NORTHRIM BANCORP, INC. This discussion should be read in conjunction with the unaudited consolidated financial statements ofNorthrim BanCorp, Inc. (the "Company") and the notes thereto presented elsewhere in this report and with the Company's Annual Report on Form 10-K for the year endedDecember 31, 2022 .
Except as otherwise noted, references to "we", "our", "us" or "the Company"
refer to
Note Regarding Forward Looking-Statements
This quarterly report on Form 10-Q includes "forward-looking statements," as
that term is defined for purposes of Section 21E of the Securities Exchange Act
of 1934, as amended, which are not historical facts. These forward-looking
statements describe management's expectations about future events and
developments such as future operating results, growth in loans and deposits,
continued success of the Company's style of banking, and the strength of the
local economy. All statements, other than statements of historical fact,
regarding our financial position, business strategy, management's plans and
objectives for future operations are forward-looking statements. We use words
such as "anticipate," "believe," "expect," "intend" and similar expressions in
part to help identify forward-looking statements. Forward-looking statements
reflect management's current plans and expectations and are inherently
uncertain. Our actual results may differ significantly from management's
expectations, and those variations may be both material and adverse.
Forward-looking statements are subject to various risks and uncertainties that
may cause our actual results to differ materially and adversely from our
expectations as indicated in the forward-looking statements. These risks and
uncertainties include: the effect of the novel coronavirus ("COVID-19") pandemic
and other infection illness outbreaks that may arise in the future and the
resulting governmental or societal responses; impact of the results of
government initiatives on the regulatory landscape, natural resource extraction
industries, and capital markets; the impact of declines in the commercial and
residential real estate markets, high unemployment rates, inflationary pressures
and slowdowns in economic growth; potential further increases in interest rates,
inflation, supply-chain constraints, and potential geopolitical instability,
including the war in Ukraine ; financial stress on borrowers (consumers and
businesses) as a result of higher rates or an uncertain economic environment;
the general condition of, and changes in, the Alaska economy; our ability to
maintain or expand our market share or net interest margin; the sufficiency of
our provision for credit losses and the accuracy of the assumptions or estimates
used in preparing our financial statements, including those related to current
expected credit losses accounting guidance; the value of securities held in our
investment portfolio; our ability to maintain asset quality; our ability to
implement our marketing and growth strategies; our ability to identify and
address cyber-security risks, including security breaches, "denial of service
attacks," "hacking," and identity theft; and our ability to execute our business
plan. Further, actual results may be affected by competition on price and other
factors with other financial institutions; customer acceptance of new products
and services; the regulatory environment in which we operate; and general trends
in the local, regional and national banking industry and economy. In addition,
there are risks inherent in the banking industry relating to collectability of
loans and changes in interest rates. Many of these risks, as well as other risks
that may have a material adverse impact on our operations and business, are
identified in Part II. Item 1A Risk Factors of this report and Part I. Item 1A
in the Company's Annual Report on Form 10-K for the year ended December 31,
2022 , as well as in our other filings with the Securities and Exchange
Commission . However, you should be aware that these factors are not an
exhaustive list, and you should not assume these are the only factors that may
cause our actual results to differ from our expectations. In addition, you
should note that forward looking statements are made only as of the date of this
report and that we do not intend to update any of the forward-looking statements
or the uncertainties that may adversely impact those statements, other than as
required by law.
37--------------------------------------------------------------------------------
Update on Economic Conditions
The Alaska Department of Labor ("DOL") has released preliminary data through February of 2023. The DOL reportedAlaska's seasonally adjusted unemployment rate for February of 2023 was 3.8% compared to 3.6% for theU.S. The DOL reports total payroll jobs inAlaska increased 2.5% or 7,700 jobs compared to February of 2022. All major sectors showed year over year growth in jobs with the exception of Manufacturing, which declined 100 jobs, or 0.9% over the last 12 months. According to the DOL, Transportations, Warehousing and Utilities had the largest growth of 11.5% year over year in February, adding 2,300 jobs. The Leisure and Hospitality sector had strong growth of 7.2% over the same 12 month period, adding 2,100 jobs.The Oil and Gas sector has benefited from higher energy prices and new exploration activity, resulting in an increase of 300 jobs or 4.3% since February of 2022. Other Services grew 3.8%; Professional and Business Services added 2.7%; Construction grew 2.2%; and Information increased 2.1% compared to February of 2022. The Retail sector has fully recovered from pre-COVID levels and now has 900 more jobs than February of 2020.Alaska's Gross State Product ("GSP") was estimated to be$64.1 billion in current dollars at the end of 2022, according to theFederal Bureau of Economic Analysis ("BEA").Alaska's inflation adjusted "real" GSP declined 2.4% in 2022. However, the decrease in "real" GSP was predominantly in the first half of the year andAlaska's GSP grew at annualized rates of 8.7% in the third quarter and 4.1% in the fourth quarter of 2022.Alaska's real GSP improvement in the second half of 2022 was primarily due to gains in the Oil and Gas sector, Transportation and Warehousing, Retail Trade and State & Local Government. The BEA also calculatedAlaska's seasonally adjusted personal income at$50.6 billion