UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
For the fiscal year ended December 31, 20192021
For the transition period from_____to____
Commission File Number 000-33501
NORTHRIM BANCORP, INC.
(Exact name of registrant as specified in its charter)
| Alaska | 92-0175752 | |||||||
(State or other jurisdiction ofincorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
3111 C Street
Anchorage, Alaska 99503
(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
Securities registered pursuant to Section 12(g) of the Act:
| Common Stock, $1.00 par value | The NASDAQ Stock Market, LLC | ||||
| (Title of Class) | (Name of Exchange on Which Listed) | ||||
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨ Yes ý No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨ Yes ý No
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 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 such files). ý Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer ¨ Accelerated Filer ý Non-accelerated Filer ¨ (Do not check if a smaller reporting company) Smaller Reporting Company ý ☒ 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 12(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ¨☐ Yes ý No
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 20192021 (the last business day of the registrant’s most recently completed second fiscal quarter) was $235,097,358.$258,025,106.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. 6,460,2045,941,885 shares of Common Stock, $1.00 par value, as of March 6, 2020.4, 2022.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement on Schedule 14A, relating to the registrant’s annual meeting of shareholders to be held on May 28, 2020,26, 2022, are incorporated by reference into Part III of this Form 10-K.
| TABLE OF CONTENTS | ||||||||
Part I | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 1B. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Part II | ||||||||
| Item 5. | ||||||||
| Item 6. | ||||||||
| Item 7. | ||||||||
| Item 7A. | ||||||||
| Item 8. | ||||||||
| Item 9. | ||||||||
| Item 9A. | ||||||||
| Item 9B. | ||||||||
| Item 9C. | ||||||||
| Part III | ||||||||
| Item 10. | ||||||||
| Item 11. | ||||||||
| Item 12. | ||||||||
| Item 13. | ||||||||
| Item 14. | ||||||||
| Part IV | ||||||||
| Item 15. | ||||||||
| Item 16. | ||||||||
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PART I
Cautionary Note Regarding Forward Looking Statements
This Annual Report on Form 10-K includes “forward-looking statements”, within the meaning of the Private Securities Litigation Reform Act of 1995, 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 Northrim BanCorp Inc.’s style of banking, and the outlookstrength of the local economy in which we operate.operate, and statements related to the expected or potential impact of the novel coronavirus ("COVID-19") pandemic, including any variants of the COVID-19 virus, the timing, availability and efficacy of the COVID-19 vaccines in the jurisdictions in which the Company operates, and related responses of the government that have been, and may in the future be imposed in response to the pandemic. All statements other than statements of historical fact, including statements regarding industry prospects, and future results of operations or financial position and the expected or potential impact of COVID-19 and related responses of the government that have been, and may in the future be imposed in response to the pandemic, 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 timing of Paycheck Protection Program ("PPP") loan forgiveness; the impact of government response that have been, and may in the future be imposed in response to the pandemic, including the effect of previously-enacted stimulus from the federal government; the impact of potential increases in interest rates, inflation, supply-chain constraints, and potential geopolitical instability; the general condition of, and changes in, the Alaska economy; factors that impact our ability to maintain or expand our market share or net interest margin; the sufficiency of our allowance for loan losses and the accuracy of the assumptions or estimates used in preparing our financial statements, including those related to current expected credit losses accounting guidance; 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 as those factors relate to our cost of funds and return on assets.economy. In addition, there are risks inherent in the banking industry relating to collectability of loans and changes in interest rates. Many of these risks, as well as other risks that may have a material adverse impact on our operations and business, are identified in Item 1A. Risk Factors, and in our 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 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.
ITEM 1. BUSINESS
In this document, please note that references to "we", "our", "us", or the "Company" mean Northrim BanCorp, Inc. and its subsidiaries, unless the context suggests otherwise.
General
We are a publicly traded bank holding company headquartered in Anchorage, Alaska. The Company’s common stock trades on the Nasdaq Global Select Stock Market (“NASDAQ”) under the symbol, “NRIM.” The Company is regulated by the Board of Governors of the Federal Reserve System. We began banking operations in Anchorage in December 1990, and formed the Company as an Alaska corporation in connection with our reorganization into a holding company structure; that reorganization was completed effective December 31, 2001.The Company has grown to be the third largest commercial bank in Alaska and in Anchorage in terms of deposits, with $1.4$2.4 billion in total deposits and $1.6$2.7 billion in total assets at December 31, 2019.2021. Through our sixteen17 banking branches and twelve11 mortgage origination offices, we are accessible to approximately 90% of the AlaskaAlaskan population.
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The Company has three direct wholly-owned subsidiaries:
•Northrim Bank (the “Bank”), a state chartered, full-service commercial bank headquartered in Anchorage, Alaska. The Bank is regulated by the Federal Deposit Insurance Corporation (the "FDIC") and the State of Alaska Department of Commerce, Community and Economic Development, Division of Banking, Securities and Corporations. The Bank has sixteen17 branch locations in Alaska; eight in Anchorage, one in Wasilla, two in Juneau, onetwo in Fairbanks, one in Ketchikan, one in Sitka, one in Eagle River, and one in Soldotna. Additionally, we have a loan production office in Kodiak. We operate in Washington State through Northrim Funding Services (“NFS”), a factoring business that the Bank started in 2004. We offer a wide array of commercial and consumer loan and deposit products, investment products, and electronic banking services over the Internet;
•Northrim Investment Services Company (“NISC”) was formed in November 2002.In the first quarter of 2006, throughThrough NISC, we purchased anown 24% of the total outstanding equity interest in Pacific Wealth Advisors, LLC (“PWA”), an investment advisory, trust, and wealth management business located in Seattle, Washington, in which we hold 24% of PWA's total outstanding equity interests.Washington. PWA is a holding company that owns Pacific Portfolio Consulting, LLC and Pacific Portfolio Trust Company;
•Northrim Statutory Trust 2 (“NST2”), an entity that we formed in December of 2005 to facilitate a trust preferred securities offering by the Company.
The Bank has three direct wholly-owned subsidiaries:
•Northrim Capital Investments Co. (“NCIC”) is a wholly-owned subsidiary of the Bank, which holds a 100% interest in a residential mortgage holding company, Residential Mortgage Holding Company, LLC, (“RML”). The predecessorthe parent company of RML, Residential Mortgage, LLC was formed in 1998 and has twelve offices throughout Alaska.(collectively “RML”). RML became a wholly-owned subsidiary of NCIC on December 1, 2014. Prior to that, the Company held a 23.5% interest in RML. RML holds a 30% investment in Homestate Mortgage, LLC. In March and December of 2005, NCIC purchased ownership interests totaling 50.1% in Northrim Benefits Group, LLC (“NBG”), an insurance brokerage company that focused on the sale and servicing of employee benefit plans. In August 2017, the Company sold all of its interest in the assets of NBG.
��Northrim Building, LLC (“NBL”) is a wholly-owned subsidiary of the Bank that owns and operates the Company’s main office facility at 3111 C Street in Anchorage.
•Northrim Building LO, LLC is a wholly-owned subsidiary of the Bank that owns and operates the Company’s community branch facility at 2270 E. 37th Avenue in Anchorage.
Segments
The Company operates in two primary segments: Community Banking and Home Mortgage Lending. Measures of the revenues, profit or loss, and total assets for each of the Company's segments are included in this report,Part II. Item 8. "Financial Statements and Supplementary Data", of this report, which is incorporated herein by reference.
Business Strategy
The Company’s primary objective is to become Alaska's most trusted financial institution by adding value for our customers, communities, and shareholders. We aspire to be Alaska's premier bank and employer of choice as a leader in financial expertise, products, and services. We value our state, and we are proud to be Alaskan. We embody Alaska's frontier spirit and values, and we support our communities. We have a sincere appreciation for our customers, and we strive to deliver superior customer first service that is reliable, ethical, and secure. We look for growth opportunities for our customers, our institution, and our employees.
Our strategy is one of value-added growth. Management believes that calculated, sustainable organic and inorganic market share growth coupled with good asset quality, an appropriate core deposit and capital base, operational efficiency, diversified sources of other operating income, and improved profitability is the most appropriate means of increasing shareholder value.
Our business strategy emphasizes commercial lending products and services through relationship banking with businesses and professional individuals. Additionally, we are a land development and residential construction lender and an active lender in the commercial real estate market in Alaska. Because of our relatively small size, our experienced senior management team can be more involved with serving customers and making credit decisions, all of which are made in Alaska, allowing us to compete
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more favorably with larger competitors for business lending relationships. Our business strategy also emphasizes the origination of a variety of home mortgage loan products, most of which we sell to the secondary market. We retain servicing for home mortgages that we originate and sell to the Alaska Housing Finance Corporation. We believe that there is opportunity to increase the Company’s loan portfolio, particularly in the commercial portion of the portfolio, in the Company’s current market areas through existing and new customers.
The Company’s business strategy also stresses the importance of customer deposit relationships to support its lending activities. Our guiding principle is to serve our market areas by operating with a “Superior Customer First Service” philosophy, affording our customers the highest priority in all aspects of our operations. We believe that our successful execution ofadherence to this philosophy has created a strong core deposit franchise that provides a stable, low cost funding source for expanded growth in all of our lending areas. We have devoted significant resources to future deposit product development, expansion of electronic services for both personal and business customers, and enhancement of the Company's information security related to providing these services.
In addition to market share growth, a significant aspect of the Company’s business strategy is focused on managing the credit quality of our loan portfolio. Over the last several years,As the Company has allocatedcontinues to grow, management is committed to allocating more resources to the credit management function of the Bank to provide enhanced financial analysis of our largest, most complex loan relationships to further develop our processes for analyzing and managing various concentrations of credit within the overall loan portfolio, and to develop strategies to improve or collect our existing loans.portfolio. Continued success in maintaining or further improving the credit quality of our loan portfolio and managing our level of other real estate owned is a significant aspect of the Company’s strategy for attaining sustainable, long-term market growth to produce increased shareholder value.
We believe that we provide a high level of customer service. To achieve our objective of providing “Superior Customer First Service”, in managing its human capital resources, management emphasizes the hiring and retention of competent and highly motivated employees at all levels of the organization. Management believes that a well-trained and highly motivated core of employees allows maximum personal contact with customers in order to understand and fulfill customer needs and preferences. This “Superior Customer First Service” philosophy is combined with our emphasis on personalized, local decision making. The Company continues to enhance our company-wide employee training program which focuses on Northrim culture, Superior"Superior Customer First Service,Service", general sales skills, and various technical areas. All applicants and employees are treated with the same high level of respect regardless of their gender, ethnicity, religion, national origin, age, marital status, political affiliation, sexual orientation, gender identity, disability or protected veteran status. The Company complies with all applicable state and local laws governing nondiscrimination in employment in every location in which the Company operates.
The Company strives to continuously evaluate our human capital polices for improvement and alignment with current best practices. The Company recently added the Juneteenth National Independence Day and Indigenous People's Day to our lineup of paid holidays for employees. Additionally, effective January 1, 2022 the Company enhanced its paid parental leave program for employees following the birth of a child or the placement of a child in connection with an adoption.
Employee Profile
We consider our relations with our employees to be highly satisfactory. We had 431451 full-time equivalent employees at December 31, 2019.2021. None of our employees are covered by a collective bargaining agreement. Of the 431451 full-time equivalent employees, 311321 were Community Banking employees and 120130 were Home Mortgage Lending employees.
Among the Company's full-time equivalent employees as of December 31, 2021, 72% identify as women and 28% as men. Approximately 34% of the workforce identify as a member of a racial minority, 4% identify as individuals with a disability, and 2% identify as veterans. In executive and senior management positions, 56% identify as women and 44% as men as of December 31, 2021. Approximately 4% of those in executive and senior management positions identify as a member of a racial minority, 4% identify as individuals with a disability, and 4% identify as veterans.
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Diversity, Equity, and Inclusion
We strive to ensure a respectful, diverse, and inclusive environment and experience for all of our employees. We support and cultivate an open and respectful environment where everyone can actively contribute, have equal access to opportunities and resources, be themselves, and realize their potential. This is reflected in our policies, which encourage individual values, strengths and protections to provide gender diversity and equality in the workplace and are reinforced through our annual anti-harassment training. As an Equal Opportunity Employer, we emphasize inclusion through hiring and compensation practices and consider a pool of diverse candidates for open positions and internal advancement opportunities and treat all our applicants with the same high level of respect regardless of their gender, ethnicity, religion, national origin, age, marital status, political affiliation, sexual orientation, gender identity, disability or protected veteran status. To address issues related to pay discrimination, we do not ask potential candidates about their current or previous compensation during the hiring process, and we incorporate equal and fair pay reviews into every employment compensation decision. Our annual Affirmative Action Plan continues to focus our diversity, equity, and inclusion efforts on increasing the number of veterans and persons with disabilities in our workforce.
Support of Human Capital in Response to COVID-19
COVID-19 acted as a catalyst for expanding workforce flexibility options at Northrim. We have increased the percentage of employees working remotely from less than 8% before the pandemic to approximately 50% of the Company's employees working remotely as of December 31, 2021 either on a full- or part-time basis, including employees that work remotely part-time and work in the office part-time, which we refer to as a "hybrid" work from home arrangement. However, these remote working schedules are no longer directly due to the COVID-19 pandemic. Like many other entities, the percentage of the Company's work force that works remotely in some fashion increased during the pandemic and is expected to stay approximately consistent with current levels in the future as the Company has adjusted to the new environment. We also offer our employees other flexible work options, such as variable work hours, condensed workweeks and part-time hours. There have been no material impacts to our operations due to the increase in these alternative working arrangements and we are pleased to provide our employees with more flexibility to accommodate their needs. In addition, Northrim provides for a strong work/life balance, including generous paid time off and paid parental leave.
The Company expanded tele-health and employee assistance program benefits to help employees manage their physical and emotional health during the pandemic. The Company's philosophy towards employee accommodations related to current and future consequences related to COVID-19 is to be as flexible as possible while balancing the Company's operational needs.
Throughout the pandemic, we have continued to follow all CDC approved COVID-19 safety measures to ensure the safety and wellness of our employees, customers and vendors. We provide employees paid time off to receive their COVID-19 vaccinations and recover from vaccination side effects that prevent them from working.
Products and Services
Community Banking
Lending Services:We have an emphasis on commercial and real estate lending. Our loan products include short and medium-term commercial loans, commercial credit lines, construction and real estate loans, and consumer loans. We emphasize providing financial services to small and medium-sized businesses and to individuals. These types of lending products have provided us with needed market opportunities and generally provide higher net interest margins compared to other types of lending such as consumer lending. However, they also believeinvolve greater risks, including greater exposure to changes in local economic conditions.
Additionally in 2021 and 2020, we haveoriginated a significant niche in constructionamount of Paycheck Protection Program ("PPP") loans. The Coronavirus Aid, Relief. and land developmentEconomic Security ("CARES") Act established several new temporary U.S. Small Business Administration (“SBA”) loan programs to assist U.S. small businesses through the COVID-19 pandemic. One of the new loan programs is the PPP, an expansion of the SBA’s 7(a) loan program and the Economic Injury Disaster Loan Program. The American Rescue Plan Act of 2021 ("ARP Act") provided additional funding for the PPP. PPP provides loans to small businesses who were affected by economic conditions as a result of COVID-19 to provide cash-flow assistance to employers who maintain their payroll (including healthcare and certain related expenses), mortgage interest, rent, leases, utilities and interest on existing debt during this emergency. Eligible borrowers need to make a good faith certification that the uncertainty of current economic conditions make requesting assistance necessary to support ongoing operations. Pursuant to the provisions
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of Section 1106 of the CARES Act, borrowers may apply to the Bank for loan forgiveness of all or a portion of the loan, subject to certain eligibility requirements and conditions.
Our lending in Anchorage, Fairbanks,operations are guided by loan policies, approval procedures, and amount limitations. Our loan policies outline the Matanuska-Susitna Valley,basic policies and procedures by which lending operations are conducted. Generally, the Kenai Peninsula,policies address our desired loan types, target markets, underwriting and Southeast Alaska. (See “Loans” in Item 7 “Management’s Discussioncollateral requirements, terms, interest rate and Analysisyield considerations, and compliance with laws and regulations. The policies are reviewed and approved annually by the board of Financial Conditiondirectors of the Bank. Our Quality Assurance Department provides a detailed financial analysis of our largest, most complex loans. In addition, the Quality Assurance Department, along with the Chief Credit Officer of the Bank, have developed processes to analyze and Resultsmanage various concentrations of Operations”.)credit within the overall loan portfolio. The Credit Administration Department monitors the procedures and processes for both the analysis and reporting of problem loans, and also develops strategies to resolve problem loans based on the facts and circumstances for each loan. Finally, our Internal Audit Department also performs an independent review of each loan portfolio for compliance with loan policy, as well as a review of credit quality. The Internal Audit review follows the FDIC sampling guidelines, and a review of each portfolio is performed on an annual basis.
Purchase of accounts receivable: We provide short-term working capital to customers primarily in our Alaska markets as well as Washington, Oregon and some other states by purchasing their accounts receivable through NFS. Our purchased receivable activity is guided by policies that outline risk management, documentation, and approval limits. In 2020,2022, we expect NFS to continue to penetrate these markets and to continue to contribute to the Company’s profitability.
Deposit Services: Our deposit services include business and personal noninterest-bearing checking accounts and interest-bearing time deposits, checking accounts, savings accounts, and individual retirement accounts. Our interest-bearing accounts generally earn interest at rates established by management based on competitive market factors and management’s desire to increase or decrease certain types or maturities of deposits.
Several of our deposit services and products are:
•A specialized business checking account customized to account activity;
•A money market deposit account;
•A “Jump-Up” certificate of deposit (“CD”) that allows additional deposits with the opportunity to increase the rate to the current market rate for a similar term CD;
• A savings account that is priced like a money market account that allows additional deposits, quarterly withdrawals without penalty, and tailored maturity dates; and
•Consumer online banking, mobile app, and mobile deposit;
•Business online banking, business mobile app, and business mobile deposit; and
•Instantly issued debit cards for business and consumer accounts at account opening.
Other Services: In addition to our traditional deposit and lending services, we offer our customers several convenience services: Consumer Online Banking, Mobile App and Mobile Deposit, Mobile Web and Text Banking, Business Online Banking, Business Mobile App and Business Mobile Deposit, consumer online account opening, Personal Finance, Online Documents, Consumer Debit Cards, Business Debit Cards, instantly issued debit cards at account opening, My Rewards for consumer debit cards, retail lockbox services, card controls, Consumer Credit Cards, Business Credit Cards, Business Employee Purchase Cards, home equity advantage access cards, telebanking, and automated teller services. Other special services include personalized checks at account opening, overdraft protection from a savings account, extended banking hours and commercial drive-up banking at many locations, automatic transfers and payments, People Pay (a peer-to-peer payment functionality), external transfers, Bill Pay, wire transfers, direct payroll deposit, electronic tax payments, Automated Clearing House origination and receipt, remote deposit capture, account reconciliation and positive pay, merchant services, cash management programs and sweep options to meet the specialized needs of business customers, annuity products, and long term investment portfolios.
Other Services Provided Through Affiliates and Former Affiliates Whom We Continue To Work With: Prior to August of 2017, the Company sold and serviced employee benefit plans for small and medium sized businesses in Alaska through NBG, an insurance brokerage company. In August 2017, we sold our interest in the assets of NBG, but we have continued our relationship with Acrisure, LLC, who purchased the assets of NBG, through an ongoing referral agreement. Our
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affiliate PWA provides investment advisory, trust, and wealth management services for customers who are primarily located in the Pacific Northwest and Alaska. We plan to continue to leverage these affiliate relationships to strengthen our existing customer base and bring new customers into the Bank.
Significant Business Concentrations:No individual or single group of related accounts is considered material in relation to our total assets or total revenues, or to the total assets, deposits or revenues of the Bank, or in relation to our overall business. Based on classification by North American Industry Classification System ("NAICS"), there are no segments that exceed 10% of portfolio loans, except for real estate (see Note 5, Loans and Credit Quality, of the Notes to Consolidated Financial Statements included in Part II. Item 8 of this report for a breakout of real estate loans). In addition to its review of NAICS codes, the Company has also identified concentrations in one specialized industry.various industries that may be adversely impacted by the COVID-19 pandemic and a decline in oil prices. We estimate that as of December 31, 2019 approximately2021 the Company had $117.0 million, or 8% of total loans, in the healthcare sector, $94.4 million, or 7% of portfolio loans, have direct exposure toin the tourism sector, $63.6 million, or 4%, in the oil and gas industrysector, $59.6 million, or 4% of portfolio loans, in Alaska.the aviation (non-tourism) sector, $55.8 million, or 4% of total loans in the fishing sector, $54.1 million, or 4% in the accommodations sector, and $46.6 million, or 3% in the restaurants and breweries sector and $31.9 million, or 2%, in retail loans. Additionally, approximately 40%33% of our loan portfolio at December 31, 20192021 is attributable to 3132 large borrowing relationships. Moreover, our business activities are currently focused primarily in the state of Alaska. Consequently, our results of operations and financial condition are dependent upon the general trends in the Alaska economy and, in particular, the residential and commercial real estate markets in Anchorage, Juneau, Fairbanks, the Matanuska-Susitna Valley, Ketchikan, Sitka, and to a lesser extent, the Kenai Peninsula. Peninsula and Kodiak.
Home Mortgage Lending
Lending Services:The Company originates 1-4 family residential mortgages throughout Alaska most of which we sell to the secondary market. Residential mortgage choices include several products from the Alaska Housing Finance Corporation ("AHFC") including first-time homebuyer, veteran's and rural community programs; Federal Housing Authority, or "FHA" loans; Veterans Affairs, or "VA" loans; Jumbo loans; and various conventional mortgages. The Company retains servicing rights on loans sold to the Alaska Housing Finance Corporation since implementing a new loan servicing program in July 2015.
Alaska Economy
Our growth and operations are impacted by the economic conditions of Alaska and the specific markets we serve. Significant changes in the Alaska economy and the markets we serve eventually could have a positive or negative impact on the Company. Alaska is strategically located on the Pacific Rim, within nine hours by air from 95% of the northern hemisphere, and Anchorage has become a worldwide air cargo and transportation link between the United States and international business in Asia and Europe. The economy of Alaska is dependent upon natural resource industries. Key sectors of the Alaska economy are the oil industry, government and military spending, and the fishing, mining, tourism, air cargo, transportation, and construction industries, as well as health services.
Recent Economic Developments
The Alaska economy showed broad improvements in 2021 as it rebounded from the pandemic lows of 2020. Management noted that a steady recovery of jobs in nearly every sector in 2021 resulted from improved independent tourism, rising oil prices, a strong housing market and consumer liquidity from government stimulus programs. We believe that the potential effects of rising interest rates, high inflation, and supply chain disruptions are the most pressing issues at the start of 2022.
The Alaska Department of Labor ("DOL") reports total payroll jobs in Alaska in December 2021 increased 2.7% or 8,000 jobs compared to December of 2020. Tourism related jobs were the hardest hit from travel restrictions and have also been the fastest to recover. According to the DOL, the Leisure and Hospitality sector improved 14% between December of 2020 and December of 2021. This is now only 4,500 jobs lower than the total of 31,400 jobs in this sector in December of 2019. Other major sectors showing improvement over the last 12 months include Oil & Gas (+9.8%); Trade, Transport, and Utilities (+3.1%); Construction (+2.8%); Financing Activities (+1.9%); Professional & Business Services (+0.8%) and Health Care (+0.8%). The Information sector was the only private sector to not show growth in 2021. It remained flat at 4,800 jobs at the end of 2020 and 2021. The Government sector was steady at 77,700 jobs. Based on the DOL report, gains in federal and local government employment offset declines in state government positions.
Alaska’s Gross State Product (“GSP”) seasonally adjusted at annualized rates for the third quarter of 2021 was $55.5 billion, compared to $49.7 billion in the third quarter of 2020, according to the Federal Bureau of Economic Analysis ("BEA")
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in a report that was released December 23, 2021. Alaska’s GSP declined 0.6% in the third quarter of 2021 after increasing 1.8% in the second quarter of 2021.
Alaska’s seasonally adjusted personal income for the third quarter of 2021 was $48.5 billion compared to $46.0 billion seasonally adjusted at annualized rates in the third quarter of 2020, according to the BEA. Alaska’s personal income grew 2.4% in the third quarter of 2021, over the second quarter, primarily due to a $662 million increase in wage earnings. This resulted from inflationary pressure on salaries and an improvement in the total number of jobs. Wage gains more than offset the $413 million decrease in government transfer payments to Alaskans in the third quarter of 2021.
The price of Alaska North Slope crude oil began 2021 averaging $55.56 in January and climbed steadily throughout the year to a monthly average high of $84.36 a barrel in October. The monthly average for December 2021 was $76.02.
Alaska’s home mortgage delinquency and foreclosure levels continue to be better than most of the nation. According to the Mortgage Bankers Association, Alaska’s foreclosure rate improved from 0.63% at the end of 2019 to 0.45% at the end of 2020. The foreclosure rate continued to improve in each of the first three quarters of 2021 to 0.33% in the third quarter of 2021. The comparable national average rate was higher than Alaska at 0.46% in the third quarter of 2021. We believe that the foreclosure rates are somewhat misleading because the recently ended federal moratorium on foreclosure activity on occupied homes led to declining foreclosure numbers, even though job losses strained the economy and borrowers' ability to pay.
The Mortgage Bankers Association survey reported that the percentage of delinquent mortgage loans at the end of 2019 in Alaska was 2.9%. This increased to 6.2% at the end of 2020 after the effects of COVID-19 impacted jobs. In the first quarter of 2021 it improved to 5.4% in Alaska and again in the second quarter to 5.1%. The most recent data available is the third quarter of 2021, which improved to 4.77%. According to the survey, the comparable delinquency rate for the entire country remains higher than Alaska at 5.04% in the third quarter of 2021.
According to the Alaska Multiple Listing Services, the average sales price of a single family home in Anchorage rose 6.9% in 2021 to $424,266. Average sales prices in the Matanuska Susitna Borough rose 15.6% in 2021 to $347,962, continuing a decade of consecutive price gains. These two markets represent where the vast majority of the Bank’s residential lending activity occurs.
The number of housing units sold in Anchorage was up significantly in 2021 by 11%, following an increase of 19.6% in 2020, as reported by the Alaska Multiple Listing Services. The Matanuska Susitna Borough also had strong sales activity, up 11.5% in 2021 and 9.7% in 2020.
We believe that the low interest rate environment has been a major factor in the strength of the housing market. According to the Federal Reserve Bank of St. Louis, the average 30 year fixed rate mortgage in the U.S. hit an all-time record low in 2020. Rates began 2020 at 3.7% in the first week of January and fell one percent to 2.7% by the end of the year. Rates began to rise slightly in 2021 and finished the year at 3.11%.
A material portion of our loans at December 31, 2021, were secured by real estate located in greater Anchorage, Matanuska-Susitna Valley, Fairbanks, and Southeast Alaska. In 2021, 36% of our revenue was derived from the residential housing market in the form of loan fees and interest on residential construction and land development loans and income from RML as compared to 45% and 31% in 2020 and 2019, respectively. Real estate values generally are affected by economic and other conditions in the area where the real estate is located, fluctuations in interest rates, changes in tax and other laws, and other matters outside of our control. A decline in real estate values in the greater Anchorage, Matanuska-Susitna Valley, Fairbanks, and Southeast Alaska areas could significantly reduce the value of the real estate collateral securing our real estate loans and could increase the likelihood of defaults under these loans.
