NORTHRIM BANCORP INC
10-Ks and 10-Qs
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
For the quarterly period ended June 30, 2022
For the transition period from_____to____
Commission File Number 000-33501
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
(Address of principal executive offices) (Zip Code)
(907 ) 562-0062
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
| TITLE OF EACH CLASS | TRADING SYMBOL | NAME OF EXCHANGE | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
ý Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
ý Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large Accelerated Filer ¨ Accelerated Filer ý Non-accelerated Filer ¨
Smaller Reporting Company ☐ Emerging Growth Company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
The number of shares of the issuer’s Common Stock, par value $1 per share, outstanding at August 5, 2022 was 5,681,089 .
| TABLE OF CONTENTS | ||||||||
| Part I | FINANCIAL INFORMATION | |||||||
| Item 1. | Financial Statements (unaudited) | |||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Part II | OTHER INFORMATION | |||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 5. | ||||||||
| Item 6. | ||||||||
1
PART I. FINANCIAL INFORMATION
These consolidated financial statements should be read in conjunction with the consolidated financial statements, accompanying notes and other relevant information included in Northrim BanCorp, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2021.
ITEM 1. FINANCIAL STATEMENTS
2
CONSOLIDATED FINANCIAL STATEMENTS
NORTHRIM BANCORP, INC.
Consolidated Balance Sheets
(Unaudited)
| June 30, 2022 | December 31, 2021 | ||||||||||
| (In Thousands, Except Share Data) | |||||||||||
| ASSETS | |||||||||||
| Cash and due from banks | $ | $ | |||||||||
| Interest bearing deposits in other banks | |||||||||||
| Investment securities available for sale, at fair value | |||||||||||
| Marketable equity securities | |||||||||||
| Investment securities held to maturity, at amortized cost | |||||||||||
| Investment in Federal Home Loan Bank stock | |||||||||||
| Loans held for sale | |||||||||||
| Loans | |||||||||||
| Allowance for credit losses, loans | ( | ( | |||||||||
| Net loans | |||||||||||
| Purchased receivables, net | |||||||||||
| Mortgage servicing rights, at fair value | |||||||||||
| Other real estate owned, net | |||||||||||
| Premises and equipment, net | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Goodwill | |||||||||||
| Other intangible assets, net | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES | |||||||||||
| Deposits: | |||||||||||
| Demand | $ | $ | |||||||||
| Interest-bearing demand | |||||||||||
| Savings | |||||||||||
| Money market | |||||||||||
| Certificates of deposit less than $250,000 | |||||||||||
| Certificates of deposit $250,000 and greater | |||||||||||
| Total deposits | |||||||||||
| Borrowings | |||||||||||
| Junior subordinated debentures | |||||||||||
| Operating lease liabilities | |||||||||||
| Other liabilities | |||||||||||
| Total liabilities | |||||||||||
| SHAREHOLDERS' EQUITY | |||||||||||
Preferred stock, $ | |||||||||||
Common stock, $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Retained earnings | |||||||||||
| Accumulated other comprehensive loss, net of tax | ( | ( | |||||||||
| Total shareholders' equity | |||||||||||
| Total liabilities and shareholders' equity | $ | $ | |||||||||
See notes to consolidated financial statements
3
NORTHRIM BANCORP, INC.
Consolidated Statements of Income
(Unaudited)
| Three Months Ended | Six Months Ended | |||||||||||||||||||
| June 30, | June 30, | |||||||||||||||||||
| (In Thousands, Except Per Share Data) | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||
| Interest and Dividend Income | ||||||||||||||||||||
| Interest and fees on loans and loans held for sale | $ | $ | $ | $ | ||||||||||||||||
| Interest on investment securities available for sale | ||||||||||||||||||||
| Dividends on marketable equity securities | ||||||||||||||||||||
| Interest on investment securities held to maturity | ||||||||||||||||||||
| Dividends on Federal Home Loan Bank stock | ||||||||||||||||||||
| Interest on deposits in other banks | ||||||||||||||||||||
| Total Interest and Dividend Income | ||||||||||||||||||||
| Interest Expense | ||||||||||||||||||||
| Interest expense on deposits | ||||||||||||||||||||
| Interest expense on borrowings | ||||||||||||||||||||
| Interest expense on junior subordinated debentures | ||||||||||||||||||||
| Total Interest Expense | ||||||||||||||||||||
| Net Interest Income | ||||||||||||||||||||
| Provision (benefit) for credit losses | ( | ( | ||||||||||||||||||
| Net Interest Income After Provision (Benefit) for Credit Losses | ||||||||||||||||||||
| Other Operating Income | ||||||||||||||||||||
| Mortgage banking income | ||||||||||||||||||||
| Bankcard fees | ||||||||||||||||||||
| Purchased receivable income | ||||||||||||||||||||
| Service charges on deposit accounts | ||||||||||||||||||||
| Gain on sale of marketable equity securities, net | ||||||||||||||||||||
| Keyman life insurance proceeds | ||||||||||||||||||||
| Unrealized (loss) gain on marketable equity securities | ( | ( | ||||||||||||||||||
| Other income | ||||||||||||||||||||
| Total Other Operating Income | ||||||||||||||||||||
| Other Operating Expense | ||||||||||||||||||||
| Salaries and other personnel expense | ||||||||||||||||||||
| Data processing expense | ||||||||||||||||||||
| Occupancy expense | ||||||||||||||||||||
| Marketing expense | ||||||||||||||||||||
| Professional and outside services | ||||||||||||||||||||
| Insurance expense | ||||||||||||||||||||
| OREO expense, net rental income and gains on sale | ||||||||||||||||||||
| Intangible asset amortization expense | ||||||||||||||||||||
| Other operating expense | ||||||||||||||||||||
| Total Other Operating Expense | ||||||||||||||||||||
| Income Before Provision for Income Taxes | ||||||||||||||||||||
| Provision for income taxes | ||||||||||||||||||||
| Net Income | $ | $ | $ | $ | ||||||||||||||||
| Earnings Per Share, Basic | $ | $ | $ | $ | ||||||||||||||||
| Earnings Per Share, Diluted | $ | $ | $ | $ | ||||||||||||||||
| Weighted Average Shares Outstanding, Basic | ||||||||||||||||||||
| Weighted Average Shares Outstanding, Diluted | ||||||||||||||||||||
See notes to consolidated financial statements
4
NORTHRIM BANCORP, INC.
Consolidated Statements of Comprehensive Income
(Unaudited)
2010
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||
| (In Thousands) | 2022 | 2021 | 2022 | 2021 | ||||||||||
| Net income | $ | $ | $ | $ | ||||||||||
| Other comprehensive income (loss), net of tax: | ||||||||||||||
| Securities available for sale: | ||||||||||||||
| Unrealized holding (losses) arising during the period | ($ | ($ | ($ | ($ | ||||||||||
| Derivatives and hedging activities: | ||||||||||||||
| Unrealized holding (losses) gains arising during the period | ( | |||||||||||||
| Income tax benefit related to unrealized gains and losses | ||||||||||||||
| Other comprehensive (loss), net of tax | ( | ( | ( | ( | ||||||||||
| Comprehensive (loss) income | ($ | $ | ($ | $ | ||||||||||
See notes to consolidated financial statements
5
NORTHRIM BANCORP, INC.
Consolidated Statements of Changes in Shareholders’ Equity
(Unaudited)
| Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss), net of Tax | Total | |||||||||||||||||||||||||||||||
| Number of Shares | Par Value | ||||||||||||||||||||||||||||||||||
| (In Thousands) | |||||||||||||||||||||||||||||||||||
| Balance as of January 1, 2021 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
Cash dividend on common stock ($ | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
| Exercise of stock options and vesting of restricted stock units, net | ( | — | — | ( | |||||||||||||||||||||||||||||||
| Repurchase of common stock | ( | ( | ( | — | — | ( | |||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| — | — | — | — | ||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Balance as of March 31, 2021 | $ | $ | $ | ($ | $ | ||||||||||||||||||||||||||||||
Cash dividend on common stock ($ | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Balance as of June 30, 2021 | $ | $ | $ | ($ | $ | ||||||||||||||||||||||||||||||
Cash dividend on common stock ($ | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
| Repurchase of common stock | ( | ( | ( | — | — | ( | |||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Balance as of September 30, 2021 | $ | $ | $ | ($ | $ | ||||||||||||||||||||||||||||||
Cash dividend on common stock ($ | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
| Exercise of stock options and vesting of restricted stock units, net | ( | — | — | ( | |||||||||||||||||||||||||||||||
| Repurchase of common stock | ( | ( | ( | — | — | ( | |||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Balance as of December 31, 2021 | $ | $ | $ | ($ | $ | ||||||||||||||||||||||||||||||
See notes to consolidated financial statements
6
NORTHRIM BANCORP, INC.
Consolidated Statements of Changes in Shareholders’ Equity
(Continued)
(Unaudited)
| Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss), net of Tax | Total | |||||||||||||||||||||||||||||||
| Number of Shares | Par Value | ||||||||||||||||||||||||||||||||||
| (In Thousands) | |||||||||||||||||||||||||||||||||||
| Balance as of January 1, 2022 | $ | $ | $ | ($ | $ | ||||||||||||||||||||||||||||||
Cash dividend on common stock ($ | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
| Repurchase of common stock | ( | ( | ( | — | — | ( | |||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Balance as of March 31, 2022 | $ | $ | $ | ($ | $ | ||||||||||||||||||||||||||||||
Cash dividend on common stock ($ | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
| Repurchase of common stock | ( | ( | ( | — | — | ( | |||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Balance as of June 30, 2022 | $ | $ | $ | ($ | $ | ||||||||||||||||||||||||||||||
See notes to consolidated financial statements
7
NORTHRIM BANCORP, INC.
Consolidated Statements of Cash Flows
(Unaudited)
| Six Months Ended June 30, | |||||||||||
| (In Thousands) | 2022 | 2021 | |||||||||
| Operating Activities: | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to Reconcile Net Income to Net Cash Provided (Used) by Operating Activities: | |||||||||||
| Gain on sale of securities, net | ( | ||||||||||
| Depreciation and amortization of premises and equipment | |||||||||||
| Amortization of software | |||||||||||
| Intangible asset amortization | |||||||||||
| Amortization of investment security premium, net of discount accretion | |||||||||||
| Unrealized loss (gain) on marketable equity securities | ( | ||||||||||
| Deferred tax (benefit) expense | |||||||||||
| Stock-based compensation | |||||||||||
| Deferred loan fees and amortization, net of costs | ( | ||||||||||
| Provision (benefit) for credit losses | ( | ||||||||||
| Additions to home mortgage servicing rights carried at fair value | ( | ( | |||||||||
| Change in fair value of home mortgage servicing rights carried at fair value | ( | ||||||||||
| Change in fair value of commercial servicing rights carried at fair value | |||||||||||
| Gain on sale of loans | ( | ( | |||||||||
| Proceeds from the sale of loans held for sale | |||||||||||
| Origination of loans held for sale | ( | ( | |||||||||
| Gain on sale of other real estate owned | ( | ||||||||||
| Proceeds from keyman life insurance | ( | ||||||||||
| Net changes in assets and liabilities: | |||||||||||
| (Increase) in accrued interest receivable | ( | ||||||||||
| Decrease in other assets | |||||||||||
| (Decrease) in other liabilities | ( | ( | |||||||||
| Net Cash Provided by Operating Activities | |||||||||||
| Investing Activities: | |||||||||||
| Investment in securities: | |||||||||||
| Purchases of investment securities available for sale | ( | ( | |||||||||
| Purchases of marketable equity securities | ( | ( | |||||||||
| Purchases of FHLB stock | ( | ( | |||||||||
| Purchases of investment securities held to maturity | ( | ( | |||||||||
| Proceeds from sales/calls/maturities of securities available for sale | |||||||||||
| Proceeds from sales of marketable equity securities | |||||||||||
| Proceeds from redemption of FHLB stock | |||||||||||
| (Increase) decrease in purchased receivables, net | ( | ||||||||||
| Decrease (increase) in loans, net | ( | ||||||||||
| Proceeds from sale of other real estate owned | |||||||||||
| Proceeds from keyman life insurance | |||||||||||
| Purchases of software | ( | ( | |||||||||
| Purchases of premises and equipment | ( | ( | |||||||||
| Net Cash (Used) by Investing Activities | ( | ( | |||||||||
| Financing Activities: | |||||||||||
| (Decrease) increase in deposits | ( | ||||||||||
| (Decrease) in borrowings | ( | ( | |||||||||
| Repurchase of common stock | ( | ( | |||||||||
| Proceeds from the issuance of common stock | |||||||||||
| Cash dividends paid | ( | ( | |||||||||
| Net Cash (Used) Provided by Financing Activities | ( | ||||||||||
| Net Change in Cash and Cash Equivalents | ( | ||||||||||
8
| Cash and Cash Equivalents at Beginning of Period | |||||||||||
| Cash and Cash Equivalents at End of Period | $ | $ | |||||||||
| Supplemental Information: | |||||||||||
| Income taxes paid | $ | $ | |||||||||
| Interest paid | $ | $ | |||||||||
| Transfer of loans to other real estate owned | $ | $ | |||||||||
| Non-cash lease liability arising from obtaining right of use assets | $ | $ | |||||||||
| Cash dividends declared but not paid | $ | $ | |||||||||
See notes to consolidated financial statements
9
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation and Significant Accounting Policies
The Company’s significant accounting policies are discussed in Note 1 to the audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2021. There have been no significant changes in our application of these accounting policies in 2022.
Reclassification of Prior Period Presentation
Certain prior year amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations or total shareholders' equity.
Recent Accounting Pronouncements
Accounting pronouncements to be implemented in future periods
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Report of Financial Reporting ("ASU 2020-04"). ASU 2020-04 was issued to provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The guidance provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference London Inter-Bank Offered Rate ("LIBOR") or another reference rate expected to be discontinued. The last expedient is a one-time election to sell or transfer debt securities classified as held to maturity. The expedients are in effect from March 12, 2020, through December 31, 2022. The Company will be able to use the expedients in this guidance to manage through the transition away from LIBOR, specifically for our loan portfolio, derivative contracts, and bond portfolio.
In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848): Scope, ("ASU 2021-01"). The amendments in ASU 2021-01 are elective and apply to all entities that have derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. The amendments clarify certain optional expedients and exceptions in Topic 848 for contract modifications apply to derivatives that are affected by the discounting transition.
10
LIBOR is a widely-referenced benchmark rate, which is published in five currencies and a range of tenors, and seeks to estimate the cost at which banks can borrow on an unsecured basis from other banks. The administrator of LIBOR, ICE Benchmark Administration, ceased the publication of one-week and two-month LIBOR, as well as all non-US Dollar LIBOR tenors as of January 1, 2022. 1-month, 3-month, 6-month, and 12-month US Dollar LIBOR will continue to be published through and will remain available for use in legacy contracts or as otherwise enumerated by financial regulators until June 30, 2023. The Company has some assets and liabilities referenced to 1-month, 3-month, and 12-month US Dollar LIBOR, such as commercial loans, derivatives, debt securities, and junior subordinated debentures. As of June 30, 2022, we had approximately $179.1 million of assets, including $101.0 million in commercial loans and $78.1 million in debt securities, and $10.0 million of liabilities in the form of our junior subordinated debentures linked to USD LIBOR. These amounts exclude derivative assets and liabilities on our consolidated balance sheet. As of June 30, 2022, the notional amount of our USD LIBOR-linked interest rate derivative contracts was $150.8 million. Of this amount, $70.0 million in notional value represent commercial loan interest rate swap agreements with commercial banking customers. An additional $70.8 million in notional value represent corresponding swap agreements with third party financial institutions that offset the commercial loan swaps. Swap agreements with third party institutions are $80.0 million, including an interest rate swap agreement for $10.0 million in notional value related to our junior subordinated debentures. Each of the USD LIBOR-linked amounts referenced above are expected to vary in future periods as current contracts expire with potential replacement contracts using an alternative reference rate.
