Northrim Banp(NRIM) - 2023 Q2 - Quarterly Report

Part I Financial Statements (unaudited) The company's financial statements reflect a slight asset decrease, loan growth, and mixed income results influenced by net interest income and mortgage banking Consolidated Balance Sheets Total assets slightly decreased to $2.64 billion, while net loans grew 10.5% to $1.64 billion, funded by reduced deposits and increased borrowings Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2023 | December 31, 2022 | Change | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total Assets | $2,638,207 | $2,674,318 | ($36,111) | -1.4% | | Net Loans | $1,643,594 | $1,487,947 | $155,647 | 10.5% | | Investment Securities (AFS & HTM) | $707,889 | $713,779 | ($5,890) | -0.8% | | Total Deposits | $2,302,311 | $2,387,211 | ($84,900) | -3.6% | | Borrowings | $64,887 | $14,095 | $50,792 | 360.4% | | Total Shareholders' Equity | $221,336 | $218,629 | $2,707 | 1.2% | Consolidated Statements of Income Q2 2023 net income rose to $5.6 million due to higher net interest income, while YTD net income decreased to $10.4 million from lower mortgage banking income Income Statement Summary (in thousands, except per share data) | Metric | Q2 2023 | Q2 2022 | YTD 2023 | YTD 2022 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $25,142 | $22,212 | $50,174 | $41,516 | | Provision for credit losses | $1,407 | $463 | $1,767 | $313 | | Mortgage banking income | $3,913 | $5,900 | $5,921 | $12,882 | | Net Income | $5,577 | $4,795 | $10,407 | $12,021 | | Earnings Per Share, Diluted | $0.98 | $0.83 | $1.82 | $2.03 | Consolidated Statements of Cash Flows Net cash and equivalents decreased by $222.6 million, with cash used in operations, investing, and financing activities primarily for loan growth and deposit outflows Six Months Ended June 30, 2023 Cash Flow Summary (in thousands) | Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net Cash (Used) Provided by Operating Activities | ($22,519) | $15,309 | | Net Cash (Used) by Investing Activities | ($155,329) | ($218,820) | | Net Cash Used by Financing Activities | ($44,750) | ($105,393) | | Net Change in Cash and Cash Equivalents | ($222,598) | ($308,904) | Notes to the Consolidated Financial Statements Notes detail accounting policies, including ASU 2022-02 adoption, investment portfolio unrealized losses, loan portfolio growth, and segment performance - The company adopted ASU 2022-02, which eliminates the accounting guidance for troubled debt restructurings (TDRs) and enhances disclosure requirements for loan modifications to borrowers experiencing financial difficulty; the adoption did not have a material impact[29] - The investment portfolio held available-for-sale securities with gross unrealized losses of $38.4 million as of June 30, 2023; management believes these losses are due to noncredit-related factors, primarily interest rate changes, and has not recognized any credit losses[33][36] - Total loans held for investment grew to $1.66 billion; the Allowance for Credit Losses (ACL) for these loans was $15.6 million, or 0.94% of the total loan portfolio[41] - The Community Banking segment generated $12.9 million in net income for the first six months of 2023, while the Home Mortgage Lending segment incurred a net loss of $2.5 million, a significant decline from a $0.6 million profit in the prior-year period[108] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q2 2023 net income growth driven by net interest income, stable Alaskan economy, solid financial condition, and strong liquidity and capital - Alaska's economy is improving, with the seasonally adjusted unemployment rate at 3.6% in May 2023, below the U.S. average; job growth was led by the Leisure and Hospitality sector[113][114] - Q2 2023 net income rose to $5.6 million, driven by a 13% increase in net interest income to $25.1 million; net interest margin expanded by 47 basis points to 4.14% compared to Q2 2022[123][124] - Loans grew 10% to $1.66 billion since year-end 2022, while deposits decreased 4% to $2.30 billion over the same period[124] Results of Operations H1 2023 net income decreased to $10.4 million due to lower mortgage banking income and higher credit loss provisions, partially offset by increased net interest income Key Performance Ratios | Ratio | Q2 2023 | Q2 2022 | YTD 2023 | YTD 2022 | | :--- | :--- | :--- | :--- | :--- | | Return