at the end of 2022, an improvement of 4.8% for the year. The national average was an increase of 2.4% for the same period. Management notes that Alaskans' personal income from wages, dividends, interest and rents was relatively similar to the US growth rates; however,Alaska was the only state in the country to have higher levels of government transfer payments in 2022 compared to 2021. The prior year was driven by large COVID relief payments, while the 2022 increase forAlaska was primarily due to the significantly largerAlaska Permanent Fund dividend payments of$3,284 per person compared to$1,114 in 2021. For about 650,000 qualified Alaskans that equates to an increase of$1.41 billion in government payments from the prior year.The Permanent Fund has grown to a value of$75.5 billion .The Permanent Fund is scheduled to transfer$3.4 billion to the State's General Fund in fiscal year 2023. It will be divided between dividends to Alaskan citizens and funds for state government services. The price of Alaska North Slope ("ANS") crude oil averaged$91.41 per barrel inAlaska's fiscal year, which endedJune 30, 2022 . TheAlaska Department of Revenue ("DOR") forecasts ANS oil to average$85.25 per barrel inAlaska fiscal year 2023 and$73 in 2024. The DOR calculated ANS crude oil production was 486 thousand barrels per day inAlaska's fiscal year endingJune 30, 2022 . The DOR has forecast production to increase to 501 thousand barrels per day inAlaska's fiscal year 2023 and 512 thousand barrels per day in 2024. This is primarily a result of new production coming on line in the NPR-A region west ofPrudhoe Bay . According to theMortgage Bankers Association ,Alaska's home mortgage delinquency rate in the fourth quarter of 2022 was 2.9% compared to 4.1% in the fourth quarter of 2021.Alaska's delinquency rate of 2.9% compares to the national average rate of 3.9% for the fourth quarter of 2022. TheMortgage Bankers Association survey reported that the mortgage foreclosure inventory inAlaska in the fourth quarter of 2022 was 0.54% and the national average was 0.57%. According to the Alaska Multiple Listing Services, the average sales price of a single family home inAnchorage rose 7.6% in 2022 to$456,509 . This was the fifth consecutive year of price increases, following growth of 6.9% in 2021 and 5.8% in 2020. Average sales prices in the Matanuska Susitna Borough rose 9.9% in 2022 to$382,504 , continuing a trend of average price increases for more than a decade. Average home prices in the Matanuska Susitna Borough increased 15.6% in 2021 and 9.9% in 2020. These two markets represent the locations of the vast majority of the residential lending activities ofNorthrim Bank (the "Bank").. The number of housing units sold inAnchorage did slow in 2022 by 21.2% compared to 2021, as reported by the Alaska Multiple Listing Services. This was following sales growth of 11.2% in 2021 compared to 2020. Management believes that a lack of inventory due to a reduction in the supply of new homes being constructed and a lower churn of existing homes being listed on the market are the primary reasons for the decline in sales. The Matanuska Susitna Borough also experienced a lower volume of home sales, down 11.9% in 2022 compared to the prior year. The number of units sold in the Matanuska Susitna Borough had been increasing for the prior four years and grew by 11.7% in 2021 as compared to 2020. 38 --------------------------------------------------------------------------------The Board of Governors of theFederal Reserve System increased its benchmark interest rate target from 4.25%-4.50% as ofDecember 31, 2022 to 4.75%-5.00% as ofMarch 31, 2023 . Similarly, the prime rate of interest has increased from 7.50% as ofDecember 31, 2022 to 8.00% as ofMarch 31, 2023 .
Highlights and Summary of Performance - First Quarter of 2023
The Company reported net income and diluted earnings per share of$4.8 million and$0.84 , respectively, for the first quarter of 2023 compared to net income and diluted earnings per share of$7.2 million and$1.20 , respectively, for the first quarter of 2022. The decrease in net income for the three-month period endingMarch 31, 2023 compared to the same period last year is primarily attributable to a decrease in net income in the Home Mortgage Lending segment as a result of decreased production and yields on sold loans, as well as an increase in salaries and personnel expense in the Community Banking segment. The first quarter of 2022 also included$2.0 million in keyman insurance proceeds. This non-recurring item represents 64% of the$3.1 million decrease in pretax income in the first quarter of 2023 compared to the first quarter of 2022. These decreases were only partially offset by an increase in net interest income. Increases in interest rates drove the decrease in production in the Home Mortgage Lending segment and the increase in net interest income in the first quarter of 2023 as compared to the same period a year ago. •Net interest income in the first quarter of 2023 increased 30% to$25.0 million compared to$19.3 million in the first quarter of 2022. •Net interest margin was 4.22% for the first quarter of 2023, a 104 basis point increase from the first quarter of 2022. The increase in this period compared to the same period in 2022 was primarily due to higher yields on all interest-earning asset categories, which were only partially offset by higher costs on interest-bearing deposits. •The weighted average interest rate for new loans booked in the first quarter of 2023 was 6.35% compared to 4.48% in the first quarter a year ago. •Loans were$1.54 billion atMarch 31, 2023 , up 2% fromDecember 31, 2022 primarily as a result of consumer mortgage loan growth. AtMarch 31, 2023 , 71% of loans are variable and 16% of earning assets are subject to rate increases in the second quarter of 2023 when prime or other indices increase. •Total deposits were$2.30 billion atMarch 31, 2023 , down 4% fromDecember 31, 2022 . Demand deposits decreased 4% atMarch 31, 2023 fromDecember 31, 2022 and currently represent 34% of total deposits. •The average cost of interest-bearing deposits was 1.20% atMarch 31, 2023 , up from 0.15% atMarch 31, 2022 . •Total liquid assets and investments and loans maturing within one year were$502.0 million and our funds available for borrowing under our existing lines of credit were$1.201 billion atMarch 31, 2023 .