In an effort to mitigate the risks associated with a transition away from LIBOR, our Asset Liability Committee has undertaken initiatives to: (i) develop more robust fallback language and disclosures related to the LIBOR transition, (ii) develop a plan to seek to amend legacy contracts to reference such fallback language or alternative reference rates, (iii) enhance systems to support commercial loans, securities, and derivatives linked to the Secured Overnight Financing Rate and other alternative reference rates, (iv) develop and evaluate internal guidance, policies and procedures focused on the transition away from LIBOR to alternative reference rate products, and (v) prepare and disseminate internal and external communications regarding the LIBOR transition.
ASU 2021-01 is not expected to have a material impact on the Company's consolidated financial statements.
In March 2022, the FASB issued ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures ("ASU 2022-02"). The amendments in ASU 2022-02 eliminate the accounting guidance for troubled debt restructurings ("TDRs") by creditors while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Specifically, rather than applying the recognition and measurement guidance for TDRs which includes an assessment of whether the creditor has granted a concession, an entity must evaluate whether the modification represents a new loan or a continuation of an existing loan. The amendments enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. Additionally, for public business entities, ASU 2022-02 requires that an entity disclose current-period gross writeoffs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, Financial Instruments-Credit Losses-Measured at Amortized Cost in the vintage disclosures required by paragraph 326-20-50-6. ASU 2022-02 is effective for the Company for fiscal years beginning after December 15, 2022. The Company may elect to apply the updated guidance on TDR recognition and measurement by using a modified retrospective transition method, which would result in a cumulative-effect adjustment to retained earnings, or to adopt the amendments prospectively. The Company intends to elect to adopt the updated guidance on TDR recognition and measurement prospectively; therefore the guidance will be applied to modifications occurring after the date of adoption. The amendments on TDR disclosures and vintage disclosures must be adopted prospectively. The Company does not believe that ASU 2022-02 will have a material impact on the Company's consolidated financial statements.
11
2. Investment Securities
Marketable Equity Securities
The Company held marketable equity securities with fair values of $9.1 million and $8.4 million at June 30, 2022 and December 31, 2021, respectively. The gross realized and unrealized gains (losses) recognized on marketable equity securities in other operating income in the Company's Consolidated Statements of Income were as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||
| (In Thousands) | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||
| Unrealized (loss) gain on marketable equity securities | ($ | $ | ($ | $ | ||||||||||||||||
| Gain on sale of marketable equity securities, net | ||||||||||||||||||||
| Total | ($ | $ | ($ | $ | ||||||||||||||||
Debt securities
Debt securities have been classified in the financial statements as available for sale or held to maturity. The following table summarizes the amortized cost, estimated fair value, and the Allowance for Credit Losses ("ACL") of debt securities and the corresponding amounts of gross unrealized gains and losses of available-for-sale securities recognized in accumulated other comprehensive income (loss) and gross unrecognized gains and losses of held to maturity securities at the periods indicated:
| (In Thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Allowance for Credit Losses | Fair Value | ||||||||||||||||||||||||
| June 30, 2022 | |||||||||||||||||||||||||||||
| Securities available for sale | |||||||||||||||||||||||||||||
| U.S. Treasury and government sponsored entities | $ | $ | ($ | $ | $ | ||||||||||||||||||||||||
| Municipal securities | ( | ||||||||||||||||||||||||||||
| Corporate bonds | ( | ||||||||||||||||||||||||||||
| Collateralized loan obligations | ( | ||||||||||||||||||||||||||||
| Total securities available for sale | $ | $ | ($ | $ | $ | ||||||||||||||||||||||||
| (In Thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||||||||
| June 30, 2022 | |||||||||||||||||||||||
| Securities held to maturity | |||||||||||||||||||||||
| Corporate bonds | $ | $ | ($ | $ | |||||||||||||||||||
| Allowance for credit losses | — | — | — | ||||||||||||||||||||
| Total securities held to maturity, net of ACL | $ | $ | ($ | $ | |||||||||||||||||||
| (In Thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Allowance for Credit Losses | Fair Value | ||||||||||||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||||||||
| Securities available for sale | |||||||||||||||||||||||||||||
| U.S. Treasury and government sponsored entities | $ | $ | ($ | $ | $ | ||||||||||||||||||||||||
| Municipal securities | |||||||||||||||||||||||||||||
| Corporate bonds | ( | ||||||||||||||||||||||||||||
| Collateralized loan obligations | ( | ||||||||||||||||||||||||||||
| Total securities available for sale | $ | $ | ($ | $ | $ | ||||||||||||||||||||||||
12
| (In Thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||
| Securities held to maturity | |||||||||||||||||||||||
| Corporate bonds | $ | $ | ($ | $ | |||||||||||||||||||
| Allowance for credit losses | — | — | — | ||||||||||||||||||||
| Total securities held to maturity, net of ACL | $ | $ | ($ | $ | |||||||||||||||||||
Gross unrealized losses on available for sale securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2022 and December 31, 2021 were as follows:
| Less Than 12 Months | More Than 12 Months | Total | ||||||||||||||||||
| (In Thousands) | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||
| June 30, 2022 | ||||||||||||||||||||
| Securities available for sale | ||||||||||||||||||||
| U.S. Treasury and government sponsored entities | $ | ($ | $ | ($ | $ | ($ | ||||||||||||||
| Corporate bonds | ( | ( | ||||||||||||||||||
| Collateralized loan obligations | ( | ( | ||||||||||||||||||
| Municipal securities | ( | ( | ||||||||||||||||||
| Total | $ | ($ | $ | ($ | $ | ($ | ||||||||||||||
| December 31, 2021: | ||||||||||||||||||||
| Securities available for sale | ||||||||||||||||||||
| U.S. Treasury and government sponsored entities | $ | ($ | $ | ($ | $ | ($ | ||||||||||||||
| Corporate bonds | ( | ( | ||||||||||||||||||
| Collateralized loan obligations | ( | ( | ||||||||||||||||||
| Total | $ | ($ | $ | ($ | $ | ($ | ||||||||||||||
Management evaluates available for sale debt securities in unrealized loss positions to determine whether the impairment is due to credit-related factors or noncredit-related factors. Consideration is given to the extent to which the fair value is less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to retain its investment in the security for a period of time sufficient to allow for any anticipated recovery in fair value.
At June 30, 2022, the Company had 79 available for sale securities in an unrealized loss position without an ACL. At June 30, 2022, the Company had four held to maturity securities in an unrealized loss position without an ACL. Management does not have the intent to sell any of these securities and believes that it is more likely than not that the Company will not have to sell any such securities before a recovery of cost. The fair value is expected to recover as the securities approach their maturity date or repricing date or if market yields for such investments decline. Accordingly, as of June 30, 2022, management believes that the unrealized losses detailed in the previous table are due to noncredit-related factors, including changes in interest rates and other market conditions, and therefore no losses have been recognized in the Company's Consolidated Statements of Income.
At June 30, 2022 and December 31, 2021, $54.7 million and $59.5 million in securities were pledged for deposits and borrowings, respectively.
13
| (In Thousands) | Amortized Cost | Fair Value | |||||||||
| US Treasury and government sponsored entities | |||||||||||
| 1-5 years | $ | $ | |||||||||
| Total | $ | $ | |||||||||
| Corporate bonds | |||||||||||
| 1-5 years | $ | $ | |||||||||
| 5-10 years | |||||||||||
| Total | $ | $ | |||||||||
| Collateralized loan obligations | |||||||||||
| 1-5 years | $ | $ | |||||||||
| 5-10 years | |||||||||||
| Over 10 years | |||||||||||
| Total | $ | $ | |||||||||
| Municipal securities | |||||||||||
| 1-5 years | $ | $ | |||||||||
| Total | $ | $ | |||||||||
There were no
A summary of interest income for the three and six-month periods ending June 30, 2022 and 2021, on available for sale investment securities are as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||
| (In Thousands) | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||
| US Treasury and government sponsored entities | $ | $ | $ | $ | ||||||||||||||||
| Other | ||||||||||||||||||||
| Total taxable interest income | $ | $ | $ | $ | ||||||||||||||||
| Municipal securities | $ | $ | $ | $ | ||||||||||||||||
| Total tax-exempt interest income | $ | $ | $ | $ | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||
14
3. Loans and Allowance for Credit Losses
Loans Held for Sale
Loans held for sale are comprised entirely of 1-4 family residential mortgage loans as of June 30, 2022 and December 31, 2021.
Loans Held for Investment
The following table presents amortized cost and unpaid principal balance of loans for the periods indicated:
| June 30, 2022 | December 31, 2021 | |||||||||||||||||||
| (In Thousands) | Amortized Cost | Unpaid Principal | Difference | Amortized Cost | Unpaid Principal | Difference | ||||||||||||||
| Commercial & industrial loans | $ | $ | ($ | $ | $ | ($ | ||||||||||||||
| Commercial real estate: | ||||||||||||||||||||
| Owner occupied properties | ( | ( | ||||||||||||||||||
| Non-owner occupied and multifamily properties | ( | ( | ||||||||||||||||||
| Residential real estate: | ||||||||||||||||||||
| 1-4 family residential properties secured by first liens | ( | ( | ||||||||||||||||||
| 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens | ||||||||||||||||||||
| 1-4 family residential construction loans | ( | ( | ||||||||||||||||||
| Other construction, land development and raw land loans | ( | ( | ||||||||||||||||||
| Obligations of states and political subdivisions in the US | ( | ( | ||||||||||||||||||
| Agricultural production, including commercial fishing | ( | ( | ||||||||||||||||||
| Consumer loans | ||||||||||||||||||||
| Other loans | ( | ( | ||||||||||||||||||
| Total | ( | ( | ||||||||||||||||||
| Allowance for credit losses | ( | ( | ||||||||||||||||||
| $ | $ | ($ | $ | $ | ($ | |||||||||||||||
The difference between the amortized cost and unpaid principal balance is net deferred origination fees totaling $8.3 million and $11.5 million at June 30, 2022 and December 31, 2021, respectively.
Accrued interest on loans, which is excluded from the amortized cost of loans held for investment, totaled $5.3 million and $5.5 million at June 30, 2022 and December 31, 2021, respectively, and was included in other assets in the Consolidated Balance Sheets.
Amortized cost in the above table includes $31.9 million and $118.2 million as of June 30, 2022 and December 31, 2021, respectively, in Paycheck Protection Program ("PPP") loans administered by the U.S. Small Business Administration ("SBA") within the Commercial & industrial loan segment.
15
Allowance for Credit Losses
The activity in the ACL related to loans held for investment is as follows:
| Three Months Ended June 30, | Beginning Balance | Credit Loss Expense (Benefit) | Charge-offs | Recoveries | Ending Balance | ||||||||||||
| (In Thousands) | |||||||||||||||||
| 2022 | |||||||||||||||||
| Commercial & industrial loans | $ | $ | ($ | $ | $ | ||||||||||||
| Commercial real estate: | |||||||||||||||||
| Owner occupied properties | |||||||||||||||||
| Non-owner occupied and multifamily properties | |||||||||||||||||
| Residential real estate: | |||||||||||||||||
| 1-4 family residential properties secured by first liens | |||||||||||||||||
| 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens | |||||||||||||||||
| 1-4 family residential construction loans | |||||||||||||||||
| Other construction, land development and raw land loans | ( | ||||||||||||||||
| Obligations of states and political subdivisions in the US | |||||||||||||||||
| Agricultural production, including commercial fishing | ( | ||||||||||||||||
| Consumer loans | ( | ||||||||||||||||
| Other loans | ( | ||||||||||||||||
| Total | $ | $ | ($ | $ | $ | ||||||||||||
| 2021 | |||||||||||||||||
| Commercial & industrial loans | $ | $ | ($ | $ | $ | ||||||||||||
| Commercial real estate: | |||||||||||||||||
| Owner occupied properties | ( | ||||||||||||||||
| Non-owner occupied and multifamily properties | |||||||||||||||||
| Residential real estate: | |||||||||||||||||
| 1-4 family residential properties secured by first liens | ( | ||||||||||||||||
| 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens | ( | ||||||||||||||||
| 1-4 family residential construction loans | ( | ||||||||||||||||
| Other construction, land development and raw land loans | ( | ||||||||||||||||
| Obligations of states and political subdivisions in the US | |||||||||||||||||
| Agricultural production, including commercial fishing | |||||||||||||||||
| Consumer loans | ( | ||||||||||||||||
| Other loans | |||||||||||||||||
| Total | $ | ($ | ($ | $ | $ | ||||||||||||
16
| Six Months Ended June 30, | Beginning Balance | Credit Loss Expense (Benefit) | Charge-offs | Recoveries | Ending Balance | ||||||||||||
| (In Thousands) | |||||||||||||||||
| 2022 | |||||||||||||||||
| Commercial & industrial loans | $ | $ | ($ | $ | $ | ||||||||||||
| Commercial real estate: | |||||||||||||||||
| Owner occupied properties | ( | ||||||||||||||||
| Non-owner occupied and multifamily properties | |||||||||||||||||
| Residential real estate: | |||||||||||||||||
| 1-4 family residential properties secured by first liens | |||||||||||||||||
| 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens | |||||||||||||||||
| 1-4 family residential construction loans | |||||||||||||||||
| Other construction, land development and raw land loans | ( | ||||||||||||||||
| Obligations of states and political subdivisions in the US | |||||||||||||||||
| Agricultural production, including commercial fishing | |||||||||||||||||
| Consumer loans | ( | ||||||||||||||||
| Other loans | ( | ||||||||||||||||
| Total | $ | $ | ($ | $ | $ | ||||||||||||
| 2021 | |||||||||||||||||
| Commercial & industrial loans | $ | $ | ($ | $ | $ | ||||||||||||
| Commercial real estate: | |||||||||||||||||
| Owner occupied properties | ( | ||||||||||||||||
| Non-owner occupied and multifamily properties | ( | ||||||||||||||||
| Residential real estate: | |||||||||||||||||
| 1-4 family residential properties secured by first liens | ( | ||||||||||||||||
| 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens | ( | ||||||||||||||||
| 1-4 family residential construction loans | ( | ||||||||||||||||
| Other construction, land development and raw land loans | ( | ||||||||||||||||
| Obligations of states and political subdivisions in the US | ( | ||||||||||||||||
| Agricultural production, including commercial fishing | ( | ||||||||||||||||
| Consumer loans | ( | ||||||||||||||||
| Other loans | |||||||||||||||||
| Total | $ | ($ | ($ | $ | $ | ||||||||||||
At June 30, 2022, as compared to March 31, 2022 and December 31, 2021, the Company forecasted a lower unemployment rate over the reasonable and supportable forecast period. In the second quarter, the ACL increased because an increase in loan balances more than offset the decrease in the forecast for unemployment, changes in the characteristics of loans, and a decrease in the ACL for loans individually evaluated. In the six months ending June 30, 2022, the ACL decreased as compared to the same six month period of 2021 because the decrease in the forecast for unemployment and changes in the characteristics of loans were only partially offset by increases in loan balances.
Credit Quality Information
As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management utilizes a loan risk grading system called the Asset Quality Rating (“AQR”) system to assign a risk classification to each of its loans. The risk classification is a dual rating system that contemplates both probability of default and risk of loss given default. Loans are graded on a scale of 1 to 10 and, loans graded 1 – 6 are considered “pass” grade loans. Loans graded 7 or higher are considered "classified" loans. A description of the general characteristics of the AQR risk classifications are as follows:
17
Pass grade loans – 1 through 6: The borrower demonstrates sufficient cash flow to fund debt service, including acceptable profit margins, cash flows, liquidity and other balance sheet ratios. Historic and projected performance indicates that the borrower is able to meet obligations under most economic circumstances. The Company has competent management with an acceptable track record. The category does not include loans with undue or unwarranted credit risks that constitute identifiable weaknesses.
Classified loans:
Special Mention – 7: A "special mention" credit has weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset at some future date.
Substandard – 8: A "substandard" credit is inadequately protected by the current worth and paying capacity of the obligor or by the collateral pledged, if any. Assets so classified must have a well-defined weakness, or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that Northrim Bank will sustain some loss if the deficiencies are not corrected.
Doubtful – 9: An asset classified "doubtful" has all the weaknesses inherent in one that is classified "substandard-8" with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions, and values, highly questionable and improbable. The loan has substandard characteristics, and available information suggests that it is unlikely that the loan will be repaid in its entirety.