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Long Term Economic Factors
We believe the long-term growth of the Alaska economy will most likely be determined by large scale natural resource development projects. Several multi-billion dollar projects can potentially advance in the moderate-term. Some of these projects include copper, gold and molybdenum production at the proposed Donlin mine and continued exploration in the National Petroleum Reserve Alaska and potential oil exploration in the Arctic National Wildlife Refuge.Alaska. Because of their size, we believe each of these projects faces tremendous challenges. We believe various political decisions need to be made by government regulators, issues need to be resolved in the court system, and multi-billion dollar financial commitments need to be made by the private sector if these large natural resource projects are to advance. If none of these projects moves forward in the next ten years, we believe state revenues will continue to decline with falling oil production from older fields on the North Slope of Alaska. We anticipate the decline in state revenues will likely have a negative effect on Alaska’s economy.
The oil industry plays a significant role in the economy of Alaska, but revenues for the State of Alaska are less dependent on the oil industry than they have been historically due to the implementation of a percent of market value ("POMV") concept that has balanced and created more certainty in state revenue streams. Part of the POMV concept creates an allocation of a portion of investment earnings to unrestricted revenue instead of restricted revenue. According to the State of Alaska Department of Revenue, approximately 23%5% of total state revenues of $11.1$29.8 billion in the fiscal year ending June 30, 20192021 were generated through various taxes and royalties on the oil industry. Investment earnings were 36%66% of the total, and federal dollars were 30%26%. In the fiscal year ending June 30, 2018,2020, approximately 20% of total state revenues of $8.7 billion were generated through various taxes and royalties on the oil industry while investment earnings and federal dollars accounted for 46%21% and 25%48%, respectively. However, in 2019In 2021 and 2020, investment earnings represented 52%65% and 66%, respectively, of unrestricted revenues as compared to 1% in 2018 for the fiscal year ending June 30.revenues. As of December 31, 2019,2021, Alaska's Constitutional Budget Reserve was $2.2$1.1 billion and the Alaska Permanent Fund had a balance of $67$82 billion. Investment revenue generated by the Alaska Permanent Fund is also used to pay an annual dividend to every eligible Alaskan citizen.
Even though we believe that the implementation of the POMV concept is a positive for the state of Alaska's financial well-being, we anticipate that if oil prices remain at their current relatively lowdrop to lower levels in the longer term it will be a concern for Alaska's long-term economic growth. However, we believe Alaska's economy is less sensitive to oil price volatility in the short-termwithin a six- to twelve-month time frame than Alaska's state government budget. While state government revenue from oil royalties is immediately and directly impacted by a drop in oil prices, we believe that the large scale and nature of oil wells in Alaska are such that project commitments that currently exist will most likely not be disrupted by short-term price volatility. We continue to be encouraged by announcements from several oil exploration companies announcing new oil fields on the North Slope resulting from increased exploration activity that began in 2018 that could lead to future increases in oil production over time.
We believe our exposure to the tourism industry diversifies the Company's customer base.base in the long-term. We believe this helps mitigate the effect that thea decline in natural resource industries, specifically the oil industry, in Alaska has hadwould have on the Company's operations. Southeast Alaska is the primary destination for cruise ships that visit Alaska. Based on the latest information from Rain Coast Data, approximately one million cruise ship tourists have visited Southeast Alaska annually in recent years and in 2019, this increased 7% to 1.2 million. However, in 2020, there was essentially no cruise ship activity and in 2021 there were approximately 116,000 cruise ship visitors in Alaska according to the State of Alaska Department of Labor and Workforce Development.. The decrease in 2020 and 2021 is primarily due to the COVID-19 pandemic. However, the State of Alaska Department of Labor and Workforce Development reported in its January 2022 issue of Alaska Economic Trends Magazine that the cruise industry expects 1.5 million cruise ship visitors in Alaska in 2022, which would be an all time high if ships reach capacity.
Alaska’s residents are not subject to any state income or state sales taxes. For over 30 years, Alaska residents have received annual distributions payable in October of each year from the Alaska Permanent Fund Corporation, which is supported by royalties from oil production. The distribution was $1,600$1,114 per eligible resident in 20192021 for an aggregate distribution of approximately $1 billion.$700 million. The Anchorage Economic Development Corporation estimates that, for most Anchorage households, distributions from the Alaska Permanent Fund Corporation exceed other Alaska taxes to which those households are subject (primarily real estate taxes).subject.
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Competition
We operate in a highly competitive and concentrated banking environment. We compete not only with other commercial banks, but also with many other financial competitors, including credit unions (including Alaska USA Federal Credit Union, one of the nation’s largest credit unions), finance companies, mortgage banks and brokers, securities firms, insurance companies, private lenders, and other financial intermediaries, many of which have a state-wide or regional presence, and in some cases, a national presence. Many of our competitors have substantially greater resources and capital than we do and offer products and services that are not offered by us. Our non-bank competitors also generally operate under fewer regulatory constraints, and in the case of credit unions, are not subject to income taxes. We estimate that credit unions in Alaska have a 44%42% share of total deposits held in banks and credit unions in the state as of June 30, 2019.2021. Changes in credit union operating practices have effectively eliminated the “common bond” of membership requirement and liberalized their lending authority to include business and real estate loans on par with commercial banks. The differences in resources and regulation may make it harder for us to compete profitably, to reduce the rates that we can earn on loans and investments, to increase the rates we must offer on deposits and other funds, and adversely affect our financial condition and earnings.
As our industry becomes increasingly dependent on and oriented toward technology-driven delivery systems, permitting transactions to be conducted electronically, non-bank institutions are able to attract funds and provide lending and other financial services even without offices located in our primary service area. Some insurance companies and brokerage firms compete for deposits by offering rates that are higher than may be appropriate for the Company in relation to its asset and liability management objectives. However, we offer a wide array of deposit products and services and believe we can compete effectively through relationship based pricing and effective delivery of “Superior Customer First Service”. We also compete with full service investment firms for non-bank financial products and services offered by PWA and through retail investment advisory services and annuity investment products that we offer through a third-party vendor.
Currently, there are seven commercial banks operating in Alaska. At June 30, 2019,2021, the date of the most recently available information, Northrim Bank had approximately a 12%13% share of the Alaska bank deposits, 17%18% in the Anchorage area, 14%20% in Juneau, 14%16% in Matanuska-Susitna, 13% in Sitka, 11%10% in Matanuska-Susitna,Fairbanks, 6% in Ketchikan, and 5%7% in Fairbanks.the Kenai Peninsula.
The following table sets forth market share data for the banks and credit unions having a presence in Alaska as of June 30, 2019,2021, the most recent date for which comparative deposit information is available.
| Financial institution | Number of branches | Total deposits (in thousands) | Market share of total financial institution deposits | Market share of total bank deposits | ||||||||||
Northrim Bank(1) | 17 | $2,178,080 | 8 | % | 13.0 | % | ||||||||
Wells Fargo Bank Alaska(1) | 40 | 7,529,724 | 26 | % | 45.0 | % | ||||||||
First National Bank Alaska(1) | 27 | 3,910,717 | 14 | % | 23.4 | % | ||||||||
Key Bank(1) | 12 | 1,531,444 | 5 | % | 9.1 | % | ||||||||
First Bank(1) | 9 | 686,502 | 2 | % | 4.1 | % | ||||||||
Mt. McKinley Bank(1) | 5 | 504,085 | 2 | % | 3.0 | % | ||||||||
Denali State Bank(1) | 5 | 407,560 | 1 | % | 2.4 | % | ||||||||
| Total bank branches | 118 | $16,748,112 | 58 | % | 100 | % | ||||||||
Credit unions(2) | 84 | $12,021,865 | 42 | % | NA | |||||||||
| Total financial institution branches | 202 | $28,769,977 | 100 | % | 100 | % | ||||||||
| Financial institution | Number of branches | Total deposits (in thousands) | Market share of total financial institution deposits | Market share of total bank deposits | ||||
Northrim Bank(1) | 16 | $1,305,714 | 6 | % | 12 | % | ||
Wells Fargo Bank Alaska(1) | 44 | 6,065,826 | 30 | % | 51 | % | ||
First National Bank Alaska(1) | 28 | 2,362,101 | 11 | % | 20 | % | ||
Key Bank(1) | 14 | 931,445 | 4 | % | 8 | % | ||
First Bank(1) | 9 | 519,903 | 2 | % | 4 | % | ||
Mt. McKinley Bank(1) | 5 | 353,493 | 2 | % | 3 | % | ||
Denali State Bank(1) | 5 | 263,117 | 1 | % | 2 | % | ||
| Total bank branches | 121 | $11,801,599 | 56 | % | 100 | % | ||
Credit unions(2) | 93 | $9,143,492 | 44 | % | NA | |||
| Total financial institution branches | 214 | $20,945,091 | 100 | % | 100 | % | ||
(1) FDIC Summary of Deposits as of June 30, 2019.2021.
(2) SNL Financial Deposit Market Share Summary as of June 30, 2019.2021.
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Supervision and Regulation
The Company is a bank holding company within the meaning of the Bank Holding Company Act of 1956 (the “BHC Act”) registered with and subject to examination by the Board of Governors of the Federal Reserve System (the “FRB”). The Company’s bank subsidiary is an Alaska-state chartered commercial bank and is subject to examination, supervision, and regulation by the Alaska Department of Commerce, Community and Economic Development, Division of Banking, Securities and Corporations (the “Division”). The FDIC insures the Bank’s deposits and also examines, supervises, and regulates the Bank. The Company’s affiliated investment advisory and wealth management company, Pacific Portfolio Consulting, LLC, is subject to and regulated under the Investment Advisors Act of 1940 and applicable state investment advisor rules and regulations. The Company’s affiliated trust company, Pacific Portfolio Trust Company, is regulated as a non-depository trust company under the trust company laws of the State of Washington and is subject to supervision and examination by the Department of Financial Institutions of Washington State.
The Company’s earnings and activities are affected, among other things, by legislation, by actions of the FRB, the Division, the FDIC and other regulators, by local legislative and administrative bodies, and decisions of courts. These include limitations on the ability of the Bank to pay dividends to the Company, numerous federal and state consumer protection laws imposing requirements on the making, enforcement, and collection of consumer loans, and restrictions on and regulation of the sale of mutual funds and other uninsured investment products to customers.
Regulation of banks and the financial services industry has been undergoing major changes in recent years, including the enactment in 2010 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). and several provisions were significantly changed by enactment of the Economic Growth Regulatory Relief and Consumer Protection Act in May 2018. The Dodd-Frank Act significantly modifies and expands legal and regulatory requirements imposed on banks and other financial institutions.
The Dodd-Frank Act has significantly affected the Bank and its business and operations. The Dodd-Frank Act permanently increased the maximum amount of deposit insurance coverage to $250,000 per depositor and deposit insurance assessments paid by the Bank are now based on the Bank’s total assets. Other Dodd-Frank Act changes include: (i) tightened capital requirements for the Bank and the Company; (ii) new requirements on parties engaged in residential mortgage origination, brokerage, lending and securitization; (iii) expanded restrictions on affiliate and insider transactions; (iv) enhanced restrictions on management compensation and related governance procedures; (v) creation of a federal Consumer Financial Protection Bureau (the "CFPB") with broad authority to regulate consumer financial products and services; and (vi) restrictions and prohibitions on the ability of banking entities to engage in proprietary trading and to invest in or have certain relationships with hedge funds and private equity funds.
The Gramm-Leach-Bliley Act (the “GLB Act”), which was enacted in 1999, allows bank holding companies to elect to become financial holding companies, subject to certain regulatory requirements. In addition to the activities previously permitted bank holding companies, financial holding companies may engage in non-banking activities that are financial in nature, such as securities, insurance, and merchant banking activities, subject to certain limitations. The Company could utilize this structure to accommodate an expansion of its products and services in the future.
Bank holding companies, such as the Company, are subject to a variety of restrictions on the activities in which they can engage and the acquisitions they can make. The activities or acquisitions of bank holding companies, such as the Company, that are not financial holding companies, are limited to those which constitute banking, managing or controlling banks or which are closely related activities. A bank holding company is required to obtain the prior approval of the FRB for the acquisition of more than 5% of the outstanding shares of any class of voting securities or substantially all of the assets of any bank or bank holding company. Nonbank acquisitions and activities of a bank holding company are also generally limited to the acquisition of up to 5% of the outstanding shares of any class of voting securities of a company unless the FRB has previously determined that the nonbank activities are closely related to banking, or prior approval is obtained from the FRB.
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The GLB Act also included extensive consumer privacy provisions. These provisions, among other things, limit the ability of banks and other financial institutions to disclose nonpublic consumer information to non-affiliated third parties. The regulations require full disclosure of the Company’s privacy policypolicies and allow consumers to consumers and mandate offering the consumer the ability to “opt out” of having non-publicprevent certain personal information disclosed tofrom being shared with non-affiliated third parties. PursuantThe Fair and Accurate Credit Transaction Act (“FACT Act”) requires financial institutions to these provisions,develop and implement an identity theft prevention program to detect, prevent and mitigate identity theft “red flags” to reduce the federal banking regulators adopted privacy regulations.risk that customer information will be misused to conduct fraudulent financial transactions. As a result of the Dodd-Frank Act, the rule-making authority for the privacy provisions of the GLB Act has been transferred to the CFPB. In addition, the states are permitted to adopt more extensive privacy protections through legislation or regulation.
There are various legal restrictions on the extent to which a bank holding company and certain of its nonbank subsidiaries can borrow or otherwise obtain credit from their banking subsidiaries or engage in certain other transactions with or involving those banking subsidiaries. With certain exceptions, federal law imposes limitations on, and requires collateral for, extensions of credit by insured depository institutions, such as the Bank, to their non-bank affiliates, such as the Company. In addition, new capital rules may affect the Company's ability to pay dividends.
Subject to certain limitations and restrictions, a bank holding company, with prior approval of the FRB, may acquire an out-of-state bank. Banks in states that do not prohibit out-of-state mergers may merge with the approval of the appropriate federal banking agency. A state bank may establish a de novo branch out of state if such branching is permitted by the other state for state banks chartered by such other state.
Among other things, applicable federal and state statutes and regulations which govern a bank’s activities relate to minimum capital requirements, required reserves against deposits, investments, loans, legal lending limits, mergers and consolidations, borrowings, issuance of securities, payment of dividends, establishment of branches and other aspects of its operations. The Division and the FDIC also have authority to prohibit banks under their supervision from engaging in what they consider to be unsafe or unsound practices.
There also are certain limitations on the ability of the Company to pay dividends to its shareholders. It is the policy of the FRB that bank holding companies should pay cash dividends on common stock only out of net income available over the past year and only if the prospective rate of earnings retention is consistent with the organization’s current and expected future capital needs, asset quality and overall financial condition. The policy provides that bank holding companies should not maintain a level of cash dividends that undermines a bank holding company’s ability to serve as a source of strength to its banking subsidiaries. Additionally, the Alaska Corporations Code generally prohibits the Company from making any distributions to the Company's shareholders unless the amount of the retained earnings of the Company immediately before the distribution equals or exceeds the amount of the proposed distribution. The Alaska Corporations Code also prohibits the Company from making any distribution to the Company's shareholders if the Company or a subsidiary of the Company making the distribution is, or as a result of the distribution would be, likely to be unable to meet its liabilities as they mature. Under Alaska law, the Bank is not permitted to pay or declare a dividend in an amount greater than its undivided profits.
Various federal and state statutory provisions also limit the amount of dividends that subsidiary banks can pay to their holding companies without regulatory approval. The FDIC or the Division could take the position that paying a dividend would constitute an unsafe or unsound banking practice. In addition, new capital rules may affect the Bank's ability to pay dividends.
Under longstanding FRB policy and under the Dodd-Frank Act, a bank holding company is required to act as a source of financial strength for its subsidiary banks. The Company could be required to commit resources to its subsidiary bank in circumstances where it might not do so, absent such requirement.
Both the Company and the Bank are required to maintain minimum levels of regulatory capital. In July 2013, federal banking regulators (including the FDIC and the FRB) adopted new capital requirement rules (the “Rules”). The Rules apply to both depository institutions (such as the Bank) and their holding companies (such as the Company). The Rules reflect, in part, certain standards initially adopted by the Basel Committee on Banking Supervision in December 2010 (which standards are commonly referred to as “Basel III”) as well as requirements contemplated by the Dodd-Frank Act. The Rules have applied to both the Company and the Bank since the beginning of 2015.
The Rules recognize three types, or tiers, of capital: common equity Tier 1 capital, additional Tier 1 capital and Tier 2 capital. Common equity Tier 1 capital generally consists of retained earnings and common stock instruments (subject to certain adjustments), as well as accumulated other comprehensive income ("AOCI"), except to the extent that the Company and the Bank exercise a one-time irrevocable option to exclude certain components of AOCI. Additional Tier 1 capital generally includes noncumulative perpetual preferred stock and related surplus subject to certain adjustments and limitations. Tier 2 capital generally includes certain capital instruments (such as subordinated debt) and portions of the amounts of the allowance
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for loan and lease losses, subject to certain requirements and deductions. The term "Tier 1 capital" means common equity Tier 1 capital plus additional Tier 1 capital, and the term "total capital" means Tier 1 capital plus Tier 2 capital.
The Rules generally measure an institution's capital using four capital measures or ratios. The common equity Tier 1 capital ratio is the ratio of the institution's common equity Tier 1 capital to its total risk-weighted assets. The Tier 1 capital ratio is the ratio of the institution's total Tier 1 capital to its total risk-weighted assets. The total capital ratio is the ratio of the institution's total capital to its total risk-weighted assets. The leverage ratio is the ratio of the institution's Tier 1 capital to its average total consolidated assets. To determine risk-weighted assets, assets of an institution are generally placed into a risk category and given a percentage weight based on the relative risk of that category. The percentage weights range from 0% to 1,250%. An asset's risk-
Both the Company and the Bank are required to have a common equity Tier 1 capital ratio of 4.5% as well as a Tier 1 leverage ratio of 4.0%, a Tier 1 risk-based ratio of 6.0% and a total risk-based ratio of 8.0%. In addition to the preceding requirements, both the Company and the Bank are required to have a “conservation buffer,” consisting of common equity Tier 1 capital, which is at least 2.5% above each of the preceding common equity Tier 1 capital ratio, the Tier 1 risk-based ratio and the total risk-based ratio. An institution that does not meet the conservation buffer will be subject to restrictions on certain activities including payment of dividends, stock repurchases and discretionary bonuses to executive officers.
The Rules set forth the manner in which certain capital elements are determined, including but not limited to, requiring certain deductions related to mortgage servicing rights and deferred tax assets. When the federal banking regulators initially proposed new capital rules in 2012, the rules would have phased out trust preferred securities as a component of Tier 1 capital. As finally adopted, however, the Rules permit holding companies with less than $15 billion in total assets as of December 31, 2009 (which includes the Company) to continue to include trust preferred securities issued prior to May 19, 2010 in Tier 1 capital, generally up to 25% of other Tier 1 capital.
The Rules made changes in the methods of calculating certain risk-based assets, which in turn affects the calculation of risk- based ratios. Higher or more sensitive risk weights are assigned to various categories of assets, among which are commercial real estate, credit facilities that finance the acquisition, development or construction of real property, certain exposures or credits that are 90 days past due or are nonaccrual, foreign exposures, certain corporate exposures, securitization exposures, equity exposures and in certain cases mortgage servicing rights and deferred tax assets.
Both the Company and the Bank were required to begin compliance with the Rules on January 1, 2015. The conservation buffer started to be phased in beginning in 2016 took full effect on January 1, 2019. Certain calculations under the Rules will also have phase-in periods. We believe that the current capital levels of the Company and the Bank are in compliance with the standards under the Rules including the conservation buffer.
Following the enactment of certain federal legislation in 2018, the federal banking regulators (including the FDIC and FRB) proposed a rule intended to simplify capital rules for certain community banks and their holding companies, the Community Bank Leverage Ratio ("CBLR"). Qualifying community banking organizations can elect to opt-into the CBLR and be under a new capital requirement rather than the current capital framework. To be eligible to make this election, the community banking organization would have to have less than $10 billion in assets, have a community bank leverage ratio of at least 9.00% and meet certain other criteria (including limits on off-balance sheet exposures and trading assets and liabilities). The CBLR would generally be the ratio of the organization's total bank equity capital to average assets, subject to certain adjustments. The intent of the CBLR is to simplify but not weaken capital requirements for qualifying community banks. Management is still assessing whether orhas not the Bank willelected to opt intoin to these new capital rules. However, the guidelines allow the Company to opt in to the simplification in the future should our assessment change.
In addition to the minimum capital standards, the federal banking agencies have issued regulations to implement a system of "prompt corrective action." These regulations apply to the Bank but not the Company. The regulations establish five capital categories; under the Rules, a bank generally is:
“well capitalized” if it has a total risk-based capital ratio of 10.0% or more, a Tier 1 risk-based capital ratio of 8.0% or more, a common equity Tier 1 risk-based ratio of 6.5% or more, and a leverage capital
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ratio of 5.0% or more, and is not subject to any written agreement, order or capital directive to meet and maintain a specific capital level for any capital measure;
“adequately capitalized” if it has a total risk-based capital ratio of 8.0% or more, a Tier 1 risk-based capital ratio of 6.0% or more, a common equity Tier 1 risk-based ratio of 4.5% or more, and a leverage capital ratio of 4.0% or more;
“undercapitalized” if it has a total risk-based capital ratio less than 8.0%, a Tier 1 risk-based capital ratio less than 6.0%, a common equity risk-based ratio less than 4.5% or a leverage capital ratio less than 4.0%;
“significantly undercapitalized” if it has a total risk-based capital ratio less than 6.0%, a Tier 1 risk-based capital ratio less than 4.0%, a common equity risk-based ratio less than 3.0% or a leverage capital ratio less than 3.0%; and
“critically undercapitalized” if it has a ratio of tangible equity to total assets that is equal to or less than 2.0%.
A bank that, based upon its capital levels, is classified as “well capitalized,” “adequately capitalized” or “undercapitalized” may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for a hearing, determines that an unsafe or unsound condition, or an unsafe or unsound practice, warrants such treatment.
At each successive lower capital category, a bank is subject to increasing supervisory restrictions. For example, being “adequately capitalized” rather than “well-capitalized” affects a bank’s ability to accept brokered deposits without the prior approval of the FDIC, and may cause greater difficulty obtaining retail deposits. Banks in the “adequately capitalized” classification may have to pay higher interest rates to continue to attract those deposits, and higher deposit insurance rates for those deposits. This status also affects a bank’s eligibility for a streamlined review process for acquisition proposals.
Management intends to maintain capital ratios for the Bank in 20202022 that exceed the FDIC’s requirements for the “well-capitalized” capital requirement classification. The dividends that the Bank pays to the Company will be limited to the extent necessary for the Bank to meet the regulatory requirements of a “well-capitalized” bank.
The capital ratios for the Company exceed those for the Bank primarily because the trust preferred securities offeringsoffering that the Company completed in the second quarter of 2003 and in the fourth quarter of 2005 areis included in the Company’s capital for regulatory purposes, although they areit is accounted for as a liability in itsthe Company's consolidated financial statements. The trust preferred securities are not accounted for on the Bank’s financial statements nor are they included in its capital (although the Company did contribute to the Bank a portion of the cash proceeds from the sale of those securities). The Company redeemed $8 million in trust preferred securities in August 2017. As a result, the Company has $10 million more in regulatory capital than the Bank at December 31, 20192021 and 2018,2020, respectively, which explains most of the difference in the capital ratios for the two entities.
The Bank is required to file periodic reports with the FDIC and the Division and is subject to periodic examinations and evaluations by those regulatory authorities. These examinations must be conducted every 12 months, except that certain “well-capitalized” banks may be examined every 18 months. The FDIC and the Division may each accept the results of an examination by the other in lieu of conducting an independent examination.
In the liquidation or other resolution of a failed insured depository institution, claims for administrative expenses (including certain employee compensation claims) and deposits are afforded a priority over other general unsecured claims, including non-deposit claims, and claims of a parent company such as the Company. Such priority creditors would include the FDIC, which succeeds to the position of insured depositors to the extent it has made payments to such depositors.
The Company is also subject to the information, proxy solicitation, insider trading restrictions and other requirements of the Securities Exchange Act of 1934, as amended (the “Securities Exchange Act of 1934”), including certain requirements under the Sarbanes-Oxley Act of 2002.
The Bank is subject to the Community Reinvestment Act of 1977 (“CRA”). The CRA requires that the Bank help meet the credit needs of the communities it serves, including low and moderate income neighborhoods, consistent with the safe and sound operation of the institution. The FDIC assigns one of four possible ratings to the Bank’s CRA performance and makes the rating and the examination reports publicly available. The four possible ratings are outstanding, satisfactory, needs
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to improve and substantial noncompliance. A financial institution’s CRA rating can affect an institution’s future business. For example, a federal banking agency will take CRA performance into consideration when acting on an institution’s application to establish or move a branch, to merge or to acquire assets or assume liabilities of another institution. In its most recent CRA examination, the Bank received a “Satisfactory” rating from the FDIC.
In December 2019, the FDIC and the Office of the Comptroller of the Currency (“OCC”) jointly proposed rules that would significantly change existing CRA regulations. The proposed rules are intended to increase bank activity in low- and moderate-income communities where there is significant need for credit, more responsible lending, greater access to banking services, and improvements to critical infrastructure. The proposals change four key areas: (i) clarifying what activities qualify for CRA credit; (ii) updating where activities count for CRA credit; (iii) providing a more transparent and objective method for measuring CRA performance; and (iv) revising CRA-related data collection, record keeping, and reporting. However, the FRB did not join in that proposed rulemaking. In June 2020, the OCC issued its final CRA rule, effective October 1, 2020, while the FDIC did not finalize any revisions to its CRA rule. In September 2020, the FRB issued an Advance Notice of Proposed Rulemaking (“ANPR”) that invited public comment on an approach to modernize the regulations that implement the CRA by strengthening, clarifying, and tailoring them to reflect the current banking landscape and better meet the core purpose of the CRA.
The ANPR sought feedback on ways to evaluate how banks meet the needs of low- and moderate-income communities and address inequities in credit access. In December 2021, the OCC issued a final rule to rescind its June 2020 final rule in favor of working with other agencies to put forward a joint rule. We will continue to evaluate the impact of any changes to the regulations implementing the CRA and their impact to our financial condition, results of operations, and/or liquidity, which cannot be predicted at this time.
The Company is also subject to the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA PATRIOT Act”) and the Anti-Money Laundering Act of 2020 (the “AMLA”). Among other things, the USA PATRIOT Act requiresand AMLA require the Company and the Bank to adopt and implement specific policies and procedures designed to prevent and defeat money laundering. Management believes the Company is in compliance with the USA PATRIOT Act as in effect on December 31, 2019.2020. The AMLA was passed on January 1, 2021 and regulatory agencies are in the process of finalizing rules and regulations required by the passage of the AMLA.
On March 27, 2020, President Trump signed the CARES Act into law. The CARES Act established several new temporary SBA loan programs to assist U.S. small businesses through the COVID-19 pandemic. One of the new loan programs is the PPP, an expansion of the SBA’s 7(a) loan program and the Economic Injury Disaster Loan Program.