Other financial measures are shown in the table below:
Three Months Ended
2023 2022
Return on average assets, annualized 0.76 % 1.12 %
Return on average shareholders' equity, annualized 8.73 % 12.36 %
Dividend payout ratio 71.30 % 34.20 %
39-------------------------------------------------------------------------------- Nonperforming assets: Nonperforming assets, net of government guarantees were$6.4 million atMarch 31, 2023 andDecember 31, 2022 . Other Real Estate Owned ("OREO"), net of government guarantees, increased to$273,000 atMarch 31, 2023 , from zero atDecember 31, 2022 . Nonperforming loans, net of government guarantees decreased$347,000 , or 5% to$6.1 million as ofMarch 31, 2023 from$6.4 million as ofDecember 31, 2022 , primarily due to payoffs and pay downs in the first three months of 2023 that were only partially offset by the transfer of one lending relationship to nonaccrual status.$4.5 million , or 74% of nonperforming loans, net of government guarantees atMarch 31, 2023 , are nonaccrual loans related to four commercial relationships.
The following table summarizes nonperforming asset activity for the three-month
periods ending
Writedowns Transfers to
Balance at December /Charge-offs Performing Status Balance at March 31 ,
(In Thousands) 31, 2022 Additions thisquarter Payments this quarter this quarter Transfers to OREO
this quarter Sales this quarter 2023
Nonperforming loans $7,076 $2,836 ($850 ) ($14 ) ($273 ) $- $- $8,775
Nonperforming loans guaranteed by
government (646) (2,540) 494 - - - - (2,692)
Nonperforming loans, net 6,430 296 (356) (14) (273) - - 6,083
Other real estate owned - 273 - - - - - 273
Total nonperforming assets,
net of government guarantees $6,430 $569 ($356 ) ($14 ) ($273 ) $- $- $6,356
Writedowns Transfers to
Balance at December /Charge-offs Performing Status Balance at March 31 ,
(In Thousands) 31, 2021 Additions this quarter Payments this quarter this quarter Transfers to OREO
this quarter Sales this quarter 2022
Nonperforming loans $11,650 $166 ($835 ) ($295 ) $- ($1,077 ) $- $9,609
Nonperforming loans guaranteed by
government (978) - 71 - - - - (907)
Nonperforming loans, net 10,672 166 (764) (295) - (1,077) - 8,702
Other real estate owned 5,638 - - - - - - 5,638
by government (1,279) - - - - - - (1,279)
Total nonperforming assets,
net of government guarantees $15,031 $166 ($764 ) ($295 ) $- ($1,077 ) $- $13,061
Potential problem loans: Potential problem loans are loans which are currently
performing in accordance with contractual terms but that have developed negative
indications that the borrower may not be able to comply with present payment
terms and which may later be included in nonaccrual, past due, or impaired
loans. These loans are closely monitored and their performance is reviewed by
management on a regular basis. At March 31, 2023 , management had identified
potential problem loans of $1.4 million as compared to potential problem loans
of $1.6 million at December 31, 2022 . The decrease in potential problem loans
from December 31, 2022 to March 31, 2023 is primarily the result of various loan
paydowns in the first three months of 2023.
RESULTS OF OPERATIONS
Income Statement
Net Income
Net income for the first quarter of 2023 decreased $2.4 million to $4.8
million as compared to $7.2 million for the same period in 2022. The decrease in
net income in the first quarter of 2023 as compared to the same quarter a year
ago is
40
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mostly attributable to a $3.5 million decrease in net income in the Home
Mortgage Lending segment, which is primarily due to lower production, which was
only partially offset by a $1.1 million increase in net income in the Community
Banking segment. The increase in net income in the Community Banking segment in
the three months ended March 31, 2023 , as compared to the same period a year ago
is primarily due to an increase in net interest income which was only partially
offset by an increase in other operating expenses and a higher provision for
credit losses. Additionally, the Company received $2.0 million in life insurance
proceeds in the three-month period ended March 31, 2022 in connection with the
death of the Company's former Executive Vice President, General Counsel and
Corporate Secretary who passed away on November 11, 2021 .
