Northrim BanCorp, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Unaudited consolidated results cover Northrim BanCorp and its subsidiaries, operating in Community Banking and Home Mortgage Lending. The bank operated 17 Alaska branches.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net interest income | $22.2 million | $19.2 million | $41.5 million | $38.7 million |
| Total revenue (net interest income plus operating income) | $30.0 million | $33.3 million | $60.1 million | $68.7 million |
| Net income | $4.8 million | $8.3 million | $12.0 million | $20.5 million |
| Diluted EPS | $0.83 | $1.33 | $2.03 | $3.27 |
| Net interest margin | 3.67% | 3.48% | 3.42% | 3.68% |
| Return on average assets, annualized | 0.74% | 1.40% | 0.93% | 1.80% |
| Return on average equity, annualized | 8.58% | 14.10% | 10.51% | 17.68% |
At June 30, total assets were $2.611 billion, down from $2.725 billion at year-end 2021. Deposits were $2.335 billion, down 4% since year-end, primarily following the withdrawal of a large temporary deposit. Loans were $1.406 billion, down 1%; excluding Paycheck Protection Program (PPP) loans, loans grew 6% to $1.374 billion. Shareholders’ equity was $215.3 million, versus $237.8 million at year-end.
Six-month operating cash flow was $15.3 million; investing cash use was $218.8 million, mainly reflecting securities purchases; financing cash use was $105.4 million, principally from lower deposits and stock repurchases. Cash and cash equivalents ended the period at $336.9 million, compared with $645.8 million at December 31, 2021.
Borrowings were $14.3 million, plus $10.3 million of junior subordinated debentures. Management reported $578.8 million in liquid assets and $1.224 billion available under borrowing lines. Regulatory capital ratios exceeded well-capitalized thresholds: the Bank’s total risk-based capital ratio was 11.46%, CET1 was 10.76%, and leverage was 7.44%.
Material changes and drivers
- Q2 net income fell 43% year over year; first-half net income fell 41%. Management attributed the decline mainly to lower mortgage production and yields on loans sold, alongside higher Community Banking credit-loss provision and expenses.
- Mortgage banking income declined to $5.9 million in Q2 from $11.4 million, and to $12.9 million for the first half from $25.0 million, as higher mortgage rates reduced refinancing and production.
- Net interest income rose 16% in Q2, aided by higher loan, investment, and deposit yields and lower deposit interest expense. For the first half it rose 7%, but net interest margin contracted 26 basis points, reflecting a less favorable earning-asset mix, including more short-term deposits.
- Credit-loss provision was $463,000 in Q2 and $313,000 for the first half, versus benefits of $427,000 and $1.9 million in the corresponding 2021 periods. The loan allowance was $11.5 million at quarter-end.
- Available-for-sale securities increased to $612.0 million. Their gross unrealized losses were $27.9 million at June 30; accumulated other comprehensive loss, net of tax, widened to $19.3 million from $3.4 million at year-end, largely due to rising interest rates. Management said it did not intend, and believed it was not likely, to sell the securities before recovery or maturity.
- The Company received $2.0 million in key-person life insurance proceeds in the first half. Marketable equity securities generated unrealized losses of $810,000 in Q2 and $1.2 million for the first half.
Outlook, risks, and contingencies
- The filing provides no specific earnings or financial forecast. Management described Alaska job and income growth, tourism recovery, and high oil prices as supportive, but expected rapidly rising interest rates to temper the housing market in the second half of 2022. Management cited expectations that rates would continue rising into late 2022 and early 2023.
- Management expected elevated liquidity to persist through 2022 and potentially beyond. It considered available liquidity sufficient for foreseeable needs, while noting potential deposit withdrawals and draws on $415.8 million of unfunded loan and letter-of-credit commitments.
- Credit indicators improved: nonperforming assets, net of government guarantees, were $11.7 million, down 22% from year-end; net nonaccrual loans were $7.3 million. Classified loans were $32.9 million gross, or $14.5 million net of government guarantees. Five commercial relationships accounted for $5.9 million, or 74%, of nonperforming assets.
- Five COVID-related interest-only modifications totaling $23.6 million remained at June 30 and were scheduled to resume normal principal and interest payments in 2022. TDRs totaled $8.9 million gross; no newly restructured loans were reported in the first half.
- Interest-rate, inflation, supply-chain, geopolitical, Alaska economic, competition, credit-quality, and regulatory risks may affect results. The Company also disclosed LIBOR-linked assets, liabilities, and derivatives and ongoing preparations for the transition to alternative reference rates.
- The Company repurchased 333,724 shares in the first half, including 200,619 in Q2 at an average $41.04 per share. The existing authorization was fully used by June 30; further repurchases were not assured. The quarterly dividend was $0.41 per share.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. Routine legal proceedings were not expected to have a material effect; risk factors were reported as not materially changed from the 2021 Form 10-K.
Important facts for investors to verify
- Whether core loan growth and higher interest rates can sustain net interest income and margin as deposit costs and deposit flows change.
- Mortgage segment earnings sensitivity to rates, refinancing activity, and lower loan-sale volumes.
- Credit quality, including classified and nonaccrual exposures, COVID-related accommodations, and adequacy of the loan-loss allowance under changing economic assumptions.
- Potential effects of securities’ unrealized losses on capital and liquidity if securities must be sold before recovery or maturity.
- Deposit stability, certificate maturities, unfunded commitments, and the availability of stated borrowing capacity under collateral and regulatory conditions.
- Capital and per-share results following the completed repurchase authorization; shares outstanding were 5,681,089 on August 5, 2022.