The PPP provides loans to small businesses who were affected by economic conditions as a result of COVID-19 to provide cash-flow assistance to employers who maintain their payroll (including healthcare and certain related expenses), mortgage interest, rent, leases, utilities and interest on existing debt during this emergency. Eligible borrowers need to make a good faith certification that the uncertainty of current economic conditions make requesting assistance necessary to support ongoing operations. Pursuant to the provisions of Section 1106 of the CARES Act, borrowers may apply to the Bank for loan forgiveness of all or a portion of the loan, subject to certain eligibility requirements and conditions. On March 11, 2021, the ARP Act was enacted and, among others, provided additional funding for the PPP and an expansion of the program for the benefit of certain nonprofits.
The Bank is an SBA lender and began accepting applications under the PPP via its online application process on April 3, 2020. As of December 31, 2021, the Bank had 1,320 PPP loans totaling $122.7 million outstanding.
In February 2018, the SEC published interpretive guidance to assist public companies in preparing disclosures about cybersecurity risks and incidents. These SEC guidelines, and any other regulatory guidance, are in addition the Companyto notification and its affiliatesdisclosure requirements under state and federal banking law and regulations.
The federal banking regulators regularly issue new guidance and standards, and update existing guidance and standards, regarding cybersecurity intended to enhance cyber risk management among financial institutions. Financial institutions are expected to comply with such guidance and standards and to accordingly develop appropriate security controls and risk management processes. If we fail to observe such regulatory guidance or standards, we could be subject to various regulatory sanctions, including financial penalties.
Recently, in November 2021, the federal banking agencies adopted a broad arrayFinal Rule, with compliance required by May 1, 2022, that requires banking organizations to notify their primary banking regulator within 36 hours of financialdetermining that a “computer-security incident” has materially disrupted or degraded, or is reasonably likely to materially disrupt or degrade, the banking organization’s ability to carry out banking operations or deliver banking products and services to a material portion of
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its customer base, its businesses and operations that would result in material loss, or that would impact the stability of the United States.State regulators have also been increasingly active in implementing privacy and cybersecurity standards and regulations.
Risks and exposures related to cybersecurity attacks, including litigation and enforcement risks, are expected to be elevated for the foreseeable future due to the rapidly evolving nature and sophistication of these threats, as well as due to the expanding use of Internet banking, mobile banking and other technology-based products and services by us and our customers.
A number of other federal and state consumer protection laws extensively govern the Bank’s relationship with its customers. These laws include the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Truth in Savings Act, the Electronic Fund Transfer Act, the Expedited Funds Availability Act, the Home Mortgage Disclosure Act, the Fair Housing Act, the Real Estate Settlement Procedures Act, the Fair Debt Collection Practices Act, Telephone Consumer Protection Act, the Service Members Civil Relief Act and regulations. Amongthese laws’ respective state-law counterparts, as well as state and territorial usury laws and laws regarding unfair and deceptive acts and practices. These and other laws subject the Bank to substantial regulatory oversight and, among other things, these lawsrequire disclosures of the cost of credit and regulations mandate certain disclosure requirements andterms of deposit accounts, provide substantive consumer rights, prohibit discrimination in credit transactions, regulate the manner in whichuse of credit report information, provide financial institutions deal with their customers.privacy protections, prohibit unfair, deceptive and abusive practices, and restrict the Bank’s ability to raise interest rates.
Available Information
The Company’s annual report on Form 10-K and quarterly reports on Form 10-Q, as well as its current reports on Form 8-K and proxy statement filings (and all amendments thereto), which are filed with the Securities and Exchange Commission (“SEC”),SEC, are accessible free of charge at our website at http://www.northrim.com as soon as reasonably practicable after filing with the SEC. By making this reference to our website, the Company does not intend to incorporate into this report any information contained in the website. The website should not be considered part of this report.
The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may also obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers, including the Company, that file electronically with the SEC.
ITEM 1A. RISK FACTORS
If any of the following risks actually occur, the Company’s financial condition and results of operations could be materially and adversely affected. If this were to happen, the value of the Company’s common stock could decline significantly, and you could lose all or part of your investment.
Risk Factors Summary
An investment in the Company's common stock is subject to risks inherent to the Company's business. Such risks, including those set forth in the summary of material risks in this Part I. Item 1A. should be carefully considered before purchasing our securities.
COVID-19 Pandemic Risk Factors
•The COVID-19 pandemic has materially impacted our business and financial results, and our business and financial results will likely continue to be adversely affected by the pandemic.
Interest Rate Risk Factor
•Changes in market interest rates could adversely impact the Company.
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Operational, Strategic and Business Risk Factors
•Current economic conditions in the State of Alaska pose challenges for us and could adversely affect our financial condition and results of operations.
•Our concentration of operations in the Anchorage, Matanuska-Susitna Valley, Fairbanks and Southeast areas of Alaska makes us more sensitive to downturns in those areas.
•Residential mortgage lending is a market sector that experiences significant volatility and is influenced by many factors beyond our control.
•Our information systems or those of our third-party vendors may be subject to an interruption or breach in security, including as a result of cyber-attacks.
•A failure in or breach of the Company's operational systems, information systems, or infrastructure, or those of the Company's third-party vendors and other service providers, may result in financial losses, or loss of customers.
•Our business is highly reliant on third party vendors.
•We continually encounter technological change, and we may have fewer resources than many of our competitors to continue to invest in technological improvements.
•Our business, financial condition and results of operations are subject to risk from changes in customer behavior.
•If we do not comply with the agreements governing servicing of loans, if these agreements change materially, or if others allege non-compliance, our business and results of operations may be harmed.
•Certain hedging strategies that we use to manage interest rate risk may be ineffective to offset any adverse changes in the fair value of these assets due to changes in interest rates and market liquidity.
•Our allowance for credit losses may be insufficient.
•We have a significant concentration in real estate lending. A downturn in real estate within our markets would have a negative impact on our results of operations.
•Real estate values may decrease leading to additional and greater than anticipated loan charge-offs and valuation writedowns on our other real estate owned (“OREO”) properties.
•We conduct substantially all of our operations through Northrim Bank, our banking subsidiary; our ability to pay dividends, repurchase our shares, or to repay our indebtedness depends upon liquid assets held by the holding company and the results of operations of our subsidiaries and their ability to pay dividends.
•There can be no assurance that the Company will continue to declare cash dividends or repurchase stock.
•We may be unable to attract and retain key employees and personnel.
•Liquidity risk could impair our ability to fund operations and jeopardize our financial conditions.
•A failure of a significant number of our borrowers, guarantors and related parties to perform in accordance with the terms of their loans would have an adverse impact on our results of operations.
Regulatory, Legislative and Legal Risk Factors
•We operate in a highly regulated environment and changes of or increases in banking or other laws and regulations or governmental fiscal or monetary policies could adversely affect us.
•Changes in the FRB’s monetary or fiscal policies could adversely affect our results of operations and financial condition.
•Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, Anti-Money Laundering Act of 2020, Real Estate Settlement Procedures Act, Truth-in-Lending Act or other laws and regulations could result in fines, sanctions or other adverse consequences.
Accounting, Tax and Financial Risk Factors
•Changes in income tax laws and interpretations, or in accounting standards, could materially affect our financial condition or results of operations.
•Uncertainty about the continuing availability of the London Inter-Bank Offered Rate ("LIBOR") may adversely affect our business.
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General Economic and Market Risk Factors
•Natural disasters and adverse weather could negatively affect real estate property values and Bank operations.
•The soundness of other financial institutions could adversely affect us.
•The financial services business is intensely competitive and our success will depend on our ability to compete effectively.
•We are a community bank and our ability to maintain our reputation is critical to the success of our business and the failure to do so could materially adversely affect our performance.
•Social, political, and economic instability, unrest, and other circumstances beyond our control could adversely affect our business operations.
•Climate change, severe weather, natural disasters, and other external events could significantly impact our business.
We attempt to mitigate the foregoing risks. However, if we are unable to effectively manage the impact of these and other risks, our financial condition, results of operations, our ability to make distributions to our shareholders, or the market price of our common stock could be materially impacted.
COVID-19 Pandemic Risks
The COVID-19 pandemic has materially impacted our business and financial results, and our business and financial results will likely continue to be adversely affected by the pandemic.
The COVID-19 pandemic has created economic and financial disruptions that have adversely affected, and are likely to continue to adversely affect, our business, financial condition, liquidity and results of operations. The extent to which the COVID-19 pandemic will continue to negatively affect our business, financial condition, liquidity and results of operations will depend on future developments, which are highly uncertain and cannot be predicted and many of which are outside of our control, including the scope and duration of the pandemic, the emergence of new variants, the effectiveness of our pandemic response plans, the direct and indirect impact of the pandemic on our employees, customers, clients, counterparties and service providers, as well as other market participants, and actions taken, or that may yet be taken, or inaction, by governmental authorities and other third parties in response to the pandemic. Should the pandemic continue for a more extended period or worsen, we may face additional circumstances such as significant draws on credit lines should customers seek to increase liquidity. Furthermore, should the pandemic continue, we may experience increased rates of employee illness or unavailability, and may experience challenges recruiting new employees.
Any disruption to our ability to deliver financial products or services to, or interact with, our clients and customers could result in losses or increased operational costs, regulatory fines, penalties and other sanctions, or harm our reputation. We are also subject to litigation and reputational risk arising from our response to the COVID-19 pandemic. The length of the pandemic and the efficacy of the measures being put in place to address it are unknown as efforts to combat the virus have been complicated by viral variants and uneven access to, and acceptance and effectiveness of, vaccines globally. To the extent the pandemic adversely affects our business, financial condition, liquidity or results of operations, it may also have the effect of heightening many of the other risks described in this report. See the section captioned “COVID-19 Issues” in Part II. Item 7 of this report for further discussion. In addition, the effects could have a material impact on our results of operations and heighten many of our known risks described in this Part I, Section 1A “Risk Factors”.
Interest Rate Risk
Changes in market interest rates could adversely impact the Company.
Our earnings and cash flows are largely dependent upon our net interest income. Net interest income is the difference between interest income earned on interest-earning assets such as loans and securities and interest expense paid on interest-bearing liabilities such as deposits and borrowed funds. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions, inflationary trends, changes in government spending and debt issuances and policies of various governmental and regulatory agencies and, in particular, the Federal Open Market Committee (“FOMC”). Changes in interest rates affect the demand for new loans, the credit profile of existing loans, the rates received on loans and securities, and rates paid on deposits and borrowings.If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, our net interest income, and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings. These impacts may negatively impact our ability to
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attract deposits, make loans, and achieve satisfactory interest rate spreads, which could adversely affect our financial condition or results of operations. In particular, increases in interest rates will likely reduce RML’s revenues by reducing the market for refinancings, as well as the demand for RML’s other residential loan products.Additionally, increases in interest rates may impact our borrowers' ability to make loan payments, particularly in our commercialloan portfolio.
Interest rates may be affected by many factors beyond our control, including general and economic conditions and the monetary and fiscal policies of various governmental and regulatory authorities. The FOMC announced its target to keep the federal funds rate near zero percent in January 2022. However, the FOMC also indicated that due to rising inflation it expects to raise interest rates in the near term. Market volatility in interest rates can be difficult to predict, as unexpected interest rate changes may result in a sudden impact while anticipated changes in interest rates generally impact the mortgage rate market prior to the actual rate change. Exposure to interest rate risk is managed by monitoring the repricing frequency of our rate-sensitive assets and rate-sensitive liabilities over any given period. Although we believe the current level of interest rate sensitivity is reasonable, significant fluctuations in interest rates could potentially have an adverse effect on our business, financial condition and results of operations.
Operational, Strategic and Business Risks
Current economic conditions in the State of Alaska pose challenges for us and could adversely affect our financial condition and results of operations.
We are operating in an uncertain economic environment. The decrease in the price of oil which began in 2014 has led to a significant deficit in the budget for the State of Alaska, which has beenwas partially alleviated by legislative actionmitigated in 2018 that now allows forby the useimplementation of a percent of market value approach allocating a portion of State's investment income from the Alaska Permanent FundFund's investment earnings to help fund the state budget. However, we believe that this has solvedaddressed only part of Alaska's structural finance problem.problem and this approach also increased Alaska's exposure to volatility in financial markets. In the longer term, relatively low oil prices are expected to negatively impact the overall economy in Alaska on a larger scale as we estimate that one third of the Alaskan economy is related to oil. Financial institutions continue to be affected by changing conditions in the real estate and financial markets, along with an arduous regulatory climate. Dramatic declines in the United States housing market from 2008 through 2012, with falling home prices and increasing foreclosures and unemployment, resulted in significant writedowns of asset values by financial institutions. While conditions have improved nationally, a return to a recessionary economy could result in financial stress on our borrowers that would adversely affect our financial condition and results of operations. Deteriorating conditions in the regional economies of Anchorage, Matanuska-Susitna Valley, Fairbanks, and the Southeast areas of Alaska served by the Company could drive losses beyond that which is provided for in our allowance for loan losses. We may also face the following risks in connection with events:
| ▪ | Ineffective monetary policy could cause rapid changes in interest rates and asset values that would have a materially adverse impact on our profitability and overall financial condition. | ||||
| ▪ | Market developments may affect consumer confidence levels and may cause adverse changes in payment patterns, resulting in increased delinquencies and default rates on loans and other credit facilities. | ||||
| ▪ | Regulatory scrutiny of the industry could increase, leading to harsh regulation of our industry that could lead to a higher cost of compliance, limit our ability to pursue business opportunities and increase our exposure to the judicial system and the plaintiff’s bar. | ||||
| ▪ | Erosion in the fiscal condition of the U.S. Treasury could lead to new taxes that would limit the ability of the Company to pursue growth and return profits to shareholders. | ||||
If these conditions or similar ones develop, we could experience adverse effects on our financial condition and results of operations.
Our concentration of operations in the Anchorage, Matanuska-Susitna Valley, Fairbanks and Southeast areas of Alaska makes us more sensitive to downturns in those areas.
Substantially all of our business is derived from the Anchorage, Matanuska-Susitna Valley, Fairbanks, and Southeast areas of Alaska. The majority of our lending has been with Alaska businesses and individuals. At December 31, 2019,2021, approximately 70%9% of the Bank’sBank's loans are PPP loans which are 100% guaranteed by the SBA. Of the remaining loan portfolio, excluding PPP loans, approximately 75% of loans are secured by real estate and 3%1% are unsecured. Approximately 27%24% are for general commercial uses, including professional, retail, and small businesses, and are secured by non-real estate assets. Repayment is expected from the borrowers’ cash flow or, secondarily, the collateral. Our exposure to credit loss, if any, is the outstanding amount of the loan if the collateral is proved to be of no value. These areas rely primarily upon the natural resources industries, particularly oil production, as well as tourism and government and U.S. military spending for their
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economic success. In particular, the oil industry plays a significant role in the Alaskan economy. We estimate that one third of Alaska's gross state product is currently derived from the oil industry.
Our business is and will remain sensitive to economic factors that relate to these industries and local and regional business conditions. As a result, local or regional economic downturns, or downturns that disproportionately affect one or more of the key industries in regions served by the Company, may have a more pronounced effect upon our business than they might on an institution that is less geographically concentrated. The extent of the future impact of these events on economic and business conditions cannot be predicted; however, prolonged or acute fluctuations could have a material and adverse impact upon our financial condition and results of operation.
The Company earns revenue from the residential mortgage lending activities primarily in the form of gains on the sale of mortgage loans that we originate and sell to the secondary market. Residential mortgage lending in general and economic conditions and the monetary and fiscal policies of various governmental and regulatory authorities. Since December 2015, the FRB has increased short-term interest rates nine times. However, the FRB reduced interest rates three times in 2019. While we expect the FRB to hold short-term interest rates stable in 2020, marketexperienced substantial volatility in interest rates can be difficultrecent periods primarily due to predict, as unexpected interest rate changes may result in a sudden impact while anticipated changes in interest rates generallyand other market forces beyond our control. Interest rate changes, such as rate increases implemented by the FRB, may result in lower rate locks and closed loan volume, which may adversely impact the mortgage rate market prior to the actual rate change. Exposure to interest rate riskearnings and results of operations of RML. In addition, an increase, as is managed by monitoring the repricing frequency of our rate-sensitive assets and rate-sensitive liabilities over any given period. Although we believe the current level of interest rate sensitivity is reasonable, significant fluctuationscurrently expected, in interest rates could potentially have an adverse effect on our business, financial condition and results of operations.
Our information systems or those of our third partythird-party vendors may be subject to an interruption or breach in security, including as a result of cyber attacks.
The Company’s technologies, systems, networks and software, and those of other financial institutions have been, and are likely to continue to be, the target of cybersecurity threats and attacks, which may range from uncoordinated individual attempts to sophisticated and targeted measures directed at us. These cybersecurity threats and attacks may include, but are not limited to, breaches, unauthorized access, misuse, malicious code, computer viruses and denial of service attacks that could result in unauthorized access, misuse, loss or destruction of data (including confidential customer information), account takeovers, unavailability of service or other events. These types of threats may result from human error, fraud or malice on the part of external or internal parties, or from accidental technological failure. Further, to access our products and services our customers may use computers and mobile devices that are beyond our security control systems. The risk of a security breach or disruption, particularly through cyber-attack or cyber intrusion, including by computer hackers, has increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased.
Our business requires the collection and retention of large volumes of customer data, including payment card numbers and other personally identifiable information in various information systems that we maintain and in those maintained by third parties with whom we contract to provide data services. We also maintain important internal company data such as personally identifiable information about our employees and information relating to our operations. The integrity and protection of that customer and company data is important to us. As customer, public, legislative and regulatory expectations and requirements regarding operational and information security have increased, our operations systems and infrastructure must continue to be safeguarded and monitored for potential failures, disruptions and breakdowns.
Our customers and employees have been, and will continue to be, targeted by parties using fraudulent e-mails and other communications in attempts to misappropriate passwords, payment card numbers, bank account information or other personal information or to introduce viruses or other malware through “trojan horse” programs to our customers’ computers. These communications may appear to be legitimate messages sent by the Bank or other businesses, but direct recipients to fake websites operated by the sender of the e-mail or request that the recipient send a password or other confidential information via e-mail or download a program. Despite our efforts to mitigate these threats through product improvements, use of encryption and
authentication technology to secure online transmission of confidential consumer information, and customer and employee education, such attempted frauds against us or our merchants and our third partythird-party service providers remain a serious issue. The pervasiveness of cyber security incidents in general and the risks of cyber-crime are complex and continue to evolve. In addition, due to COVID-19, we have modified our business practices with a portion of our employees working remotely from their homes. The continuation of these work-from-home measures also introduces additional operational risk, including increased cybersecurity risk. In light of several recent high-profile data breaches at other companies involving customer personal and financial information, we believe the potential impact of a cyber security incident involving the Company, any exposure to consumer losses and the cost of technology investments to improve security could cause customer and/or Bank losses, damage to our brand, and increase our costs.
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Although we make significant efforts to maintain the security and integrity of our information systems and have implemented various measures to manage the risk of a security breach or disruption, there can be no assurance that our security efforts and measures will be effective or that attempted security breaches or disruptions would not be successful or damaging. Even the most well-protected information, networks, systems and facilities remain potentially vulnerable because attempted security breaches, particularly cyber-attacks and intrusions, or disruptions will occur in the future, and because the techniques used in such attempts are constantly evolving and generally are not recognized until launched against a target, and in some cases are designed not to be detected and, in fact, may not be detected. Accordingly, we may be unable to anticipate these techniques or to implement adequate security barriers or other preventative measures, and thus it is virtually impossible for us to entirely mitigate this risk. A security breach or other significant disruption could: disrupt the proper functioning of our networks and systems and therefore our operations and/or those of certain of our customers; result in the unauthorized access to, and destruction, loss, theft, misappropriation or release of confidential, sensitive or otherwise valuable information of ours or our customers, including account numbers and other financial information; result in a violation of applicable privacy, data breach and other laws, subjecting the Bank to additional regulatory scrutiny and exposing the Bank to civil litigation, governmental fines and possible financial liability; require significant management attention and resources to remedy the damages that result; or harm our reputation or cause a decrease in the number of customers that choose to do business with us or reduce the level of business that our customers do with us. The occurrence of any such failures, disruptions or security breaches could have a negative impact on our financial condition and results of operations.
A failure in or breach of the Company's operational systems, information systems, or infrastructure, or those of the Company's third party vendors and other service providers, may result in financial losses, or loss of customers.
The Company relies heavily on communications and information systems to conduct our business. In addition, we rely on third parties to provide key components of our infrastructure, including the processing of sensitive consumer and business customer data, internet connections, and network access. These types of information and related systems are critical to the operation of our business and essential to our ability to perform day-to-day operations, and, in some cases, are critical to the operations of many of our customers. These third parties with which the Company does business or that facilitate our business activities, including exchanges, financial intermediaries or vendors that provide services or security solutions for our operations, could also be sources of operational and information security risk to us, including breakdowns or failures of their own systems or capacity constraints. Although the Company has implemented safeguards and business continuity plans, our business operations may be adversely affected by significant and widespread disruption to our physical infrastructure or operating systems that support our business and our customers, resulting in financial losses or loss of customers.
Our business is highly reliant on third party vendors.
We rely on third parties to provide services that are integral to our operations. These vendors provide services that support our operations, including the storage and processing of sensitive consumer and business customer data. The loss of these vendor relationships, or a failure of these vendors' systems, could disrupt the services we provide to our customers and cause us to incur significant expense in connection with replacing these services.
We continually encounter technological change, and we may have fewer resources than many of our competitors to continue to invest in technological improvements.
The financial services industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. Our future success will depend, in part, upon our ability to address the needs of our clients by using technology to provide products and services that will satisfy client demands for convenience, as well as to create additional efficiencies in our operations. Many national vendors provide turn-key services to community banks, such as Internet banking and remote deposit capture that allow smaller banks to compete with institutions that have substantially greater resources to invest in technological improvements. We may not be able, however, to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers.
Individual, economic, political, industry-specific conditions and other factors outside of RML. In addition, an increaseour control, such as fuel prices, energy costs, real estate values, inflation, taxes or other factors that affect customer income levels, could alter anticipated customer behavior, including borrowing, repayment, investment and deposit practices. Such a change in interest ratesthese practices could materially adversely affect our ability to anticipate business needs and meet regulatory requirements. Further, difficult economic conditions may materiallynegatively affect consumer confidence levels. A decrease in consumer confidence levels would likely
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aggravate the adverse effects of these difficult market conditions on us, our customers and adversely affect our future loan origination volume and margins.
If we do not comply with the agreements governing servicing of loans, if these agreements change materially, or if others allege non-compliance, our business and results of operations may be harmed.
We have contractual obligations under the servicing agreements pursuant to which we service mortgage loans. Many of our servicing agreements require adherence to general servicing standards, and certain contractual provisions delegate judgment over various servicing matters to us. If the terms of these servicing agreements change, we may sustain higher costs. Our servicing practices, and the judgments that we make in our servicing of loans, could also be questioned by parties to these agreements. We could also become subject to litigation claims seeking damages or other remedies arising from alleged breaches of our servicing agreements.
Additionally, under our loan servicing program we retain servicing rights on mortgage loans originated by RML and sold to the Alaska Housing Finance Corporation. If we breach any of the representations and warranties in our servicing agreements with the Alaska Housing Finance Corporation, we may be required to repurchase any loan sold under this program and record a loss upon repurchase and/or bear any subsequent loss on the loan. We may not have any remedies available to us against third parties for such losses, or the remedies might not be as broad as the remedies available to the Alaska Housing Finance Corporation against us.
Certain hedging strategies that we use to manage interest rate risk may be ineffective to offset any adverse changes in the fair value of these assets due to changes in interest rates and market liquidity.
We use derivative instruments to economically hedge the interest rate risk in our residential mortgage loan commitments. Our hedging strategies are susceptible to prepayment risk, basis risk, market volatility and changes in the shape of the yield curve, among other factors. In addition, hedging strategies rely on assumptions and projections regarding assets and general market factors. If these assumptions and projections prove to be incorrect or our hedging strategies do not adequately mitigate the impact of changes in interest rates, we may incur losses that would adversely impact our financial condition and results of operations.
Our loan loss allowance for credit losses may not be adequate to cover future loaninsufficient.
We maintain allowances for credit losses which may adversely affect our earnings.
We have a significant concentration in real estate lending.Adownturn in real estate within our markets would have a negative impact on our results of operations.
Approximately 70%75% of the Bank’s loan portfolio, excluding PPP loans, at December 31, 20192021 consisted of loans secured by commercial and residential real estate located in Alaska. Additionally, all of the Company's loans held for sale are secured by residential real estate. A slowdown in the residential sales cycle in our major markets and a constriction in the availability of mortgage financing, such as what occurred during the financial crisis in the United States housing market from 2008 through 2012, would negatively impact residential real estate sales, which would result in customers’ inability to repay loans. This would result in an increase in our non-performing assets if more borrowers fail to perform according to loan terms and if we take possession of real estate properties. Additionally, if real estate values decline, the value of real estate collateral
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securing our loans could be significantly reduced. If
any of these effects continue or become more pronounced, loan losses will increase more than we expect and our financial condition and results of operations would be adversely impacted.
Further, approximately 47%52% of the Bank’s loan portfolio at December 31, 20192021 consisted of commercial real estate loans. While our investments in these types of loans have not been as adversely impacted as residential construction and land development loans, there can be no assurance that the credit quality in these portfolios will remain stable. Commercial construction and commercial real estate loans typically involve larger loan balances to single borrowers or groups of related borrowers. Consequently, an adverse development with respect to one commercial loan or one credit relationship exposes us to significantly greater risk of loss compared to an adverse development with respect to a consumer loan. The credit quality of these loans may deteriorate more than expected which may result in losses that exceed the estimates that are currently included in our loan loss allowance, which could adversely affect our financial conditionscondition and results of operations.
Real estate values may decrease leading to additional and greater than anticipated loan charge-offs and valuation writedowns on our other real estate owned (“OREO”) properties.
Real estate owned by the Bank and not used in the ordinary course of its operations is referred to as “other real estate owned” or “OREO” property. We foreclose on and take title to the real estate serving as collateral for defaulted loans as part of our business. At December 31, 2019,2021, the Bank held $7.0$5.6 million of OREO properties, most of which relate to a commercial real estate loan. Increased OREO balances lead to greater expenses as we incur costs to manage and dispose of the properties. Our ability to sell OREO properties is affected by public perception that banks are inclined to accept large discounts from market value in order to quickly liquidate properties. Any decrease in market prices may lead to OREO writedowns, with a corresponding expense in our income statement. We evaluate OREO property values periodically and writedown the carrying value of the properties if the results of our evaluations require it. Further writedowns on OREO or an inability to sell OREO properties could have a material adverse effect on our results of operations and financial condition.
We conduct substantially all of our operations through Northrim Bank, our banking subsidiary; our ability to pay dividends, repurchase our shares, or to repay our indebtedness depends upon liquid assets held by the holding company and the results of operations of our subsidiaries and their ability to pay dividends.
The Company is a separate legal entity from our subsidiaries. It receives substantially all of its revenue from dividends paid from the Bank. There are legal limitations on the extent to which the Bank may extend credit, pay dividends or otherwise supply funds to, or engage in transactions with us. Our inability to receive dividends from the Bank could adversely affect our business, financial condition, results of operations and prospects.
Our net income depends primarily upon the Bank’s net interest income, which is the income that remains after deducting from total income generated by earning assets the expense attributable to the acquisition of the funds required to support earning assets (primarily interest paid on deposits and borrowings). The amount of interest income is dependent on many factors including
the volume of earning assets, the general level of interest rates, the dynamics of changes in interest rates and the levels of nonperforming loans. All of those factors affect the Bank’s ability to pay dividends to the Company. In 2016,On January 1, 2019, a requirement to have a capital conservation buffer started to be phased in and this requirement, which went into full effect on January 1, 2019and could adversely affect the Bank's ability to pay dividends.
