share, up from $0.38 a year earlier.
Outlook, risks, and contingencies
- No quantified earnings or growth guidance is provided. Management expected interest rates to continue rising through year-end 2022 and into the first half of 2023, and said elevated liquidity could persist through the remainder of 2022 and potentially into subsequent years.
- Management described Alaska’s economy as recovering in employment and tourism, with high oil prices, but noted inflation, rising rates, and declining home sales. The filing highlights risks from rate changes, inflation, economic conditions in Alaska, loan quality, competition, and uncertainty in mortgage lending and the broader economy.
- Interest-rate exposure is significant: 75% of portfolio loans were adjustable rate, including 25% subject to rate increases in Q4; 33% of earning assets were also subject to Q4 rate increases when relevant indices rose. Deposit pricing and funding costs may change as rates rise.
- Other risks include the $466.6 million of unfunded loan and letter-of-credit commitments, $130.4 million of certificates of deposit maturing within 12 months, and sensitivity of mortgage servicing rights to prepayment and discount-rate assumptions. The company also had LIBOR-linked assets, liabilities, and derivatives and was preparing for the benchmark transition.
- Management said ordinary-course legal matters were not expected to materially affect the company. Risk factors were reported as not materially changed from the 2021 Form 10-K. Disclosure controls were considered effective, with no material change in internal control over financial reporting reported.
Important facts for investors to verify
- Whether higher rates continue to support net interest income and margin, and how quickly deposit costs respond.
- Whether mortgage production and mortgage banking income weaken further as rates rise and home sales slow.
- Whether securities-related unrealized losses remain unrealized, and how they affect capital and liquidity if securities must be sold.
- Trends in classified and nonperforming loans, allowance adequacy, and the return of COVID-accommodated loans to regular payments.
- Deposit stability, upcoming certificate maturities, unfunded commitments, and the availability of stated borrowing capacity.