Northrim BanCorp, Inc. — Q1 2022 Form 10-Q
Business context and reporting period. The Alaska-based bank holding company reports unaudited results for the three months ended March 31, 2022, with balance-sheet comparisons to December 31, 2021. Its two operating segments are Community Banking and Home Mortgage Lending; Community Banking operated 17 Alaska branches.
Key financial results
| Metric | Q1 2022 | Comparable / prior date |
|---|---|---|
| Net income | $7.2 million | $12.2 million in Q1 2021 |
| Diluted EPS | $1.20 | $1.94 in Q1 2021 |
| Total revenue (net interest income plus other operating income) | $30.1 million | $35.4 million in Q1 2021 |
| Net interest income | $19.3 million | $19.5 million in Q1 2021 |
| Net interest margin | 3.18% | 3.90% in Q1 2021 |
| Credit-loss benefit | $150,000 | $1.5 million benefit in Q1 2021 |
| Operating cash flow | $19.8 million provided | $44.6 million provided in Q1 2021 |
Net income declined about 41% year over year; annualized return on average assets was 1.12% versus 2.25%, and return on average equity was 12.36% versus 21.40%. Mortgage banking income fell to $7.0 million from $13.6 million. Other operating expenses eased 1% to $21.1 million. The $2.0 million key-person life insurance proceeds partially offset weaker mortgage banking income; this was a nonrecurring item.
Balance sheet, liquidity and capital
- Total assets were $2.626 billion at March 31, down from $2.725 billion at year-end. Total shareholders’ equity was $225.8 million, down from $237.8 million; accumulated other comprehensive loss widened to $14.4 million from $3.4 million, principally reflecting unrealized losses on available-for-sale securities.
- Loans were $1.377 billion, down 2.6% from year-end, largely due to PPP forgiveness. Excluding PPP loans, loans increased 1.3% to $1.313 billion. The allowance for loan credit losses was $11.3 million.
- Deposits declined 3% to $2.343 billion, primarily reflecting the runoff of a large temporary deposit. Transaction accounts remained 93% of deposits. Cash and cash equivalents were $532.8 million, or 20% of assets, versus $645.8 million, or 24%, at year-end.
- Management reported $787.0 million of liquid assets and $1.233 billion available under borrowing lines, and considered liquidity sufficient for the foreseeable future. Cash flows were $45.8 million used in investing and $87.0 million used in financing, with financing outflows mainly from lower deposits, share repurchases and dividends.
- Borrowings were $14.4 million, consisting of FHLB advances; junior subordinated debentures were $10.3 million. No discount-window advances were outstanding. Company and Bank capital ratios exceeded well-capitalized thresholds; Bank total risk-based capital was 11.96% and its leverage ratio was 7.40%.
Changes, outlook and risks
- Net interest margin contracted 72 basis points year over year, mainly because a larger share of earning assets was held in low-yielding short-term deposits at other banks. Net interest income excluding PPP interest and fees increased 11% to $17.0 million.
- Mortgage production and refinancing activity weakened as mortgage rates rose. Management said it expects rising rates to moderate housing activity. The company expects elevated liquidity to continue through 2022 and potentially beyond, and has invested in somewhat longer-term securities.
- Management described Alaska’s economy as improving through Q1 2022, while identifying rising rates, high inflation and supply-chain disruptions as pressing concerns. Other disclosed uncertainties include the Alaska economy, oil and gas conditions, the war in Ukraine, COVID-19 effects, PPP forgiveness timing, competition, funding flows and credit quality. The filing provides no quantified earnings or revenue guidance.
- Credit indicators improved in some areas: nonperforming assets, net of government guarantees, declined to $13.1 million from $15.0 million at year-end, and net nonperforming loans fell to $8.7 million from $10.7 million. COVID-related interest-only accommodations totaled $45.1 million across 13 loans; $36.6 million were scheduled to return to normal payments by the end of Q2 2022. Classified loans were $30.4 million gross, or $15.9 million net of government guarantees.
- Available-for-sale securities had $20.4 million of gross unrealized losses at quarter-end, up from $4.5 million at year-end. Management attributed these losses to noncredit factors, said it did not intend to sell the securities and believed it would not be required to sell before recovery; no credit-loss allowance was recorded on them.
- The company repurchased 133,105 shares for approximately $5.9 million at an average $44.50 per share and paid a $0.41 quarterly dividend per share. Management stated it may continue repurchases depending on market conditions, without assurance of continued activity.
- LIBOR-linked exposures include approximately $180.5 million of assets, $10.0 million of liabilities and $151.6 million of derivative notional at March 31, 2022. The company is preparing for the transition to alternative reference rates.
Important facts for investors to verify
- Whether reduced mortgage banking volume and the decline in earnings persist, and how much the reported $2.0 million insurance proceeds affected comparability.
- How margin and funding costs respond to rising interest rates, given the large short-term deposit balance and that 73% of core portfolio loans are adjustable rate.
- Whether deposit outflows, maturing certificates of deposit ($136.2 million due within 12 months) or $392.5 million of unfunded loan and letter-of-credit commitments materially change liquidity needs.
- Whether portfolio credit quality and the $11.3 million loan-loss allowance remain adequate as COVID-related accommodations normalize and economic conditions evolve.
- How market-value declines in securities affect equity and capital, and whether management’s ability to hold the securities remains intact.
- Progress on LIBOR contract conversion, and the impact of any changes in the company’s share-repurchase activity and dividend policy.