Various statutory provisions restrict the amount of dividends the Bank can pay to us without regulatory approval. Under Alaska law, a bank may not declare or pay a dividend in an amount greater than its net undivided profits then on hand. In addition, the Bank may not pay cash dividends if that payment could reduce the amount of its capital below that necessary to meet the “adequately capitalized” level in accordance with regulatory capital requirements. It is also possible that, depending upon the financial condition of the Bank and other factors, regulatory authorities could conclude that payment of dividends or other payments, including payments to us, is an unsafe or unsound practice and impose restrictions or prohibit such payments. It is the policy of the FRB that bank holding companies should pay cash dividends on common stock only out of net income available over the past year and only if the prospective rate of earnings retention is consistent with the organization’s current and expected future capital needs, asset quality and overall financial condition. The policy provides that bank holding companies should not maintain a level of cash dividends that undermines a bank holding company’s ability to serve as a source of strength to its banking subsidiaries.
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There can be no assurance that the Company will continue to declare cash dividends or repurchase stock.
During 2019,2021, the Company repurchased 347,676279,276 shares of common stock at an average price of $36.15$41.30 per share under its previously announced share repurchase program. On January 27, 2020,28, 2022, the Company announced that its Board of Directors had authorized the repurchase of up to an additional 327,000300,000 shares of common stock. The Company also paid cash dividends of $1.26$1.50 per diluted share in 2019.2021. On February 27, 2020,24, 2022, the Board of Directors approved payment of a $0.34$0.41 per share dividend on the Company’s outstanding shares.
Whether we continue, and the amount and timing of, such dividends and/or stock repurchases is subject to capital availability and periodic determinations by our Board. The Company continues to evaluate the potential impact that regulatory proposals may have on our liquidity and capital management strategies, including Basel III and those required under the Dodd-Frank Act. The actual amount and timing of future dividends and share repurchases, if any, will depend on market and economic conditions, applicable SEC rules, federal and state regulatory restrictions, and various other factors. In addition, the amount we spend and the number of shares we are able to repurchase under our stock repurchase program may further be affected by a number of other factors, including the stock price and blackout periods in which we are restricted from repurchasing shares. Our dividend payments and/or stock repurchases may change from time to time, and we cannot provide assurance that we will continue to declare dividends and/or repurchase stock in any particular amounts or at all. A reduction in or elimination of our dividend payments and/or stock repurchases could have a negative effect on our stock price.
We may be unable to attract and retain key employees and personnel.
We will be dependent for the foreseeable future on the services of Joseph M. Schierhorn, our Chairman of the Board, President, Chief Executive Officer, and Chief Operating Officer of the Company; Michael Martin, our Executive Vice President, General Counsel and Corporate Secretary; and Jed W. Ballard, our Executive Vice President and Chief Financial Officer. While we maintain keyman life insurance on the lives of Messrs. Schierhorn Martin, and Ballard in the amounts of $2.4 million and $2 million, each,respectively, we may not be able to timely replace Mr. Schierhorn Mr. Martin, or Mr. Ballard with a person of comparable ability and experience should the need to do so arise, causing losses in excess of the insurance proceeds. The unexpected loss of key employees could have a material adverse effect on our business and possibly result in reduced revenues and earnings.
Liquidity risk could impair our ability to fund operations and jeopardize our financial conditions.
Liquidity is essential to our business. An inability to raise funds through deposits, borrowings and other sources could have a substantial negative effect on our liquidity and severely constrain our financial flexibility. Our primary source of funding is deposits gathered through our network of branch offices. Our access to funding sources in amounts adequate to finance our activities on terms that are acceptable to us could be impaired by factors that affect us specifically or the financial services industry or the economy in general. Factors that could negatively impact our access to liquidity sources include:
•a decrease in the level of our business activity as a result of an economic downturn in the markets in which our loans are concentrated;
•adverse regulatory actions against us; or
•our inability to attract and retain deposits.
Our ability to borrow could be impaired by factors that are not specific to us or our region, such as a disruption in the financial markets or negative views and expectations about the prospects for the financial services industry and unstable credit markets. Our access to deposits may also be negatively impacted by, among other factors, continued periods of low interest rates and increased competition for deposits, including from new financial technology competitors.
A failure of a significant number of our borrowers, guarantors and related parties to perform in accordance with the terms of their loans would have an adverse impact on our results of operations.
A source of risk arises from the possibility that losses will be sustained if a significant number of our borrowers, guarantors and related parties fail to perform in accordance with the terms of their loans. We have adopted underwriting and credit monitoring procedures and credit policies, including the establishment and review of our allowance for loan losses, which we believe are appropriate to minimize this risk by assessing the likelihood of nonperformance, tracking loan performance, and diversifying our credit portfolio. These policies and procedures, however, may not prevent unexpected losses that could materially affect our financial condition and results of operations.
24
Regulatory, Legislative and Legal Risks
We operate in a highly regulated environment and changes of or increases in banking or other laws and regulations or governmental fiscal or monetary policies could adversely affect us.
We are subject to extensive regulation, supervision and examination by federal and state banking authorities. In addition, as a publicly-traded company, we are subject to regulation by the continuing availabilitySEC and NASDAQ. Any change in applicable regulations or federal or state legislation or in policies or interpretations or regulatory approaches to compliance and enforcement, income tax laws and accounting principles could have a substantial impact on us and our operations. Changes in laws and regulations may also increase our expenses by imposing additional fees or taxes or restrictions on our operations. Additional legislation and regulations that could significantly affect our authority and operations may be enacted or adopted in the future, which could have a material adverse effect on our financial condition and results of the London Inter-Bank Offered Rate ("LIBOR") mayoperations. Failure to appropriately comply with any such laws, regulations or principles could result in sanctions by regulatory agencies or damage to our reputation, all of which could adversely affect our business.business, financial condition or results of operations.
In that regard, the Dodd-Frank Act was enacted in July 2010. Among other provisions, the Dodd-Frank Act created the CFPB with broad powers to regulate consumer financial products such as credit cards and mortgages, created a Financial Stability Oversight Council comprised of the heads of other regulatory agencies, has resulted in new capital requirements from federal banking agencies, placed new limits on electronic debit card interchange fees, and requires banking regulators, the SEC and national stock exchanges to adopt significant new corporate governance and executive compensation reforms.
We cannot accurately predict the full effects of recent or future legislation or the various other governmental, regulatory, monetary and fiscal initiatives which have been and may be enacted on the financial markets and on the Company. The terms and costs of these activities could materially and adversely affect our business, financial condition, results of operations and the trading price of our common stock.
Changes in the FRB’s monetary or fiscal policies could adversely affect our results of operations and financial condition.
Our earnings will be affected by domestic economic conditions and the monetary and fiscal policies of the United Kingdom’s Financial Conduct Authority,States government and its agencies. The FRB has, and is likely to continue to have, an important impact on the operating results of depository institutions through its power to implement national monetary policy, among other things, in order to curb inflation or combat a recession. The FRB affects the levels of bank loans, investments and deposits through its control over the issuance of United States government securities, its regulation of the discount rate applicable to member banks and its influence over reserve requirements to which regulatesmember banks are subject. The FOMC announced its target to keep the LIBOR announcedfederal funds rate near zero percent in January 2022. However, the FOMC also indicated that after December 31, 2021due to rising inflation it would no longer compel banksexpects to submit the rates required to calculate LIBOR. With this announcement there is uncertainty about the continued availability of LIBOR after 2021. If LIBOR ceases to be available or the methods of calculating LIBOR change from the current methods, financial products withraise interest rates tiedin the near term. While we expect the FRB to LIBOR may be adversely affected. Even if LIBOR remains available it is uncertain whether it will continue to be viewed as an acceptable market benchmark, what rateraise short-term interest rates in 2022, we cannot predict the nature or rates may become accepted alternatives to LIBOR or what the effectimpact of any suchfuture changes in views or alternatives may be on the markets for LIBOR-indexed financial instruments. We have loans, derivative contracts,monetary and other financial instruments, including debentures related to our trust preferred securities, with rates that are either directly or indirectly tied to LIBOR. If any of the foregoing were to occur, the interest rates on these instruments, as well as the revenue and expenses associatedfiscal policies.
25
Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, Anti-Money Laundering Act of 2020, Real Estate Settlement Procedures Act, Truth-in-Lending Act or other laws and regulations could result in fines, sanctions or other adverse consequences.
Financial institutions are required under the USA PATRIOT Act and Bank Secrecy Act to develop programs to prevent financial institutions from being used for money-laundering and terrorist activities. Financial institutions are also obligated to file suspicious activity reports with the United States Treasury Department’s Office of Financial Crimes Enforcement Network if such activities are detected. These rules also require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts. Failure or the inability to comply with these regulations could result in fines or penalties, intervention or sanctions by regulators, and costly litigation or expensive additional controls and systems. In recent years, several banking institutions have received large fines for non-compliance with these laws and regulations. In addition, the federal government has in place laws and regulations relating to residential and consumer lending, as well as other activities with customers, that create significant compliance burdens and financial risks. We have developed policies and continue to augment procedures and systems designed to assist in compliance with these laws and regulations; however, it is possible for such safeguards to fail or prove deficient during the implementation phase to avoid non-compliance with such laws.
Changes in income tax laws and interpretations, or in accounting standards, could materially affect our financial condition or results of operations.
Further changes in income tax laws could be enacted, or interpretations of existing income tax laws could change, causing an adverse effect on our financial condition or results of operations. Similarly, our accounting policies and methods are fundamental to how we report our financial condition and results of operations. Some of these policies require the use of estimates and assumptions that may affect the value of our assets, liabilities, and financial results. Periodically, new accounting standards are issued or existing standards are revised, changing the methods for preparing our financial statements. These changes are not within our control and may significantly impact our financial condition and results of operations.
Uncertainty about the continuing availability of the London Inter-Bank Offered Rate ("LIBOR") may adversely affect our business.
On July 27, 2017, the United Kingdom’s Financial Conduct Authority, which regulates the LIBOR announced that after December 31, 2021 it would no longer compel banks to submit the rates required to calculate LIBOR. With this announcement there is uncertainty about the continued availability of LIBOR after 2021. If LIBOR ceases to be available or the methods of calculating LIBOR change from the current methods, financial products with interest rates tied to LIBOR may be adversely affected. Even if LIBOR remains available it is uncertain whether it will continue to be viewed as an acceptable market benchmark, what rate or rates may become accepted alternatives to LIBOR or what the effect of any such changes in views or alternatives may be on the markets for LIBOR-indexed financial instruments. We have loans, derivative contracts, and other financial instruments, including debentures related to our trust preferred securities, with rates that are either directly or indirectly tied to LIBOR. If any of the foregoing were to occur, the interest rates on these instruments, as well as the revenue and expenses associated with the same, may be adversely affected. Furthermore, failure to adequately manage this transition process with our customers could adversely impact our reputation.
General Economic and Market Risks
Natural disasters and adverse weather could negatively affect real estate property values and Bank operations.
Real estate and real estate property values play an important role for the Bank in several ways. The Bank owns or leases many real estate properties in connection with its operations, located in Anchorage, Juneau, Fairbanks, the Matanuska-Susitna Valley, Kodiak, Ketchikan, Sitka, and the Kenai Peninsula. Real estate is also utilized as collateral for many of our loans. A natural disaster could cause property values to fall, which could require the Bank to record an impairment on its financial statements. A natural disaster could also impact collateral values, which would increase our exposure to loan defaults. Our business operations could also suffer to the extent the Bank cannot utilize its branch network due to a natural disaster or other weather-related damage.
26
The soundness of other financial institutions could adversely affect us.
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the financial instrument exposure. There can be no assurance that any such losses would not materially and adversely affect our results of operations.
The financial services business is intensely competitive and our success will depend on our ability to compete effectively.
The financial services business in our market areas is highly competitive. It is becoming increasingly competitive due to changes in regulation, technological advances, and the accelerating pace of consolidation among financial services providers. We face competition both in attracting deposits and in originating loans. We compete for loans principally through the pricing of interest rates and loan fees and the efficiency and quality of services. Increasing levels of competition in the banking and financial services industries may reduce our market share or cause the prices charged for our services to fall. Improvements in technology, communications, and the internet have intensified competition. As a result, our competitive position could be weakened, which could adversely affect our financial condition and results of operations.
We are a community bank and our ability to maintain our reputation is critical to the success of our business and the failure to do so could materially adversely affect our performance.
We are a community bank, and our reputation is one of the most valuable components of our business. As such, we strive to conduct our business in a manner that enhances our reputation. This is done, in part, by recruiting, hiring and retaining employees who share our core values of being an integral part of the communities we serve, delivering superior service to our customers and caring about our customers and associates. If our reputation is negatively affected, by the actions of our employees or otherwise, our business and, therefore, our operating results could be materially adversely affected.
Social, political, and economic instability, unrest, and other circumstances beyond our control could adversely affect our business operations.
Our business may be adversely affected by social, political, and economic instability, unrest, or disruption in a geographic region in which we operate, regardless of cause, including legal, regulatory, and policy changes by a new presidential administration in the U.S., protests, demonstrations, strikes, riots, civil disturbance, disobedience, insurrection, or social and other political unrest.
Such events may result in restrictions, curfews, or other actions and give rise to significant changes in regional and global economic conditions and cycles, which may adversely affect our financial condition and operations. In 2020, there were protests in cities throughout the U.S. as well as globally, including in Hong Kong, in connection with civil rights, liberties, and social and governmental reform. Looting, vandalism, and fires have occurred in cities such as Seattle, Portland, Los Angeles, Washington, D.C., New York City, and Minneapolis that have led to the imposition of mandatory curfews and, in some locations, deployment of the U.S. National Guard. Government actions in an effort to protect people and property, including curfews and restrictions on business operations, may disrupt operations, harm perceptions of personal well-being, and increase the need for additional expenditures on security resources. In addition, action resulting from such social or political unrest may pose significant risks to our personnel, facilities, and operations. The effect and duration of demonstrations, protests, or other factors is uncertain, and we cannot ensure there will not be further political or social unrest in the future or that there will not be other events that could lead to social, political, and economic disruptions. If such events or disruptions persist for a prolonged period of time, our overall business and results of operations may be adversely affected.
In addition, a new U.S. President, Joseph R. Biden, was elected in November 2020. The aftermath of the November 2020 presidential election, including the January 6, 2021, violent disruption at the Capitol, has left the U.S. in what many consider to be an extremely heightened state of political and social tension, and it is unclear whether this tension will dissipate or intensify in coming months and what resulting impacts may occur to adversely affect our business operations or the safety of our employees, our customers, and the communities in which we operate.
27
Changes in federal policy, including tax policies, and at regulatory agencies occur over time through policy and personnel changes following elections, which lead to changes involving the level of oversight and focus on certain industries and corporate entities. The nature, timing, and economic and political effects of potential changes to the current legal and regulatory frameworks affecting the financial services industry remain highly uncertain.
Climate change, severe weather, natural disasters, and other external events could significantly impact our business.
Severe weather events of increasing strength and frequency due to climate change cannot be predicted and may be exacerbated by global climate change, natural disasters, including volcanic eruptions and earthquakes, and other adverse external events could have a significant impact on our ability to conduct business or upon third parties who perform operational services for us. In addition, there is continuing uncertainty over demand for oil and gas in part due to regulatory changes from climate change related policies.Such events could affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in lost revenue, or cause us to incur additional expenses.Although management has established disaster recovery policies and procedures, there can be no assurance of the effectiveness of such policies and procedures, and the occurrence of any such event could have a material adverse effect on our business, financial condition and results of operations.
ITEM 1B.UNRESOLVED STAFF COMMENTS
None.
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ITEM 2.PROPERTIES
The following sets forth information about our Community Banking branch locations:
| Locations | Type | Leased/Owned | ||||||
Midtown Financial Center: Northrim Headquarters 3111 C Street, Anchorage, AK | Traditional | Land partially leased, partially owned, building owned | ||||||
SouthSide Financial Center 8730 Old Seward Highway, Anchorage, AK | Traditional | Land leased, building owned | ||||||
Lake Otis Community Branch 2270 East 37th Avenue, Anchorage, AK | Traditional | Land leased, building owned | ||||||
Huffman Branch 1501 East Huffman Road, Anchorage, AK | In-store | Leased | ||||||
Jewel Lake Branch 4000 W. Dimond Boulevard, Suite | Traditional | Leased | ||||||
Seventh Avenue Branch 517 West Seventh Avenue, Suite 300, Anchorage, AK | Traditional | Leased | ||||||
| Eastside Community Branch 7905 Creekside Center Drive, Suite 100, Anchorage, AK | Traditional | Leased | ||||||
West Anchorage Branch 2709 Spenard Road, Anchorage, AK | Traditional | Owned | ||||||
Eagle River Branch 12812 Old Glenn Highway, Suite C03, Eagle River, AK | Traditional | Leased | ||||||
Fairbanks Financial Center 360 Merhar Avenue, Fairbanks, AK | Traditional | Owned | ||||||
Wasilla Financial Center 850 E. USA Circle, Suite A, Wasilla, AK | Traditional | Owned | ||||||
| Soldotna Financial Center 44384 Sterling Highway, Suite 101, Soldotna, AK | Traditional | Leased | ||||||
| Juneau Financial Center 2094 Jordan Avenue, Juneau, AK | Traditional | Leased | ||||||
| Juneau Downtown Branch 301 North Franklin Street, Juneau, AK | Traditional | Leased | ||||||
| Sitka Financial Center 315 Lincoln Street, Suite 206, Sitka, AK | Traditional | Leased | ||||||
| Ketchikan Financial Center 2491 Tongass Avenue, Ketchikan, AK | Traditional | Owned | ||||||
| Kodiak Loan Production Office 2011 Mill Bay Road, #1, Kodiak, AK | Loan Production | Leased | ||||||
| Fairbanks West Community Branch 3637 Airport Way, Suite 110, Fairbanks, AK | Traditional | Leased | ||||||
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The following sets forth information about our Home Mortgage Lending branch locations, operated by RML:
| Locations | Leased/Owned | ||||
Main Office at Calais 100 Calais Drive, Anchorage, AK | Leased | ||||
| ReMax/Dynamic Office 3350 Midtown Place, Suite 101, Anchorage, AK | Leased | ||||
| Midtown Office 101 W. Benson Boulevard, #201, Anchorage, AK | Leased | ||||
| Eagle River Office 12812 Old Glenn Highway, Suite C-4, Eagle River, AK | Leased | ||||
| Fairbanks Office 324 Old Steese Highway, Suite 7, Fairbanks, AK | Leased | ||||
| Fairbanks Office 711 Gaffney Road, Suite | Leased | ||||
| Juneau Office 8800 Glacier Highway, #232, Juneau, AK | Leased | ||||
| Kodiak Office 2011 Mill Bay Road, | Leased | ||||
| Soldotna Office 44384 Sterling Highway, | Leased | ||||
| Wasilla Remax Dynamic Branch 892 E USA Circle, Suite 105, Wasilla, AK | Leased | ||||
| Wasilla Northrim Branch 850 E USA Circle, Suite B, Wasilla, AK | Leased | ||||
ITEM 3.LEGAL PROCEEDINGS
The Company from time to time may be involved with disputes, claims and litigation related to the conduct of its banking business. 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 4.MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock trades on the NASDAQ Global Select Stock Market under the symbol, “NRIM.” At March 6, 2020,4, 2022, the number of shareholders of record of our common stock was 233.218. As many of our shares of common stock are held of record in "street name" by brokers and other institutions on behalf of shareholders, we are unable to estimate the total number of beneficial holders of our common stock represented by these record holders.
| First | Second | Third | Fourth | ||
| Quarter | Quarter | Quarter | Quarter | ||
| 2019 | |||||
| High | $39.60 | $36.71 | $41.82 | $39.79 | |
| Low | $32.36 | $33.22 | $34.72 | $36.46 | |
| 2018 | |||||
| High | $36.05 | $40.45 | $45.35 | $43.00 | |
| Low | $32.80 | $34.05 | $38.80 | $30.70 | |
Repurchase of Securities
At December 31, 2019,2021, there were no33,724 shares available under the previously announced stock repurchase program. The Company repurchased 347,676279,276 shares in 20192021 and 15,468327,000 shares in 2018.2020. On January 27, 2020,28, 2022, the Company announced that its Board of Directors had authorized the repurchase of up to an additional 327,000300,000 shares of its common stock. The Company intends to continue to repurchase its stock from time to time depending upon market conditions, but we can make no assurances that we will continue this program.
The Company repurchased 188,264 shares of its common stock during the three-month period ending December 31, 2021.
| 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 | ||||||||||||||
| October 1, 2021 - October 31, 2021 | 35,810 | $44.24 | 35,810 | 186,178 | ||||||||||
| Month No. 2 | ||||||||||||||
| November 1, 2021 - November 30, 2021 | 20,189 | $44.58 | 20,189 | 165,989 | ||||||||||
| Month No. 3 | ||||||||||||||
| December 1, 2021 - December 31, 2021 | 132,265 | $42.60 | 132,265 | 33,724 | ||||||||||
| Total | 188,264 | $43.12 | 188,264 | 33,724 | ||||||||||
Equity Compensation Plan Information
The following table sets forth information regarding securities authorized for issuance under the Company’s equity plans as of December 31, 2019.2021. Additional information regarding the Company’s equity plans is presented in Note 2322 of the Notes to Consolidated Financial Statements included in Part II. Item 8 of this report.
| Plan Category | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (a) (2) | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) | Plan Category | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (a) | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) | |||||||
Equity compensation plans approved by security holders1 | 227,734 | $21.21 | 99,665 | Equity compensation plans approved by security holders1 | 193,034 | $23.77 | 170,905 | |||||||
| Total | 227,734 | $21.21 | 99,665 | Total | 193,034 | $23.77 | 170,905 | |||||||
1Consists of the Company's 2017 Stock Incentive Plan, which replaced the 2014 Stock Incentive Plan (the "2014 Plan") | ||||||||||||||
2 Includes 94,125 options awarded under the 2014 Plan and other previous stock option plans. | ||||||||||||||
1Consists of the Company's 2020 Stock Incentive Plan, which replaced the 2017 Stock Incentive Plan (the "2017 Plan") | 1Consists of the Company's 2020 Stock Incentive Plan, which replaced the 2017 Stock Incentive Plan (the "2017 Plan") | |||||||||||||
We do not have any equity compensation plans that have not been approved by our shareholders.
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Stock Performance Graph
The graph shown below depicts the total return to shareholders during the period beginning after December 31, 2014,2016, and ending December 31, 2019.2021. The definition of total return includes appreciation in market value of the stock, as well as the actual cash and stock dividends paid to shareholders. The comparable indices utilized are the Russell 3000 Index, representing approximately 98% of the U.S. equity market, and the SNL Financial Bank StockS&P U.S. Small Cap Banks Index, comprised of publicly traded banks with assets of $1 billiona market capitalization between $750 million to $5$3.3 billion, which are located in the United States. The graph assumes that the value of the investment in the Company’s common stock and each of the two indices was $100 on December 31, 2014,2016, and that all dividends were reinvested.