Net Interest Income/Net Interest Margin
Net interest income for the first quarter of 2023 increased$5.7 million , or 30%, to$25.0 million as compared to$19.3 million for the first quarter of 2022. The net interest margin increased 104 basis points to 4.22% in the first quarter of 2023 as compared to 3.18% in the first quarter of 2022. The increase in net interest income in the first quarter of 2023 compared to the same period in 2022 was primarily the result of increased interest on loans, investments, and interest bearing deposits in other banks which was only partially offset by an increase in interest expense on interest-bearing deposits. The increase in net interest margin in the first quarter of 2023 as compared to the same period of 2022 was primarily the result of higher yields on earning-assets. Changes in net interest margin in the three-month period endedMarch 31, 2023 as compared to the same period in the prior year are detailed below: Three Months EndedMarch 31, 2023 vs.March 31, 2022 Nonaccrual interest adjustments 0.02 % Impact of SBA Paycheck Protection Program loans (0.28) %
Interest rates on loans and liabilities and loan fees, all other loans
1.28 %
Volume and mix of other interest-earning assets and liabilities 0.02 %
Change in net interest margin 1.04 %
41--------------------------------------------------------------------------------
Components of Net Interest Margin
The following table compares average balances and rates as well as margins on
earning assets for the three-month periods ended
(Dollars in Thousands) Three Months Ended March 31,
Interest income/ Average Tax Equivalent
Average Balances Change expense Change Yields/Costs6
2023 2022 $ % 2023 2022 $ % 2023 2022 Change
Interest-bearing deposits in other
banks1 $130,929 $538,537 ($407,608 ) (76) % $1,489 $242 $1,247 515 % 4.55 % 0.18 % 4.37 %
Taxable long-term investments2 726,813 490,196 236,617 48 % 4,608 1,544 3,064 198 % 2.40 % 1.23 % 1.17 %
Non-taxable long-term investments2 797 833 (36) (4) % 4 4 - - % 2.82 % 2.70 % 0.12 %
Loans held for sale 20,901 52,630 (31,729) (60) % 290 405 (115) (28) % 5.54 % 3.08 % 2.46 %
Loans3,4 1,524,130 1,379,850 144,280 10 % 23,404 17,863 5,541 31 % 6.28 % 5.27 % 1.01 %
Interest-earning assets5 2,403,570 2,462,046 (58,476) (2) % 29,795 20,058 9,737 49 % 5.10 % 3.33 % 1.77 %
Nonearning assets 185,755 156,482 29,273 19 %
Total $2,589,325 $2,618,528 ($29,203 ) (1) %
Interest-bearing demand $718,463 $675,573 $42,890 6 % $2,027 $116 $1,911 1,647 % 1.14 % 0.07 % 1.07 %
Savings deposits 301,333 352,556 (51,223) (15) % 340 128 212 166 % 0.46 % 0.15 % 0.31 %
Money market deposits 293,643 320,767 (27,124) (8) % 783 102 681 668 % 1.08 % 0.13 % 0.95 %
Time deposits 229,998 177,204 52,794 30 % 1,434 230 1,204 523 % 2.53 % 0.53 % 2.00 %
Total interest-bearing deposits 1,543,437 1,526,100 17,337 1 % 4,583 575 4,008 697 % 1.20 % 0.15 % 1.05 %
Borrowings 24,366 24,777 (411) (2) % 180 179 1 1 % 2.92 % 2.91 % 0.01 %
Total interest-bearing liabilities 1,567,803 1,550,877 16,926 1 % 4,763 754 4,009 532 % 1.23 % 0.20 % 1.03 %
Non-interest bearing demand deposits 756,088 794,702 (38,614) (5) %
Other liabilities 41,067 35,835 5,232 15 %
Equity 224,367 237,114 (12,747) (5) %
Total $2,589,325 $2,618,528 ($29,203 ) (1) %
Net interest income $25,032 $19,304 $5,728 30 %
Net interest margin 4.22 % 3.18 % 1.04 %
Average loans to average
interest-earning assets 63.41 % 56.04 %
Average loans to average total
deposits 66.28 % 59.46 %
Average non-interest deposits to
average total deposits 32.88 % 34.24 %
Average interest-earning assets to
average interest-bearing liabilities 153.31 % 158.75 %
1Consists of interest bearing deposits in other banks and domestic CDs. 2Consists of investment securities available for sale, investment securities held to maturity, marketable equity securities, and investment inFederal Home Loan Bank stock. Taxable long-term investments consist ofU.S. treasury and government sponsored entities, corporate bonds, collateral loan obligations, marketable equity securities, andFederal Home Loan Bank stock. Non-taxable long-term investments consist of municipal securities. 3Interest income includes loan fees. Loan fees recognized during the period and included in the yield calculation totaled$1.3 million and$3.0 in the first quarter of 2023 and 2022, respectively. 4Nonaccrual loans are included with a zero effective yield. Average nonaccrual loans included in the computation of the average loan balances were$7.1 million and$11.0 million in the first quarter of 2023 and 2022, respectively.
5The Company does not have any fed funds sold or securities purchased with agreements to resell to disclose as part of its total interest-earning assets in the periods presented.
6Tax-equivalent yields/costs assume a federal tax rate of 21% and state tax rate of 7.43% for a combined tax rate of 28.43%.
42
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The following tables set forth the changes in consolidated net interest income
attributable to changes in volume and to changes in interest rates for the
three-month periods ending March 31, 2023 and 2022. Changes attributable to the
combined effect of volume and interest rate have been allocated proportionately
to the changes due to volume and the changes due to interest rates. The Company
did not have any fed funds sold or securities purchased with agreements to
resell for the three-month periods ending March 31, 2023 and 2022.
(In Thousands) Three Months Ended March 31, 2023 vs. 2022
Increase (decrease) due to
Volume Rate Total
Interest Income:
Short-term investments ($40 ) $1,287 $1,247
Taxable long-term investments 1,038 2,026 3,064
Loans held for sale (324) 209 (115)
Loans 666 4,875 5,541
Total interest income $1,340 $8,397 $9,737
Interest Expense:
Interest-bearing demand $7 $1,904 $1,911
Savings deposits (22) 234 212
Money market deposits (10) 691 681
Time deposits 46 1,158 1,204
Interest-bearing deposits 21 3,987
4,008
Borrowings 1 - 1
Total interest expense $22 $3,987 $4,009
43--------------------------------------------------------------------------------
Provision for Credit Losses
The provision for credit loss expense is the amount of expense that, based on
our judgment, is required to maintain the Allowance for Credit Losses ("ACL") at
an appropriate level under the Current Expected Credit Losses ("CECL") model.