Loss – 10: An asset classified "loss" is considered uncollectible and of such little value that its continuance on the books is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this basically worthless asset, even though partial recovery may be affected in the future.
The following tables present the Company's portfolio of risk-rated loans by grade and by year of origination. Management considers the guidance in ASC 310-20 when determining whether a modification, extension, or renewal of loan constitutes a current period origination. Generally, current period renewals of credit are re-underwritten at the point of renewal and considered current period originations for purposes of the table below.
| June 30, 2022 | 2022 | 2021 | 2020 | 2019 | 2018 | Prior | Total | ||||||||||||||||
| (In Thousands) | |||||||||||||||||||||||
| Commercial & industrial loans | |||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||
| Classified | |||||||||||||||||||||||
| Total commercial & industrial loans | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||
| Commercial real estate: | |||||||||||||||||||||||
| Owner occupied properties | |||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||
| Classified | |||||||||||||||||||||||
| Total commercial real estate owner occupied properties | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||
| Non-owner occupied and multifamily properties | |||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||
| Classified | |||||||||||||||||||||||
| Total commercial real estate non-owner occupied and multifamily properties | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||
| Residential real estate: | |||||||||||||||||||||||
| 1-4 family residential properties secured by first liens | |||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||
| Classified | |||||||||||||||||||||||
| Total residential real estate 1-4 family residential properties secured by first liens | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||
| 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens | |||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||
| Classified | |||||||||||||||||||||||
18
| Total residential real estate 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||
| 1-4 family residential construction loans | |||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||
| Classified | |||||||||||||||||||||||
| Total residential real estate 1-4 family residential construction loans | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||
| Other construction, land development and raw land loans | |||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||
| Classified | |||||||||||||||||||||||
| Total other construction, land development and raw land loans | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||
| Obligations of states and political subdivisions in the US | |||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||
| Classified | |||||||||||||||||||||||
| Total obligations of states and political subdivisions in the US | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||
| Agricultural production, including commercial fishing | |||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||
| Classified | |||||||||||||||||||||||
| Total agricultural production, including commercial fishing | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||
| Consumer loans | |||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||
| Classified | |||||||||||||||||||||||
| Total consumer loans | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||
| Other loans | |||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | ($ | $ | ||||||||||||||||
| Classified | |||||||||||||||||||||||
| Total other loans | $ | $ | $ | $ | $ | ($ | $ | ||||||||||||||||
| Total loans | |||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||
| Classified | |||||||||||||||||||||||
| Total loans | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||
| Total pass loans | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||
| Government guarantees | ( | ( | ( | ( | ( | ( | ( | ||||||||||||||||
| Total pass loans, net of government guarantees | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||
| Total classified loans | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||
| Government guarantees | ( | ( | ( | ( | ( | ||||||||||||||||||
| Total classified loans, net government guarantees | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||
| December 31, 2021 | 2021 | 2020 | 2019 | 2018 | 2017 | Prior | Total | ||||||||||||||||
| (In Thousands) | |||||||||||||||||||||||
| Commercial & industrial loans | |||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||
| Classified | |||||||||||||||||||||||
| Total commercial & industrial loans | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||
| Commercial real estate: | |||||||||||||||||||||||
| Owner occupied properties | |||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||
| Classified | |||||||||||||||||||||||
19
| Total commercial real estate owner occupied properties | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||
| Non-owner occupied and multifamily properties | |||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||
| Classified | |||||||||||||||||||||||
| Total commercial real estate non-owner occupied and multifamily properties | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||
| Residential real estate: | |||||||||||||||||||||||
| 1-4 family residential properties secured by first liens | |||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||
| Classified | |||||||||||||||||||||||
| Total residential real estate 1-4 family residential properties secured by first liens | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||
| 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens | |||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||
| Classified | |||||||||||||||||||||||
| Total residential real estate 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||
| 1-4 family residential construction loans | |||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||
| Classified | |||||||||||||||||||||||
| Total residential real estate 1-4 family residential construction loans | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||
| Other construction, land development and raw land loans | |||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||
| Classified | |||||||||||||||||||||||
| Total other construction, land development and raw land loans | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||
| Obligations of states and political subdivisions in the US | |||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||
| Classified | |||||||||||||||||||||||
| Total obligations of states and political subdivisions in the US | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||
| Agricultural production, including commercial fishing | |||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||
| Classified | |||||||||||||||||||||||
| Total agricultural production, including commercial fishing | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||
| Consumer loans | |||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||
| Classified | |||||||||||||||||||||||
| Total consumer loans | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||
| Other loans | |||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||
| Classified | |||||||||||||||||||||||
| Total other loans | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||
| Total loans | |||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||
| Classified | |||||||||||||||||||||||
| Total loans | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||
| Total pass loans | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||
| Government guarantees | ( | ( | ( | ( | ( | ( | ( | ||||||||||||||||
| Total pass loans, net of government guarantees | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||
| Total classified loans | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||
20
| Government guarantees | ( | ( | ( | ( | |||||||||||||||||||
| Total classified loans, net government guarantees | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||
21
Past Due Loans: The following tables present an aging of contractually past due loans as of the periods presented:
| (In Thousands) | 30-59 Days Past Due | 60-89 Days Past Due | Greater Than 90 Days Past Due | Total Past Due | Current | Total | Greater Than 90 Days Past Due Still Accruing | ||||||||||||||||||||||||||||||||||
| June 30, 2022 | |||||||||||||||||||||||||||||||||||||||||
| Commercial & industrial loans | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
| Commercial real estate: | |||||||||||||||||||||||||||||||||||||||||
| Owner occupied properties | |||||||||||||||||||||||||||||||||||||||||
| Non-owner occupied and multifamily properties | |||||||||||||||||||||||||||||||||||||||||
| Residential real estate: | |||||||||||||||||||||||||||||||||||||||||
| 1-4 family residential properties secured by first liens | |||||||||||||||||||||||||||||||||||||||||
| 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens | |||||||||||||||||||||||||||||||||||||||||
| 1-4 family residential construction loans | |||||||||||||||||||||||||||||||||||||||||
| Other construction, land development and raw land loans | |||||||||||||||||||||||||||||||||||||||||
| Obligations of states and political subdivisions in the US | |||||||||||||||||||||||||||||||||||||||||
| Agricultural production, including commercial fishing | |||||||||||||||||||||||||||||||||||||||||
| Consumer loans | |||||||||||||||||||||||||||||||||||||||||
| Other loans | |||||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||||||||||||||||||||
| Commercial & industrial loans | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
| Commercial real estate: | |||||||||||||||||||||||||||||||||||||||||
| Owner occupied properties | |||||||||||||||||||||||||||||||||||||||||
| Non-owner occupied and multifamily properties | |||||||||||||||||||||||||||||||||||||||||
| Residential real estate: | |||||||||||||||||||||||||||||||||||||||||
| 1-4 family residential properties secured by first liens | |||||||||||||||||||||||||||||||||||||||||
| 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens | |||||||||||||||||||||||||||||||||||||||||
| 1-4 family residential construction loans | |||||||||||||||||||||||||||||||||||||||||
| Other construction, land development and raw land loans | |||||||||||||||||||||||||||||||||||||||||
| Obligations of states and political subdivisions in the US | |||||||||||||||||||||||||||||||||||||||||
| Agricultural production, including commercial fishing | |||||||||||||||||||||||||||||||||||||||||
| Consumer loans | |||||||||||||||||||||||||||||||||||||||||
| Other loans | |||||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
Nonaccrual loans: Nonaccrual loans net of government guarantees totaled $7.3 million and $10.7 million at June 30, 2022 and December 31, 2021, respectively. The following table presents loans on nonaccrual status and loans on nonaccrual status
22
for which there was no related ACL. All loans with no ACL are individually evaluated for credit losses in the Company's Current Expected Credit Losses methodology.
| June 30, 2022 | December 31, 2021 | |||||||||||||
| (In Thousands) | Nonaccrual | Nonaccrual With No ACL | Nonaccrual | Nonaccrual With No ACL | ||||||||||
| Commercial & industrial loans | $ | $ | $ | $ | ||||||||||
| Commercial real estate: | ||||||||||||||
| Owner occupied properties | ||||||||||||||
| Residential real estate: | ||||||||||||||
| 1-4 family residential properties secured by first liens | ||||||||||||||
| 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens | ||||||||||||||
| 1-4 family residential construction loans | ||||||||||||||
| Other construction, land development and raw land loans | ||||||||||||||
| Consumer loans | ||||||||||||||
| Total nonaccrual loans | ||||||||||||||
| Government guarantees on nonaccrual loans | ( | ( | ( | ( | ||||||||||
| Net nonaccrual loans | $ | $ | $ | $ | ||||||||||
There was no interest on nonaccrual loans reversed through interest income during three-month period ending June 30, 2022 and $2,000 in interest on nonaccrual loans reversed through interest income during the six-month period ending June 30, 2022. There was no
There was no interest earned on nonaccrual loans with a principal balance during the three and six-month periods ending June 30, 2022 and June 30, 2021, respectively. However, the Company recognized interest income of $873,000 and $232,000 in the three-month periods ending June 30, 2022 and 2021, respectively, and $930,000 and $366,000 in the six-month periods ending June 30, 2022 and 2021, respectively, related to interest collected on nonaccrual loans whose principal had been paid down to zero.
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Troubled Debt Restructurings: Loans classified as TDRs totaled $8.9 million and $10.6 million at June 30, 2022 and December 31, 2021, respectively. A TDR is a loan to a borrower that is experiencing financial difficulty that has been modified from its original terms and conditions in such a way that the Company is granting the borrower a concession that it would not grant otherwise.
The provisions of the Coronavirus Aid, Relief, and Economic Security ("CARES") Act included an election to not apply the guidance on accounting for TDRs to loan modifications, such as extensions or deferrals, related to COVID-19 made between March 1, 2020 and December 31, 2021. The relief can only be applied to modifications for borrowers that were not more than 30 days past due as of December 31, 2019. The Company elected to adopt these provisions of the CARES Act. The Company has made the following types of loan modifications related to COVID-19, which are not classified as TDRs with principal balance outstanding of:
| Loan Modifications due to COVID-19 as of June 30, 2022 | |||||||||||
| (Dollars in thousands) | Interest Only | Full Payment Deferral | Total | ||||||||
| Portfolio loans | $ | $ | $ | ||||||||
| Number of modifications | |||||||||||
| Loan Modifications due to COVID-19 as of December 31, 2021 | |||||||||||
| (Dollars in thousands) | Interest Only | Full Payment Deferral | Total | ||||||||
| Portfolio loans | $ | $ | $ | ||||||||
| Number of modifications | |||||||||||
The Company has granted a variety of concessions to borrowers in the form of loan modifications. The modifications granted can generally be described in the following categories:
Rate Modification: A modification in which the interest rate is changed.
Term Modification: A modification in which the maturity date, timing of payments, or frequency of payments is changed.
Payment Modification: A modification in which the dollar amount of the payment is changed, or in which a loan is converted to interest only payments for a period of time is included in this category.
Combination Modification: Any other type of modification, including the use of multiple categories above.
AQR pass graded loans included above in the impaired loan data are loans classified as TDRs. By definition, TDRs are considered impaired loans. All of the Company's TDRs are included in impaired loans.
There were no newly restructured loans that occurred during the six months ended June 30, 2022. As discussed above, the CARES Act provided banks an option to elect to not account for certain loan modifications related to COVID-19 between March 1, 2020 and December 31, 2021 as TDRs as long as the borrowers were not more than 30 days past due as of December 31, 2019. The disclosed loan restructurings were not related to COVID-19 modifications.
| Accrual Status | Nonaccrual Status | Total Modifications | |||||||||||||||
| (In Thousands) | |||||||||||||||||
| Existing Troubled Debt Restructurings | $ | $ | $ | ||||||||||||||
| Total | $ | $ | $ | ||||||||||||||
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The following table presents newly restructured loans that occurred during the six months ended June 30, 2021, by concession (terms modified):
| June 30, 2021 | |||||||||||||||||||||||||||||||||||
| Number of Contracts | Rate Modification | Term Modification | Payment Modification | Combination Modification | Total Modifications | ||||||||||||||||||||||||||||||
| (In Thousands) | |||||||||||||||||||||||||||||||||||
| Pre-Modification Outstanding Recorded Investment: | |||||||||||||||||||||||||||||||||||
| Commercial - AQR substandard | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
| Post-Modification Outstanding Recorded Investment: | |||||||||||||||||||||||||||||||||||
| Commercial - AQR substandard | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
The Company had no commitments to extend additional credit to borrowers whose terms have been modified in TDRs. There were no in charge-offs in the six months ended June 30, 2022 on loans that were newly classified as TDRs during the same period.
There were no
4. Purchased Receivables
Purchased receivables are carried at their principal amount outstanding, net of an ACL, and have a maturity of less than one year . There were no no
Income on purchased receivables is accrued and recognized on the principal amount outstanding using an effective interest method except when management believes doubt exists as to the collectability of the income or principal. There were no
There was no no
The following table summarizes the components of net purchased receivables for the periods indicated:
| (In Thousands) | June 30, 2022 | December 31, 2021 | ||||||
| Purchased receivables | $ | $ | ||||||
| Allowance for credit losses - purchased receivables | ||||||||
| Total | $ | $ | ||||||
25
5. Servicing Rights
Mortgage servicing rights
The following table details the activity in the Company's mortgage servicing rights ("MSR") for the three and six-month periods ended June 30, 2022 and 2021:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||
| (In Thousands) | 2022 | 2021 | 2022 | 2021 | ||||||||||
| Balance, beginning of period | $ | $ | $ | $ | ||||||||||
| Additions for new MSR capitalized | ||||||||||||||
| Changes in fair value: | ||||||||||||||
Due to changes in model inputs of assumptions (1) | ( | ( | ||||||||||||
Other (2) | ( | ( | ( | ( | ||||||||||
| Balance, end of period | $ | $ | $ | $ | ||||||||||
(1) Principally reflects changes in discount rates and prepayment speed assumptions, which are primarily affected by changes in interest rates.
(2) Represents changes due to collection/realization of expected cash flows over time.
The following table details information related to our serviced mortgage loan portfolio as of June 30, 2022 and December 31, 2021:
| (In Thousands) | June 30, 2022 | December 31, 2021 | ||||||
| Balance of mortgage loans serviced for others | $ | $ | ||||||
| MSR as a percentage of serviced loans | % | % | ||||||
The Company recognized servicing fees of $804,000 and $707,000 during the three-month periods ending June 30, 2022 and 2021, respectively, and $1.6 million and $1.4 million during the six-month periods ending June 30, 2022 and 2021, respectively, which includes contractually specified servicing fees and ancillary fees as a component of other noninterest income in the Company's Consolidated Statements of Income.
| June 30, 2022 | December 31, 2021 | |||||||
| Constant prepayment rate | % | % | ||||||
| Discount rate | % | % | ||||||
26
| (In Thousands) | June 30, 2022 | December 31, 2021 | |||||||||
| Aggregate portfolio principal balance | $ | $ | |||||||||
| Weighted average rate of note | % | % | |||||||||
| June 30, 2022 | Base | 1.0% Adverse Rate Change | 2.0% Adverse Rate Change | ||||||||
| Constant prepayment rate | % | % | % | ||||||||
| Discount rate | % | % | % | ||||||||
| Fair value MSR | $ | $ | $ | ||||||||
| Percentage of MSR | % | % | % | ||||||||
| December 31, 2021 | |||||||||||
| Constant prepayment rate | % | % | % | ||||||||
| Discount rate | % | % | % | ||||||||
| Fair value MSR | $ | $ | $ | ||||||||
| Percentage of MSR | % | % | % | ||||||||
The above tables show the sensitivity to market rate changes for the par rate coupon for a conventional one-to-four family Alaska Housing Finance Corporation/FNMA/FHLMC serviced home loan. The above tables reference a 100 basis point and 200 basis point decrease in discount rates.