| Period Ending | ||||||||||||||||||||
| Index | 12/31/16 | 12/31/17 | 12/31/18 | 12/31/19 | 12/31/20 | 12/31/21 | ||||||||||||||
| Northrim BanCorp, Inc. | 100.00 | 110.12 | 109.83 | 132.45 | 122.95 | 162.87 | ||||||||||||||
| Russell 3000 | 100.00 | 121.13 | 114.78 | 150.39 | 181.8 | 228.45 | ||||||||||||||
| S&P U.S. SmallCap Banks | 100.00 | 104.33 | 87.06 | 109.22 | 99.19 | 138.09 | ||||||||||||||
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| Period Ending | ||||||||||||
| Index | 12/31/14 | 12/31/15 | 12/13/16 | 12/31/17 | 12/31/18 | 12/31/19 | ||||||
| Northrim BanCorp, Inc. | 100.00 | 104.22 | 127.61 | 140.52 | 140.13 | 169.02 | ||||||
| Russell 3000 | 100.00 | 100.48 | 113.27 | 137.21 | 130.02 | 170.35 | ||||||
| SNL Bank $1B-$5B | 100.00 | 111.94 | 161.04 | 171.69 | 150.42 | 182.85 | ||||||
ITEM 6.SELECTED FINANCIAL DATA(1) [RESERVED]
| Years Ended December 31, | ||||||||||||||||||||
| (In thousands, except per share data and shares outstanding amounts) | ||||||||||||||||||||
| 2019 | 2018 | 2017 | 2016 | 2015 | 2014 | Five Year Compound Growth Rate | ||||||||||||||
| (Unaudited) | ||||||||||||||||||||
| Net interest income | $64,442 | $61,208 | $57,678 | $56,357 | $56,909 | $52,293 | 4 | % | ||||||||||||
| Provision (benefit) for loan losses | (1,175 | ) | (500 | ) | 3,200 | 2,298 | 1,754 | (636 | ) | NM | ||||||||||
| Other operating income | 37,346 | 32,167 | 40,474 | 43,263 | 44,608 | 20,034 | 13 | % | ||||||||||||
| Compensation expense, RML acquisition payments | 468 | — | 130 | 4,775 | 4,094 | — | NM | |||||||||||||
| Other operating expense | 76,370 | 69,800 | 71,023 | 71,505 | 68,551 | 46,923 | 10 | % | ||||||||||||
| Income before provision for income taxes | $26,125 | $24,075 | $23,799 | $21,042 | $27,118 | $26,040 | — | % | ||||||||||||
| Provision for income taxes | 5,434 | 4,071 | 10,321 | 6,052 | 8,784 | 8,173 | (8 | )% | ||||||||||||
| Net Income | 20,691 | 20,004 | 13,478 | 14,990 | 18,334 | 17,867 | 3 | % | ||||||||||||
| Less: Net income attributable to | ||||||||||||||||||||
| noncontrolling interest | — | — | 327 | 579 | 551 | 459 | NM | |||||||||||||
| Net income attributable to Northrim Bancorp, Inc. | $20,691 | $20,004 | $13,151 | $14,411 | $17,783 | $17,408 | 4 | % | ||||||||||||
| Year End Balance Sheet | ||||||||||||||||||||
| Assets | $1,643,996 | $1,502,988 | $1,518,596 | $1,525,851 | $1,498,691 | $1,448,327 | 3 | % | ||||||||||||
| Portfolio loans | 1,043,371 | 984,346 | 954,953 | 974,074 | 979,682 | 923,122 | 2 | % | ||||||||||||
| Deposits | 1,372,351 | 1,228,088 | 1,258,283 | 1,267,653 | 1,240,792 | 1,179,747 | 3 | % | ||||||||||||
| Securities sold under repurchase agreements | — | 34,278 | 27,746 | 27,607 | 31,420 | 19,843 | (100 | )% | ||||||||||||
| Borrowings | 8,891 | 7,241 | 7,362 | 4,338 | 2,120 | 26,304 | (20 | )% | ||||||||||||
| Junior subordinated debentures | 10,310 | 10,310 | 10,310 | 18,558 | 18,558 | 18,558 | (11 | )% | ||||||||||||
| Shareholders' equity | 207,117 | 205,947 | 192,802 | 186,712 | 177,214 | 164,441 | 5 | % | ||||||||||||
| Common shares outstanding | 6,558,809 | 6,883,216 | 6,871,963 | 6,897,890 | 6,877,140 | 6,854,189 | (1 | )% | ||||||||||||
| Average Balance Sheet | ||||||||||||||||||||
| Assets | $1,555,707 | $1,493,385 | $1,511,052 | $1,506,522 | $1,480,913 | $1,335,929 | 3 | % | ||||||||||||
| Earning assets | 1,386,557 | 1,346,449 | 1,367,203 | 1,361,913 | 1,334,102 | 1,212,291 | 3 | % | ||||||||||||
| Portfolio loans | 1,010,098 | 971,548 | 981,001 | 976,613 | 968,752 | 893,031 | 2 | % | ||||||||||||
| Deposits | 1,276,407 | 1,227,272 | 1,248,333 | 1,250,243 | 1,219,445 | 1,111,594 | 3 | % | ||||||||||||
| Securities sold under repurchase agreements | 15,167 | 29,940 | 29,690 | 27,322 | 24,447 | 20,909 | (6 | )% | ||||||||||||
| Borrowings | 8,071 | 7,309 | 5,767 | 4,215 | 14,552 | 4,697 | 11 | % | ||||||||||||
| Junior subordinated debentures | 10,310 | 10,310 | 15,066 | 18,558 | 18,558 | 18,558 | (11 | )% | ||||||||||||
| Shareholders' equity | 208,602 | 201,022 | 193,129 | 181,628 | 169,802 | 155,591 | 6 | % | ||||||||||||
| Basic common shares outstanding | 6,708,622 | 6,877,573 | 6,889,621 | 6,883,663 | 6,859,209 | 6,761,328 | — | % | ||||||||||||
| Diluted common shares outstanding | 6,808,209 | 6,981,557 | 6,977,910 | 6,974,864 | 6,948,474 | 6,852,267 | — | % | ||||||||||||
| Per Common Share Data | ||||||||||||||||||||
| Basic earnings | $3.08 | $2.91 | $1.91 | $2.09 | $2.59 | $2.57 | 4 | % | ||||||||||||
| Diluted earnings | $3.04 | $2.86 | $1.88 | $2.06 | $2.56 | $2.54 | 4 | % | ||||||||||||
| Book value per share | $31.58 | $29.92 | $28.06 | $27.07 | $25.77 | $23.99 | 6 | % | ||||||||||||
Tangible book value per share(2) | $29.12 | $27.57 | $25.70 | $24.70 | $22.31 | $20.48 | 7 | % | ||||||||||||
| Cash dividends per share | $1.26 | $1.02 | $0.86 | $0.78 | $0.74 | $0.70 | 12 | % | ||||||||||||
| Years Ended December 31, | ||||||||||||||||||||
| 2019 | 2018 | 2017 | 2016 | 2015 | 2014 | Five Year Compound Growth Rate | ||||||||||||||
| (Unaudited) | ||||||||||||||||||||
| Performance Ratios | ||||||||||||||||||||
| Return on average assets | 1.33 | % | 1.34 | % | 0.87 | % | 0.96 | % | 1.20 | % | 1.30 | % | — | % | ||||||
| Return on average equity | 9.92 | % | 9.95 | % | 6.81 | % | 7.93 | % | 10.47 | % | 11.19 | % | (2 | )% | ||||||
| Equity/assets | 12.60 | % | 13.70 | % | 12.70 | % | 12.24 | % | 11.82 | % | 11.35 | % | 2 | % | ||||||
Tangible common equity/tangible assets(3) | 11.73 | % | 12.76 | % | 11.75 | % | 11.29 | % | 10.40 | % | 9.86 | % | 4 | % | ||||||
| Net interest margin | 4.65 | % | 4.55 | % | 4.22 | % | 4.14 | % | 4.27 | % | 4.31 | % | 2 | % | ||||||
Net interest margin (tax equivalent)(4) | 4.70 | % | 4.60 | % | 4.28 | % | 4.20 | % | 4.32 | % | 4.36 | % | 2 | % | ||||||
| Non-interest income/total revenue | 36.69 | % | 34.45 | % | 41.24 | % | 43.43 | % | 43.94 | % | 27.70 | % | 6 | % | ||||||
Efficiency ratio (5) | 75.43 | % | 74.68 | % | 72.39 | % | 76.44 | % | 71.31 | % | 64.48 | % | 3 | % | ||||||
| Dividend payout ratio | 40.79 | % | 35.08 | % | 45.44 | % | 37.59 | % | 28.81 | % | 27.40 | % | 8 | % | ||||||
| Asset Quality | ||||||||||||||||||||
| Nonperforming loans, net of government guarantees | $13,951 | $14,694 | $21,411 | $12,936 | $2,125 | $3,496 | 32 | % | ||||||||||||
| Nonperforming assets, net of government guarantees | 19,946 | 22,619 | 28,729 | 19,315 | 5,178 | 7,231 | 22 | % | ||||||||||||
| Nonperforming loans/portfolio loans, net of government guarantees | 1.34 | % | 1.49 | % | 2.24 | % | 1.33 | % | 0.22 | % | 0.38 | % | 29 | % | ||||||
| Net charge-offs (recoveries)/average loans | (0.07 | )% | 0.15 | % | 0.15 | % | 0.08 | % | 0.03 | % | (0.12 | )% | NM | |||||||
| Allowance for loan losses/portfolio loans | 1.83 | % | 1.98 | % | 2.25 | % | 2.02 | % | 1.85 | % | 1.81 | % | — | % | ||||||
| Nonperforming assets/assets, net of government guarantees | 1.21 | % | 1.50 | % | 1.89 | % | 1.27 | % | 0.35 | % | 0.50 | % | 19 | % | ||||||
| Other Data | ||||||||||||||||||||
Effective tax rate (6) | 21 | % | 17 | % | 43 | % | 29 | % | 32 | % | 31 | % | (7 | )% | ||||||
Number of banking offices(7) | 16 | 16 | 14 | 14 | 14 | 14 | 3 | % | ||||||||||||
Number of employees (FTE) (8) | 431 | 430 | 429 | 451 | 441 | 426 | — | % | ||||||||||||
| (In Thousands) | 2019 | 2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||
| Total shareholders' equity | $207,117 | $205,947 | $192,802 | $186,712 | $177,214 | $164,441 | ||||||||||||
| Total assets | 1,643,996 | 1,502,988 | 1,518,596 | 1,525,851 | 1,498,691 | 1,448,327 | ||||||||||||
| Total shareholders' equity to total assets ratio | 12.60 | % | 13.70 | % | 12.70 | % | 12.24 | % | 11.82 | % | 11.35 | % | ||||||
| (In Thousands) | 2019 | 2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||
| Total shareholders' equity | $207,117 | $205,947 | $192,802 | $186,712 | $177,214 | $164,441 | ||||||||||||
| Less: goodwill and other intangible assets, net | 16,094 | 16,154 | 16,224 | 16,324 | 23,776 | 24,035 | ||||||||||||
| Tangible common shareholders' equity | $191,023 | $189,793 | $176,578 | $170,388 | $153,438 | $140,406 | ||||||||||||
| Total assets | $1,643,996 | $1,502,988 | $1,518,596 | $1,525,851 | $1,498,691 | $1,448,327 | ||||||||||||
| Less: goodwill and other intangible assets, net | 16,094 | 16,154 | 16,224 | 16,324 | 23,776 | 24,035 | ||||||||||||
| Tangible assets | $1,627,902 | $1,486,834 | $1,502,372 | $1,509,527 | $1,474,915 | $1,424,292 | ||||||||||||
| Tangible common equity to tangible assets ratio | 11.73 | % | 12.76 | % | 11.75 | % | 11.29 | % | 10.40 | % | 9.86 | % | ||||||
| (In thousands, except per share data) | 2019 | 2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||
| Total shareholders' equity | $207,117 | $205,947 | $192,802 | $186,712 | $177,214 | $164,441 | ||||||||||||
| Divided by common shares outstanding | 6,558,809 | 6,883,216 | 6,871,963 | 6,897,890 | 6,877,140 | 6,854,189 | ||||||||||||
| Book value per share | $31.58 | $29.92 | $28.06 | $27.07 | $25.77 | $23.99 | ||||||||||||
| (In thousands, except per share data) | 2019 | 2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||
| Total shareholders' equity | $207,117 | $205,947 | $192,802 | $186,712 | $177,214 | $164,441 | ||||||||||||
| Less: goodwill and intangible assets, net | 16,094 | 16,154 | 16,224 | 16,324 | 23,776 | 24,035 | ||||||||||||
| $191,023 | $189,793 | $176,578 | $170,388 | $153,438 | $140,406 | |||||||||||||
| Divided by common shares outstanding | 6,558,809 | 6,883,216 | 6,871,963 | 6,897,890 | 6,877,140 | 6,854,189 | ||||||||||||
| Tangible book value per share | $29.12 | $27.57 | $25.70 | $24.70 | $22.31 | $20.48 | ||||||||||||
| (In Thousands) | 2019 | 2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||
Net interest income(9) | $64,442 | $61,208 | $57,678 | $56,357 | $56,909 | $52,293 | ||||||||||||
| Divided by average interest-bearing assets | 1,386,557 | 1,346,449 | 1,367,203 | 1,361,913 | 1,334,102 | 1,212,291 | ||||||||||||
| Net interest margin | 4.65 | % | 4.55 | % | 4.22 | % | 4.14 | % | 4.27 | % | 4.31 | % | ||||||
| (In Thousands) | 2019 | 2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||
Net interest income(9) | $64,442 | $61,208 | $57,678 | $56,357 | $56,909 | $52,293 | ||||||||||||
| Plus: reduction in tax expense related to | ||||||||||||||||||
| tax-exempt interest income | 722 | 726 | 872 | 808 | 722 | 583 | ||||||||||||
| $65,164 | $61,934 | $58,550 | $57,165 | $57,631 | $52,876 | |||||||||||||
| Divided by average interest-bearing assets | 1,386,557 | 1,346,449 | 1,367,203 | 1,361,913 | 1,334,102 | 1,212,291 | ||||||||||||
| Tax-equivalent net interest margin | 4.70 | % | 4.60 | % | 4.28 | % | 4.20 | % | 4.32 | % | 4.36 | % | ||||||
| (In Thousands) | 2019 | 2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||
Net interest income(9) | $64,442 | $61,208 | $57,678 | $56,357 | $56,909 | $52,293 | ||||||||||||
| Other operating income | 37,346 | 32,167 | 40,474 | 43,263 | 44,608 | 20,034 | ||||||||||||
| Total revenue | 101,788 | 93,375 | 98,152 | 99,620 | 101,517 | 72,327 | ||||||||||||
| Other operating expense | 76,838 | 69,800 | 71,153 | 76,280 | 72,645 | 46,923 | ||||||||||||
| Less intangible asset amortization | 60 | 70 | 100 | 135 | 258 | 289 | ||||||||||||
| Adjusted other operating expense | $76,778 | $69,730 | $71,053 | $76,145 | $72,387 | $46,634 | ||||||||||||
| Efficiency ratio | 75.43 | % | 74.68 | % | 72.39 | % | 76.44 | % | 71.31 | % | 64.48 | % | ||||||
ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This annual report contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those indicated in forward-looking statements. See “Cautionary Note Regarding Forward-Looking Statements.”
Executive Overview
Net income attributable to the Company increased 3%14% to $20.7$37.5 million or $3.04$6.00 per diluted share for the year ended December 31, 2019,2021, from $20.0$32.9 million, or $2.86$5.11 per diluted share, for the year ended December 31, 2018. Significant items contributing to the increase in 2019 compared to 2018 were:
is the result of an $11.6 million increase in the gain on marketable equity securities from changes in fair value; and
Highlights for the year ended December 31, 20192021 are as follows:
◦Interest and fee income on PPP loans increased $7.3 million to $15.4 million in 2018. This increase mainly reflects increases2021 from $8.1 million in net interest2020. Interest income mortgage bankingon PPP loans was $2.9 million and $2.5 million in 2021 and 2020, respectively. Loan fee income changeson PPP loans was $12.5 million and $5.6 million in 2021 and 2020, respectively. Loan fee income on PPP loans is largely made up of fees fully recognized upon loan forgiveness from the fair value of marketable equity securities, and higher interest rate swap income. These increasesSBA. In 2021, $426.3 million PPP loans were partially offset by a decrease in commercial servicing revenue.
◦The provision for loancredit losses decreased in 20192021 to a benefit of $1.2$4.1 million from a benefitprovision of $500,000$2.4 million in 2018.2020. As of January 1, 2021, the Company implemented ASU 2016-13, Financial Instruments - Credit Losses ("ASU 2016-13" or "CECL"). The provision for 2021 was recorded using the CECL methodology and reflects expected lifetime credit losses on loans and off-balance sheet unfunded loan commitments. The decrease in the provision for credit losses in 2021 compared to 2020 is primarily the result of improvement in economic assumptions used to estimate lifetime credit losses, which have improved but are not yet at pre-pandemic levels. Our nonperforming loans, net of government guarantees, decreasedincreased to $14.0$10.7 million at the end of 20192021 compared to $14.7$10.0 million at the end of 2018,2020, while total adversely classified loans, net of government guarantees at December 31, 2019 decreased2021 increased to $22.3$13.7 million from $27.2$12.8 million at December 31, 2018.2020. The allowanceAllowance for loan losses (“Allowance”Credit Losses ("ACL") totaled 1.83%0.83% of total portfolio loans at December 31, 2019,2021, compared to 1.98%1.46% at December 31, 2018.2020. The AllowanceACL compared to nonperforming loans, net of government guarantees, was 137%110% at December 31, 20192021 compared to 133%210% at the end of 2018.2020.
◦The changes above where partially offset by a $3.8 million increase in tax expense in the Community Banking segment in 2021 primarily due to higher taxable income in 2021 compared to 1.34%2020.
•Net income in 2018.the Home Mortgage Lending segment decreased 40%, or $7.0 million, to $10.3 million in 2021 from $17.3 million in 2020 primarily due to a decrease in production volume to $1.118 billion in 2021 from $1.295 billion in 2020, as well as a $3.7 million decrease in the change in fair value of the interest rate lock commitments as the loan pipeline decreased at December 31, 2021 compared to December 31, 2020.
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•The net interest margin decreased to 3.58% in 2021 from 4.02% in 2020 mostly due to a decrease in average yields on interest earning assets to 3.74% in 2021 compared to 4.36% in 2020 as a result of lower interest rates. Additionally, the mix of earning assets, specifically an increase in interest-bearing cash, also contributed to the decrease in the net interest margin in 2021 as compared to the prior year.
•The Company continued to maintain strong capital ratios with Tier 1 Capital to Risk Adjusted Assets of 14.38%14.08% at December 31, 20192021 as compared to 15.47%14.20% at December 31, 2018. 2020.
•The aggregate cash dividends paid by the Company in 20192021 rose 21%6% to $8.5$9.4 million from $7.1$8.8 million paid in 2018.2020.
•The Company repurchased 347,676279,276 shares of its common stock in 20192021 at an average price of $36.15$41.30 per share.
COVID-19 Issues:
•Industry Exposure: Northrim has identified various industries that may be adversely impacted by the COVID-19 pandemic and the volatility in oil prices that has occurred over the last year and a half, though oil prices have rebounded recently. Though the industries affected may change through the progression of the pandemic, the following sectors for which the Company has exposure, as a percent of the total loan portfolio as of December 31, 2021 are being impacted: Healthcare (8%), Tourism (7%), Oil and Gas (4%), Aviation (non-tourism) (4%), Accommodations (4%), Fishing (4%), Restaurants and Breweries (3%) and Retail (2%). The portion of the Company's Allowance that related to the loans with exposure to these industries is estimated at the following amounts as of December 31, 2021:
| (In Thousands) | Tourism | Aviation (non-tourism) | Healthcare | Retail | Restaurants and Breweries | Fishing | Accommodations | Total | ||||||||||||||||||
| Allowance | $896 | $565 | $1,257 | $332 | $486 | $432 | $507 | $4,475 | ||||||||||||||||||
•Customer Accommodations: The Company has implemented assistance to help customers experiencing financial challenges as a result of COVID-19 in addition to our participation in PPP lending. The provisions of the CARES Act included an election to not apply the guidance on accounting for certain troubled debt restructurings ("TDR") related to COVID-19 and allow certain accommodations to borrowers. These accommodations include interest only and deferral options on loan payments, as well as the waiver of various fees related to loans, deposits and other services. The Company has elected to adopt these provisions of the CARES Act. The outstanding principal balance of loan modifications due to the economic impacts of COVID-19 for the periods below were as follows:
| Loan Modifications due to COVID-19 as of December 31, 2021 | |||||||||||
| (Dollars in thousands) | Interest Only | Full Payment Deferral | Total | ||||||||
| Portfolio loans | $49,219 | $31 | $49,250 | ||||||||
| Number of modifications | 16 | 1 | 17 | ||||||||
| Loan Modifications due to COVID-19 as of December 31, 2020 | |||||||||||
| (Dollars in thousands) | Interest Only | Full Payment Deferral | Total | ||||||||
| Portfolio loans | $43,379 | $22,165 | $65,544 | ||||||||
| Number of modifications | 23 | 11 | 34 | ||||||||
All 17 loan modifications as of December 31, 2021, have entered into more than one modification.
•Branch Operations: All branches have returned to pre-pandemic levels, while a number of customer and employee safety measure continue to be implemented.
•Growth and Paycheck Protection Program:
•Over the last two years, Northrim funded a total of nearly 5,800 PPP loans totaling $612.6 million to both existing and new customers.
•Management estimates that Northrim funded approximately 24% of the number and 32% of the value of all Alaska PPP second round loans.
•As of December 31, 2021, Northrim customers had received forgiveness through the SBA on 4,451 PPP loans totaling $491.4 million.
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•The Company initially utilized the Federal Reserve Bank's Paycheck Protection Program Liquidity Facility (the "PPPLF") to fund PPP loans, but paid those funds back in full during the second quarter of 2020 and has since funded the PPP loans through core deposits and maturity of long-term investments.
Trends in Miscellaneous Financial Data(1)
| Years Ended December 31, | |||||||||||||||||||||||
| (In thousands, except per share data and shares outstanding amounts) | |||||||||||||||||||||||
| 2021 | 2020 | 2019 | 2018 | 2017 | 2016 | Five Year Compound Growth Rate | |||||||||||||||||
| (Unaudited) | |||||||||||||||||||||||
| Net interest income | $80,827 | $70,665 | $64,442 | $61,208 | $57,678 | $56,357 | 7 | % | |||||||||||||||
| Provision (benefit) for credit losses | (4,099) | 2,432 | (1,175) | (500) | 3,200 | 2,298 | NM | ||||||||||||||||
| Other operating income | 52,263 | 63,328 | 37,346 | 32,167 | 40,474 | 43,263 | 4 | % | |||||||||||||||
| Compensation expense, RML acquisition payments | — | — | 468 | — | 130 | 4,775 | (100) | ||||||||||||||||
| Other operating expense | 89,196 | 89,114 | 76,370 | 69,800 | 71,023 | 71,505 | 5 | % | |||||||||||||||
| Income before provision for income taxes | $47,993 | $42,447 | $26,125 | $24,075 | $23,799 | $21,042 | 18 | % | |||||||||||||||
| Provision for income taxes | 10,476 | 9,559 | 5,434 | 4,071 | 10,321 | 6,052 | 12 | % | |||||||||||||||
| Net Income | 37,517 | 32,888 | 20,691 | 20,004 | 13,478 | 14,990 | 20 | % | |||||||||||||||
| Less: Net income attributable to | |||||||||||||||||||||||
| noncontrolling interest | — | — | — | — | 327 | 579 | (100) | ||||||||||||||||
| Net income attributable to Northrim Bancorp, Inc. | $37,517 | $32,888 | $20,691 | $20,004 | $13,151 | $14,411 | 21 | % | |||||||||||||||
| Year End Balance Sheet | |||||||||||||||||||||||
| Assets | $2,724,719 | $2,121,798 | $1,643,996 | $1,502,988 | $1,518,596 | $1,525,851 | 12 | % | |||||||||||||||
| Loans | 1,413,886 | 1,444,050 | 1,043,371 | 984,346 | 954,953 | 974,074 | 8 | % | |||||||||||||||
| Deposits | 2,421,631 | 1,824,981 | 1,372,351 | 1,228,088 | 1,258,283 | 1,267,653 | 14 | % | |||||||||||||||
| Shareholders' equity | 237,817 | 221,575 | 207,117 | 205,947 | 192,802 | 186,712 | 5 | % | |||||||||||||||
| Common shares outstanding | 6,014,813 | 6,251,004 | 6,558,809 | 6,883,216 | 6,871,963 | 6,897,890 | (3) | % | |||||||||||||||
| Average Balance Sheet | |||||||||||||||||||||||
| Assets | $2,432,599 | $1,936,047 | $1,555,707 | $1,493,385 | $1,511,052 | $1,506,522 | 10 | % | |||||||||||||||
| Earning assets | 2,260,778 | 1,758,839 | 1,386,557 | 1,346,449 | 1,367,203 | 1,361,913 | 11 | % | |||||||||||||||
| Loans | 1,478,318 | 1,339,908 | 1,010,098 | 971,548 | 981,001 | 976,613 | 9 | % | |||||||||||||||
| Deposits | 2,125,080 | 1,638,216 | 1,276,407 | 1,227,272 | 1,248,333 | 1,250,243 | 11 | % | |||||||||||||||
| Shareholders' equity | 239,214 | 211,721 | 208,602 | 201,022 | 193,129 | 181,628 | 6 | % | |||||||||||||||
| Basic common shares outstanding | 6,180,801 | 6,354,687 | 6,708,622 | 6,877,573 | 6,889,621 | 6,883,663 | (2) | % | |||||||||||||||
| Diluted common shares outstanding | 6,249,313 | 6,431,367 | 6,808,209 | 6,981,557 | 6,977,910 | 6,974,864 | (2) | % | |||||||||||||||
| Per Common Share Data | |||||||||||||||||||||||
| Basic earnings | $6.07 | $5.18 | $3.08 | $2.91 | $1.91 | $2.09 | 24 | % | |||||||||||||||
| Diluted earnings | $6.00 | $5.11 | $3.04 | $2.86 | $1.88 | $2.06 | 24 | % | |||||||||||||||
| Book value per share | $39.54 | $35.45 | $31.58 | $29.92 | $28.06 | $27.07 | 8 | % | |||||||||||||||
Tangible book value per share(2) | $36.88 | $32.88 | $29.12 | $27.57 | $25.70 | $24.70 | 8 | % | |||||||||||||||
| Cash dividends per share | $1.50 | $1.38 | $1.26 | $1.02 | $0.86 | $0.78 | 14 | % | |||||||||||||||
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| Years Ended December 31, | |||||||||||||||||||||||
| 2021 | 2020 | 2019 | 2018 | 2017 | 2016 | Five Year Compound Growth Rate | |||||||||||||||||
| (Unaudited) | |||||||||||||||||||||||
| Performance Ratios | |||||||||||||||||||||||
| Return on average assets | 1.54 | % | 1.70 | % | 1.33 | % | 1.34 | % | 0.87 | % | 0.96 | % | 10 | % | |||||||||
| Return on average equity | 15.68 | % | 15.53 | % | 9.92 | % | 9.95 | % | 6.81 | % | 7.93 | % | 15 | % | |||||||||
| Equity/assets | 8.73 | % | 10.44 | % | 12.60 | % | 13.70 | % | 12.70 | % | 12.24 | % | (7) | % | |||||||||
Tangible common equity/tangible assets(3) | 8.19 | % | 9.76 | % | 11.73 | % | 12.76 | % | 11.75 | % | 11.29 | % | (6) | % | |||||||||
| Net interest margin | 3.58 | % | 4.02 | % | 4.65 | % | 4.55 | % | 4.22 | % | 4.14 | % | (3) | % | |||||||||
Net interest margin (tax equivalent)(4) | 3.60 | % | 4.05 | % | 4.70 | % | 4.60 | % | 4.28 | % | 4.20 | % | (3) | % | |||||||||
| Non-interest income/total revenue | 39.27 | % | 47.26 | % | 36.69 | % | 34.45 | % | 41.24 | % | 43.43 | % | (2) | % | |||||||||
Efficiency ratio (5) | 66.99 | % | 66.47 | % | 75.43 | % | 74.68 | % | 72.39 | % | 76.44 | % | (3) | % | |||||||||
| Dividend payout ratio | 25.02 | % | 26.66 | % | 40.79 | % | 35.08 | % | 45.44 | % | 37.59 | % | (8) | % | |||||||||
| Asset Quality | |||||||||||||||||||||||
| Nonperforming loans, net of government guarantees | $10,672 | $10,048 | $13,951 | $14,694 | $21,411 | $12,936 | (4) | % | |||||||||||||||
| Nonperforming assets, net of government guarantees | 15,031 | 16,289 | 19,946 | 22,619 | 28,729 | 19,315 | (5) | % | |||||||||||||||
| Nonperforming loans, net of government guarantees/portfolio loans | 0.75 | % | 0.70 | % | 1.34 | % | 1.49 | % | 2.24 | % | 1.33 | % | (11) | % | |||||||||
| Net charge-offs (recoveries)/average loans | 0.07 | % | 0.03 | % | (0.07) | % | 0.15 | % | 0.15 | % | 0.08 | % | (3) | % | |||||||||
| Allowance for credit losses/portfolio loans | 0.83 | % | 1.46 | % | 1.83 | % | 1.98 | % | 2.25 | % | 2.02 | % | (16) | % | |||||||||
| Nonperforming assets, net of government guarantees/assets | 0.55 | % | 0.77 | % | 1.21 | % | 1.50 | % | 1.89 | % | 1.27 | % | (15) | % | |||||||||
| Other Data | |||||||||||||||||||||||
Effective tax rate (6) | 22 | % | 23 | % | 21 | % | 17 | % | 43 | % | 29 | % | (5) | % | |||||||||
Number of banking offices(7) | 18 | 17 | 16 | 16 | 14 | 14 | 5 | % | |||||||||||||||
Number of employees (FTE) (8) | 451 | 438 | 431 | 430 | 429 | 451 | — | % | |||||||||||||||
1 These unaudited schedules provide selected financial information concerning the Company that should be read in conjunction with Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this report.
2Tangible book value per share is a non-GAAP ratio defined as shareholders’ equity, less intangible assets, divided by common shares outstanding. Management believes that tangible book value is a useful measurement of the value of the Company’s equity because it excludes the effect of intangible assets on the Company’s equity. See reconciliation to book value per share, the most comparable GAAP measurement below.
3Tangible common equity to tangible assets is a non-GAAP ratio that represents total equity less goodwill and intangible assets divided by total assets less goodwill and intangible assets. Management believes this ratio is important as it has received more attention over the past several years from stock analysts and regulators. The most comparable GAAP measure of shareholders' equity to total assets is calculated by dividing total shareholders' equity by total assets. See reconciliation to shareholders' equity to total assets below.
4Tax-equivalent net interest margin is a non-GAAP performance measurement in which interest income on non-taxable investments and loans is presented on a tax-equivalent basis using a combined federal and state statutory rate of 28.43% in 2018 through 2021 and 41.11% in all other years presented. Management believes that tax-equivalent net interest margin is a useful financial measure because it enables investors to evaluate net interest margin excluding tax expense in order to monitor our effectiveness in growing higher interest yielding assets and
36
managing our costs of interest bearing liabilities over time on a fully tax equivalent basis. See reconciliation to net interest margin, the comparable GAAP measurement below.