The determination of the amount of the ACL is complex and involves a high degree
of judgment and subjectivity. The following table presents the major categories
of credit loss expense:
Three Months Ended March 31,
(In Thousands) 2023 2022
Credit loss expense on loans held for investment $259 ($167 )
Credit loss expense on unfunded commitments 101 17
Credit loss expense on available for sale debt securities - -
Credit loss expense on held to maturity securities - -
Credit loss expense on purchased receivables - -
Total credit loss (benefit) expense $360 ($150 )
The increase in the ACL for the three-month periods ending March 31, 2023 as
compared to the same periods in 2022 is primarily the result of increased loan
and unfunded commitment balances, as well as a decrease in management's
assumptions for prepayment and curtailment speeds. These changes are only
partially offset by improvement in management's forecasted economic factors. The
ongoing impacts of the CECL methodology will be dependent upon changes in
economic conditions and forecasts, as well as loan portfolio composition,
quality, and duration.
Other Operating Income
Other operating income for the three-month period endedMarch 31, 2023 , decreased$5.9 million , or 55%, to$4.9 million as compared to$10.8 million for the same period in 2022, primarily due to a$5.0 million decrease in mortgage banking income in the first quarter of 2023 compared to the same quarter a year ago. The decrease in mortgage banking income in the three-month period endedMarch 31, 2023 as compared to the same period in 2022 was primarily due to decreased production volume due to increases in mortgage interest rates. Additionally, the Company received$2.0 million in keyman insurance proceeds in 2022 which was not repeated in 2023. Other Operating Expense Other operating expense for the first quarter of 2023 increased$2.4 million , or 11%, to$23.5 million as compared to$21.1 million for the same period in 2022 primarily due to an increase in salaries and other personnel expense as well as smaller increases in most other expense categories as the Company has grown and increased its number of branches and mortgage origination offices. The Company opened its 18th branch inNome in the fourth quarter of 2022 and its 19th branch inKodiak in the first quarter of 2023 which contributed to increased salaries and personnel expense for the Community Banking segment. Despite lower mortgage loan production volumes, salaries and personnel expense for the Home Mortgage Lending segment increased as a result of branch expansion in new markets in late 2022 and early 2023.
Income Taxes
For the first quarter of 2023, Northrim recorded a lower effective tax rate as compared to the same period in 2022 as a result of an increase in tax credits and tax exempt interest income as a percentage of pre-tax income in 2023. In the first quarter of 2023, Northrim recorded$1.2 million in state and federal income tax expense, for an effective tax rate of 20.44% compared to$1.9 million and 21.25% for the same period in 2022. 44 --------------------------------------------------------------------------------
FINANCIAL CONDITION Balance Sheet Overview Portfolio Investments Portfolio investments, which include investment securities available for sale, investment securities held to maturity, and marketable equity securities, atMarch 31, 2023 increased slightly to$725.0 million from$724.5 million atDecember 31, 2022 as the fair market value of available for sale securities increased but was largely offset by maturities and calls of available for sale securities during the first three months of 2023. The table below details portfolio investment balances by portfolio investment type: March 31, 2023 December 31, 2022 (In Thousands) Dollar Amount Percent of Total Dollar Amount Percent of Total Balance % of total Balance % of total U.S. Treasury and government sponsored entities$602,374 83.0 %$595,161 82.2 % Municipal securities 802 0.1 % 795 0.1 % Corporate bonds 52,165 7.2 % 60,394 8.3 % Collateralized loan obligations 59,143 8.2 % 57,429 7.9 % Preferred stock 10,515 1.5 % 10,740 1.5 % Total portfolio investments$724,999 $724,519 The average estimated duration of the investment portfolio atMarch 31, 2023 , was approximately three-years. As ofMarch 31, 2023 ,$29.6 million available for sale securities are scheduled to mature in the next six months,$76.9 million are scheduled to mature in six months to one year, and$151.8 million are scheduled to mature in the following year, a total of$258.3 million or 11% of earning assets atMarch 31, 2023 . 45 --------------------------------------------------------------------------------
Loans and Lending Activities
The following table presents the concentration distribution of the loan portfolio, net of deferred fees and costs, as of the dates indicated:
March 31, 2023 December 31, 2022
Percent of Percent of
(In Thousands) Dollar Amount Total Dollar Amount Total
Commercial & industrial loans $364,109 23.7 % $358,128 23.8 %
Commercial real estate:
Owner occupied properties 343,162 22.4 % 349,973 23.3 %
Non-owner occupied and multifamily properties 473,227 30.8 % 482,270 32.2 %
Residential real estate:
1-4 family residential properties secured by first liens 112,214 7.3 % 73,381 4.9 %
1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens
23,027 1.5 % 20,259 1.3 %
1-4 family residential construction loans 40,652 2.6 % 44,000 2.9 %
Other construction, land development and raw land loans 91,712 6.0 % 99,182 6.6 %
Obligations of states and political subdivisions in the US 42,257 2.8 % 32,539 2.2 %
Agricultural production, including commercial fishing 37,429 2.4 % 34,099 2.3 %
Consumer loans 4,661 0.3 % 4,335 0.3 %
Other loans 2,737 0.2 % 3,619 0.2 %
Total loans $1,535,187 $1,501,785
Loans increased by $33.4 million , or 2%, to $1.535 billion at March 31, 2023
from $1.502 billion at December 31, 2022 , primarily as a result of increased
consumer mortgage loans.