These sensitivities are hypothetical and should be used with caution as the tables above demonstrate the Company’s methodology for estimating the fair value of MSR is highly sensitive to changes in key assumptions. For example, actual prepayment experience may differ and any difference may have a material effect on MSR fair value. Changes in fair value resulting from changes in assumptions generally cannot be extrapolated because the relationship of the change in the assumption to the change in fair value may not be linear. Also, in these tables, the effects of a variation in a particular assumption on the fair value of the MSR is calculated without changing any other assumption; in reality, changes in one factor may be associated with changes in another (for example, decreases in market interest rates may provide an incentive to refinance; however, this may also indicate a slowing economy and an increase in the unemployment rate, which reduces the number of borrowers who qualify for refinancing), which may magnify or counteract the sensitivities. Thus, any measurement of MSR fair value is limited by the conditions existing and assumptions made at a particular point in time. Those assumptions may not be appropriate if they are applied to a different point in time.
Commercial servicing rights
The commercial servicing rights asset ("CSR") has a carrying value $1.1 254.5 million and $259.8 million at June 30, 2022 and December 31, 2021, respectively. Key assumptions used in measuring the fair value of the CSR as of June 30, 2022 and December 31, 2021 include a constant prepayment rate of 16.08 9.94
6. Leases
27
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||
| (In Thousands) | 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Lease Cost | |||||||||||||||||
Operating lease cost(1) | $ | $ | $ | $ | |||||||||||||
Short term lease cost(1) | |||||||||||||||||
| Total lease cost | $ | $ | $ | $ | |||||||||||||
| Other information | |||||||||||||||||
| Operating leases - operating cash flows | $ | $ | |||||||||||||||
| Weighted average lease term - operating leases, in years | |||||||||||||||||
| Weighted average discount rate - operating leases | % | % | |||||||||||||||
(1) | Expenses are classified within occupancy expense on the Consolidated Statements of Income. | ||||||||||||||||
| (In Thousands) | Operating Leases | ||||
| 2022 (Six months) | $ | ||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| Thereafter | |||||
| Total minimum lease payments | $ | ||||
| Less: amount of lease payment representing interest | ( | ||||
| Present value of future minimum lease payments | $ | ||||
28
7. Derivatives
Derivatives swaps related to community banking activities
The Company enters into commercial loan interest rate swap agreements with commercial banking customers which are offset with a corresponding swap agreement with a third party financial institution ("counterparty"). The Company has agreements with its counterparties that contain provisions that provide that if the Company fails to maintain its status as a "well-capitalized" institution under regulatory guidelines, then the counterparty could terminate the derivative positions and the Company would be required to settle its obligations under the agreements. These agreements also require that the Company and the counterparty collateralize any fair value shortfalls that exceed $250,000 with eligible collateral, which includes cash and securities backed with the full faith and credit of the federal government. Similarly, the Company could be required to settle its obligations under the agreement if specific regulatory events occur, such as if the Company were issued a prompt corrective action directive or a cease and desist order, or if certain regulatory ratios fall below specified levels. The Company pledged $569,000 as of June 30, 2022 and $8.2 million as of December 31, 2021 in available for sale securities to collateralize fair value shortfalls on interest rate swap agreements.
The Company had interest rate swaps related to commercial loans with an aggregate notional amount of $213.0 million and $212.6 million at June 30, 2022 and December 31, 2021, respectively. At June 30, 2022, the notional amount of interest rate swaps is made up of 19 variable to fixed rate swaps to commercial loan customers totaling $106.5 million, and 19 fixed to variable rate swaps with a counterparty totaling $106.5 million. Changes in fair value from these 19 interest rate swaps offset each other in the first six months of 2022. The Company recognized $87,000 and $90,000 in fee income related to interest rate swaps in the three and six-month periods ending June 30, 2022, respectively, and $103,000 and $195,000 in fee income related to interest rate swaps in the three and six-month periods ending June 30, 2021, respectively. Interest rate swap income is recorded in other operating income on the Consolidated Statements of Income. None of these interest rate swaps are designated as hedging instruments.
The Company has an interest rate swap to hedge the variability in cash flows arising out of its junior subordinated debentures, which is floating rate debt, by swapping the cash flows with an interest rate swap which receives floating and pays fixed. The Company has designated this interest rate swap as a hedging instrument. The interest rate swap effectively fixes the Company's interest payments on the $10.0 million of junior subordinated debentures held under Northrim Statutory Trust 2 at 3.72 % through its maturity date. The floating rate that the dealer pays is equal to the three month LIBOR plus 1.37 % which reprices quarterly on the payment date. This rate was 3.20 % as of June 30, 2022. The Company pledged $130,000 in cash to collateralize initial margin and fair value exposure of our counterparty on this interest rate swap as of June 30, 2022 and $2.9 million as of December 31, 2021. Changes in the fair value of this interest rate swap are reported in other comprehensive income on the Consolidated Statements of Income. The unrealized gain on this interest rate swap was $798,000 as of June 30, 2022 and the unrealized loss was $1.0 million as of December 31, 2021.
Derivatives related to home mortgage banking activities
The Company also uses derivatives to hedge the risk of changes in the fair values of interest rate lock commitments. The Company enters into commitments to originate residential mortgage loans at specific rates; the value of these commitments are detailed in the table below as "interest rate lock commitments". The Company also hedges the interest rate risk associated with its residential mortgage loan commitments, which are referred to as "retail interest rate contracts" in the table below. Market risk with respect to commitments to originate loans arises from changes in the value of contractual positions due to changes in interest rates. RML had commitments to originate mortgage loans held for sale totaling $116.2 million and $81.6 million at June 30, 2022 and December 31, 2021, respectively. Changes in the value of RML's interest rate derivatives are recorded in mortgage banking income on the Consolidated Statements of Income. None of these derivatives are designated as hedging instruments.
29
| (In Thousands) | Asset Derivatives | ||||||||||
| June 30, 2022 | December 31, 2021 | ||||||||||
| Balance Sheet Location | Fair Value | Fair Value | |||||||||
| Interest rate swaps | Other assets | $ | $ | ||||||||
| Interest rate lock commitments | Other assets | ||||||||||
| Retail interest rate contracts | Other assets | ||||||||||
| Total | $ | $ | |||||||||
| (In Thousands) | Liability Derivatives | ||||||||||
| June 30, 2022 | December 31, 2021 | ||||||||||
| Balance Sheet Location | Fair Value | Fair Value | |||||||||
| Interest rate swaps | Other liabilities | $ | $ | ||||||||
| Retail interest rate contracts | Other liabilities | ||||||||||
| Total | $ | $ | |||||||||
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||
| (In Thousands) | Income Statement Location | 2022 | 2021 | 2022 | 2021 | ||||||||||||
| Retail interest rate contracts | Mortgage banking income | $ | ($ | $ | $ | ||||||||||||
| Interest rate lock commitments | Mortgage banking income | ( | |||||||||||||||
| Total | $ | ($ | $ | $ | |||||||||||||
Our derivative transactions with counterparties under International Swaps and Derivative Association master agreements include "right of set-off" provisions. "Right of set-off" provisions are legally enforceable rights to offset recognized amounts and there may be an intention to settle such amounts on a net basis. We do not offset such financial instruments for financial reporting purposes.
30
| June 30, 2022 | Gross amounts not offset in the Statement of Financial Position | |||||||||||||||||||
| (In Thousands) | Gross amounts of recognized assets and liabilities | Gross amounts offset in the Statement of Financial Position | Net amounts of assets and liabilities presented in the Statement of Financial Position | Financial Instruments | Collateral Posted | Net Amount | ||||||||||||||
| Asset Derivatives | ||||||||||||||||||||
| Interest rate swaps | $ | $ | $ | $ | $ | $ | ||||||||||||||
| Liability Derivatives | ||||||||||||||||||||
| Interest rate swaps | $ | $ | $ | $ | $ | $ | ||||||||||||||
| Retail interest rate contracts | ||||||||||||||||||||
| December 31, 2021 | Gross amounts not offset in the Statement of Financial Position | |||||||||||||||||||
| (In Thousands) | Gross amounts of recognized assets and liabilities | Gross amounts offset in the Statement of Financial Position | Net amounts of assets and liabilities presented in the Statement of Financial Position | Financial Instruments | Collateral Posted | Net Amount | ||||||||||||||
| Asset Derivatives | ||||||||||||||||||||
| Interest rate swaps | $ | $ | $ | $ | $ | $ | ||||||||||||||
| Retail interest rate contracts | ||||||||||||||||||||
| Liability Derivatives | ||||||||||||||||||||
| Interest rate swaps | $ | $ | $ | $ | $ | $ | ||||||||||||||
8. Fair Value Measurements
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Investment securities available for sale and marketable equity securities: Fair values are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.
Servicing rights: MSR and CSR are measured at fair value on a recurring basis. These assets are classified as Level 3 as quoted prices are not available. In order to determine the fair value of MSR and CSR, the present value of net expected future cash flows is estimated. Assumptions used include market discount rates, anticipated prepayment speeds, escrow calculations, delinquency rates, and ancillary fee income net of servicing costs.
Derivative instruments: The fair value of the interest rate lock commitments are estimated using quoted or published market prices for similar instruments, adjusted for factors such as pull-through rate assumptions based on historical information, where appropriate. The pull-through rate assumptions are considered Level 3 valuation inputs and are significant to the interest rate lock commitment valuation; as such, the interest rate lock commitment derivatives are classified as Level 3. Interest rate contracts are valued in a model, which uses as its basis a discounted cash flow technique incorporating credit valuation adjustments to reflect nonperformance risk in the measurement of fair value. Although the Company has determined that the majority of inputs used to value its interest rate derivatives fall within Level 2 of the fair value hierarchy, the credit valuation
31
adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of June 30, 2022, the Company has assessed the significance of the impact of these adjustments on the overall valuation of its interest rate positions and has determined that they are not significant to the overall valuation of its interest rate derivatives. As a result, the Company has classified its interest rate derivative valuations in Level 2 of the fair value hierarchy.
Commitments to extend credit and standby letters of credit: The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligation with the counterparties at the reporting date.
Assets Subject to Nonrecurring Adjustment to Fair Value
The Company is also required to measure certain assets such as equity method investments, goodwill, intangible assets, impaired loans, and Other Real Estate Owned ("OREO") at fair value on a nonrecurring basis in accordance with GAAP. Any nonrecurring adjustments to fair value usually result from the write-down of individual assets.
The Company uses either in-house evaluations or external appraisals to estimate the fair value of OREO and impaired loans as of each reporting date. In-house appraisals are considered Level 3 inputs and external appraisals are considered Level 2 inputs. The Company’s determination of which method to use is based upon several factors. The Company takes into account compliance with legal and regulatory guidelines, the amount of the loan, the size of the assets, the location and type of property to be valued and how critical the timing of completion of the analysis is to the assessment of value. Those factors are balanced with the level of internal expertise, internal experience and market information available, versus external expertise available such as qualified appraisers, brokers, auctioneers and equipment specialists.
Limitations
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
32
| June 30, 2022 | December 31, 2021 | ||||||||||||||||||||||
| (In Thousands) | Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||||||||
| Financial assets: | |||||||||||||||||||||||
| Level 1 inputs: | |||||||||||||||||||||||
| Cash, due from banks and deposits in other banks | $ | $ | $ | $ | |||||||||||||||||||
| Investment securities available for sale | |||||||||||||||||||||||
| Marketable equity securities | |||||||||||||||||||||||
| Level 2 inputs: | |||||||||||||||||||||||
| Investment securities available for sale | |||||||||||||||||||||||
| Investment in Federal Home Loan Bank stock | |||||||||||||||||||||||
| Loans held for sale | |||||||||||||||||||||||
| Accrued interest receivable | |||||||||||||||||||||||
| Interest rate swaps | |||||||||||||||||||||||
| Retail interest rate contracts | |||||||||||||||||||||||
| Level 3 inputs: | |||||||||||||||||||||||
| Investment securities held to maturity | |||||||||||||||||||||||
| Loans | |||||||||||||||||||||||
| Purchased receivables, net | |||||||||||||||||||||||
| Interest rate lock commitments | |||||||||||||||||||||||
| Mortgage servicing rights | |||||||||||||||||||||||
| Commercial servicing rights | |||||||||||||||||||||||
| Financial liabilities: | |||||||||||||||||||||||
| Level 2 inputs: | |||||||||||||||||||||||
| Deposits | $ | $ | $ | $ | |||||||||||||||||||
| Borrowings | |||||||||||||||||||||||
| Accrued interest payable | |||||||||||||||||||||||
| Interest rate swaps | |||||||||||||||||||||||
| Level 3 inputs: | |||||||||||||||||||||||
| Junior subordinated debentures | |||||||||||||||||||||||
33
| (In Thousands) | Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||||||||
| June 30, 2022 | |||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Available for sale securities | |||||||||||||||||||||||
| U.S. Treasury and government sponsored entities | $ | $ | $ | $ | |||||||||||||||||||
| Municipal securities | |||||||||||||||||||||||
| Corporate bonds | |||||||||||||||||||||||
| Collateralized loan obligations | |||||||||||||||||||||||
| Total available for sale securities | $ | $ | $ | $ | |||||||||||||||||||
| Marketable equity securities | $ | $ | $ | $ | |||||||||||||||||||
| Total marketable equity securities | $ | $ | $ | $ | |||||||||||||||||||
| Interest rate swaps | $ | $ | $ | $ | |||||||||||||||||||
| Interest rate lock commitments | |||||||||||||||||||||||
| Mortgage servicing rights | |||||||||||||||||||||||
| Commercial servicing rights | |||||||||||||||||||||||
| Total other assets | $ | $ | $ | $ | |||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Interest rate swaps | $ | $ | $ | $ | |||||||||||||||||||
| Retail interest rate contracts | |||||||||||||||||||||||
| Total other liabilities | $ | $ | $ | $ | |||||||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Available for sale securities | |||||||||||||||||||||||
| U.S. Treasury and government sponsored entities | $ | $ | $ | $ | |||||||||||||||||||
| Municipal securities | |||||||||||||||||||||||
| Corporate bonds | |||||||||||||||||||||||
| Collateralized loan obligations | |||||||||||||||||||||||
| Total available for sale securities | $ | $ | $ | $ | |||||||||||||||||||
| Marketable equity securities | $ | $ | $ | $ | |||||||||||||||||||
| Total marketable securities | $ | $ | $ | $ | |||||||||||||||||||
| Interest rate swaps | $ | $ | $ | $ | |||||||||||||||||||
| Interest rate lock commitments | |||||||||||||||||||||||
| Mortgage servicing rights | |||||||||||||||||||||||
| Commercial servicing rights | |||||||||||||||||||||||
| Retail interest rate contracts | |||||||||||||||||||||||
| Total other assets | $ | $ | $ | $ | |||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Interest rate swaps | $ | $ | $ | $ | |||||||||||||||||||
| Total other liabilities | $ | $ | $ | $ | |||||||||||||||||||
34
The following tables provide a reconciliation of the assets and liabilities measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the three and six-month periods ended June 30, 2022 and 2021:
| (In Thousands) | Beginning balance | Change included in earnings | Purchases and issuances | Sales and settlements | Ending balance | Net change in unrealized gains (losses) relating to items held at end of period | ||||||||||||||
| Three Months Ended June 30, 2022 | ||||||||||||||||||||
| Interest rate lock commitments | $ | ($ | $ | ($ | $ | $ | ||||||||||||||
| Mortgage servicing rights | ( | |||||||||||||||||||
| Commercial servicing rights | ( | |||||||||||||||||||
| Total | $ | ($ | $ | ($ | $ | $ | ||||||||||||||
| Three Months Ended June 30, 2021 | ||||||||||||||||||||
| Interest rate lock commitments | $ | ($ | $ | ($ | $ | $ | ||||||||||||||
| Mortgage servicing rights | ( | |||||||||||||||||||
| Commercial servicing rights | ( | |||||||||||||||||||
| Total | $ | ($ | $ | ($ | $ | $ | ||||||||||||||
| (In Thousands) | Beginning balance | Change included in earnings | Purchases and issuances | Sales and settlements | Ending balance | Net change in unrealized gains (losses) relating to items held at end of period | ||||||||||||||
| Six Months Ended June 30, 2022 | ||||||||||||||||||||
| Interest rate lock commitments | $ | ($ | $ | ($ | $ | $ | ||||||||||||||
| Mortgage servicing rights | ||||||||||||||||||||
| Commercial servicing rights | ( | |||||||||||||||||||
| Total | $ | ($ | $ | ($ | $ | $ | ||||||||||||||
| Six Months Ended June 30, 2021 | ||||||||||||||||||||
| Interest rate lock commitments | $ | ($ | $ | ($ | $ | $ | ||||||||||||||
| Mortgage servicing rights | ( | |||||||||||||||||||
| Commercial servicing rights | ( | |||||||||||||||||||
| Total | $ | ($ | $ | ($ | $ | $ | ||||||||||||||
There were no
35
As of and for the periods ending June 30, 2022 and December 31, 2021, no
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||
| (In Thousands) | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||
| Loans individually measured for credit losses | ($ | ($ | $ | $ | ||||||||||||||||
| Total loss from nonrecurring measurements | ($ | ($ | $ | $ | ||||||||||||||||
Assets and Liabilities Measured at Fair Value Using Significant Unobservable Inputs (Level 3)
| Financial Instrument | Valuation Technique | Unobservable Input | Weighted Average Rate Range | ||||||||
| June 30, 2022 | |||||||||||
| Interest rate lock commitment | External pricing model | Pull through rate | % | ||||||||
| Mortgage servicing rights | Discounted cash flow | Constant prepayment rate | |||||||||
| Discount rate | % | ||||||||||
| Commercial servicing rights | Discounted cash flow | Constant prepayment rate | |||||||||
| Discount rate | % | ||||||||||
| December 31, 2021 | |||||||||||
| Interest rate lock commitment | External pricing model | Pull through rate | % | ||||||||
| Mortgage servicing rights | Discounted cash flow | Constant prepayment rate | |||||||||
| Discount rate | |||||||||||
| Commercial servicing rights | Discounted cash flow | Constant prepayment rate | |||||||||
| Discount rate | % | ||||||||||
36
9. Segment Information
The Company's operations are managed along two operating segments: Community Banking and Home Mortgage Lending. The Community Banking segment's principal business focus is the offering of loan and deposit products to business and consumer customers in its primary market areas. As of June 30, 2022, the Community Banking segment operated 17 branches throughout Alaska. The Home Mortgage Lending segment's principal business focus is the origination and sale of mortgage loans for 1-4 family residential properties.