5In managing our business, we review the efficiency ratio exclusive of intangible asset amortization, which is a non-GAAP performance measurement. Management believes that this is a useful financial measurement because we believe this presentation provides investors with a more accurate picture of our operating efficiency. The efficiency ratio is calculated by dividing other operating expense, exclusive of intangible asset amortization, by the sum of net interest income and other operating income. Other companies may define or calculate this data differently. For additional information see the "Other Operating Expense" section in Part II. Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this report. See reconciliation to comparable GAAP measurement below.
6The Company’s 2017 results included the impact of the enactment of the Tax Cuts and Jobs Act, which was signed into law on December 22, 2017. The law includes significant changes to the U.S. corporate tax system, including a Federal corporate rate reduction from 35% to 21%. In 2017, the Company applied the newly enacted corporate federal income tax rate of 21%, reducing the value of the Company's net deferred tax asset, resulting in approximately a $2.7 million increase in tax expense. In 2018, the Company finalized changes related to the reduction in the federal tax rate which resulted in a $470,000 reduction in tax expense.
7Number of banking offices does not include RML locations. 2021 number of banking offices includes 17 full service branches and 1 loan production office. 2020 number of banking offices includes 16 full service branches and 1 loan production office. 2018 number of banking offices includes 15 full service branches and 1 loan production office.
8FTE includes 321, 312, 311, 320, 314, and 321 Community Banking employees in 2021, 2020, 2019, 2018, 2017 and 2016, respectively. FTE includes 130, 126, 120, 110, 115, and 130 Home Mortgage Lending employees in 2021, 2020, 2019, 2018, 2017 and 2016, respectively.
Reconciliation of Selected Non-GAAP Financial Data to GAAP Financial Measures
These unaudited schedules provide selected financial information concerning the Company that should be read in conjunction with "Part II. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of this report.
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Reconciliationoftotal shareholders' equity to tangiblecommonshareholders’equity (Non-GAAP)and total assets totangible assets:
| (In Thousands) | 2021 | 2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||
| Total shareholders' equity | $237,817 | $221,575 | $207,117 | $205,947 | $192,802 | $186,712 | ||||||||||||||
| Total assets | 2,724,719 | 2,121,798 | 1,643,996 | 1,502,988 | 1,518,596 | 1,525,851 | ||||||||||||||
| Total shareholders' equity to total assets ratio | 8.73 | % | 10.44 | % | 12.60 | % | 13.70 | % | 12.70 | % | 12.24 | % | ||||||||
| (In Thousands) | 2021 | 2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||
| Total shareholders' equity | $237,817 | $221,575 | $207,117 | $205,947 | $192,802 | $186,712 | ||||||||||||||
| Less: goodwill and other intangible assets, net | 16,009 | 16,046 | 16,094 | 16,154 | 16,224 | 16,324 | ||||||||||||||
| Tangible common shareholders' equity | $221,808 | $205,529 | $191,023 | $189,793 | $176,578 | $170,388 | ||||||||||||||
| Total assets | $2,724,719 | $2,121,798 | $1,643,996 | $1,502,988 | $1,518,596 | $1,525,851 | ||||||||||||||
| Less: goodwill and other intangible assets, net | 16,009 | 16,046 | 16,094 | 16,154 | 16,224 | 16,324 | ||||||||||||||
| Tangible assets | $2,708,710 | $2,105,752 | $1,627,902 | $1,486,834 | $1,502,372 | $1,509,527 | ||||||||||||||
| Tangible common equity to tangible assets ratio | 8.19 | % | 9.76 | % | 11.73 | % | 12.76 | % | 11.75 | % | 11.29 | % | ||||||||
Reconciliation of tangible book value per share (Non-GAAP) to book value per share
| (In thousands, except per share data) | 2021 | 2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||
| Total shareholders' equity | $237,817 | $221,575 | $207,117 | $205,947 | $192,802 | $186,712 | ||||||||||||||
| Divided by common shares outstanding | 6,014,813 | 6,251,004 | 6,558,809 | 6,883,216 | 6,871,963 | 6,897,890 | ||||||||||||||
| Book value per share | $39.54 | $35.45 | $31.58 | $29.92 | $28.06 | $27.07 | ||||||||||||||
| (In thousands, except per share data) | 2021 | 2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||
| Total shareholders' equity | $237,817 | $221,575 | $207,117 | $205,947 | $192,802 | $186,712 | ||||||||||||||
| Less: goodwill and intangible assets, net | 16,009 | 16,046 | 16,094 | 16,154 | 16,224 | 16,324 | ||||||||||||||
| Tangible book value | $221,808 | $205,529 | $191,023 | $189,793 | $176,578 | $170,388 | ||||||||||||||
| Divided by common shares outstanding | 6,014,813 | 6,251,004 | 6,558,809 | 6,883,216 | 6,871,963 | 6,897,890 | ||||||||||||||
| Tangible book value per share | $36.88 | $32.88 | $29.12 | $27.57 | $25.70 | $24.70 | ||||||||||||||
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Reconciliation of tax-equivalent net interest margin (Non-GAAP) to net interest margin
| (In Thousands) | 2021 | 2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||
Net interest income(9) | $80,827 | $70,665 | $64,442 | $61,208 | $57,678 | $56,357 | ||||||||||||||
| Divided by average interest-bearing assets | 2,260,778 | 1,758,839 | 1,386,557 | 1,346,449 | 1,367,203 | 1,361,913 | ||||||||||||||
| Net interest margin | 3.58 | % | 4.02 | % | 4.65 | % | 4.55 | % | 4.22 | % | 4.14 | % | ||||||||
| (In Thousands) | 2021 | 2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||
Net interest income(9) | $80,827 | $70,665 | $64,442 | $61,208 | $57,678 | $56,357 | ||||||||||||||
| Plus: reduction in tax expense related to | ||||||||||||||||||||
| tax-exempt interest income | 489 | 613 | 722 | 726 | 872 | 808 | ||||||||||||||
| $81,316 | $71,278 | $65,164 | $61,934 | $58,550 | $57,165 | |||||||||||||||
| Divided by average interest-bearing assets | 2,260,778 | 1,758,839 | 1,386,557 | 1,346,449 | 1,367,203 | 1,361,913 | ||||||||||||||
| Tax-equivalent net interest margin | 3.60 | % | 4.05 | % | 4.70 | % | 4.60 | % | 4.28 | % | 4.20 | % | ||||||||
Calculation of efficiency ratio
| (In Thousands) | 2021 | 2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||
Net interest income(9) | $80,827 | $70,665 | $64,442 | $61,208 | $57,678 | $56,357 | ||||||||||||||
| Other operating income | 52,263 | 63,328 | 37,346 | 32,167 | 40,474 | 43,263 | ||||||||||||||
| Total revenue | 133,090 | 133,993 | 101,788 | 93,375 | 98,152 | 99,620 | ||||||||||||||
| Other operating expense | 89,196 | 89,114 | 76,838 | 69,800 | 71,153 | 76,280 | ||||||||||||||
| Less intangible asset amortization | 37 | 48 | 60 | 70 | 100 | 135 | ||||||||||||||
| Adjusted other operating expense | $89,159 | $89,066 | $76,778 | $69,730 | $71,053 | $76,145 | ||||||||||||||
| Efficiency ratio | 66.99 | % | 66.47 | % | 75.43 | % | 74.68 | % | 72.39 | % | 76.44 | % | ||||||||
9Amount represents net interest income before provision for loan losses.
Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited. Although we believe these non-GAAP financial measures are frequently used by stakeholders in the evaluation of the Company, they have limitations as analytical tools and should not be considered in isolation or as a substitute for analysis of results as reported under GAAP.
RESULTS OF OPERATIONS
Income Statement
Net Income
Our results of operations are dependent to a large degree on our net interest income. We also generate other income primarily through mortgage banking income, purchased receivables products, service charges and fees, and bankcard fees. Our operating expenses consist in large part of salaries and other personnel costs, data processing, occupancy, marketing, and professional services expenses. Interest income and cost of funds, or interest expense, and mortgage banking income are affected significantly by general economic conditions, particularly changes in market interest rates, by government policies and the actions of regulatory authorities, and by competition in our markets.
We earned net income of $37.5 million in 2021, compared to net income of $32.9 million in 2020. During these periods, net income per diluted share was $6.00 and $5.11, respectively. The following sections present discussion of the components that make up net income.
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Net Interest Income / Net Interest Margin
Net interest income is the difference between interest income from loan and investment securities portfolios and interest expense on customer deposits and borrowings. Changes in net interest income result from changes in volume and spread, which in turn affect our margin. For this purpose, volume refers to the average dollar level of interest-earning assets and interest-bearing liabilities, spread refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities, and margin refers to net interest income divided by average interest-earning assets. Changes in net interest income are influenced by yields and the level and relative mix of interest-earning assets and interest-bearing liabilities.
Net interest income in 2021 was $80.8 million, compared to $70.7 million in 2020. The increase in 2021 as compared to 2020 was primarily the result of a $7.3 million increase in interest and fee income on PPP loans in 2021 compared to 2020. Interest income on PPP loans was $2.9 million and $2.5 million in 2021 and 2020, respectively. Loan fee income on PPP loans was $12.5 million and $5.6 million in 2021 and 2020, respectively. Loan fee income on PPP loans is largely made up of fees fully recognized upon loan forgiveness from the SBA. Interest income not related to PPP loans also increased $934,000 in 2021 as compared to 2020 due to higher net average interest-earning asset balances that was only partially offset by a decrease in interest rates. Interest expense decreased $2.1 million as a result of lower interest rates. During 2021 and 2020, net interest margins were 3.58% and 4.02%, respectively. The decrease in net interest margin in 2021 as compared to 2020 is the result of decreases in the spread between the average yield on interest-earning assets and the average cost of interest-bearing liabilities which was impacted by a decrease in interest rates, as well as a change in the mix of interest earning-assets. Average loans, the Company's highest yielding interest-earning asset, decreased to 65% of total average interest-earning assets in 2021 from 76% in the 2020. Short-term investments, the Company's lowest yielding interest-earning asset, increased to 14% of total average interest-earning assets in 2021 from 4% in the 2020.
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The following table sets forth for the periods indicated information with regard to average balances of assets and liabilities, as well as the total dollar amounts of interest income from interest-earning assets and interest expense on interest-bearing liabilities. Average yields or costs, net interest income, and net interest margin are also presented. Average yields or costs are not calculated on a tax-equivalent basis:
| Years ended December 31, | 2021 | 2020 | 2019 | ||||||||||||||||||||||||||||||||
| Average outstanding balance | Interest income / expense | Average Yield / Cost | Average outstanding balance | Interest income / expense | Average Yield / Cost | Average outstanding balance | Interest income / expense | Average Yield / Cost | |||||||||||||||||||||||||||
| (In Thousands) | |||||||||||||||||||||||||||||||||||
Loans (1),(2) | $1,478,318 | $76,392 | 5.17 | % | $1,339,908 | $67,876 | 5.07 | % | $1,010,098 | $59,919 | 5.93 | % | |||||||||||||||||||||||
| Loans held for sale | 101,752 | 2,849 | 2.80 | % | 105,287 | 3,215 | 3.05 | % | 56,344 | 2,231 | 3.96 | % | |||||||||||||||||||||||
Taxable long-term investments(3) | 368,319 | 4,900 | 1.33 | % | 245,148 | 5,234 | 2.14 | % | 269,228 | 6,891 | 2.56 | % | |||||||||||||||||||||||
Non-taxable long-term investments(3) | 853 | 18 | 2.11 | % | 2,236 | 82 | 3.67 | % | 4,483 | 120 | 2.68 | % | |||||||||||||||||||||||
Interest-bearing deposits in other banks(4) | 311,536 | 447 | 0.14 | % | 66,260 | 309 | 0.47 | % | 46,404 | 922 | 1.99 | % | |||||||||||||||||||||||
Total interest-earning assets(5) | 2,260,778 | 84,606 | 3.74 | % | 1,758,839 | 76,716 | 4.36 | % | 1,386,557 | 70,083 | 5.05 | % | |||||||||||||||||||||||
| Noninterest-earning assets | 171,821 | 177,208 | 169,150 | ||||||||||||||||||||||||||||||||
| Total | $2,432,599 | $1,936,047 | $1,555,707 | ||||||||||||||||||||||||||||||||
| Interest-bearing demand | $575,298 | $484 | 0.08 | % | $387,417 | $622 | 0.16 | % | $272,894 | $475 | 0.17 | % | |||||||||||||||||||||||
| Savings deposits | 323,131 | 499 | 0.15 | % | 257,292 | 717 | 0.28 | % | 233,057 | 1,082 | 0.46 | % | |||||||||||||||||||||||
| Money market deposits | 264,344 | 418 | 0.16 | % | 219,024 | 708 | 0.32 | % | 209,246 | 1,142 | 0.55 | % | |||||||||||||||||||||||
| Time deposits | 178,215 | 1,676 | 0.94 | % | 176,873 | 3,232 | 1.83 | % | 135,005 | 2,262 | 1.68 | % | |||||||||||||||||||||||
| Total interest-bearing deposits | 1,340,988 | 3,077 | 0.23 | % | 1,040,606 | 5,279 | 0.51 | % | 850,202 | 4,961 | 0.58 | % | |||||||||||||||||||||||
| Borrowings | 24,993 | 702 | 2.81 | % | 35,918 | 772 | 1.37 | % | 33,730 | 680 | 2.02 | % | |||||||||||||||||||||||
| Total interest-bearing liabilities | 1,365,981 | 3,779 | 0.28 | % | 1,076,524 | 6,051 | 0.56 | % | 883,932 | 5,641 | 0.64 | % | |||||||||||||||||||||||
| Noninterest-bearing demand deposits | 784,092 | 597,610 | 426,205 | ||||||||||||||||||||||||||||||||
| Other liabilities | 43,312 | 50,192 | 36,968 | ||||||||||||||||||||||||||||||||
| Equity | 239,214 | 211,721 | 208,602 | ||||||||||||||||||||||||||||||||
| Total | $2,432,599 | $1,936,047 | $1,555,707 | ||||||||||||||||||||||||||||||||
| Net interest income | $80,827 | $70,665 | $64,442 | ||||||||||||||||||||||||||||||||
| Net interest margin | 3.58 | % | 4.02 | % | 4.65 | % | |||||||||||||||||||||||||||||
| Average portfolio loans to average-earnings assets | 65.39 | % | 76.18 | % | 72.85 | % | |||||||||||||||||||||||||||||
| Average portfolio loans to average total deposits | 69.57 | % | 81.79 | % | 79.14 | % | |||||||||||||||||||||||||||||
| Average non-interest deposits to average total deposits | 36.90 | % | 36.48 | % | 33.39 | % | |||||||||||||||||||||||||||||
| Average interest-earning assets to average interest-bearing liabilities | 165.51 | % | 163.38 | % | 156.86 | % | |||||||||||||||||||||||||||||
1Interest income includes loan fees. Loan fees recognized during the period and included in the yield calculation totaled $16.2 million, $8.9 million and $3.3 million for 2021, 2020 and 2019, respectively.
2Nonaccrual loans are included with a zero effective yield. Average nonaccrual loans included in the computation of the average loans were $12.3 million, $13.8 million, and $16.9 million in 2021, 2020 and 2019, respectively.
3Consists 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.
4Consists of interest bearing deposits in other banks and domestic CDs.
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.
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The following table sets forth the changes in consolidated net interest income attributable to changes in volume and to changes in interest rates. 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 rate:
| 2021 compared to 2020 | 2020 compared to 2019 | |||||||||||||||||||
| Increase (decrease) due to | Increase (decrease) due to | |||||||||||||||||||
| (In Thousands) | Volume | Rate | Total | Volume | Rate | Total | ||||||||||||||
| Interest Income: | ||||||||||||||||||||
| Loans | $7,186 | $1,330 | $8,516 | $17,590 | ($9,633) | $7,957 | ||||||||||||||
| Loans held for sale | (105) | (261) | (366) | 1,336 | (352) | 984 | ||||||||||||||
| Taxable long-term investments | 2,064 | (2,398) | (334) | (580) | (1,077) | (1,657) | ||||||||||||||
| Non-taxable long-term investments | (38) | (26) | (64) | (143) | 105 | (38) | ||||||||||||||
| Interest-bearing deposits in other banks | 170 | (32) | 138 | 779 | (1,392) | (613) | ||||||||||||||
| Total interest income | $9,277 | ($1,387) | $7,890 | $18,982 | ($12,349) | $6,633 | ||||||||||||||
| Interest Expense: | ||||||||||||||||||||
| Interest-bearing demand | $229 | ($367) | ($138) | $186 | ($39) | $147 | ||||||||||||||
| Savings deposits | 154 | (372) | (218) | 104 | (469) | (365) | ||||||||||||||
| Money market deposits | 125 | (415) | (290) | 51 | (485) | (434) | ||||||||||||||
| Time deposits | 25 | (1,581) | (1,556) | 751 | 219 | 970 | ||||||||||||||
| Interest-bearing deposits | 1,236 | (3,438) | (2,202) | 763 | (445) | 318 | ||||||||||||||
| Borrowings | 29 | (99) | (70) | 9 | 83 | 92 | ||||||||||||||
| Total interest expense | $1,265 | ($3,537) | ($2,272) | $772 | ($362) | $410 | ||||||||||||||
Provision for Credit Losses
The Company adopted ASU 2016-13 effective January 1, 2021. The provision for credit loss expense is the amount of expense that, based on our judgment, is required to maintain the ACL at an appropriate level under CECL. The determination of the amount of the ACL is complex and involves a high degree of judgment and subjectivity. Refer to Note 1 of the notes to Consolidated Financial Statements included in Part II. Item 8 of this report for detailed discussion regarding ACL methodologies for loans, available for sale debt securities, held to maturity securities, loans held for investment, unfunded commitments, and purchased receivables.
The following table presents the major categories of credit loss expense:
| (In Thousands) | 2021 | 2020 | ||||||
| Credit loss expense on loans held for investment | ($3,779) | $2,432 | ||||||
| Credit loss expense on unfunded commitments | (320) | — | ||||||
| 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 expense | ($4,099) | $2,432 | ||||||
As noted above, the provision for credit losses was recorded in accordance with CECL in 2021. The provision for credit losses in 2020, prior to adoption of CECL, was recorded under the incurred loss model. Despite the fact that a different methodology was used in the calculation of the provision for credit losses in 2021 versus 2020, in general the decrease in the provision for credit losses on loans in 2021 as compared to 2020 is primarily the result of improvement in economic assumptions used to estimate credit losses. 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.
42
See the “Loans and Lending Activity” section under “Financial Condition” and Note 5 of the Notes to Consolidated Financial Statements included in Part II. Item 8 of this report for further discussion of these decreases and changes in the Company’s ACL.
Other Operating Income
The following table details the major components of other operating income for the years ended December 31:
| (In Thousands) | 2021 | $ Change | % Change | 2020 | $ Change | % Change | 2019 | ||||||||||||||||
| Other Operating Income | |||||||||||||||||||||||
| Mortgage banking income | $42,144 | ($10,491) | (20) | % | $52,635 | $28,434 | 117 | % | $24,201 | ||||||||||||||
| Bankcard fees | 3,389 | 552 | 19 | % | 2,837 | (139) | (5) | % | 2,976 | ||||||||||||||
| Purchased receivable income | 2,259 | (391) | (15) | % | 2,650 | (621) | (19) | % | 3,271 | ||||||||||||||
| Service charges on deposit accounts | 1,297 | 195 | 18 | % | 1,102 | (455) | (29) | % | 1,557 | ||||||||||||||
| Merchant fees | 561 | 146 | 35 | % | 415 | (52) | (11) | % | 467 | ||||||||||||||
| Interest rate swap income | 452 | (497) | (52) | % | 949 | (15) | (2) | % | 964 | ||||||||||||||
| Commercial servicing revenue | 306 | (221) | (42) | % | 527 | (97) | (16) | % | 624 | ||||||||||||||
| Rental income | 188 | (90) | (32) | % | 278 | (219) | (44) | % | 497 | ||||||||||||||
| Gain (loss) on sale of securities | 67 | (31) | (32) | % | 98 | 75 | 100 | % | 23 | ||||||||||||||
| Gain (loss) on marketable equity securities | (101) | (162) | (266) | % | 61 | (850) | 93 | % | 911 | ||||||||||||||
| Other income | 1,701 | (75) | (4) | % | 1,776 | (79) | (4) | % | 1,855 | ||||||||||||||
| Total other operating income | $52,263 | ($11,065) | (17) | % | $63,328 | $25,982 | 70 | % | $37,346 | ||||||||||||||
2021 Compared to 2020
The most significant change in other operating income in 2021 was a decrease in mortgage banking income, followed by an increase in bankcard fees and decreases in interest rate swap income and purchased receivable income.
Mortgage banking income consists of gross income from the origination and sale of mortgages as well as mortgage loan servicing fees and is the largest component of other operating income at 81% of total other operating income in 2021 and 83% in 2020. Mortgage banking income decreased in 2021 compared to 2020 mainly due to a decrease in mortgage loans originated and sold as this volume decreased to $1.1 billion in 2021 from $1.3 billion in 2020. The overall decrease in mortgage originations in 2021 as compared to the prior year is primarily the result of the changes in interest rates during the year that led to decreased refinance activity. Additionally, there was a $3.7 million decrease in the fair value of the interest rate lock commitments, which is also included in mortgage banking income, due to a decrease in the loan origination pipeline at December 31, 2021 compared to December 31, 2020.
Interest rate swap income decreased in 2021 as compared to 2020 due to a decrease in the origination of new swap contracts with commercial loan customers. The Company executed new customer swap contracts with a notional value of $15.7 million in 2021 as compared to new customer swap contracts with a notional value of $49.3 million in 2020.
Purchased receivable income decreased in 2021 as compared to 2020 due to customers reportedly using PPP funds instead of selling receivables to fund their operating cash needs.
Bankcard fees and service charges on deposit accounts increased in 2021 due to the cessation of COVID-19 quarantine restrictions, which led to higher transaction volume as compared to 2020, as well as the increase in customers.
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Other Operating Expense
The following table details the major components of other operating expense for the years ended December 31:
| (In Thousands) | 2021 | $ Change | % Change | 2020 | $ Change | % Change | 2019 | ||||||||||||||||
| Other Operating Expense | |||||||||||||||||||||||
| Salaries and other personnel expense | $60,412 | ($725) | (1) | % | $61,137 | $9,820 | 19 | % | $51,317 | ||||||||||||||
| Data processing expense | 8,567 | 899 | 12 | % | 7,668 | 540 | 8 | % | 7,128 | ||||||||||||||
| Occupancy expense | 7,078 | 454 | 7 | % | 6,624 | 17 | — | % | 6,607 | ||||||||||||||
| Professional and outside services | 2,801 | (356) | (11) | % | 3,157 | 626 | 25 | % | 2,531 | ||||||||||||||
| Marketing expense | 2,741 | 421 | 18 | % | 2,320 | (53) | (2) | % | 2,373 | ||||||||||||||
| Insurance expense | 1,593 | 365 | 30 | % | 1,228 | 671 | 120 | % | 557 | ||||||||||||||
| Compensation expense - RML acquisition payments | — | — | NM | — | (468) | (100) | % | 468 | |||||||||||||||
| Intangible asset amortization | 37 | (11) | (23) | % | 48 | (12) | (20) | % | 60 | ||||||||||||||
| OREO (income) expense, net rental income and gains on sale: | |||||||||||||||||||||||
| OREO operating expense | 777 | 119 | 18 | % | 658 | (35) | (5) | % | 693 | ||||||||||||||
| Rental income on OREO | (524) | (15) | (3) | % | (509) | (3) | (1) | % | (506) | ||||||||||||||
| Gains on sale of OREO | (685) | (294) | (75) | % | (391) | (11) | NM | (380) | |||||||||||||||
| Subtotal | (432) | (190) | (79) | % | (242) | (49) | 25 | % | (193) | ||||||||||||||
| Other expenses | 6,399 | (775) | (11) | % | 7,174 | 1,184 | 20 | % | 5,990 | ||||||||||||||
| Total other operating expense | $89,196 | $82 | — | % | $89,114 | $12,276 | 16 | % | $76,838 | ||||||||||||||
2021 Compared to 2020
Other operating expense increased by less than 1% in 2021 as compared to 2020. The largest increases where in data processing expense, occupancy expense, insurance expense, and marketing expense. These increases were only mostly offset by decreases in salary and other personnel expense, professional and outside services, and OREO expense. Data processing expense increased in 2021 compared to 2020 mostly due to increased customer and transaction volume. Occupancy expense, insurance expense, and marketing expense increased in 2021 as compared to 2020 due to miscellaneous repairs and maintenance and tenant improvements at several of the Company's locations, increased FDIC insurance costs associated with asset growth, and increased marketing expense due to higher giving in the form of increased sponsorship and charitable contributions. Decreases in salaries and other personnel expense and professional and outside services in 2021 as compared to 2020 are primarily related to mortgage banking operations, which fluctuate with production volumes. OREO expense decreased in 2021 primarily due to increased gains on sale of OREO properties as compared to 2020.
Income Taxes
The provision for income taxes increased $917,000 or 10%, to $10.5 million in 2021 as compared to 2020. The increase in 2021 is primarily due to higher pretax income. The Company's effective tax rates were relatively consistent at 21.8% and 22.5% in 2021 and 2020, respectively.
FINANCIAL CONDITION
Investment Securities
The composition of our investment securities portfolio, which includes securities available for sale and marketable equity securities, reflects management’s investment strategy of maintaining an appropriate level of liquidity while providing a relatively stable source of interest income. The investment securities portfolio also mitigates interest rate and credit risk inherent in the loan portfolio, while providing a vehicle for the investment of available funds, a source of liquidity (by pledging as collateral or through repurchase agreements), and collateral for certain public funds deposits. Investment securities designated as available for sale comprised 94% of the portfolio as of December 31, 2021 and are available to meet liquidity requirements.
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Our investment portfolio consists primarily of government sponsored entity securities, corporate securities, collateralized loan obligations, and municipal securities. Investment securities at December 31, 2021 increased $188.4 million, or 71%, to $455.1 million from $266.7 million at December 31, 2020. The increase at December 31, 2021 as compared to December 31, 2020 came from an increase in deposits that were not lent out were invested. The average maturity of the investment portfolio was approximately four years at December 31, 2021.
Investment securities may be pledged as collateral to secure public deposits or borrowings. At December 31, 2021 and 2020, $59.5 million and $77.9 million in securities were pledged for deposits and borrowings, respectively. Pledged securities decreased at December 31, 2021 as compared to December 31, 2020 primarily due to decreased pledges to the FHLB to support the Company's immediate borrowing capacity at December 31, 2021.