Information about loan concentrations
The Company defines "direct exposure" to the oil and gas industry as companies that it has identified as significantly reliant upon activity related to the oil and gas industry, such as oilfield services, lodging, equipment rental, transportation, and other logistic services specific to the industry. The Company estimates that$79.0 million , or approximately 5% of loans as ofMarch 31, 2023 have direct exposure to the oil and gas industry as compared to$83.4 million , or approximately 6% of loans as ofDecember 31, 2022 . The Company's unfunded commitments to borrowers that have direct exposure to the oil and gas industry were$54.8 million and$51.8 million atMarch 31, 2023 andDecember 31, 2022 , respectively. The portion of the Company's ACL that related to the loans with direct exposure to the oil and gas industry was estimated at$764,000 as ofMarch 31, 2023 and$786,000 as ofDecember 31, 2022 .
The following table details loan balances by loan segment and class of financing receivable for loans with direct oil and gas exposure as of the dates indicated:
(In Thousands) March 31, 2023 December 31, 2022 Commercial & industrial loans$62,821 $66,864
Commercial real estate:
Owner occupied properties 8,901 9,108 Non-owner occupied and multifamily properties 5,870 6,013 Other loans 1,416 1,431 Total$79,008 $83,416 The Company monitors other concentrations within the loan portfolio depending on trends in the current and future estimated economic conditions. AtMarch 31, 2023 , the Company had$126.7 million , or 8% of portfolio loans, in the Healthcare sector,$99.9 million , or 6% of portfolio loans, in the Tourism sector,$69.5 million , or 5% of portfolio loans, in the Fishing sector,$68.7 million , or 4% of portfolio loans, in the Accommodations sector,$54.2 million , or 4% of portfolio loans, in the Retail sector,$50.3 million , or 3% of portfolio loans, in the Aviation (non-tourism) sector, and$47.3 million , or 3% in the Restaurant sector. 46 -------------------------------------------------------------------------------- The portion of the Company's ACL that related to the loans with exposure to these industries is estimated at the following amounts as ofMarch 31, 2023 : (In Thousands) Tourism Aviation (non-tourism) Healthcare Retail Fishing Restaurant Accommodations Total ACL$679 $426 $1,125 $521 $480 $396 $527 $4,154
The following table sets forth information regarding changes in the ACL for the periods indicated:
Three Months Ended March 31,
(In Thousands) 2023 2022
Balance at beginning of period $13,838 $11,739
Commercial & industrial loans - (295)
Consumer loans (14) -
Other loans - -
Total charge-offs (14) (295)
Recoveries:
Commercial & industrial loans 65 13
Residential real estate:
1-4 family residential properties secured by junior liens
and revolving secured by 1-4 family first liens 7 12 Agricultural production, including commercial fishing - 7 Consumer loans 2 1 Total recoveries 74 33 Net, charge-offs 60 (262) Provision (benefit) for credit losses 259 (167) Balance at end of period$14,157 $11,310
The following table sets forth information regarding changes in the ACL for unfunded commitments for the periods indicated:
Three Months Ended March 31,
(In Thousands) 2023 2022
Balance at beginning of period $1,970 $1,096
Provision for credit losses 101 17
Balance at end of period $2,071 $1,113
While management believes that it uses the best information available to
determine the ACL, unforeseen market conditions and other events could result in
adjustment to the ACL, and net income could be significantly affected if
circumstances differed substantially from the assumptions used in making the
final determination of the ACL.