| Three Months Ended June 30, 2022 | |||||||||||||||||
| (In Thousands) | Community Banking | Home Mortgage Lending | Consolidated | ||||||||||||||
| Interest income | $ | $ | $ | ||||||||||||||
| Interest expense | |||||||||||||||||
| Net interest income | |||||||||||||||||
| Provision for credit losses | |||||||||||||||||
| Other operating income | |||||||||||||||||
| Other operating expense | |||||||||||||||||
| Income before provision for income taxes | ( | ||||||||||||||||
| Provision for income taxes | ( | ||||||||||||||||
| Net income | $ | ($ | $ | ||||||||||||||
| Three Months Ended June 30, 2021 | |||||||||||||||||
| (In Thousands) | Community Banking | Home Mortgage Lending | Consolidated | ||||||||||||||
| Interest income | $ | $ | $ | ||||||||||||||
| Interest expense | |||||||||||||||||
| Net interest income | |||||||||||||||||
| Benefit for credit losses | ( | ( | |||||||||||||||
| Other operating income | |||||||||||||||||
| Other operating expense | |||||||||||||||||
| Income before provision for income taxes | |||||||||||||||||
| Provision for income taxes | |||||||||||||||||
| Net income | $ | $ | $ | ||||||||||||||
37
| Six Months Ended June 30, 2022 | |||||||||||||||||
| (In Thousands) | Community Banking | Home Mortgage Lending | Consolidated | ||||||||||||||
| Interest income | $ | $ | $ | ||||||||||||||
| Interest expense | |||||||||||||||||
| Net interest income | |||||||||||||||||
| Provision for credit losses | |||||||||||||||||
| Other operating income | |||||||||||||||||
| Other operating expense | |||||||||||||||||
| Income before provision for income taxes | |||||||||||||||||
| Provision for income taxes | |||||||||||||||||
| Net income | $ | $ | $ | ||||||||||||||
| Six Months Ended June 30, 2021 | |||||||||||||||||
| (In Thousands) | Community Banking | Home Mortgage Lending | Consolidated | ||||||||||||||
| Interest income | $ | $ | $ | ||||||||||||||
| Interest expense | |||||||||||||||||
| Net interest income | |||||||||||||||||
| Benefit for credit losses | ( | ( | |||||||||||||||
| Other operating income | |||||||||||||||||
| Other operating expense | |||||||||||||||||
| Income before provision for income taxes | |||||||||||||||||
| Provision for income taxes | |||||||||||||||||
| Net income | $ | $ | $ | ||||||||||||||
| June 30, 2022 | |||||||||||||||||
| (In Thousands) | Community Banking | Home Mortgage Lending | Consolidated | ||||||||||||||
| Total assets | $ | $ | $ | ||||||||||||||
| Loans held for sale | $ | $ | $ | ||||||||||||||
| December 31, 2021 | |||||||||||||||||
| (In Thousands) | Community Banking | Home Mortgage Lending | Consolidated | ||||||||||||||
| Total assets | $ | $ | $ | ||||||||||||||
| Loans held for sale | $ | $ | $ | ||||||||||||||
38
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion should be read in conjunction with the unaudited consolidated financial statements of Northrim 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 ended December 31, 2021.
Except as otherwise noted, references to "we", "our", "us" or "the Company" refer to Northrim BanCorp, Inc. and its subsidiaries that are consolidated for financial reporting purposes.
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, the strength of the local economy, and statements related to the expected or potential impact of the novel coronavirus ("COVID-19") pandemic and related responses of the government. All statements other than statements of historical fact, including statements regarding industry prospects, future results of operations or financial position and the expected or potential impact of COVID-19 and related responses of the government, made in this report are forward-looking. 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, whether concerning COVID-19 and the government response related thereto or otherwise, 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 uncertainties relating to the impact of COVID-19 on the Company's credit quality, business, operations and employees; the availability and terms of funding from government sources related to COVID-19; the impact of the results of government initiatives on the regulatory landscape, natural resource extraction industries, capital markets, and the response to and management of the COVID-19 pandemic, including the effectiveness of previously-enacted fiscal stimulus from the federal government and a potential infrastructure bill; the timing of Paycheck Protection Program ("PPP") loan forgiveness; the impact of interest rates, inflation, supply-chain constraints, trade policies and tensions, including tariffs, and potential geopolitical instability, including the ware in Ukraine; the general condition of, and changes in, the Alaska economy; our ability to maintain or expand our market share or net interest margin; our ability to maintain asset quality; our ability to implement our marketing and growth strategies; 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. 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, 2021, 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.
39
Update on Economic Conditions
The Alaska economy has seen continued job growth and personal income gains. A strong rebound in tourism activity, coupled with high oil prices has benefited the state. Management believes that the national focus on supply chain issues and the desire for more domestic production should improve the demand for Alaska’s vast natural resources. Like the rest of the nation, Alaska’s housing market saw large price increases over the last year. However, we expect the rapidly rising interest rate environment to temper the Alaska housing market in the second half of 2022.
The Alaska Department of Labor ("DOL") has released data through May of 2022. The DOL reports total payroll jobs in Alaska increased 2.9% or 8,900 jobs compared to May of 2021. The Leisure and Hospitality sector showed the fastest year over year increase of 12.4%. Tourism related jobs were the hardest hit from the pandemic travel restrictions, but were also the quickest to rebound. The Oil and Gas sector has benefited from high energy prices and added 600 jobs since May of 2021, a 9.1% increase. Other sectors showing improvement over the last 12 months include Trade, Warehousing, and Utilities (+6.8%), Other Services (+4.8%); Financial Activities (+2.8%), and Professional and Business Services (+2.6%). The only private sectors to decline year over year were Manufacturing (-2.9%) and Information (-2.1%). The Government sector was up slightly by 0.6%, an increase of 500 jobs through May 2022 year-over-year.
Alaska’s Gross State Product (“GSP”), was estimated to be $58 billion at the end of 2021 by the Federal Bureau of Economic Analysis ("BEA"). This was a 0.3% increase in 2021 over 2020 figures. The BEA also calculated Alaska’s seasonally adjusted personal income was $49 billion in 2021, an improvement of 5.9% over 2020. This was largely a result of COVID related government transfer payments and an improvement in employment leading to higher wage income last year.
The price of Alaska North Slope crude oil began 2021 averaging $55.56 a barrel in January and climbed steadily throughout the year due to rising global demand to a monthly average high of $84.36 in October 2021. 2022 began with a monthly average of $86.50 a barrel in January and surpassed $100 in March after the war in Ukraine began. Prices increased in the second quarter of 2022, reaching a monthly average of $120.17 a barrel in June.
Alaska’s home mortgage delinquency level continues to be better than most of the nation. According to the Mortgage Bankers Association, Alaska’s delinquency rate in the first quarter of 2022 was 3.49% compared to the national average rate of 3.84%. The Mortgage Bankers Association survey reported that the mortgage foreclosure rate in Alaska in the first quarter of 2022 was identical to the national average rate of 0.53%.
According to the Alaska Multiple Listing Services, the average sales price of a single family home in Anchorage rose 6.9% in 2021 to $424,148. In the first six months of 2022 prices climbed another 7.5% to $456,052. Average sales prices in the Matanuska Susitna Borough rose 15.6% in 2021 and another 11% in the first six months of 2022 to $386,429. These two markets represent where the vast majority of the Bank’s residential lending activity occurs. Prices also increased 13.9% in the Fairbanks North Star Borough, 13.4% in the Kenai Peninsula Borough, and 13.8% in the Kodiak Island Borough in 2021.
The number of housing units sold in Anchorage was up significantly in 2021 by 11.2%, following an increase of 19.5% in 2020, as reported by the Alaska Multiple Listing Services. The Matanuska Susitna Borough also had strong sales activity, up 11.7% in 2021 and 9.7% in 2020.
The Board of Governors of the Federal Reserve System increased its benchmark interest rate target from near zero as of December 31, 2021 to 2.25%-2.50% as of July 31, 2022. Similarly, the Prime rate of interest has increased from 3.25% as of December 31, 2022 to 5.50% as of July 31, 2022. The two and ten year Treasury rates were 2.89% and 2.67% as of July 31, 2022, up from 0.73% and 1.52% as of December 31, 2021, respectively. Management agrees with sentiment from industry experts that rates will continue to rise through the end of 2022 and into the first half of 2023.
40
Highlights and Summary of Performance - Second Quarter of 2022
The Company reported net income and diluted earnings per share of $4.8 million and $0.83, respectively, for the second quarter of 2022 compared to net income and diluted earnings per share of $8.3 million and $1.33, respectively, for the second quarter of 2021. The Company reported net income and diluted earnings per share of $12.0 million and $2.03, respectively, for the first six months of 2022 compared to net income and diluted earnings per share of $20.5 million and $3.27, respectively, for the first six months of 2021. The decrease in net income for the three and six-month periods ending June 30, 2022 compared to the same periods 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 a higher provision for credit losses and higher other operating expenses in the Community Banking segment that were only partially offset by higher 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.
•Total revenue in the second quarter of 2022, which includes net interest income plus other operating income, decreased 10% to $30.0 million from $33.3 million in the second quarter a year ago, primarily due to a $5.5 million decrease in mortgage banking income and a $988.0 thousand increase in unrealized loss on marketable equity securities. These decreases were only partially offset by a $3.0 million increase in net interest income. Total revenue in the six-months ending June 30, 2022 decreased 12% to $60.1 million from $68.7 million in the same period a year ago, primarily due to a $12.1 million decrease in mortgage banking income and a $1.3 million increase in unrealized loss on marketable securities.
•Net interest income in the second quarter of 2022 increased 16% to $22.2 million compared to $19.2 million in the second quarter of 2021. Net interest income excluding PPP interest and fees in the second quarter of 2022 increased 33% to $20.8 million, compared to $15.6 million in the second quarter of 2021. Net interest income in the six-months ending June 30, 2022 increased 7% to $41.5 million compared to $38.7 million in the same period a year ago. Net interest income excluding PPP interest and fees in the six-months ending June 30, 2022 increased 22% to $37.8 million compared to $30.9 million in the same period a year ago.
•Net interest margin was 3.67% for the second quarter of 2022, a 19 basis point increase from the second quarter of 2021 primarily due to the higher yields on portfolio loans and investments and on interest bearing deposits in other banks. Net interest margin was 3.42% for the six-months ending June 30, 2022, a 26 basis point decrease from the same period a year ago primarily due to the a change in the mix of earning assets that was only partially offset by higher yields. Average interest bearing deposits in other banks increased to 19% of average interest-earning assets in the six-months ending June 30, 2022, compared to 8% in the same period a year ago.
•Loans were $1.41 billion at June 30, 2022, down 1% from December 31, 2021 primarily as a result of PPP forgiveness which was only partially offset by core loan growth. Loans excluding the impact from PPP, were $1.37 billion at June 30, 2022, up 6% from $1.30 billion at December 31, 2021. As of June 30, 2022, 76% of core portfolio loans are adjustable rate and are subject to rate increases as the prime rate and other indices increase.
•The Company booked a provision for credit losses of $463,000 and $313,000 for the three- and six-month periods ending June 30, 2022, respectively, compared to a benefit of $427,000 and a benefit of $1.9 million in the same periods in 2021. The increase in the provision for credit losses in both periods in 2022 compared to the same periods in the prior year are primarily the result of core loan growth.
•The Company paid cash dividends of $0.41 per common share in the second quarter of 2022, up 11% from $0.37 in the second quarter of 2021.
•At June 30, 2022, the capital ratios of the Company and Northrim Bank (the "Bank") were well in excess of all regulatory requirements.
•During the second quarter of 2022, the Company repurchased 200,619 shares of its common stock under the previously announced share repurchase program at an average price of $41.04 per share. There are no shares remaining of the 300,000 previously authorized for repurchase.
41
Other financial measures are shown in the table below:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||
| Return on average assets, annualized | 0.74 | % | 1.40 | % | 0.93 | % | 1.80 | % | ||||||
| Return on average shareholders' equity, annualized | 8.58 | % | 14.10 | % | 10.51 | % | 17.68 | % | ||||||
| Dividend payout ratio | 49.30 | % | 27.80 | % | 40.22 | % | 22.57 | % | ||||||
Growth and Paycheck Protection Program:
•In 2020 and 2021, Northrim funded a total of nearly 5,800 PPP loans totaling $612.6 million to both existing and new customers. Management estimates that we funded approximately 24% of the number and 32% of the value of all Alaska PPP second round loans.
•As of June 30, 2022, PPP has resulted in 2,344 new customers totaling $69.7 million in non-PPP loans, and $132.4 million in new deposit balances.
•As of June 30, 2022, Northrim customers had received forgiveness through the U.S, Small Business Administration ("SBA") on 5,407 PPP loans totaling $582.0 million, of which 417 PPP loans totaling $33.7 million were forgiven in the second quarter of 2022, 537 PPP loans totaling $56.9 million were forgiven in the first quarter of 2022, and 4,451 PPP loans totaling $491.4 million were forgiven in 2021. Of the PPP loans forgiven in the second quarter of 2022, 414 loans totaling $33.4 million related to PPP round two. As of June 30, 2022, approximately 99% of the number of PPP round one loans funded and 88% of the number of PPP round two loans funded have been forgiven.
Credit Quality
•Customer Accommodations: The Company implemented several forms of assistance to help our customers in the event that they experienced financial hardship as a result of COVID-19 in addition to our participation in PPP lending. As of June 30, 2022, remaining accommodations include interest only and deferral options on loan payments. The total outstanding principal balance of loan modifications due to the impacts of COVID-19 for the periods indicated were as follows:
| Loan Modifications due to COVID-19 as of June 30, 2022 | |||||||||||
| (Dollars in thousands) | Interest Only | Full Payment Deferral | Total | ||||||||
| Portfolio loans | $23,573 | $— | $23,573 | ||||||||
| Number of modifications | 5 | — | 5 | ||||||||
| Number of relationships | 2 | — | 2 | ||||||||
| Loan Modifications due to COVID-19 as of December 31, 2021 | |||||||||||
| (Dollars in thousands) | Interest Only | Full Payment Deferral | Total | ||||||||
| Portfolio loans | $49,219 | $— | $49,219 | ||||||||
| Number of modifications | 16 | — | 16 | ||||||||
| Number of relationships | 6 | — | 6 | ||||||||
The $23.6 million in COVID-19 loan accommodations as of June 30, 2022 are scheduled to return to normal principal and interest payments in 2022.