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The following tables set forth the composition of our investment portfolio at December 31 for the years indicated:
| (In Thousands) | Amortized Cost | Fair Value | |||||||||
| Securities Available for Sale: | |||||||||||
| 2021: | |||||||||||
| U.S. Treasury and government sponsored entities | $345,514 | $341,480 | |||||||||
| Municipal Securities | 820 | 840 | |||||||||
| Corporate Bonds | 32,721 | 32,946 | |||||||||
| Collateralized Loan Obligations | 51,431 | 51,418 | |||||||||
| Total | $430,486 | $426,684 | |||||||||
| 2020: | |||||||||||
| U.S. Treasury and government sponsored entities | $173,318 | $174,601 | |||||||||
| Municipal Securities | 820 | 856 | |||||||||
| Corporate Bonds | 29,951 | 30,492 | |||||||||
| Collateralized Loan Obligations | 41,782 | 41,684 | |||||||||
| Total | $245,871 | $247,633 | |||||||||
| 2019: | |||||||||||
| U.S. Treasury and government sponsored entities | $210,756 | $211,852 | |||||||||
| Municipal Securities | 3,288 | 3,297 | |||||||||
| Corporate Bonds | 34,764 | 35,066 | |||||||||
| Collateralized Loan Obligations | 25,980 | 25,923 | |||||||||
| Total | $274,788 | $276,138 | |||||||||
| Marketable Equity Securities: | |||||||||||
| 2021: | |||||||||||
| Preferred Stock | $7,865 | $8,420 | |||||||||
| Total | $7,865 | $8,420 | |||||||||
| 2020: | |||||||||||
| Preferred Stock | $8,395 | $9,052 | |||||||||
| Total | $8,395 | $9,052 | |||||||||
| 2019: | |||||||||||
| Preferred Stock | $7,349 | $7,945 | |||||||||
| Total | $7,349 | $7,945 | |||||||||
| Securities Held to Maturity: | |||||||||||
| 2021: | |||||||||||
| Corporate Bonds | $20,000 | $19,164 | |||||||||
| Total | $20,000 | $19,164 | |||||||||
| 2020: | |||||||||||
| Corporate Bonds | $10,000 | $10,000 | |||||||||
| Total | $10,000 | $10,000 | |||||||||
| 2019: | |||||||||||
| Corporate Bonds | $— | $— | |||||||||
| Total | $— | $— | |||||||||
46
The following table sets forth the market value, maturities, and weighted average pretax yields of our investment portfolio as of December 31, 2021:
| Maturity | |||||||||||||||||
| Within | Over | ||||||||||||||||
| (In Thousands) | 1 Year | 1-5 Years | 5-10 Years | 10 Years | Total | ||||||||||||
| Securities Available for Sale: | |||||||||||||||||
| U.S. Treasury and government sponsored entities | |||||||||||||||||
| Balance | $5,041 | $336,439 | $— | $— | $341,480 | ||||||||||||
Weighted average yield(1) | 2.80 | % | 0.79 | % | — | % | — | % | 0.82 | % | |||||||
| Municipal securities | |||||||||||||||||
| Balance | $— | $840 | $— | $— | $840 | ||||||||||||
Weighted average yield(1) | — | % | 2.14 | % | — | % | — | % | 2.14 | % | |||||||
| Corporate bonds | |||||||||||||||||
| Balance | $— | $27,993 | $4,953 | $— | $32,946 | ||||||||||||
Weighted average yield(1) | — | % | 1.29 | % | 1.50 | % | — | % | 1.33 | % | |||||||
| Collateralized loan obligations | |||||||||||||||||
| Balance | $— | $5,000 | $46,418 | $— | $51,418 | ||||||||||||
Weighted average yield(1) | — | % | 1.65 | % | 1.39 | % | — | % | 1.42 | % | |||||||
| Total | |||||||||||||||||
| Balance | $5,041 | $370,272 | $51,371 | $— | $426,684 | ||||||||||||
Weighted average yield(1) | 2.80 | % | 0.84 | % | 1.40 | % | — | % | 0.93 | % | |||||||
| Securities Held to Maturity | |||||||||||||||||
| Corporate bonds | |||||||||||||||||
| Balance | $— | $9,919 | $9,245 | $— | $19,164 | ||||||||||||
Weighted average yield(1) | — | % | 5.50 | % | 5.00 | % | — | % | 5.25 | % | |||||||
| Marketable Equity Securities | |||||||||||||||||
| Preferred Stock | |||||||||||||||||
| Balance | $— | $— | $— | $8,420 | $8,420 | ||||||||||||
Weighted average yield(1) | — | % | — | % | — | % | 5.57 | % | 5.57 | % | |||||||
(1) Weighted average yields have been calculated on an amortized cost basis and not on a tax-equivalent basis.
The Company’s investment in marketable equity securities does not have a maturity date but it has been included in the over 10 years column above.
Loans and Lending Activities
All of our loans and credit lines are subject to approval procedures and amount limitations. These limitations apply to the borrower’s total outstanding indebtedness and commitments to us, including the indebtedness of any guarantor. Generally, we are permitted to make loans to one borrower of up to 15% of the unimpaired capital and surplus of the Bank. The legal lending limit for the Bank was $30.2 million at December 31, 2021. At December 31, 2021, the Company had two relationships whose total direct and indirect commitments exceeded $30.2 million; however, no individual direct relationship exceeded the loans-to-one borrower limitation.
The Company's loans have grown significantly in recent history, in part due to PPP loans, but over the last 3 years, non-PPP loans have also increased significantly. Management attributes higher growth in loans, excluding PPP loans, in 2021 and 2020 to our ability to attract new customers through our outreach to the community. The Company's "Land and Expand" program was designed to increase both loans and deposits as we attract a broader customer base and convert new PPP customers into full banking relationships.
47
The following table presents growth information for loans and loans excluding PPP loans:
| Years Ended December 31, | |||||||||||||||||||||||
| (In Thousands) | 2021 | 2020 | 2019 | 2018 | 2017 | 2016 | Five Year Compound Growth Rate | ||||||||||||||||
| Loans | $1,413,886 | $1,444,050 | $1,043,371 | $984,346 | $954,953 | $974,074 | 8 | % | |||||||||||||||
| Less: PPP loans | 118,229 | 304,587 | — | — | — | — | NM | ||||||||||||||||
| Loans, excluding PPP loans | $1,295,657 | $1,139,463 | $1,043,371 | $984,346 | $954,953 | $974,074 | 6 | % | |||||||||||||||
| Percent change, Loans excluding PPP loans | 14 | % | 9 | % | 6 | % | 3 | % | (2) | % | |||||||||||||
The following table sets forth the composition of our loan portfolio by loan segment as of the dates indicated:
| December 31, 2021 | December 31, 2020 | |||||||||||||
| Dollar Amount | Percent of Total | Dollar Amount | Percent of Total | |||||||||||
| (In Thousands) | ||||||||||||||
| Commercial & industrial loans | $448,338 | 31.7 | % | $612,254 | 42.2 | % | ||||||||
| Commercial real estate: | ||||||||||||||
| Owner occupied properties | 300,200 | 21.2 | % | 233,320 | 16.2 | % | ||||||||
| Non-owner occupied and multifamily properties | 435,311 | 30.8 | % | 392,452 | 27.2 | % | ||||||||
| Residential real estate: | ||||||||||||||
| 1-4 family residential properties secured by first liens | 32,542 | 2.3 | % | 33,415 | 2.3 | % | ||||||||
| 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens | 19,610 | 1.4 | % | 18,236 | 1.3 | % | ||||||||
| 1-4 family residential construction loans | 36,222 | 2.6 | % | 32,500 | 2.3 | % | ||||||||
| Other construction, land development and raw land loans | 88,094 | 6.2 | % | 83,463 | 5.8 | % | ||||||||
| Obligations of states and political subdivisions in the US | 16,403 | 1.2 | % | 15,318 | 1.1 | % | ||||||||
| Agricultural production, including commercial fishing | 27,959 | 2.0 | % | 12,968 | 0.9 | % | ||||||||
| Consumer loans | 4,801 | 0.3 | % | 5,734 | 0.4 | % | ||||||||
| Other loans | 4,406 | 0.3 | % | 4,390 | 0.3 | % | ||||||||
| Total portfolio loans | $1,413,886 | $1,444,050 | ||||||||||||
The following table presents the maturity distribution of our loan portfolio and the rate sensitivity of these loans to changes in interest rates as of December 31, 2021:
| By Maturity | Loans Over One Year By Rate Sensitivity | |||||||||||||||||||||||||
| (In Thousands) | Within 1 Year | 1-5 Years | 5-15 Years | Over 15 Years | Total | Fixed Interest Rate | Floating Interest Rate | |||||||||||||||||||
| Commercial & industrial loans | $92,622 | $242,076 | $113,054 | $— | $447,752 | $219,834 | $135,296 | |||||||||||||||||||
| Commercial real estate | 43,627 | 125,032 | 491,692 | 79,952 | 740,303 | 180,555 | 516,121 | |||||||||||||||||||
| Residential real estate | 41,142 | 5,228 | 18,803 | 21,103 | 86,276 | 19,862 | 25,272 | |||||||||||||||||||
| Other construction | 44,549 | 19,692 | 17,534 | 2,076 | 83,851 | 13,980 | 25,322 | |||||||||||||||||||
| Consumer and other | 7,631 | 9,320 | 38,743 | 10 | 55,704 | 12,726 | 35,347 | |||||||||||||||||||
| Total | $229,571 | $401,348 | $679,826 | $103,141 | $1,413,886 | $446,957 | $737,358 | |||||||||||||||||||
48
Loans Directly Exposed to the Oil and Gas Industry: 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 oil producers or drilling and exploration companies, and companies who provide oilfield services, lodging, equipment rental, transportation, and other logistic services specific to the industry. The Company estimates that $63.6 million, or approximately 4% of loans as of December 31, 2021 have direct exposure to the oil and gas industry as compared to $65.1 million, or approximately 4% of loans as of December 31, 2020. The Company's exposure as a percent of the total loan portfolio excluding PPP loans as of December 31, 2021 was 5%. The Company has no loans to oil producers or drilling and exploration companies as of the end of 2021 or 2020, but the $63.6 million outstanding as of December 31, 2021 noted above does include $1.8 million related to the construction of an oil drilling rig. The Company's unfunded commitments to borrowers that have direct exposure to the oil and gas industry were $66.4 million and $63.5 million at December 31, 2021 and 2020, respectively. The portion of the Company's allowance for loan losses that related to the loans with direct exposure to the oil and gas industry was estimated at $684,000 and $1.2 million as of December 31, 2021 and 2020, respectively.
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) | December 31, 2021 | December 31, 2020 | |||||||||
| Commercial & industrial loans | $45,338 | $41,016 | |||||||||
| Commercial real estate: | |||||||||||
| Owner occupied properties | 10,244 | 11,296 | |||||||||
| Non-owner occupied and multifamily properties | 6,564 | 6,606 | |||||||||
| Consumer loans | — | 2,256 | |||||||||
| Other loans | 1,495 | 3,948 | |||||||||
| Total loans | $63,641 | $65,122 | |||||||||
49
Credit Quality and Nonperforming Assets
The following table sets forth information regarding our nonperforming loans and total nonperforming assets:
| December 31, | December 31, | |||||||
| (In Thousands) | 2021 | 2020 | ||||||
| Nonaccrual loans | $11,650 | $11,120 | ||||||
| Loans 90 days past due and accruing | — | 449 | ||||||
| Total nonperforming loans | 11,650 | 11,569 | ||||||
| Nonperforming loans guaranteed by government | (978) | (1,521) | ||||||
| Net nonperforming loans | 10,672 | 10,048 | ||||||
| Other real estate owned | 5,638 | 7,289 | ||||||
| Repossessed assets | — | 231 | ||||||
| Other real estate owned guaranteed by government | (1,279) | (1,279) | ||||||
| Net nonperforming assets | $15,031 | $16,289 | ||||||
| Nonperforming loans, net of government guarantees / portfolio loans | 0.75 | % | 0.70 | % | ||||
| Nonperforming loans, net of government guarantees / portfolio loans, net of government guarantees | 0.88 | % | 0.92 | % | ||||
| Nonperforming assets, net of government guarantees / total assets | 0.55 | % | 0.77 | % | ||||
| Nonperforming assets, net of government guarantees / total assets net of government guarantees | 0.60 | % | 0.92 | % | ||||
| Performing restructured loans | $3,291 | $2,355 | ||||||
| Performing restructured loans guaranteed by government | (2,518) | (1,523) | ||||||
| Net performing restructured loans | $773 | $832 | ||||||
| Nonperforming loans plus performing restructured loans, net of government guarantees | $11,445 | $10,880 | ||||||
| Nonperforming loans plus performing restructured loans, net of government | ||||||||
| guarantees / portfolio loans | 0.81 | % | 0.75 | % | ||||
| Nonperforming loans plus performing restructured loans, net of government | ||||||||
| guarantees / portfolio loans, net of government guarantees | 0.94 | % | 0.99 | % | ||||
| Nonperforming assets plus performing restructured loans, net of government | ||||||||
| guarantees / total assets | 0.58 | % | 0.81 | % | ||||
| Nonperforming assets plus performing restructured loans, net of government | ||||||||
| guarantees / total assets, net of government guarantees | 0.63 | % | 0.97 | % | ||||
| Adversely classified loans, net of government guarantees | $13,739 | $12,768 | ||||||
| Special mention loans, net of government guarantees | $22,110 | $19,063 | ||||||
| Loans 30-89 days past due and accruing, net of government guarantees /portfolio loans | — | 0.05 | % | |||||
| Loans 30-89 days past due and accruing, net of government guarantees / | ||||||||
| portfolio loans, net of government guarantees | — | 0.07 | % | |||||
| Allowance for credit losses / portfolio loans | 0.83 | % | 1.46 | % | ||||
| Allowance for credit losses / portfolio loans, net of government guarantees | 0.97 | % | 1.93 | % | ||||
| Allowance for credit losses / nonperforming loans, net of government | ||||||||
| guarantees | 110 | % | 210 | % | ||||
| Gross loan charge-offs for the quarter | $1,179 | $11 | ||||||
| Gross loan recoveries for the quarter | ($53) | $64 | ||||||
| Net loan (recoveries) charge-offs for the quarter | $1,126 | ($53) | ||||||
| Net loan (recoveries) charge-offs year-to-date | $1,107 | $384 | ||||||
| Net loan (recoveries) charge-offs for the quarter / average loans, for the quarter | 0.08 | % | — | % | ||||
| Net loan (recoveries) charge-offs year-to-date / average loans, | ||||||||
| year-to-date annualized | 0.07 | % | 0.03 | % | ||||
50
The Company’s nonperforming loans, net of government guarantees increased in 2021 to $10.7 million as compared to $10.0 million in 2020. This increase was mostly due to several additions to nonaccrual loans which were only partially offset by principal paydowns and charge-offs on nonaccrual loans in 2021. There was interest income of $1.6 million and $924,000 recognized in net income for 2021 and 2020, respectively, related to interest collected on nonaccrual loans whose principal has been paid down to zero. The Company had three relationships that each represented more than 10% of nonaccrual loans as of December 31, 2021.
The Company had $773,000 and $832,000 in loans classified as TDRs, net of government guarantees that were performing as of December 31, 2021 and 2020, respectively. Additionally, there were $6.5 million and $5.5 million in TDRs included in nonaccrual loans at December 31, 2021 and 2020 for total TDRs, net of government guarantees of $7.3 million and $5.3 million at December 31, 2021 and 2020, respectively. The increase in TDRs at December 31, 2021 as compared to 2020 was primarily due additions to TDRs that were only partially offset by payoffs and paydowns on loans classified as TDRs in 2021. See Note 5 of the Notes to Consolidated Financial Statements included in Part II. Item 8 of this report for further discussion of TDRs.
At December 31, 2021, management had identified potential problem loans of $2.1 million as compared to potential problem loans of $6.1 million at December 31, 2020. Potential problem loans are loans which are currently performing 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. The $4.0 million decrease in potential problem loans at December 31, 2021 from December 31, 2020 was primarily the result of one $3.9 million relationship moving to nonaccrual as well as paydowns and credit risk upgrades to existing potential problem loans that were partially offset by the addition of new potential problem loans in 2021.
The Company acquired a vessel totaling $231,000 in the third quarter of 2019 through foreclosure proceedings related to one lending relationship that was sold in the second quarter of 2021.
The following summarizes OREO activity for the periods indicated:
| (In Thousands) | 2021 | 2020 | 2019 | ||||||||
| Balance, beginning of the year | $7,289 | $7,043 | $7,962 | ||||||||
| Transfers from loans | 274 | 652 | — | ||||||||
| Proceeds from the sale of other real estate owned | (2,610) | (797) | (1,299) | ||||||||
| Gain on sale of other real estate owned, net | 685 | 391 | 380 | ||||||||
| Balance, end of year | 5,638 | 7,289 | 7,043 | ||||||||
| Government guarantees | (1,279) | (1,279) | (1,279) | ||||||||
| Balance, end of year, net of government guarantees | $4,359 | $6,010 | $5,764 | ||||||||
The Company made a $1.0 million loan in 2021 to facilitate the sale of OREO in 2021, but did not make any loans to facilitate the sale of OREO in 2020. Our underwriting policies and procedures for loans to facilitate the sale of OREO are no different than our standard loan policies and procedures.
Allowance for Credit Losses
The Company adopted ASU 2016-13 effective January 1, 2021. The determination of the amount of the ACL is complex and involves a high degree of judgment and subjectivity. Refer to Note 1 of the notes to Consolidated Financial
51
Statements included in Part II. Item 8 of this report for detailed discussion regarding the ACL methodology for loans and unfunded commitments.
The following tables show the allocation of the ACL and the percent of loans in each category to total loans and the ratio of net loan charge-offs to average loans outstanding by loan segment for the years indicated:
| 2021 | |||||||||||
% of Loans(1) | Net loan charge-offs (recoveries) to average loans | ||||||||||
| (In Thousands) | Amount | ||||||||||
| Commercial & industrial loans | $3,027 | 33 | % | 0.21 | % | ||||||
| Commercial real estate: | |||||||||||
| Owner occupied properties | 3,176 | 21 | % | — | % | ||||||
| Non-owner occupied and multifamily properties | 2,930 | 31 | % | — | % | ||||||
| Residential real estate: | |||||||||||
| 1-4 family residential properties secured by first liens | 439 | 2 | % | — | % | ||||||
| 1-4 family residential properties secured by junior liens and revolving secured by 1-4 family first liens | 215 | 1 | % | (0.21) | % | ||||||
| 1-4 family residential construction loans | 120 | 3 | % | — | % | ||||||
| Other construction, land development and raw land loans | 1,635 | 6 | % | — | % | ||||||
| Obligations of states and political subdivisions in the US | 32 | 1 | % | — | % | ||||||
| Agricultural production, including commercial fishing | 91 | 2 | % | (0.15) | % | ||||||
| Consumer loans | 67 | — | % | (0.27) | % | ||||||
| Other loans | 7 | — | % | — | % | ||||||
| Total | $11,739 | 100 | % | 0.07 | % | ||||||
1Represents percentage of this category of loans to total portfolio loans.
| 2020 | |||||||||||
% of Loans(1) | Net loan charge-offs (recoveries) to average loans | ||||||||||
| (In Thousands) | Amount | ||||||||||
| Commercial | $7,973 | 39 | % | 0.04 | % | ||||||
| Real estate construction one-to-four family | 679 | 3 | % | — | % | ||||||
| Real estate construction other | 1,179 | 6 | % | — | % | ||||||
| Real estate term owner occupied | 2,625 | 11 | % | 0.06 | % | ||||||
| Real estate term non-owner occupied | 5,133 | 21 | % | — | % | ||||||
| Real estate term other | 779 | 3 | % | — | % | ||||||
| Consumer secured by 1st deed of trust | 261 | 1 | % | — | % | ||||||
| Consumer other | 400 | 2 | % | (0.04) | % | ||||||
| Unallocated | 2,107 | — | % | — | % | ||||||
| Total | $21,136 | 86 | % | 0.03 | % | ||||||
1Represents percentage of this category of loans to total portfolio loans.
As of December 31, 2021, and 2020, loans acquired in connection with our acquisition of Alaska Pacific on April 1, 2014 are included in the Company's ACL using the same methodology as all other loans as described in Note 1 of the notes to Consolidated Financial Statements included in Part II. Item 8 of this report due to the amount of time that has passed since the loans were purchased. The purchase discount related to acquired credit impaired loans was zero and $328,000 as of December 31, 2021 and 2020, respectively.
The provision for credit losses in 2021 as compared to 2020 decreased $6.5 million to a benefit for credit losses of $4.1 million compared to a provision of $2.4 million in 2020. This decrease is primarily due to improvement in economic assumptions. The Company determined that an ACL of $11.7 million, or 0.83% of portfolio loans, is appropriate as of December 31, 2021 based on our analysis of the current credit quality of the portfolio and current economic conditions. The provision for credit losses in 2020 as compared to 2019 increased $3.6 million to a provision for credit losses of $2.4 million compared to a benefit of $1.2 million in 2019. This increase is primarily due to management's assessment of risk associated with the economic impacts of the COVID-19 pandemic, the reduction in oil prices and a slowing Alaska economy, as well as growth in the unguaranteed portion of the loan portfolio.
52
As noted above, the ACL was recorded in accordance with CECL in 2021. The allowance for loan losses in 2020, prior to adoption of CECL, was recorded under the incurred loss model. Despite the fact that a different methodology was used in the calculation of the provision for credit losses in 2021 versus 2020, in general the decrease in the ACL on loans as of December 31, 2021 compared to December 31, 2020 is primarily the result of improvement in economic assumptions used to estimate credit losses following the economy's recovery from the COVID-19 pandemic. 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.
The following table sets forth information regarding changes in the ACL for unfunded commitments for the years indicated:
| (In Thousands) | 2021 | 2020 | ||||||
| Balance at beginning of period | $187 | $152 | ||||||
| Impact of adopting ASC 326 | 1,229 | — | ||||||
| Adjusted balance, beginning of period | 1,416 | 152 | ||||||
| (Benefit) provision for credit losses | (320) | 35 | ||||||
| Balance at end of period | $1,096 | $187 | ||||||
While management believes that it uses the best information available to determine the ACL, unforeseen market conditions and other events could result in an 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.
Purchased Receivables
Purchased receivable balances decreased at December 31, 2021 to $7.0 million from $13.9 million at December 31, 2020, and year-to-date average purchased receivable balances were $12.4 million and $14.5 million in 2021 and 2020, respectively. Purchased receivable income was $2.3 million and $2.7 million in 2021 and 2020, respectively. Purchased receivable income in 2021 decreased from 2020 due to customers reportedly using PPP loans to fund liquidity needs instead of selling receivables.
The following table sets forth information regarding changes in the purchased receivable ACL for the years indicated:
| (In Thousands) | 2021 | 2020 | 2019 | ||||||||
| Balance at beginning of year | $73 | $94 | $190 | ||||||||
| Charge-offs | — | — | — | ||||||||
| Recoveries | — | — | — | ||||||||
| Charge-offs net of recoveries | — | — | — | ||||||||
| Reserve for (recovery from) purchased receivables | — | (21) | (96) | ||||||||
| Balance at end of year | $— | $73 | $94 | ||||||||
| Ratio of net charge-offs (recoveries) to average purchased receivables during the period | — | % | — | % | — | % | |||||
Deposits
Deposits are our primary source of funds. Total deposits increased 33% to $2.4 billion at December 31, 2021 from $1.8 billion at December 31, 2020. This increase is primarily due to funding PPP loans, but is also due to new client relationships as a result of the Company's significant PPP efforts during 2021 and 2020. Our deposits generally are expected to fluctuate according to the level of our market share, economic conditions, and normal seasonal trends.
53
The following table sets forth the average balances outstanding and average interest rates for each major category of our deposits, for the periods indicated:
| 2021 | 2020 | 2019 | ||||||||||||||||||||||||
| Average balance | Average rate paid | Average balance | Average rate paid | Average balance | Average rate paid | |||||||||||||||||||||
| (In Thousands) | ||||||||||||||||||||||||||
| Interest-bearing demand accounts | $575,298 | 0.08 | % | $387,416 | 0.16 | % | $272,895 | 0.17 | % | |||||||||||||||||
| Money market accounts | 264,344 | 0.16 | % | 219,025 | 0.32 | % | 209,245 | 0.55 | % | |||||||||||||||||
| Savings accounts | 323,131 | 0.15 | % | 257,292 | 0.28 | % | 233,057 | 0.46 | % | |||||||||||||||||
| Certificates of deposit | 178,215 | 0.94 | % | 176,873 | 1.83 | % | 135,005 | 1.67 | % | |||||||||||||||||
| Total interest-bearing accounts | 1,340,988 | 0.23 | % | 1,040,606 | 0.51 | % | 850,202 | 0.58 | % | |||||||||||||||||
| Noninterest-bearing demand accounts | 784,092 | 597,610 | 426,205 | |||||||||||||||||||||||
| Total average deposits | $2,125,080 | $1,638,216 | $1,276,407 | |||||||||||||||||||||||
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 December 31, 2021 and 90% at December 31, 2020.
The only deposit category with stated maturity dates is certificates of deposit. At December 31, 2021, we had $178.0 million in certificates of deposit, of which $118.5 million, or 67%, are scheduled to mature in 2022. The Company’s certificates of deposit increased to $178.0 million during 2021 as compared to $175.6 million at December 31, 2020. The aggregate amount of certificates of deposit in amounts of $250,000 or more at December 31, 2021 and 2020, was $77.1 million and $83.6 million, respectively. The following table sets forth the amount outstanding of certificates of deposits in amounts of $250,000 or more by time remaining until maturity and percentage of total deposits as of December 31, 2021:
| Time Certificates of Deposits | |||||||||||
| of $250,000 or More | |||||||||||
| Percent of Total Deposits | |||||||||||
| (In Thousands) | Amount | ||||||||||
| Amounts maturing in: | |||||||||||
| Three months or less | $9,787 | 13 | % | ||||||||
| Over 3 through 6 months | 9,814 | 13 | % | ||||||||
| Over 6 through 12 months | 25,523 | 33 | % | ||||||||
| Over 12 months | 31,989 | 41 | % | ||||||||
| Total | $77,113 | 100 | % | ||||||||
The Company offers the Certificate of Deposit Account Registry Service® (CDARS®) as a member of Promontory Interfinancial Network, LLCSM (Network). When a Network member places a deposit using CDARS, that certificate of deposit is divided into amounts under the standard FDIC insurance maximum ($250,000) and is allocated among member banks, making the large deposit eligible for FDIC insurance. The Company had $24.0 million CDARS certificates of deposits at December 31, 2021 and $9.4 million CDARS certificates of deposits at December 31, 2020.
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 Company’s assets. At December 31, 2021, our maximum borrowing line from the FHLB was $1.219 billion, approximately 45% of the Bank’s assets, subject to the FHLB’s collateral requirements. The Company has outstanding advances of $14.5 million as of December 31, 2021 which were originated to match fund low income housing projects that qualify for long term fixed interest
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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 $50.7 million of loans as collateral to secure advances made through the discount window as of December 31, 2021. There were no discount window advances outstanding at December 31, 2021 or 2020. The Company paid less than $1,000 in interest in 2021 and 2020 on this agreement. The Company utilized the Federal Reserve Bank's PPPLF to fund SBA PPP loans during the second quarter of 2020, but has repaid those funds in full as of June 30, 2020. This advance had an interest rate of 0.35%.
Other Short and Long-term Borrowings: The Company had no short or long-term borrowings outstanding other than the FHLB advances noted above as of December 31, 2021 or 2020.
The Company is subject to provisions under Alaska state law which generally limit the amount of outstanding debt to 35% of total assets or $948.0 million at December 31, 2021 and 35% of total assets or $736.0 million at December 31, 2020.