47
--------------------------------------------------------------------------------Deposits
Deposits are the Company's primary source of funds. Total deposits decreased$90.9 million , or 4%, to$2.296 billion as ofMarch 31, 2023 compared to$2.387 billion as ofDecember 31, 2022 . The following table summarizes the Company's composition of deposits as of the periods indicated: March 31, 2023 December 31, 2022 (In thousands) Balance % of total Balance % of total Demand deposits$767,772 34 %$797,434 34 % Interest-bearing demand 717,910 31 % 767,686 32 % Savings deposits 292,857 13 % 320,917 13 % Money market deposits 262,478 11 % 308,317 13 % Time deposits 255,256 11 % 192,857 8 % Total deposits$2,296,273 $2,387,211
The Company's mix of deposits continues to contribute to a low cost of funds
with balances in transaction accounts representing 89% of total deposits at
The only deposit category with stated maturity dates is certificates of deposit. AtMarch 31, 2023 , the Company had$255.3 million in certificates of deposit as compared to certificates of deposit of$192.9 million atDecember 31, 2022 . AtMarch 31, 2023 ,$154.2 million , or 60%, of the Company's certificates of deposits are scheduled to mature over the next 12 months as compared to$128.4 million , or 67%, of total certificates of deposit atDecember 31, 2022 . The aggregate amount of certificates of deposit in amounts of$250,000 and greater atMarch 31, 2023 andDecember 31, 2022 , was$105.6 million and$77.5 million , respectively. The following table sets forth the amount outstanding of deposits in amounts of$250,000 and greater by time remaining until maturity and percentage of total deposits as ofMarch 31, 2023 : Time Certificates of Deposit of$250,000 or More (In Thousands) Amount Percent of Total Deposits Amounts maturing in: Three months or less$4,403 4 % Over 3 through 6 months 9,016 9 % Over 6 through 12 months 40,559 38 % Over 12 months 51,580 49 % Total$105,558 100 % AtMarch 31, 2023 , 68% of total deposits were held in business accounts and 32% of deposit balances were held in consumer accounts. Northrim had approximately 33,000 deposit customers with an average balance of$69,000 as ofMarch 31, 2023 . Northrim had 16 customers with balances over$10 million as ofMarch 31, 2023 which accounted for$346.9 million , or 15%, of total deposits. Uninsured deposits totaled$981.3 million or 43% of total deposits as ofMarch 31, 2023 compared to$1.1 billion or 46% of total deposits as ofDecember 31, 2022 . As interest rates continued to increase in the first quarter of 2023, Northrim began a proactive, targeted approach to increase deposit rates. There was no unusual deposit activity during the first quarter of 2023. 48 --------------------------------------------------------------------------------
Borrowings
FHLB: The Bank is a member of theFederal Home Loan Bank of Des Moines (the "FHLB"). As a member, the Bank is eligible to obtain advances from the FHLB. FHLB advances are dependent on the availability of acceptable collateral such as marketable securities or real estate loans, although all FHLB advances are secured by a blanket pledge of the Bank's assets. AtMarch 31, 2023 , our maximum borrowing line from the FHLB was$1.154 billion , approximately 45% of the Bank's assets, subject to the FHLB's collateral requirements. The Company has outstanding advances of$14.0 million as ofMarch 31, 2023 which were originated to match fund low income housing projects that qualify for long term fixed interest rates. These advances have original terms of either 18 or 20 years with 30 year amortization periods and fixed interest rates ranging from 1.23% to 3.25%.Federal Reserve Bank : TheFederal Reserve Bank of San Francisco (the "Federal Reserve Bank ") is holding$43.6 million of loans as collateral to secure the Company's ability to take advances through the discount window onMarch 31, 2023 . There were no discount window advances outstanding at eitherMarch 31, 2023 orDecember 31, 2022 . Other Short-term Borrowings: The Company is subject to provisions underAlaska state law, which generally limit the amount of outstanding debt to 35% of total assets or$897.6 million atMarch 31, 2023 and$930.1 million atDecember 31, 2022 .
At
Long-term Borrowings. The Company had no long-term borrowing outstanding other
than the FHLB advances noted above as of
Liquidity and Capital Resources
The Company is a single bank holding company and its primary ongoing source of liquidity is from dividends received from the Bank. Such dividends arise from the cash flow and earnings of the Bank. Banking regulations and regulatory authorities may limit the amount of, or require the Bank to obtain certain approvals before paying, dividends to the Company. Given that the Bank currently meets and the Bank anticipates that it will continue to meet, all applicable capital adequacy requirements for a "well-capitalized" institution by regulatory standards, the Company expects to continue to receive dividends from the Bank during the remainder of 2023. Other available sources of liquidity for the bank holding company include the issuance of debt and the issuance of common or preferred stock. As ofMarch 31, 2023 , the Company has 10.0 million authorized shares of common stock, of which 5.7 million are issued and outstanding, leaving 4.3 million shares available for issuance. Additionally, the Company has 2.5 million authorized shares of preferred stock available for issuance. The Bank manages its liquidity through itsAsset and Liability Committee . The Bank's primary source of funds are customer deposits. These funds, together with loan repayments, loan sales, maturity of investment securities, borrowed funds, and retained earnings are used to make loans, to acquire securities and other assets, and to fund deposit flows and continuing operations. The primary sources of demands on our liquidity are customer demands for withdrawal of deposits and borrowers' demands that we advance funds against unfunded lending commitments. 49 -------------------------------------------------------------------------------- The Company had cash and cash equivalents of$139.2 million , or 5% of total assets atMarch 31, 2023 compared to$259.4 million , or 10% of total assets as ofDecember 31, 2022 . The decrease in cash and cash equivalents since the end of 2022 is primarily due to a decrease in deposits, but is still elevated as compared to historical norms both in balance and as a percentage of total assets. The Company had other comprehensive income, net of tax, of$5.6 million for the three-month period endingMarch 31, 2023 primarily due to unrealized holding gains on available for sale securities. Accumulated unrealized losses, net of income taxes on available for sale securities, which are recorded in total shareholders' equity, are$24.3 million as ofMarch 31, 2023 . Accumulated unrealized losses, net of income taxes on held to maturity securities, which are not recorded in shareholders' equity, are$3.0 million as ofMarch 31, 2023 . Management does not believe that liquidation of these securities, which would result in realized losses, will occur prior to maturity of these securities. As ofMarch 31, 2023 , the weighted average maturity of available for sale securities