Nonperforming assets: Nonperforming assets, net of government guarantees at June 30, 2022 decreased 22%, or $3.3 million to $11.7 million as compared to $15.0 million at December 31, 2021. Other Real Estate Owned ("OREO"), net of government guarantees, remained at $4.4 million at June 30, 2022 as compared to December 31, 2021. Nonperforming loans, net of government guarantees decreased $3.4 million, or 32% to $7.3 million as of June 30, 2022 from $10.7 million as of December 31, 2021, primarily due to the transfer of one relationship back to accrual status in the first six months of 2022 as well as payoffs and pay downs in the first half of 2022. $5.9 million, or 74% of nonperforming assets at June 30, 2022, are nonaccrual loans related to five commercial relationships.
The following table summarizes nonperforming asset activity for the three-month periods ending June 30, 2022 and 2021.
42
| Writedowns | Transfers to | |||||||||||||||||||||||||
| (In Thousands) | Balance at March 31, 2022 | Additions this quarter | Payments this quarter | /Charge-offs this quarter | Transfers to OREO | Performing Status this quarter | Sales this quarter | Balance at June 30, 2022 | ||||||||||||||||||
| Nonperforming loans | $9,609 | $22 | ($1,464) | ($166) | $— | $— | $— | $8,001 | ||||||||||||||||||
| Nonperforming loans guaranteed by government | (907) | — | 224 | — | — | — | — | (683) | ||||||||||||||||||
| Nonperforming loans, net | 8,702 | 22 | (1,240) | (166) | — | — | — | 7,318 | ||||||||||||||||||
| Other real estate owned | 5,638 | — | — | — | — | — | — | 5,638 | ||||||||||||||||||
| Other real estate owned guaranteed | ||||||||||||||||||||||||||
| by government | (1,279) | — | — | — | — | — | — | (1,279) | ||||||||||||||||||
| Total nonperforming assets, | ||||||||||||||||||||||||||
| net of government guarantees | $13,061 | $22 | ($1,240) | ($166) | $— | $— | $— | $11,677 | ||||||||||||||||||
| Writedowns | Transfers to | |||||||||||||||||||||||||
| (In Thousands) | Balance at March 31, 2021 | Additions this quarter | Payments this quarter | /Charge-offs this quarter | Transfers to OREO/REPO | Performing Status this quarter | Sales this quarter | Balance at June 30, 2021 | ||||||||||||||||||
| Nonperforming loans | $14,463 | $173 | ($1,422) | ($110) | $— | $— | $— | $13,104 | ||||||||||||||||||
| Nonperforming loans guaranteed by government | (1,382) | — | 286 | — | — | — | — | (1,096) | ||||||||||||||||||
| Nonperforming loans, net | 13,081 | 173 | (1,136) | (110) | — | — | — | 12,008 | ||||||||||||||||||
| Other real estate owned | 7,563 | — | — | — | — | — | (490) | 7,073 | ||||||||||||||||||
| Repossessed assets | 225 | — | — | — | — | — | (225) | — | ||||||||||||||||||
| Other real estate owned guaranteed | ||||||||||||||||||||||||||
| by government | (1,279) | — | — | — | — | — | — | (1,279) | ||||||||||||||||||
| Total nonperforming assets, | ||||||||||||||||||||||||||
| net of government guarantees | $19,590 | $173 | ($1,136) | ($110) | $— | $— | ($715) | $17,802 | ||||||||||||||||||
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 June 30, 2022, management had identified potential problem loans of $1.4 million as compared to potential problem loans of $2.1 million at December 31, 2021. The decrease in potential problem loans from December 31, 2021 to June 30, 2022 is primarily the result of one relationship payoff in the first half of 2022 which was only partially offset by the addition of one relationship in the first six months of 2022.
Troubled debt restructurings (“TDRs”): TDRs are those loans for which concessions, including the reduction of interest rates below a rate otherwise available to that borrower, have been granted due to the borrower’s weakened financial condition. Interest on TDRs will be accrued at the restructured rates when it is anticipated that no loss of original principal will occur, and the interest can be collected, which is generally after a period of six months. The Company had $3.0 million in loans classified as TDRs that were performing and $5.8 million in TDRs included in nonaccrual loans at June 30, 2022 for a total of approximately $8.9 million. There are $3.1 million in government guarantees associated with TDRs, resulting in total TDRs, net of government guarantees, of $5.8 million at June 30, 2022. At December 31, 2021 there were $773,000 in loans classified as TDRs, net of government guarantees that were performing and $6.5 million in TDRs included in nonaccrual loans for a total of $7.3 million. See Note 3 of the Notes to Consolidated Financial Statements included in Item 1 of this report for further discussion of TDRs.
43
RESULTS OF OPERATIONS
Income Statement
Net Income
Net income for the second quarter of 2022 decreased $3.6 million to $4.8 million as compared to $8.3 million for the same period in 2021. The decrease in net income is mostly attributable to a $3.3 million decrease in net income in the Home Mortgage Lending segment, which is primarily due to lower production and a $239,000 decrease in net income in the Community Banking segment. The decrease in net income in the Community Banking segment in the three months ended June 30, 2022, as compared to the same period a year ago is primarily due to an increase in the provision for credit losses and other operating expenses which were only partially offset by increased net interest income.
Net income for the first half of 2022 decreased $8.5 million to $12.0 million as compared to $20.5 million for the same period in 2021. The decrease in net income is mostly attributable to a $7.3 million decrease in net income in the Home Mortgage Lending segment, which is primarily due to lower production and a $1.2 million decrease in net income in the Community Banking segment. The decrease in net income in the Community Banking segment in the six-month period ended June 30, 2022, as compared to the same period a year ago is primarily due to an increase in the provision for credit losses and other operating expenses. These decreases were only partially offset by a $2.8 million increase in net interest income and $2.0 million in life insurance proceeds received 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.
44
Net Interest Income/Net Interest Margin
Net interest income for the second quarter of 2022 increased $3.0 million, or 16%, to $22.2 million as compared to $19.2 million for the second quarter of 2021. Net interest margin increased 19 basis points to 3.67% in the second quarter of 2022 as compared to 3.48% in the second quarter of 2021. Net interest income for the first half of 2022 increased $2.8 million, or 7%, to $41.5 million as compared to $38.7 million for the first half of 2021. Net interest margin decreased 26 basis points to 3.42% in the first half of 2022 as compared to 3.68% in the first half of 2021.
The increase in net interest income in the second quarter and first six-months of 2022 compared to the same periods in 2021 was primarily the result of increased interest on loans, investments, and interest bearing deposits in other banks and decreased interest expense which was only partially offset by a decrease in loan fee income due in large part to decreased recognition of the deferred PPP loan fees upon loan forgiveness through the SBA. During the three and six-month periods ending June 30, 2022, Northrim received $33.7 million and $90.6 million, respectively, in PPP loan forgiveness through the SBA, compared to $133.0 million and $238.0 million, respectively, in the same periods in 2021. Total net PPP fee income including accretion and full fee recognition upon loan forgiveness was $1.3 million and $2.6 million during the three-month periods ending June 30, 2022 and 2021, respectively, and $3.4 million and $5.9 million during the six-month periods ending June 30, 2022 and 2021, respectively. As of June 30, 2022, there was $1.1 million of net deferred fees remaining on PPP loans mostly from the second round of PPP loan originations.
The increase in net interest margin in the second quarter of 2022 as compared to the same period a year ago was primarily the result of higher yields on earning-assets which was only partially offset by a less favorable mix of earning assets due to significant increases in short-term investments, which is the lowest yielding type of earning asset for the Company. The decrease in the net interest margin in the first half of 2022 compared to the same period a year ago is primarily due to the less favorable mix of earning assets, which was only partially offset by higher yields. Changes in net interest margin in the three and six-month periods ended June 30, 2022 as compared to the same periods in the prior year are detailed below:
| Three Months Ended June 30, 2022 vs. June 30, 2021 | |||||
| Nonaccrual interest adjustments | (0.04) | % | |||
| Impact of SBA Paycheck Protection Program loans | 0.11 | % | |||
| Interest rates and loan fees | 0.35 | % | |||
| Volume and mix of interest-earning assets | (0.23) | % | |||
| Change in net interest margin | 0.19 | % | |||
| Six Months Ended June 30, 2022 vs. June 30, 2021 | |||||
| Nonaccrual interest adjustments | 0.05 | % | |||
| Impact of SBA Paycheck Protection Program loans | 0.09 | % | |||
| Interest rates and loan fees | 0.07 | % | |||
| Volume and mix of interest-earning assets | (0.47) | % | |||
| Change in net interest margin | (0.26) | % | |||
45
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 June 30, 2022 and 2021. Average yields or costs are not calculated on a tax-equivalent basis.
| (Dollars in Thousands) | Three Months Ended June 30, | ||||||||||||||||||||||||||||||||||
| Interest income/ | |||||||||||||||||||||||||||||||||||
| Average Balances | Change | expense | Change | Average Yields/Costs | |||||||||||||||||||||||||||||||
| 2022 | 2021 | $ | % | 2022 | 2021 | $ | % | 2022 | 2021 | Change | |||||||||||||||||||||||||
Interest-bearing deposits in other banks1 | $382,015 | $208,067 | $173,948 | 84 | % | $766 | $61 | $705 | 1,156 | % | 0.80 | % | 0.12 | % | 0.68 | % | |||||||||||||||||||
Taxable long-term investments2 | 588,741 | 353,404 | 235,337 | 67 | % | 2,415 | 1,225 | 1,190 | 97 | % | 1.65 | % | 1.39 | % | 0.26 | % | |||||||||||||||||||
Non-taxable long-term investments2 | 812 | 856 | (44) | (5) | % | 4 | 4 | — | — | % | 1.98 | % | 1.87 | % | 0.11 | % | |||||||||||||||||||
| Loans held for sale | 59,677 | 111,228 | (51,551) | (46) | % | 620 | 763 | (143) | (19) | % | 4.17 | % | 2.75 | % | 1.42 | % | |||||||||||||||||||
Loans3,4 | 1,398,149 | 1,541,701 | (143,552) | (9) | % | 19,187 | 18,200 | 987 | 5 | % | 5.50 | % | 4.74 | % | 0.76 | % | |||||||||||||||||||
Interest-earning assets5 | 2,429,394 | 2,215,256 | 214,138 | 10 | % | 22,992 | 20,253 | 2,739 | 14 | % | 3.80 | % | 3.67 | % | 0.13 | % | |||||||||||||||||||
| Nonearning assets | 172,655 | 173,164 | (509) | — | % | ||||||||||||||||||||||||||||||
| Total | $2,602,049 | $2,388,420 | $213,629 | 9 | % | ||||||||||||||||||||||||||||||
| Interest-bearing demand | $669,848 | $561,570 | $108,278 | 19 | % | $167 | $128 | $39 | 30 | % | 0.10 | % | 0.09 | % | 0.01 | % | |||||||||||||||||||
| Savings deposits | 349,108 | 311,929 | 37,179 | 12 | % | 118 | 126 | (8) | (6) | % | 0.14 | % | 0.16 | % | (0.02) | % | |||||||||||||||||||
| Money market deposits | 322,384 | 256,215 | 66,169 | 26 | % | 103 | 112 | (9) | (8) | % | 0.13 | % | 0.18 | % | (0.05) | % | |||||||||||||||||||
| Time deposits | 172,617 | 186,315 | (13,698) | (7) | % | 211 | 513 | (302) | (59) | % | 0.49 | % | 1.10 | % | (0.61) | % | |||||||||||||||||||
| Total interest-bearing deposits | 1,513,957 | 1,316,029 | 197,928 | 15 | % | 599 | 879 | (280) | (32) | % | 0.16 | % | 0.27 | % | (0.11) | % | |||||||||||||||||||
| Borrowings | 24,675 | 25,032 | (357) | (1) | % | 181 | 182 | (1) | (1) | % | 2.94 | % | 2.92 | % | 0.02 | % | |||||||||||||||||||
| Total interest-bearing liabilities | 1,538,632 | 1,341,061 | 197,571 | 15 | % | 780 | 1,061 | (281) | (26) | % | 0.20 | % | 0.32 | % | (0.12) | % | |||||||||||||||||||
| Non-interest bearing demand deposits | 808,186 | 766,954 | 41,232 | 5 | % | ||||||||||||||||||||||||||||||
| Other liabilities | 839,250 | 809,971 | (11,953) | (28) | % | ||||||||||||||||||||||||||||||
| Equity | 224,167 | 237,388 | (13,221) | (6) | % | ||||||||||||||||||||||||||||||
| Total | $2,602,049 | $2,388,420 | $213,629 | 9 | % | ||||||||||||||||||||||||||||||
| Net interest income | $22,212 | $19,192 | $3,020 | 16 | % | ||||||||||||||||||||||||||||||
| Net interest margin | 3.67 | % | 3.48 | % | 0.19 | % | |||||||||||||||||||||||||||||
| Average loans to average interest-earning assets | 57.55 | % | 69.59 | % | |||||||||||||||||||||||||||||||
| Average loans to average total deposits | 60.21 | % | 74.01 | % | |||||||||||||||||||||||||||||||
| Average non-interest deposits to average total deposits | 34.80 | % | 36.82 | % | |||||||||||||||||||||||||||||||
| Average interest-earning assets to average interest-bearing liabilities | 157.89 | % | 165.19 | % | |||||||||||||||||||||||||||||||
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 in Federal Home Loan Bank stock. Taxable long-term investments consist of U.S. treasury and government sponsored entities, corporate bonds, collateral loan obligations, marketable equity securities, and Federal 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 $2.3 million and $3.4 million in the second quarter of 2022 and 2021, respectively.
4Nonaccrual loans are included with a zero effective yield. Average nonaccrual loans included in the computation of the average loan balances were $8.8 million and $13.8 million in the second quarter of 2022 and 2021, 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.
