Northrim BanCorp, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This is an annual report; the supplied filing text does not provide clear standalone fourth-quarter results. Northrim is an Alaska-based bank holding company operating Community Banking and Home Mortgage Lending businesses.
Financial performance and position
- Profit: Net income was $37.5 million, up 14% from $32.9 million in 2020. Diluted earnings per share rose to $6.00 from $5.11.
- Revenue and margin: Net interest income increased 14% to $80.8 million. Other operating income fell 17% to $52.3 million, mainly as mortgage banking income declined. Net interest margin compressed to 3.58% from 4.02%; average earning-asset yield fell to 3.74% from 4.36%.
- Credit costs: The company recorded a $4.1 million benefit for credit losses, versus $2.4 million of provision expense in 2020. The year-end loan allowance was $11.7 million, or 0.83% of portfolio loans, compared with $21.1 million, or 1.46%, a year earlier. The company adopted CECL on January 1, 2021, so the allowance comparison uses different accounting methodologies.
- Segments: Community Banking net income increased 74% to $27.2 million. Home Mortgage Lending net income fell 40% to $10.3 million as mortgage production declined to $1.118 billion from $1.295 billion.
- Balance sheet: Assets increased to $2.725 billion from $2.122 billion. Deposits grew 33% to $2.422 billion. Portfolio loans were $1.414 billion, down from $1.444 billion; excluding PPP loans, they grew 14% to $1.296 billion.
- Cash flow and liquidity: Operating activities provided $112.0 million, versus $36.5 million used in 2020. Cash and cash equivalents rose to $645.8 million from $116.0 million. Management reported $907.9 million of liquid assets and $1.27 billion available under borrowing lines, and expects elevated liquidity to continue through 2022.
- Debt and capital: Year-end borrowings were $14.5 million, plus $10.3 million of junior subordinated debentures; no other short- or long-term borrowings were outstanding. The Bank’s total risk-based capital ratio was 12.13% and leverage ratio 7.31%; it remained “well-capitalized.”
- Shareholder returns: The company paid $1.50 per share in dividends during 2021 and repurchased 279,276 shares at an average $41.30. The board later authorized repurchases of up to an additional 300,000 shares and declared a $0.41-per-share dividend in February 2022.
Material changes and notable items
- PPP loan fee income supported earnings: PPP interest and fees totaled $15.4 million, versus $8.1 million in 2020. The Bank had $122.7 million of PPP loans outstanding at year-end, and $426.3 million of PPP loans were forgiven during 2021.
- Mortgage banking income fell 20% to $42.1 million, reflecting lower origination and sale volume and a smaller year-end loan pipeline. The related segment’s lower earnings partly offset Community Banking’s improvement.
- Investment securities increased to $455.1 million from $266.7 million. Year-end accumulated other comprehensive loss was $3.4 million, compared with $18,000 of income in 2020, largely reflecting unrealized securities and hedging changes.
- Nonperforming loans, net of government guarantees, were $10.7 million versus $10.0 million; net nonperforming assets declined to $15.0 million from $16.3 million. The allowance covered 110% of net nonperforming loans, down from 210%.
- The company adopted CECL early in 2021, recording a $2.4 million net increase to retained earnings at adoption. The auditor identified the forecast of economic conditions used in the loan allowance as a critical audit matter.
Outlook, commentary, and risks
- Management said its strategy is to pursue sustainable market-share growth, particularly in commercial lending, while maintaining asset quality and a strong core-deposit base. It expects NFS factoring to continue contributing to profitability and expects elevated liquidity to persist into 2022.
- Management described Alaska’s economy as broadly improving in 2021, while identifying rising interest rates, inflation, and supply-chain disruption as pressing early-2022 concerns. It expects to grow the balance sheet and maintain Bank capital above well-capitalized requirements, but provided no specific earnings or margin guidance.
- Key exposures include Alaska’s concentrated economy and real-estate-dependent loan book: about 75% of loans excluding PPP were secured by real estate, and commercial real estate was about 52% of the Bank’s loan portfolio. Thirty-two large borrowing relationships represented approximately 33% of loans.
- Risks include renewed COVID-19 effects, borrower stress, local real estate or oil-related weakness, rising rates and inflation, mortgage-volume and margin declines, cybersecurity and third-party disruptions, liquidity pressure, and the judgment inherent in CECL estimates. The company also had $445.9 million of unfunded commitments at year-end.
- Subsequent event: the company received $2.0 million of key-person life-insurance proceeds in February 2022, expected to be reflected in first-quarter 2022 income. Management said it did not expect pending litigation to have a material effect. The auditor gave an unqualified opinion on the financial statements and reported effective internal control over financial reporting.
Important facts for investors to verify
- Whether PPP forgiveness and remaining deferred fees materially affect 2022 earnings as the program runs off.
- How deposit growth, excess cash, and subsequent lending or securities investment affect net interest margin and returns.
- Whether declining allowance coverage remains appropriate given higher nonperforming loans, classified credits, and the real estate concentration.
- The sensitivity of mortgage banking income and servicing-right valuations to interest rates, refinancing activity, and loan volumes.
- How the $445.9 million of unfunded commitments, large-borrower exposures, and remaining COVID-related modifications perform.
- Progress on transitioning LIBOR-linked loans, derivatives, and debentures to alternative reference rates.