is 3.1 years compared to 3.3 years atDecember 31, 2022 and 4.1 years atDecember 31, 2021 . AtMarch 31, 2023 ,$106.6 million available for sale securities mature within one year,$151.8 million mature within one to two years, and$164.3 million mature within two to three years. Our total unfunded commitments to fund loans and letters of credit atMarch 31, 2023 were$445.7 million . We do not expect that all of these loans are likely to be fully drawn upon at any one time. AtMarch 31, 2023 , certificates of deposit totaling$154.2 million are scheduled to mature over the next 12 months and may be withdrawn from the Bank. Similar to loans, we do not expect that these maturing certificates of deposit, or other non-maturity deposits, to be withdrawn from the Bank in a manner that will strain liquidity; however, unforeseen future circumstances or events may cause higher than anticipated withdrawal of deposits or draws of unfunded commitments to fund new loans. Management believes that cash requirements to fund future non-deposit liabilities, including operating lease liabilities, other liabilities, or borrowings as ofMarch 31, 2023 , are not material to the Company's liquidity position as ofMarch 31, 2023 . The Company has other available sources of liquidity to fund unforeseen liquidity requirements. These include borrowings available through our correspondent banking relationships and our credit lines with theFederal Reserve Bank and the FHLB. AtMarch 31, 2023 , our liquid assets, which include investments and loans maturing within a year, were$502.0 million and our funds available for borrowing under our existing lines of credit were$1.201 billion . Additionally, the Company can obtain borrowings under theFederal Reserve Bank's newly created Bank Term Funding Program ("BTFP") as a source of liquidity in order to help assure that banks have the ability to meet the needs of all depositors. The BTFP allows eligible depository institutions to pledge high-quality securities to obtain liquidity and eliminate the need for the financial institution to sell securities quickly in times of stress. The Company did not borrow from the BTFP in the first quarter of 2023. Given these sources of liquidity and our expectations for customer demands for cash and for our operating cash needs, we believe our sources of liquidity to be sufficient for the foreseeable future. As shown in the Consolidated Statements of Cash Flows included in Part I - Item 1 "Financial Statements" of this report, net cash provided by operating activities was$4.3 million for the first three months of 2023, primarily due to cash provided by net income and net proceeds from the sale of loans held for sale, which were only partially offset by cash used in connection with the origination of loans held for sale. Net cash used by investing activities was$28.7 million for the same period, primarily due to an increase in loans which was only partially offset by maturities and calls of available for sale securities. Net cash used by financing activities in the same period was$95.8 million , primarily due to a decrease in deposits, as well as cash dividends paid to shareholder and repurchases of common stock. Throughout our history, the Company has periodically repurchased for cash a portion of its shares of common stock in the open market. The Company repurchased 27,887 shares of its common stock under the Company's previously announced repurchase programs in the first three months of 2023. AtMarch 31, 2023 , there are 257,113 shares remaining under the repurchase program. The Company may elect to continue to repurchase our stock from time-to-time depending upon market conditions, but we can make no assurances that we will continue this program or that we will authorize additional shares for repurchase.
Capital Requirements and Ratios
We are subject to minimum capital requirements. Federal banking agencies have adopted regulations establishing minimum requirements for the capital adequacy of banks and bank holding companies. The requirements address both risk-based capital and leverage capital. We believe as ofMarch 31, 2023 , that the Company and the Bank met all applicable capital adequacy requirements for a "well-capitalized" institution by regulatory standards. The table below illustrates the capital requirements in effect for the periods noted for the Company and the Bank and the actual capital ratios for each entity that exceed these requirements. Management intends to maintain capital ratios for the Bank in 2023, exceeding theFDIC's requirements for the "well-capitalized" classification. The capital ratios for the Company exceed those for the Bank primarily because the$10 million trust preferred securities offering completed in the fourth quarter of 2005 is included in the Company's capital for regulatory purposes, although they are accounted for as a long-term debt in our 50 -------------------------------------------------------------------------------- financial statements. The trust preferred securities are not accounted for on the Bank's financial statements nor are they included in its capital. As a result, the Company has$10 million more in regulatory capital than the Bank atMarch 31, 2023 , which explains most of the difference in the capital ratios for the two entities. Minimum Required Capital Well-Capitalized Actual Ratio Company Actual Ratio Bank March 31, 2023 Total risk-based capital 8.00% 10.00% 13.60% 11.45% Tier 1 risk-based capital 6.00% 8.00% 12.75% 10.59% Common equity tier 1 capital 4.50% 6.50% 12.24% 10.60% Leverage ratio 4.00% 5.00% 9.40% 7.79% See Note 22 of the Consolidated Financial Statements in Part II. Item 8 of the Company's Annual Report on Form 10-K for the year endedDecember 31, 2022 for a detailed discussion of the capital ratios. The requirements for "well-capitalized" come from the Prompt Corrective Action rules. See Part I. Item 1 - Business - Supervision and Regulation in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2022 . These rules apply to the Bank but not to the Company. Under the rules of theFederal Reserve Bank , a bank holding company such as the Company is generally defined to be "well capitalized" if its Tier 1 risk-based capital ratio is 8.0% or more and its total risk-based capital ratio is 10.0% or more.
Critical Accounting Policies
Our critical accounting policies are described in detail in Part II. Item 7, Management's Discussion and Analysis, and in Note 1, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2022 . TheSEC defines "critical accounting policies" as those that require application of management's most difficult, subjective or complex judgments as a result of the need to make "critical accounting estimates", which are estimates that involve estimation uncertainty that has had or is reasonably likely to have a material impact on the Company's financial condition or results of operations. The Company's critical accounting policies include allowance for credit losses, valuation of goodwill and other intangible assets, the valuation of mortgage servicing rights, and fair value. There have been no material changes to the valuation techniques or models, that affect our estimates during 2023.
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