46
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 June 30, 2022 and 2021. 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 June 30, 2022 and 2021.
| (In Thousands) | Three Months Ended June 30, 2022 vs. 2021 | ||||||||||
| Increase (decrease) due to | |||||||||||
| Volume | Rate | Total | |||||||||
| Interest Income: | |||||||||||
| Short-term investments | $91 | $614 | $705 | ||||||||
| Taxable long-term investments | 1,039 | 151 | 1,190 | ||||||||
| Nontaxable long-term investments | — | — | — | ||||||||
| Loans held for sale | (439) | 296 | (143) | ||||||||
| Loans | (1,299) | 2,286 | 987 | ||||||||
| Total interest income | ($608) | $3,347 | $2,739 | ||||||||
| Interest Expense: | |||||||||||
| Interest-bearing demand | $26 | $13 | $39 | ||||||||
| Savings deposits | 14 | (22) | (8) | ||||||||
| Money market deposits | 25 | (34) | (9) | ||||||||
| Time deposits | (41) | (261) | (302) | ||||||||
| Interest-bearing deposits | 24 | (304) | (280) | ||||||||
| Borrowings | (2) | 1 | (1) | ||||||||
| Total interest expense | $22 | ($303) | ($281) | ||||||||
47
The following table compares average balances and rates as well as margins on earning assets for the six-month periods ended June 30, 2022 and 2021. Average yields or costs are not calculated on a tax-equivalent basis.
| (Dollars in Thousands) | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||
| Interest income/ | |||||||||||||||||||||||||||||||||||
| Average Balances | Change | expense | Change | Average Yields/Costs | |||||||||||||||||||||||||||||||
| 2022 | 2021 | $ | % | 2022 | 2021 | $ | % | 2022 | 2021 | Change | |||||||||||||||||||||||||
Interest-bearing deposits in other banks1 | $459,843 | $164,712 | $295,131 | 179 | % | $1,008 | $99 | $909 | 918 | % | 0.44 | % | 0.12 | % | 0.32 | % | |||||||||||||||||||
Taxable long-term investments2 | 56,173 | 112,897 | (56,724) | (50) | % | 1,025 | 1,545 | (520) | (34) | % | 3.68 | % | 2.76 | % | 0.92 | % | |||||||||||||||||||
Non-taxable long-term investments2 | 539,741 | 325,815 | 213,926 | 66 | % | 3,958 | 2,354 | 1,604 | 68 | % | 1.48 | % | 1.46 | % | 0.02 | % | |||||||||||||||||||
| Loans held for sale | 822 | 856 | (34) | (4) | % | 9 | 9 | — | — | % | 2.21 | % | 2.12 | % | 0.09 | % | |||||||||||||||||||
Loans3,4 | 1,389,050 | 1,517,438 | (128,388) | (8) | % | 37,050 | 36,842 | 208 | 1 | % | 5.38 | % | 4.90 | % | 0.48 | % | |||||||||||||||||||
Interest-earning assets5 | 2,445,629 | 2,121,718 | 323,911 | 15 | % | 43,050 | 40,849 | 2,201 | 5 | % | 3.55 | % | 3.88 | % | (0.33) | % | |||||||||||||||||||
| Nonearning assets | 164,611 | 171,870 | (7,259) | (4) | % | ||||||||||||||||||||||||||||||
| Total | $2,610,240 | $2,293,588 | $316,652 | 14 | % | ||||||||||||||||||||||||||||||
| Interest-bearing demand | $672,694 | $516,228 | $156,466 | 30 | % | $282 | $246 | $36 | 15 | % | 0.08 | % | 0.10 | % | (0.02) | % | |||||||||||||||||||
| Savings deposits | 350,823 | 314,709 | 36,114 | 11 | % | 246 | 255 | (9) | (4) | % | 0.14 | % | 0.16 | % | (0.02) | % | |||||||||||||||||||
| Money market deposits | 321,580 | 251,140 | 70,440 | 28 | % | 205 | 225 | (20) | (9) | % | 0.13 | % | 0.18 | % | (0.05) | % | |||||||||||||||||||
| Time deposits | 174,898 | 179,778 | (4,880) | (3) | % | 441 | 1,102 | (661) | (60) | % | 0.51 | % | 1.24 | % | (0.73) | % | |||||||||||||||||||
| Total interest-bearing deposits | 1,519,995 | 1,261,855 | 258,140 | 20 | % | 1,174 | 1,828 | (654) | (36) | % | 0.16 | % | 0.29 | % | (0.13) | % | |||||||||||||||||||
| Borrowings | 24,726 | 25,066 | (340) | (1) | % | 360 | 336 | 24 | 7 | % | 2.94 | % | 2.70 | % | 0.24 | % | |||||||||||||||||||
| Total interest-bearing liabilities | 1,544,721 | 1,286,921 | 257,800 | 20 | % | 1,534 | 2,164 | (630) | (29) | % | 0.20 | % | 0.34 | % | (0.14) | % | |||||||||||||||||||
| Non-interest bearing demand deposits | 801,481 | 727,589 | 73,892 | 10 | % | ||||||||||||||||||||||||||||||
| Other liabilities | 33,436 | 44,959 | (11,523) | (26) | % | ||||||||||||||||||||||||||||||
| Equity | 230,602 | 234,119 | (3,517) | (2) | % | ||||||||||||||||||||||||||||||
| Total | $2,610,240 | $2,293,588 | $316,652 | 14 | % | ||||||||||||||||||||||||||||||
| Net interest income | $41,516 | $38,685 | $2,831 | 7 | % | ||||||||||||||||||||||||||||||
| Net interest margin | 3.42 | % | 3.68 | % | (0.26) | % | |||||||||||||||||||||||||||||
| Average loans to average interest-earning assets | 56.80 | % | 71.52 | % | |||||||||||||||||||||||||||||||
| Average loans to average total deposits | 59.83 | % | 76.27 | % | |||||||||||||||||||||||||||||||
| Average non-interest deposits to average total deposits | 34.52 | % | 36.57 | % | |||||||||||||||||||||||||||||||
| Average interest-earning assets to average interest-bearing liabilities | 158.32 | % | 164.87 | % | |||||||||||||||||||||||||||||||
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 in Federal Home Loan Bank stock. Taxable long-term investments consist of U.S. treasury and government sponsored entities, corporate bonds, collateral loan obligations, marketable equity securities, and Federal 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 $5.3 million and $16.2 million in the first six months of 2022 and 2021, respectively.
4Nonaccrual loans are included with a zero effective yield. Average nonaccrual loans included in the computation of the average loan balances were $9.9 million and $12.2 million in the first six months of 2022 and 2021, 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.
48
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 six-month periods ending June 30, 2022 and 2021. 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 six-month periods ending June 30, 2022 and 2021.
| (In Thousands) | Six Months Ended June 30, 2022 vs. 2021 | ||||||||||
| Increase (decrease) due to | |||||||||||
| Volume | Rate | Total | |||||||||
| Interest Income: | |||||||||||
| Short-term investments | $367 | $542 | $909 | ||||||||
| Taxable long-term investments | 1,354 | 250 | 1,604 | ||||||||
| Nontaxable long-term investments | — | — | — | ||||||||
| Loans held for sale | (1,549) | 1,029 | (520) | ||||||||
| Loans | (6,666) | 6,874 | 208 | ||||||||
| Total interest income | ($6,494) | $8,695 | $2,201 | ||||||||
| Interest Expense: | |||||||||||
| Interest-bearing demand | $68 | ($32) | $36 | ||||||||
| Savings deposits | 27 | (36) | (9) | ||||||||
| Money market deposits | 54 | (74) | (20) | ||||||||
| Time deposits | (31) | (630) | (661) | ||||||||
| Interest-bearing deposits | 118 | (772) | (654) | ||||||||
| Borrowings | (5) | 29 | 24 | ||||||||
| Total interest expense | $113 | ($743) | ($630) | ||||||||
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 June 30, | Six Months Ended June 30, | |||||||||||||
| (In Thousands) | 2022 | 2021 | 2022 | 2021 | ||||||||||
| Credit loss expense on loans held for investment | $273 | ($161) | $106 | ($2,066) | ||||||||||
| Credit loss expense on unfunded commitments | 190 | (266) | 207 | 151 | ||||||||||
| 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 | $463 | ($427) | $313 | ($1,915) | ||||||||||
The increase in the provision for credit losses on loans for the three and six-month periods ending June 30, 2022 as compared to the same periods in 2021 is primarily the result of increased unguaranteed loan balances in the three and six-month periods ending June 30, 2022 as compared to the same periods in 2021 that were only partially offset by a decrease in the estimated loss rates due to lower forecasted unemployment rates. During the same periods in 2021, decreases in estimated loss rates were higher than the decreases in 2022 due to larger decreases in the forecasted unemployment rates. 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.
49
Other Operating Income
Other operating income for the three-month period ended June 30, 2022, decreased $6.3 million, or 45%, to $7.8 million as compared to $14.1 million for the same period in 2021, primarily due to a $5.5 million decrease in mortgage banking income in the second quarter of 2022 compared to the same quarter in 2021. The decrease in mortgage banking income in the three-month period ended June 30, 2022 as compared to the same period in 2021 was primarily due to decreased production volume due to decreased refinance activity resulting from increases in the mortgage interest rates. Additionally, there was a $988.0 thousand increase in unrealized loss on marketable securities. These decreases were only partially offset by small increases in bankcard fees and service charges on deposit accounts due to an increase in customers.
Other operating income for the six-month period ended June 30, 2022, decreased $11.4 million, or 38%, to $18.6 million as compared to $30.0 million for the same period in 2021, primarily due to a $12.1 million decrease in mortgage banking income in the first half of 2022 compared to the same period in 2021 for the same reason outlined above. Additionally, there was a $1.3 million increase in unrealized loss on marketable securities. These decreases were only partially offset by $2.0 million in life insurance proceeds received 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, as well as small increases in bankcard fees and service charges on deposit accounts due to an increase in customers.
Other Operating Expense
Other operating expense for the second quarter of 2022 increased $902,000, or 4%, to $23.2 million as compared to $22.3 million for the same period in 2021 primarily due to higher salaries and other personnel expense related to the community banking segment that was only partially offset by a decrease in salaries and other personnel expense related to mortgage banking operations, which fluctuate with production volumes. Additionally, insurance expense increased in the second quarter of 2022 as compared to the second quarter of 2021 due to higher FDIC insurance premiums primarily due to growth in the Company's balance sheet.
Other operating expense for the first half of 2022 increased $676,000, or 2%, to $44.3 million as compared to $43.7 million for the same period in 2021 primarily due to higher insurance expense due to higher FDIC insurance premiums primarily due to growth in the Company's balance sheet. Additionally, marketing expense and professional fees increased in the first half of 2022 as compared to 2021 due to timing differences of advertising and sponsorships and increased investment management fees attributable to the growth in our investment portfolio.
Income Taxes
For the second quarter and first half of 2022, Northrim recorded a lower effective tax rate as compared to the same periods in 2021 as a result of an increase in tax credits and tax exempt interest income as a percentage of pre-tax income in 2022. In the second quarter of 2022, Northrim recorded $1.5 million in state and federal income tax expense, for an effective tax rate of 24.11% compared to $3.1 million and 26.89% for the same period in 2021. For the first half of 2022, Northrim recorded $3.5 million in state and federal income tax expense, for an effective tax rate of 22.42% compared to $6.4 million in state and federal income tax expense, for an effective tax rate of 23.88% for the same period in 2021.
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, at June 30, 2022 increased 43%, or $195.8 million, to $650.9 million from $455.1 million at December 31, 2021 as proceeds from an increase in deposits that were not lent out were invested in the first six months of 2022.
50
The table below details portfolio investment balances by portfolio investment type:
| June 30, 2022 | December 31, 2021 | |||||||||||||
| Dollar Amount | Percent of Total | Dollar Amount | Percent of Total | |||||||||||
| (In Thousands) | ||||||||||||||
| Balance | % of total | Balance | % of total | |||||||||||
| U.S. Treasury and government sponsored entities | $521,338 | 80.1 | % | $341,480 | 75.0 | % | ||||||||
| Municipal securities | 807 | 0.1 | % | 840 | 0.2 | % | ||||||||
| Corporate bonds | 61,753 | 9.5 | % | 52,946 | 11.6 | % | ||||||||
| Collateralized loan obligations | 57,878 | 8.9 | % | 51,418 | 11.3 | % | ||||||||
| Preferred stock | 9,122 | 1.4 | % | 8,420 | 1.9 | % | ||||||||
| Total portfolio investments | $650,898 | $455,104 | ||||||||||||
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:
| June 30, 2022 | December 31, 2021 | |||||||||||||
| Dollar Amount | Percent of Total | Dollar Amount | Percent of Total | |||||||||||
| (In Thousands) | ||||||||||||||
| Commercial & industrial loans | $394,841 | 28.1 | % | $448,338 | 31.7 | % | ||||||||
| Commercial real estate: | ||||||||||||||
| Owner occupied properties | 313,174 | 22.3 | % | 300,200 | 21.2 | % | ||||||||
| Non-owner occupied and multifamily properties | 446,592 | 31.7 | % | 435,311 | 30.8 | % | ||||||||
| Residential real estate: | ||||||||||||||
| 1-4 family residential properties secured by first liens | 37,298 | 2.7 | % | 32,542 | 2.3 | % | ||||||||
| 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens | 21,953 | 1.6 | % | 19,610 | 1.4 | % | ||||||||
| 1-4 family residential construction loans | 43,915 | 3.1 | % | 36,222 | 2.6 | % | ||||||||
| Other construction, land development and raw land loans | 87,163 | 6.2 | % | 88,094 | 6.2 | % | ||||||||
| Obligations of states and political subdivisions in the US | 24,005 | 1.7 | % | 16,403 | 1.2 | % | ||||||||
| Agricultural production, including commercial fishing | 29,482 | 2.1 | % | 27,959 | 2.0 | % | ||||||||
| Consumer loans | 4,092 | 0.3 | % | 4,801 | 0.3 | % | ||||||||
| Other loans | 3,194 | 0.2 | % | 4,406 | 0.3 | % | ||||||||
| Total loans | $1,405,709 | $1,413,886 | ||||||||||||
Loans decreased by $8.2 million, or 1%, to $1.406 billion at June 30, 2022 from $1.414 billion at December 31, 2021, primarily as a result of decreased SBA PPP loans. Loans excluding PPP loans increased $78.2 million, or 6% to $1.374 billion at June 30, 2022 from $1.296 billion at December 31, 2021. Management believes that the significant outreach that the Company has done throughout the SBA PPP lending cycle to both existing customers and new PPP loan customers has contributed to growth in our market share for non-PPP lending relationships. PPP loans are included in commercial and industrial loans in the table above and totaled $31.9 million at June 30, 2022 and $118.2 million at December 31, 2021.
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 $59.2 million, or approximately 4% of loans as of June 30, 2022 have direct exposure to the oil and gas industry as compared to $63.6 million, or approximately 5% of loans as of December 31, 2021. The Company's unfunded commitments to borrowers that have direct exposure to the oil and gas industry were $68.1 million and $66.4 million at June 30, 2022 and December 31, 2021, respectively. The portion of the Company's
51
ACL that related to the loans with direct exposure to the oil and gas industry was estimated at $466,000 as of June 30, 2022 and $684,000 as of December 31, 2021.
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) | June 30, 2022 | December 31, 2021 | ||||||
| Commercial & industrial loans | $41,370 | $45,338 | ||||||
| Commercial real estate: | ||||||||
| Owner occupied properties | 10,066 | 10,244 | ||||||
| Non-owner occupied and multifamily properties | 6,296 | 6,564 | ||||||
| Other loans | 1,465 | 1,495 | ||||||
| Total | $59,197 | $63,641 | ||||||
The Company monitors other concentrations within the loan portfolio depending on trends in the current and future estimated economic conditions. At June 30, 2022, the Company had $121.3 million, or 9% of portfolio loans, in the Healthcare sector, $96.6 million, or 7% of portfolio loans, in the Tourism sector, $63.1 million, or 4% of portfolio loans, in the Retail sector, $59.9 million, or 4% of portfolio loans, in the Accommodations sector, $58.5 million, or 4% of portfolio loans, in the Fishing sector, $51.1 million, or 4% in the Restaurant sector, and $50.0 million, or 4% of portfolio loans, in the Aviation (non-tourism) sector.
The portion of the Company's ACL that related to the loans with exposure to these industries is estimated at the following amounts as of June 30, 2022:
| (In Thousands) | Tourism | Aviation (non-tourism) | Healthcare | Retail | Fishing | Restaurant | Accommodations | Total | ||||||||||||||||||
| ACL | $683 | $325 | $945 | $529 | $365 | $406 | $459 | $3,712 | ||||||||||||||||||
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The following table sets forth information regarding changes in the ACL for the periods indicated:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||
| (In Thousands) | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||
| Balance at beginning of period | $11,310 | $14,764 | $11,739 | $21,136 | ||||||||||||||||
| Cumulative effect of adoption of ASU 2016-13 | — | — | — | (4,511) | ||||||||||||||||
| Charge-offs: | ||||||||||||||||||||
| Commercial & industrial loans | (166) | (110) | (461) | (273) | ||||||||||||||||
| Total charge-offs | (166) | (110) | (461) | (273) | ||||||||||||||||
| Recoveries: | ||||||||||||||||||||
| Commercial & industrial loans | 103 | 27 | 116 | 212 | ||||||||||||||||
| Commercial real estate: | ||||||||||||||||||||
| Owner occupied properties | — | 2 | — | 4 | ||||||||||||||||
| 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens | 9 | 10 | 21 | 20 | ||||||||||||||||
| Agricultural production, including commercial fishing | 7 | 7 | 15 | 15 | ||||||||||||||||
| Consumer loans | 1 | — | 1 | 2 | ||||||||||||||||
| Total recoveries | 120 | 46 | 153 | 253 | ||||||||||||||||
| Net, charge-offs | (46) | (64) | (308) | (20) | ||||||||||||||||
| (Benefit) provision for credit losses | 273 | (161) | 106 | (2,066) | ||||||||||||||||
| Balance at end of period | $11,537 | $14,539 | $11,537 | $14,539 | ||||||||||||||||
The following table sets forth information regarding changes in the ACL for unfunded commitments for the periods indicated:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||
| (In Thousands) | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||
| Balance at beginning of period | $1,113 | $1,833 | $1,096 | $187 | ||||||||||||||||
| Cumulative effect of adoption of ASU 2016-13 | — | — | — | 1,229 | ||||||||||||||||
| Adjusted balance, beginning of period | 1,113 | 1,833 | 1,096 | 1,416 | ||||||||||||||||
| (Benefit) provision for credit losses | 190 | (266) | 207 | 151 | ||||||||||||||||
| Balance at end of period | $1,303 | $1,567 | $1,303 | $1,567 | ||||||||||||||||
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. Moreover, bank regulators frequently monitor banks' loan loss allowances, and if regulators were to determine that the Company’s ACL is inadequate, they may require the Company to increase the ACL, which may adversely impact the Company’s net income and financial condition.