on average assets, annualized | 0.85 % | 0.74 % | 0.81 % | 0.93 % | | Return on average shareholders' equity, annualized | 9.85 % | 8.58 % | 9.30 % | 10.51 % | - Net interest margin (NIM) for Q2 2023 increased by 47 basis points to 4.14% compared to Q2 2022, primarily due to higher yields on earning assets outpacing the rise in deposit costs[131][133] - The provision for credit losses increased to $1.8 million for the first six months of 2023, up from $0.3 million in the prior-year period, reflecting loan growth and changes in economic forecasts under CECL[142] - Other operating income for H1 2023 decreased 36% to $11.9 million, mainly due to a $7.0 million drop in mortgage banking income from lower production volume caused by rising interest rates; the prior year period also included a one-time $2.0 million life insurance proceed[144] Financial Condition The company's financial condition shows 10% loan growth to $1.66 billion, funded by a 4% deposit decrease and increased borrowings, with strong credit quality - The loan portfolio grew by $157.5 million (10%) in the first six months of 2023, with commercial & industrial loans and 1-4 family residential properties showing notable increases[151] - Nonperforming assets, net of government guarantees, decreased to $5.6 million at June 30, 2023, from $6.4 million at December 31, 2022[125] - Total deposits decreased by $84.9 million (4%) to $2.30 billion, with a notable shift from demand and savings accounts into higher-yielding time deposits[155] - Uninsured deposits totaled $910.7 million, representing 40% of total deposits as of June 30, 2023, down from 46% at year-end 2022[157] Liquidity and Capital Resources The company maintains robust liquidity with $442.9 million in liquid assets and $1.224 billion in borrowing capacity, exceeding all 'well-capitalized' regulatory capital ratios - The company has strong liquidity sources, including $442.9 million in liquid assets maturing within a year and $1.224 billion in available borrowing lines from the FHLB and Federal Reserve[165] Capital Ratios as of June 30, 2023 | Ratio | Minimum Required | Well Capitalized | Company Actual | Bank Actual | | :--- | :--- | :--- | :--- | :--- | | Total risk-based capital | 8.00% | 10.00% | 13.02% | 11.16% | | Tier 1 risk-based capital | 6.00% | 8.00% | 12.13% | 10.26% | | Common equity tier 1 capital | 4.50% | 6.50% | 11.64% | 10.27% | | Leverage ratio | 4.00% | 5.00% | 9.28% | 7.83% | - The company repurchased 89,887 shares of its common stock in the first six months of 2023; as of June 30, 2023, 195,113 shares remain authorized for repurchase[167][181] Quantitative and Qualitative Disclosures About Market Risk No material changes in market risk disclosures were identified from the prior annual report as of June 30, 2023 - There have been no material changes in the company's market risk profile since the end of 2022[173] Controls and Procedures Management concluded disclosure controls and procedures were effective, with no material changes to internal control over financial reporting during Q2 2023 - The principal executive and financial officers concluded that disclosure controls and procedures were effective as of June 30, 2023[174] - No material changes to the internal control over financial reporting occurred during the second quarter of 2023[175] Part II Legal Proceedings The company is involved in routine legal actions not expected to materially impact its financial condition or results of operations - The company is party to various routine debtor-creditor legal actions, which are not expected to have a material impact on its financial position[177] Risk Factors No material changes to the company's risk factors were identified from the prior annual report as of June 30, 2023 - Risk factors have not changed materially as of June 30, 2023, from what was reported in the 2022 Form 10-K[178] Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 62,000 shares in Q2 2023 at an average of $40.30, with 195,113 shares remaining for repurchase Share Repurchases in Q2 2023 | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | April 2023 | 19,000 | $44.34 | | May 2023 | 22,000 | $37.10 | | June 2023 | 21,000 | $40.09 | | Total Q2 | 62,000 | $40.30 | - As of June 30, 2023, 195,113 shares remain available for repurchase under the company's publicly announced plan[181]