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Deposits
Deposits are the Company’s primary source of funds. Total deposits decreased $86.2 million, or 4%, to $2.335 billion as of June 30, 2022 compared to $2.422 billion as of December 31, 2021, primarily due to the drawdown of a large temporary deposit in the first quarter of 2022. The following table summarizes the Company's composition of deposits as of the periods indicated:
| June 30, 2022 | December 31, 2021 | |||||||||||||
| (In thousands) | Balance | % of total | Balance | % of total | ||||||||||
| Demand deposits | $830,156 | 35 | % | $887,824 | 37 | % | ||||||||
| Interest-bearing demand | 666,283 | 29 | % | 692,683 | 29 | % | ||||||||
| Savings deposits | 349,208 | 15 | % | 348,164 | 14 | % | ||||||||
| Money market deposits | 319,843 | 14 | % | 314,996 | 13 | % | ||||||||
| Time deposits | 169,900 | 7 | % | 177,964 | 7 | % | ||||||||
| Total deposits | $2,335,390 | $2,421,631 | ||||||||||||
The Company’s mix of deposits continues to contribute to a low cost of funds with balances in transaction accounts representing 93% of total deposits at June 30, 2022 and 93% of total deposits at December 31, 2021.
The only deposit category with stated maturity dates is certificates of deposit. At June 30, 2022, the Company had $169.9 million in certificates of deposit as compared to certificates of deposit of $178.0 million at December 31, 2021. At June 30, 2022, $133.1 million, or 78%, of the Company’s certificates of deposits are scheduled to mature over the next 12 months as compared to $118.5 million, or 67%, of total certificates of deposit at December 31, 2021. The aggregate amount of certificates of deposit in amounts of $250,000 and greater at June 30, 2022 and December 31, 2021, was $73.3 million and $77.1 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 of June 30, 2022:
| Time Certificates of Deposit | ||||||||
| of $250,000 or More | ||||||||
| Percent of Total Deposits | ||||||||
| (In Thousands) | Amount | |||||||
| Amounts maturing in: | ||||||||
| Three months or less | $11,681 | 16 | % | |||||
| Over 3 through 6 months | 14,653 | 20 | % | |||||
| Over 6 through 12 months | 29,479 | 40 | % | |||||
| Over 12 months | 17,457 | 24 | % | |||||
| Total | $73,270 | 100 | % | |||||
Borrowings
FHLB: The Bank is a member of the Federal 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. At June 30, 2022, our maximum borrowing line from the FHLB was $1.169 billion, approximately 45% of the Bank’s assets, subject to the FHLB’s collateral requirements. The Company has outstanding advances of $14.3 million as of June 30, 2022 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: The Federal Reserve Bank of San Francisco (the "Federal Reserve Bank") is holding $50.5 million of loans as collateral to secure advances made through the discount window on June 30, 2022. There were no discount window advances outstanding at either June 30, 2022 or December 31, 2021.
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Other Short-term Borrowings: The Company is subject to provisions under Alaska state law, which generally limit the amount of outstanding debt to 35% of total assets or $909.4 million at June 30, 2022 and $948.0 million at December 31, 2021.
At June 30, 2022 and December 31, 2021, the Company had no short-term (original maturity of one year or less) borrowings that exceeded 30% of shareholders’ equity.
Long-term Borrowings. The Company had no long-term borrowing outstanding other than the FHLB advances noted above as of June 30, 2022 or December 31, 2021.
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 2022. Other available sources of liquidity for the bank holding company include the issuance of debt and the issuance of common or preferred stock. As of June 30, 2022, 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 its Asset 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.
The Company had cash and cash equivalents of $336.9 million, or 13% of total assets at June 30, 2022 compared to $645.8 million, or 24% of total assets as of December 31, 2021. The decrease in cash and cash equivalents is primarily due to an increase in available for sale securities and a decrease in deposits, but is still elevated as compared to historical norms. The Company had other comprehensive losses, net of tax, of $4.9 million and $15.9 million for the three and six-month periods ending June 30, 2022 primarily due to unrealized holding losses on available for sale securities due to increases in interest rates. Management does not believe that liquidation of these securities, which would result in realized losses, will occur prior to maturity of these securities. Furthermore, management expects that the Company's elevated level of liquidity will continue through 2022 and potentially into subsequent years. Accordingly, management has invested in slightly longer term investment securities as compared to the last several years. As of June 30, 2022, the weighted average maturity of available for sale securities is 3.6 years compared to 4.1 years at December 31, 2021 and 2.6 years at December 31, 2020. At June 30, 2022, no available for sale securities mature within one year, $137.0 million mature within one to two years, and $178.4 million mature within two to three years. Our total unfunded commitments to fund loans and letters of credit at June 30, 2022 were $415.8 million. We do not expect that all of these loans are likely to be fully drawn upon at any one time. At June 30, 2022, certificates of deposit totaling $133.1 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 of June 30, 2022, are not material to the Company's liquidity position as of June 30, 2022.
The Company has other available sources of liquidity to fund unforeseen liquidity needs. These include borrowings available through our correspondent banking relationships and our credit lines with the Federal Reserve Bank and the FHLB. At June 30, 2022, our liquid assets were $578.8 million and our funds available for borrowing under our existing lines of credit were $1.224 billion. 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 in the foreseeable future.
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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 $15.3 million for the first six months of 2022, primarily due to cash provided by 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 $218.8 million for the same period, primarily due to purchases of available for sale and held to maturity securities as well as an increase in purchased receivables. This use of cash was only partially offset by a decrease in loans, mostly attributable to SBA PPP forgiveness. Net cash used by financing activities in the same period was $105.4 million, primarily due to a decrease in deposits.
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 333,724 shares of its common stock under the Company's previously announced repurchase programs in the first six months of 2022. At June 30, 2022, there are no shares remaining of the shares previously authorized for repurchase. 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 of June 30, 2022, 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 2022, exceeding the FDIC’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 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 at both June 30, 2022 and December 31, 2021, 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 | ||||||||||||||||||||
| June 30, 2022 | |||||||||||||||||||||||
| Total risk-based capital | 8.00% | 10.00% | 13.45% | 11.46% | |||||||||||||||||||
| Tier 1 risk-based capital | 6.00% | 8.00% | 12.74% | 10.74% | |||||||||||||||||||
| Common equity tier 1 capital | 4.50% | 6.50% | 12.20% | 10.76% | |||||||||||||||||||
| Leverage ratio | 4.00% | 5.00% | 8.84% | 7.44% | |||||||||||||||||||
See Note 23 of the Consolidated Financial Statements in Part II. Item 8 of the Company's Annual Report on Form 10-K for the year ended December 31, 2021 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 ended December 31, 2021. These rules apply to the Bank but not to the Company. Under the rules of the Federal 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.
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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 ended December 31, 2021. The SEC 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 OREO, 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 2022 except as noted below.
Allowance for Credit Losses Policy: For loan pools that utilize the discounted cash flow ("DCF") method, the Company utilizes complex models to obtain reasonable and supportable forecasts to calculate two predictive metrics, the probability of default ("PD") and loss given default. The PD measures the probability that a loan will default within a given time horizon and is an assumption derived from regression models which determine the relationship between historical defaults and certain economic variables. As of December 31, 2021, management utilized and forecasted Alaska unemployment as a loss driver for all of the loan pools that utilized the DCF method. Management also utilized and forecasted either one-year percentage change in the Alaska home price index or the one-year percentage change in the national commercial real estate price index as a second loss driver depending on the nature of the underlying loan pool and how well that loss driver correlated to expected future losses. Additionally, the Company's regression models for PD as of December 31, 2021 utilized the Company's actual historical loan level default data.
As of January 1, 2022, management utilizes and forecasts U.S. unemployment as the sole loss driver for all of the loan pools that utilize the DCF method. The Company's regression models for PD as of January 1, 2022 utilize peer historical loan level default data. Peers for this purpose include banks in the United States with total assets between $1 billion and $5 billion whose loan portfolios share certain characteristics with the Company's loan portfolio. Peers differ by loan segment; a bank is included in the peer group for each loan segment under the following circumstances:
•The percentage the balance of the loan segment compared to total loans over a five year look back period is within 1.5 standard deviations of the Company's data, and
•The percentage of total charge offs for the loan segment over a five year look back period is within 1 standard deviation of the Company's data; and
•The percentage of total charge offs for the loan segment during the recessionary period from the fourth quarter of 2008 to the fourth quarter of 2012 is within 1 standard deviation of the Company's data.
No other changes have been made to the Company's Allowance for Credit Losses Policy since December 31, 2021.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our assessment of market risk as of June 30, 2022 indicates that there are no material changes in the quantitative and qualitative disclosures from those in our Annual Report on Form 10-K for the year ended December 31, 2021.
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ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, we evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Securities Exchange Act of 1934). Our principal executive and financial officers supervised and participated in this evaluation. Based on this evaluation, our principal executive and financial officers each concluded that as of June 30, 2022, the disclosure controls and procedures are effective in timely alerting them to material information required to be included in the periodic reports to the Securities and Exchange Commission. The design of any system of controls is based in part upon various assumptions about the likelihood of future events, and there can be no assurance that any of our plans, products, services or procedures will succeed in achieving their intended goals under future conditions.
Changes in Internal Control over Disclosure and Reporting
There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15-d-15(f) of the Securities Exchange Act of 1934) that occurred during the quarterly period ended June 30, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During the normal course of its business, the Company is a party to various debtor-creditor legal actions, disputes, claims, and litigation related to the conduct of its banking business. These include cases filed as a plaintiff in collection and foreclosure cases, and the enforcement of creditors’ rights in bankruptcy proceedings. Management does not expect that the resolution of these matters will have a material effect on the Company’s business, financial position, results of operations, or cash flows.
ITEM 1A. RISK FACTORS
For information regarding risk factors, please refer to Part I. Item 1A in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, as updated by the Company's periodic filings with the SEC. These risk factors have not changed materially as of June 30, 2022.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a)-(b) Not applicable
(c) The Company repurchased 200,619 shares of its common stock during the three-month period ending June 30, 2022.
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| Total Number of Shares (or Units) Purchased | Average Price Paid per Shares (or Unit) | Total Number of Shares (or Units) Purchased as Part of the Publicly Announced Plans or Programs | Maximum Number (1) (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs | |||||||||||
| Period | (a) | (b) | (c) | (d) | ||||||||||
| Month No. 1 | ||||||||||||||
| April 1, 2022 - April 30, 2022 | 57,333 | $42.30 | 57,333 | 143,286 | ||||||||||
| Month No. 2 | ||||||||||||||
| May 1, 2022 - May 31, 2022 | 77,219 | $40.23 | 77,219 | 66,067 | ||||||||||
| Month No. 3 | ||||||||||||||
| June 1, 2022 - June 30, 2022 | 66,067 | $40.89 | 66,067 | 0 | ||||||||||
| Total | 200,619 | $41.04 | 200,619 | 0 | ||||||||||
(1) In August 2004, the Company publicly announced its board of director's (the "Board") authorization to increase the stock in its repurchase program (the "Plan") by an additional 304,283, or 5%, of total shares outstanding. As a result, the total shares available under the Plan at that time increased to 385,855 shares. On June 8, 2007, the Company publicly announced the Board’s authorization to increase the stock in its repurchase program by an additional 305,029 shares, or 5% of total shares outstanding, bringing the total shares available and authorized for repurchase under the Plan at that time to 342,242 shares. In 2007, the Company repurchased shares, bringing the total shares available and authorized for repurchase under the Plan to 227,242 shares. In the third quarter of 2017, the Company repurchased 58,341 shares, bringing the total shares available and authorized for repurchase under the Plan to 168,901. In the fourth quarter of 2018, the Company repurchased 15,468 shares, bringing the total shares available and authorized for repurchase under the Plan to 153,433. In the first quarter of 2019, the Company repurchased 6,110 shares, bringing the total shares available and authorized for repurchase under the Plan to 147,323 as of March 31, 2019. In April 2019, the Company publicly announced its Board's authorization to increase the stock in the Plan by an additional 193,678, or approximately 3%, of total shares outstanding. As a result, the total shares available under the Plan at that time increased to 340,000 shares, or 5% of total shares outstanding. In the second quarter of 2019, the Company repurchased 149,373 shares, bringing the total shares available and authorized for repurchase under the Plan to 192,193 as of June 30, 2019. In the third quarter of 2019, the Company repurchased 192,193 shares, bringing the total shares available and authorized for repurchase under the Plan to zero as of September 30, 2019. On January 27, 2020, the Board authorized the repurchase of up to an additional 327,000 shares of its common stock. In the first quarter of 2020, the Company repurchased 192,709 shares, bringing the total number of shares available and authorized for repurchase under the Plan to 134,291. As of March 31, 2020, the Company had suspended all stock repurchasing activity. The Company resumed its stock repurchase program on August 28, 2020. In the third quarter of 2020, the Company repurchased 88,742 shares, bringing the total number of shares available and authorized for repurchase under the Plan to 45,549. In the fourth quarter of 2020, the Company repurchased 45,549 shares, bringing the total shares available and authorized for repurchase to zero as of December 31, 2020. On February 1, 2021, the Company publicly announced its Board's authorization to repurchase up to an additional 313,000 shares of its common stock. In the first quarter of 2021, the Company repurchased 61,399 shares, bringing the total shares available and authorized for repurchase under the Plan to 251,601. In the third quarter of 2021, the Company repurchased 29,613 shares, bringing the total shares available and authorized for repurchase under the Plan to 221,988. In the fourth quarter of 2021, the Company repurchased 188,264 shares, bringing the total shares available and authorized for repurchase under the Plan to 33,724. On January 28, 2022, the Company announced that its Board of Directors had authorized the repurchase of up to an additional 300,000 shares of common stock. In the first quarter of 2022, the Company repurchased 133,105 shares, bringing the total shares remaining available and authorized for repurchase under the Plan to 200,619. In the second quarter of 2022, the Company repurchased 200,619 shares, bringing the total shares available and authorized for repurchase to zero as of June 30, 2022.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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ITEM 5. OTHER INFORMATION
(a) Not applicable
(b) There have been no material changes to the procedures by which shareholders may nominate directors to the Company’s board of directors.
ITEM 6. EXHIBITS
| 101.INS | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | ||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | ||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | ||||
| 101.LAB | Inline XBRL Taxonomy Extension Labels Linkbase Document | ||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | ||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | ||||
| 104 | The cover page for the Company's Quarterly Report on 10-Q for the quarter ended June 30, 2022 - formatted in Inline XBRL (included in Exhibit 101) | ||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
NORTHRIM BANCORP, INC.
| August 5, 2022 | By | /s/ Joseph M. Schierhorn | ||||||
| Joseph M. Schierhorn | ||||||||
| Chairman, President, Chief Executive Officer and Chief Operating Officer | ||||||||
| (Principal Executive Officer) | ||||||||
| August 5, 2022 | By | /s/ Jed W. Ballard | ||||||
| Jed W. Ballard | ||||||||
| Executive Vice President, Chief Financial Officer | ||||||||
| (Principal Financial and Accounting Officer) | ||||||||
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TABLE OF CONTENTS
Part I. Financial InformationItem 1. Financial StatementsItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II - Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Mine Safety DisclosuresItem 5. Other InformationItem 6. Exhibits