Junior Subordinated Debentures
On December 16, 2005, the Company’s subsidiary, NST2, issued trust preferred securities in the principal amount of $10 million. These securities carry an interest rate of 90-day LIBOR plus 1.37% per annum that was initially set at 5.86% adjusted quarterly. The securities have a maturity date of March 15, 2036, and are callable by the Company on or after March 15, 2011. These securities are treated as Tier 1 capital by the Company’s regulators for capital adequacy calculations. The interest cost to the Company of these securities was $160,000 in 2021. At December 31, 2021, the securities had an interest rate of 1.57%. The Company entered into an interest rate swap in the third quarter of 2017 to hedge the variability in cash flows arising out of its junior subordinated debentures, 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 million of junior subordinated debentures held under NST2 at 3.72% through its maturity date. Net of the impact of the interest rate swap, interest expense on these securities was $382,000 in 2021 and $385,000 in 2020.
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 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 December 31, 2021, the Company has 10.0 million authorized shares of common stock, of which 6.0 million are issued and outstanding, leaving 4.0 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 $645.8 million, or 24% of total assets at December 31, 2021 compared to $116.0 million, or 6% of total assets as of December 31, 2020. The increase in cash and cash equivalents is primarily due to a significant increase in deposits. Management expects this elevated level of liquidity to 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 December 31, 2021, the weighted average maturity of available for sale securities is 4.1 years compared to 2.6 years at December 31, 2020. At December 31, 2021, $5.0 million in available for sale securities mature in 2022, $15 million mature in 2023, and $116.2 million mature in 2024. Our total unfunded commitments to fund loans, loans held for sale, and letters of credit at December 31, 2021, were $445.9 million. We do not expect that all of these loans are likely to be fully drawn upon at any one time. At December 31, 2021, certificates of deposit totaling $118.6 million and $52.6 million, respectively, contractually mature in 2022 and 2023, and may be withdrawn from the Bank. Similar to loans, we do not
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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 December 31, 2021, are not material to the Company's liquidity position as of December 31, 2021.
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 December 31, 2021, our liquid assets were $907.9 million and our funds available for borrowing under our existing lines of credit were $1.27 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.
As shown in the Consolidated Statements of Cash Flows included in Part II. Item 8 of this report, net cash provided by operating activities was $112.0 million in 2021 and net cash used by operating activities was $36.5 million in 2020. The primary source of cash provided by, and used by operating activities for all periods presented was positive net income. In 2021 proceeds from the sale of loans held for sale exceeded proceeds used in originations as refinance activity slowed, and in 2020 the opposite was true. In 2020 the origination of loans held for sale exceeded proceeds from the sale of loans held for sale which is the primary reason that operating cash flow is negative in 2020. Net cash used by investing activities was $159.1 million in 2021 primarily due to purchases of available for sale and held to maturity securities. Net cash used by investing activities was $382.8 million in 2020 primarily due to increases in loans, in particular PPP loans. Financing activities provided cash of $577.0 million in 2021 and $439.8 million in 2020. Financing activities provided cash in both 2021 and 2020 due to increases in deposits that were only partially offset by the payment of cash dividends to shareholders and the repurchase of shares of the Company's common stock.
Throughout our history, the Company has periodically repurchased for cash a portion of its shares of common stock in the open market. The following table presents the amount of common shares repurchased and the weighted average price paid per share for the periods indicated:
| Years Ending: | Common Shares Repurchased | Weighted Average Price | |||||||||
| 2021 | 279,276 | $41.30 | |||||||||
| 2020 | 327,000 | $30.51 | |||||||||
| 2019 | 347,676 | $36.15 | |||||||||
| 2018 | 15,468 | $31.90 | |||||||||
| 2017 | 58,341 | $27.56 | |||||||||
At December, 31, 2021, there were 33,724 shares available under the previously announced stock repurchase program. However, on January 28, 2022 the Company announced that its Board of Directors authorized the repurchase of up to an additional 300,000 shares of common stock. The Company intends 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.
The table below shows the cumulative effect the repurchase of common shares since the inception of the Company on diluted earnings per share:
| Years Ending: | Diluted EPS as Reported | Diluted EPS without Stock Repurchase | |||||||||
| 2021 | $6.00 | $4.79 | |||||||||
| 2020 | $5.11 | $4.22 | |||||||||
| 2019 | $3.04 | $2.59 | |||||||||
| 2018 | $2.86 | $2.56 | |||||||||
| 2017 | $1.88 | $1.69 | |||||||||
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Regulatory Capital Requirements: 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 December 31, 2021, 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 in 2021 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 new 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 is included in the Company’s capital for regulatory purposes, although they are accounted for as a long-term debt in our consolidated 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 December 31, 2021 and 2020, respectively, 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 | ||||||||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||
| Total risk-based capital | 8.00% | 10.00% | 14.79% | 12.13% | |||||||||||||||||||
| Tier 1 risk-based capital | 6.00% | 8.00% | 14.08% | 11.42% | |||||||||||||||||||
| Common equity tier 1 capital | 4.50% | 6.50% | 13.50% | 11.43% | |||||||||||||||||||
| Leverage ratio | 4.00% | 5.00% | 9.03% | 7.31% | |||||||||||||||||||
See Note 23 of the Consolidated Financial Statements included in Part II. Item 8 of this report for a detailed discussion of the capital ratios. The requirements for "well-capitalized" come from the Prompt Correction Action rules. See Part I. Item 1 Supervision and Regulation. 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.
Critical Accounting Policies
The SEC defines "critical accounting policies" as those that require application of management's most difficult, subjective or complex judgments often as a result of the need to make "critical accounting estimates", which are estimates aboutthat involve estimation uncertainty that has had or is reasonably likely to have a material impact on the effectCompany's financial condition or results of matters that are inherently uncertain and may change in future periods.operations. Our significant accounting policies are described in Note 1 in the Notes to Consolidated Financial Statements in Part II. Item 8 of this report. Not all of these significant accounting policies require management to make difficult, subjective or complex judgments orcritical accounting estimates. Management believes that the following accounting policies would be considered critical under the SEC's definition. The following discussion is intended to supplement, but not duplicate, information provided in Note 1 in the Notes to Consolidated Financial Statements in Part II. Item 8 of this report for these policies.
Allowance for loan losses:Credit Losses Policy: The Company maintains an Allowance to reflect inherent lossesadopted CECL on January 1, 2021. The Company's Executive Loan Management Committee and Asset Liability Committee are both involved in its loan portfolio asmonitoring various aspects of the balance sheet date.Company's ACL methodology. The Company performs regular credit reviewsCompany's Audit Committee provides board oversight of the loan portfolioACL process and reviews and approves the ACL methodology on a quarterly basis.
CECL is not prescriptive in the methodology used to determine the expected credit qualityloss estimate. Therefore, management has flexibility in selecting the methodology. However, the expected credit losses must be estimated over a financial asset's contractual term, adjusted for prepayments, utilizing quantitative and adherencequalitative factors. The estimate of current expected credit losses is based on relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts. Historical loss experience is the starting point for estimating expected credit losses. Adjustments are made to historical loss experience to reflect differences in asset-specific risk characteristics, such as underwriting standards.standards, portfolio mix or asset terms, and differences in economic conditions – both current conditions and reasonable and supportable forecasts. When the Company is not able to make or obtain reasonable and supportable forecasts for the entire life of the financial asset it has estimated expected credit losses for the remaining life after the forecasted period using an approach that reverts to historical credit loss information.
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Depending on the nature and size of the pool of financial assets with similar risk characteristics, the Company uses a discounted cash flow (“DCF”) method or a weighted average remaining life method to estimate expected credit losses quantitatively. The Company uses a DCF method for 8 of its 11 loan pools, which represent 97% of the amortized cost basis of total loan pools at December 31, 2021. The weighted average remaining life method is used for the remaining 3 loan pools primarily because loan level data constraints preclude the use of the DCF model.
Under the 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 ("LGD"). 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. The Company's regression models for PD utilize the Company's actual historical loan level default data. The Company determines a reasonable and supportable forecast and applies that forecast to the regression model to estimate defaults over the forecast period. Management leverages economic projections from a reputable and independent third-party to inform its loss driver forecasts over the Company's four quarter forecast period. Management utilizes and forecasts Alaska unemployment as a loss driver for all of the loans pools that utilize the DCF method. Management also utilizes and forecasts 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 correlates to expected future losses. Other internal and external indicators of economic forecasts are originated, they are assignedalso considered by management when developing the forecast metrics. Following the forecast period, the economic variables used to calculate PD revert to a risk rating thathistorical average at a constant rate over an eight quarter reversion period. Other assumptions relevant to the discounted cash flow model to derive the quantitative allowance include the LGD, which is reassessed periodically during the estimate of loss for a defaulted loan, prepayment speeds, and the discount rate applied to future cash flows. The DCF method utilizes the effective interest rate of individual assets to discount the expected credit losses over the contractual term of the loan, through the credit review process. The Company's risk rating methodology assigns risk ratings ranging from 1 to 10, where a higher rating represents higher risk. These risk ratings are then consolidated into five classes, which include pass, special mention, substandard, doubtful and loss. These classes are a primary factor in determining an appropriate amount for the allowance for loan losses. Each class is assessed an inherent credit loss factor that determines an amount of allowance for loan losses provided for that group of loans. This allowance is then adjusted for qualitative factors, by segment and class. Qualitative factors are based on management’s assessment of current trends that may cause losses inherent in the current loan portfolio to differ significantly from historical losses. Some factors that management considers in determining the qualitative adjustment to the general reserve include loan quality trends in our own portfolio, the degree of concentrations of large borrowers in our loan portfolio, national and local economic trends, business conditions, underwriting policies and standards, trends in local real estate markets, effects of various political activities, peer group data, and internal factors such as underwriting policies and expertise of the Company’s employees.
The analysisCompany has identified the following pools of collateral dependentfinancial assets with similar risk characteristics for measuring expected credit losses under CECL as adopted by the Company on January 1, 2021:
Commercial & industrial - Commercial loans are loans for commercial, corporate and business purposes. The Company’s commercial business loan portfolio is comprised of loans for a variety of purposes and across a variety of industries. These loans include general commercial and industrial loans, loans to purchase capital equipment, and other business loans for working capital and operational purposes. Commercial loans are generally secured by accounts receivable, inventory and other business assets. Also included in commercial loans are our PPP loans originated during 2020 and 2021. The Company utilizes the DCF method to quantitatively estimate credit losses for this pool.
Commercial real estate - This category of loans consists of the following loan types:
Owner occupied - This category includes non-farm, non-residential real estate loans for a variety of commercial property types and purposes, including owner occupied commercial real estate loans primarily secured by commercial office or industrial buildings, warehouses or retail buildings where the owner of the building occupies the property. Repayment terms vary considerably, interest rates are fixed or variable, and are structured for full, partial, or no amortization of principal. The Company utilizes the DCF method to quantitatively estimate credit losses for this pool.
Non-owner occupied and multifamily - This category includes non-farm, non-residential real estate loans for a variety of commercial property types and purposes, including investment real estate loans that are primarily secured by office and industrial buildings, warehouses or retail buildings where the owner of the building does not occupy the property, non-owner occupied apartment or multifamily residential buildings, and various special purpose properties. Repayment terms vary considerably, interest rates are fixed or variable, and are structured for full, partial, or no amortization of principal. Generally, these types of loans are thought to involve a greater degree of credit risk than owner occupied commercial real estate as they are more sensitive to adverse economic conditions. The Company utilizes the DCF method to quantitatively estimate credit losses for this pool.
Residential real estate - This category of loans consists of the following loan types:
1-4 family residential properties secured by first liens - This category of loans includes appraisals onterm loans secured by first liens on residential real property, management’s assessmentestate. The Company utilizes the DCF method to quantitatively estimate credit losses for this pool.
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1-4 family residential properties secured by junior liens and revolving credit lines secured by 1-4 family first liens - This category of loans includes term loans primarily secured by junior liens on residential real estate and revolving credit lines that are secured by first liens on residential real estate. Home equity revolving lines of credit and home equity term loans are included in this group of loans. The Company utilizes the DCF method to quantitatively estimate credit losses for this pool.
1-4 family residential construction - This category of loans consists of loans to finance the ground up construction, improvement and/or carrying for sale after the completion of construction of 1-4 family residential properties which will secure the loan. These loans may also be secured by tracts or individual parcels of land on which 1-4 family residential properties are being constructed. The repayment of construction loans is generally dependent upon the successful completion of the current market, recent payment history and an evaluationimprovements by the builder for the end user, or sale of other sources of repayment.the property to a third-party. The Company obtains appraisals on realutilizes the DCF method to quantitatively estimate credit losses for this pool.
Other construction, land development, and personal property that secure itsraw land - This category of loans duringconsists of loans to finance the loan origination process in accordance with regulatory guidanceground up construction, improvement and/or carrying for sale after the completion of construction of owner occupied and its loan policy. The Company obtains updated appraisals onnon-owner occupied commercial properties, and loans secured by raw or improved land. The repayment of construction loans is generally dependent upon the successful completion of the improvements by the builder for the end user, or sale of the property to a third-party. Repayment of land secured loans are dependent upon the successful development and sale of the property, the sale of the land as is, or the outside cash flow of the owners to support the retirement of the debt. The Company utilizes the DCF method to quantitatively estimate credit losses for this pool.
Agricultural production, including commercial fishing - These loans are for the purpose of financing agricultural production, including growing and storing of crops, and for the purpose of financing fisheries and forestries, including loans to commercial fishermen. These loans may be secured or unsecured, but any loans for these purposes that are secured by real estate are included in a real estate category. The Company utilizes the weighted average remaining life method to quantitatively estimate credit losses for this pool.
Consumer - Loans used for personal use, which may be secured or personal property based upon its assessmentunsecured, and customer overdrafts. The Company utilizes the DCF method to quantitatively estimate credit losses for this pool.
Obligations of changesstates and political subdivisions in the current market or particular projects or properties, information from other current appraisalsUS - This category of loans includes all loans made to states, counties municipalities, school districts, drainage and other sourcessewer districts, and Indian tribes in the U.S. These loans maybe be secured by any type of information.collateral, including real estate. The Company usesutilizes the information provided in these updated appraisals along with its evaluationweighted average remaining life method to quantitatively estimate credit losses for this pool.
Other - This category of loans includes all other information available on a particular property as it assesses the collateral coverage on its performing and nonperforming loans and the impact that may have on the adequacy of its Allowance.
In addition to the quantitative portion of the ACL derived using either the DCF or weighted average remaining life method, the Company also considers the effects of the following qualitative factors in its calculation of expected losses in the loan we either recognize an impairment reserve as a specific component to be provided forportfolio:
•Lending strategy, policies, and procedures;
•Quality of internal loan review;
•Lending management and staff;
•Trends in underlying collateral values;
•Competition, legal, and regulatory changes;
•Economic and business conditions including fluctuations in the Allowance or charge-off the impaired balance on collateral dependentprice of Alaska North slope crude oil;
•Changes in trends, volume and severity of adversely classified loans, if it is determined that such amount represents a confirmed loss. The combination of the risk rating-based allowance component and the impairment reserve allowance component lead to an allocated allowance for loan losses.
•Concentration of credit; and
•Changes in light of current economic conditions. This portion of the Allowance is deemed “unallocated” because it is not allocated to any segment or classnature and volume of the loan portfolio. This portion of the Allowance provides for coverage of credit losses inherent in the loan portfolio but not captured in the credit loss factors that are utilized in the risk rating-based component or in the specific impairment component of the Allowance and acknowledges the inherent imprecision of all loss prediction models.
Valuation of goodwill and other intangibles: Goodwill and other intangible assets with indefinite lives are not amortized but instead are periodically tested for impairment. Management performs an impairment analysis for the intangible assets with indefinite lives on an annual basis as of December 31. Additionally, goodwill and other intangible assets with indefinite lives are evaluated on an interim basis when events or circumstances indicate impairment potentially exists. The impairment analysis requires management to make subjective judgments. Events and factors that may significantly affect the estimates include, among others, competitive forces, customer behaviors and attrition, changes in revenue growth trends, cost structures, technology, changes in discount rates and specific industry and market conditions. There can be no assurance that changes in circumstances, estimates or assumptions may result in additional impairment of all, or some portion of, goodwill or other intangible assets. The Company performed its annual goodwill impairment testing at December 31, 20192021 and 20182020 in
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accordance with the policy described in Note 1 to the financial statements included within Part II. Item 8 of this report. At December 31, 2019,2021, the Company performed its annual impairment test by performing a qualitative assessment. Significant positive inputs to the qualitative assessment included the Company’s increasing net income as compared to historical trends,trends; the Company's stable budget-to-actual results of operations;increasing market share for deposits in our markets; results of regulatory examinations; peer comparisons of the Company's net interest margin; trends in the Company’s cash flows; improvements in the Alaskan economy in 2019;2021; increases in the volume of mortgage originations in Alaska; increases in the Company's market share of mortgage originations; and increases in the Company's stock price. Significant negative inputs to the qualitative assessment included the continued lower level of oil prices and the muted pace of growth in the Alaska economy. We believe that the positive inputs to the qualitative assessment noted above outweigh the negative inputs for both of the Company's operating segments, and we therefore concluded that it is more likely than not that the fair value of the Company exceeds its carrying value at December 31, 20192021 and that no potential impairment existed at that time.
Valuation of OREO: OREO Other Real Estate Owned ("OREO") represents properties acquired through foreclosure or its equivalent. Prior to foreclosure, the carrying value is adjusted to the fair value, less cost to sell, of the real estate to be acquired by an adjustment to the allowance for loan loss. The amount by which the fair value less cost to sell is greater than the carrying amount of the loan plus amounts previously charged off is recognized in earnings. Any subsequent reduction in the carrying value is charged against earnings. Management's evaluation of fair value is based on appraisals or discounted cash flows of anticipated sales. The amounts ultimately recovered from the sale of OREO may differ from the carrying value of the assets because of market factors beyond the Company's control or due to changes in the Company's strategies for recovering the investment.
Servicing rights: The Company measures mortgage servicing rights ("MSRs") and commercial servicing rights ("CSRs") at fair value on a recurring basis with changes in fair value going through earnings in the period in which the change occurs. Changes in the fair value of MSRs are recorded in mortgage banking income, and changes in the fair value of CSRs are recorded in commercial servicing revenue. Fair value adjustments encompass market-driven valuation changes and the decrease in value that occurs from the passage of time, which are separately reported. Retained servicing rights are measured at fair value as of the date of sale. Initial and subsequent fair value measurements are determined using a discounted cash flow model. In order to determine the fair value of servicing rights, the present value of expected net 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. The model assumptions for MSRs are also compared to publicly filed information from several large MSR holders, as available.
Fair Value: A hierarchical disclosure framework associated with the level of pricing observability is utilized in measuring financial instruments at fair value. The degree of judgment utilized in measuring the fair value of financial instruments generally correlates to the level of pricing observability. Financial instruments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of pricing observability and a lesser degree of judgment utilized in measuring fair value. Conversely, financial instruments rarely traded or not quoted will generally have little or no pricing observability and a higher degree of judgment utilized in measuring fair value. Pricing observability is impacted by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established and the characteristics specific to the transaction.
| Years ended December 31, | 2019 | 2018 | 2017 | |||||||||||||||||||||||
| Average outstanding balance | Interest income / expense | Average Yield / Cost | Average outstanding balance | Interest income / expense | Average Yield / Cost | Average outstanding balance | Interest income / expense | Average Yield / Cost | ||||||||||||||||||
| (In Thousands) | ||||||||||||||||||||||||||
Loans (1),(2) | $1,010,098 | $59,919 | 5.93 | % | $971,548 | $55,526 | 5.72 | % | $981,001 | $53,301 | 5.43 | % | ||||||||||||||
| Loans held for sale | 56,344 | 2,231 | 3.96 | % | 46,089 | 2,016 | 4.37 | % | 44,047 | 1,740 | 3.95 | % | ||||||||||||||
Long-term Investments(3) | 273,711 | 7,011 | 2.56 | % | 286,426 | 5,829 | 2.04 | % | 305,211 | 4,634 | 1.52 | % | ||||||||||||||
Short-term investments(4) | 46,404 | 922 | 1.99 | % | 42,386 | 806 | 1.90 | % | 36,944 | 433 | 1.17 | % | ||||||||||||||
| Total interest-earning assets | $1,386,557 | $70,083 | 5.05 | % | $1,346,449 | $64,177 | 4.77 | % | $1,367,203 | $60,108 | 4.40 | % | ||||||||||||||
| Noninterest-earning assets | 169,150 | 146,936 | 143,849 | |||||||||||||||||||||||
| Total | $1,555,707 | $1,493,385 | $1,511,052 | |||||||||||||||||||||||
| Interest-bearing deposits | $850,202 | $4,961 | 0.58 | % | $809,808 | $2,307 | 0.28 | % | $829,918 | $1,707 | 0.21 | % | ||||||||||||||
| Borrowings | 33,730 | 680 | 2.02 | % | 47,570 | 662 | 1.37 | % | 50,523 | 723 | 1.43 | % | ||||||||||||||
| Total interest-bearing liabilities | $883,932 | $5,641 | 0.64 | % | $857,378 | $2,969 | 0.35 | % | $880,441 | $2,430 | 0.28 | % | ||||||||||||||
| Noninterest-bearing demand deposits | 426,205 | 417,464 | 418,415 | |||||||||||||||||||||||
| Other liabilities | 36,968 | 17,521 | 19,067 | |||||||||||||||||||||||
| Equity | 208,602 | 201,022 | 193,129 | |||||||||||||||||||||||
| Total | $1,555,707 | $1,493,385 | $1,511,052 | |||||||||||||||||||||||
| Net interest income | $64,442 | $61,208 | $57,678 | |||||||||||||||||||||||
| Net interest margin | 4.65 | % | 4.55 | % | 4.22 | % | ||||||||||||||||||||
| Average portfolio loans to average-earnings assets | 72.85 | % | 72.16 | % | 71.75 | % | ||||||||||||||||||||
| Average portfolio loans to average total deposits | 79.14 | % | 79.16 | % | 78.58 | % | ||||||||||||||||||||
| Average non-interest deposits to average total deposits | 33.39 | % | 34.02 | % | 33.52 | % | ||||||||||||||||||||
| Average interest-earning assets to average interest-bearing liabilities | 156.86 | % | 157.04 | % | 155.29 | % | ||||||||||||||||||||
| 2019 compared to 2018 | 2018 compared to 2017 | |||||||||||||||||
| Increase (decrease) due to | Increase (decrease) due to | |||||||||||||||||
| (In Thousands) | Volume | Rate | Total | Volume | Rate | Total | ||||||||||||
| Interest Income: | ||||||||||||||||||
| Loans | $2,246 | $2,147 | $4,393 | ($508 | ) | $2,733 | $2,225 | |||||||||||
| Loans held for sale | 374 | (159 | ) | 215 | 83 | 193 | 276 | |||||||||||
| Long-term investments | (245 | ) | 1,427 | 1,182 | (264 | ) | 1,459 | 1,195 | ||||||||||
| Short term investments | 79 | 37 | 116 | 71 | 302 | 373 | ||||||||||||
| Total interest income | $2,454 | $3,452 | $5,906 | ($618 | ) | $4,687 | $4,069 | |||||||||||
| Interest Expense: | ||||||||||||||||||
| Interest-bearing deposits | $120 | $2,534 | $2,654 | ($40 | ) | $640 | $600 | |||||||||||
| Borrowings | (29 | ) | 47 | 18 | (35 | ) | (26 | ) | (61 | ) | ||||||||
| Total interest expense | $91 | $2,581 | $2,672 | ($75 | ) | $614 | $539 | |||||||||||
| (In Thousands) | 2019 | $ Change | % Change | 2018 | $ Change | % Change | 2017 | ||||||||||||
| Other Operating Income | |||||||||||||||||||
| Mortgage banking income | $24,201 | $3,357 | 16 | % | $20,844 | ($2,443 | ) | (10 | )% | $23,287 | |||||||||
| Purchased receivable income | 3,271 | 16 | — | % | 3,255 | 280 | 9 | % | 2,975 | ||||||||||
| Bankcard fees | 2,976 | 165 | 6 | % | 2,811 | 214 | 8 | % | 2,597 | ||||||||||
| Service charges on deposit accounts | 1,557 | 49 | 3 | % | 1,508 | (106 | ) | (7 | )% | 1,614 | |||||||||
| Interest rate swap income | 964 | 880 | 1,048 | % | 84 | 58 | 223 | % | 26 | ||||||||||
| Gain (loss) on marketable equity securities | 911 | 1,536 | 246 | % | (625 | ) | (625 | ) | (100 | )% | — | ||||||||
| Commercial servicing revenue | 624 | (798 | ) | (56 | )% | 1,422 | 1,050 | 282 | % | 372 | |||||||||
| Rental income | 497 | (195 | ) | (28 | )% | 692 | 160 | 30 | % | 532 | |||||||||
| Other loan fees | 269 | 77 | 40 | % | 192 | (2 | ) | (1 | )% | 194 | |||||||||
| Gain on loans acquired - APB | 30 | (227 | ) | (88 | )% | 257 | 68 | 36 | % | 189 | |||||||||
| Gain (loss) on sale of securities | 23 | 23 | 100 | % | — | (11 | ) | (100 | )% | 11 | |||||||||
| Gain on sale of Northrim Benefits Group | — | — | — | % | — | (4,445 | ) | (100 | )% | 4,445 | |||||||||
| Employee benefit plan income | — | — | — | % | — | (2,506 | ) | (100 | )% | 2,506 | |||||||||
| Other income | 2,023 | 296 | 17 | % | 1,727 | 1 | — | % | 1,726 | ||||||||||
| Total other operating income | $37,346 | $5,179 | 16 | % | $32,167 | ($8,307 | ) | (21 | )% | $40,474 | |||||||||
| (In Thousands) | 2019 | $ Change | % Change | 2018 | $ Change | % Change | 2017 | ||||||||||||
| Other Operating Expense | |||||||||||||||||||
| Salaries and other personnel expense | $51,317 | $6,667 | 15 | % | $44,650 | ($71 | ) | — | % | $44,721 | |||||||||
| Data processing expense | 7,128 | 1,093 | 18 | % | 6,035 | 486 | 9 | % | 5,549 | ||||||||||
| Occupancy expense | 6,607 | 471 | 8 | % | 6,136 | (616 | ) | (9 | )% | 6,752 | |||||||||
| Professional and outside services | 2,531 | 78 | 3 | % | 2,453 | 88 | 4 | % | 2,365 | ||||||||||
| Marketing expense | 2,373 | 55 | 2 | % | 2,318 | (248 | ) | (10 | )% | 2,566 | |||||||||
| Insurance expense | 557 | (305 | ) | (35 | )% | 862 | (299 | ) | (26 | )% | 1,161 | ||||||||
| Compensation expense - RML acquisition payments | 468 | 468 | 100 | % | — | (130 | ) | (100 | )% | 130 | |||||||||
| Intangible asset amortization | 60 | (10 | ) | (14 | )% | 70 | (30 | ) | (30 | )% | 100 | ||||||||
| Loss on sale of premise and equipment | — | (2 | ) | (100 | )% | 2 | (1 | ) | (33 | )% | 3 | ||||||||
| OREO (income) expense, net rental income and gains on sale: | |||||||||||||||||||
| OREO operating expense | 693 | (109 | ) | (14 | )% | 802 | 382 | 91 | % | 420 | |||||||||
| Impairment on OREO | — | — | — | % | — | (904 | ) | (100 | )% | 904 | |||||||||
| Rental income on OREO | (506 | ) | 35 | 6 | % | (541 | ) | (425 | ) | (366 | )% | (116 | ) | ||||||
| Gains on sale of OREO | (380 | ) | (377 | ) | NM | (3 | ) | 368 | 99 | % | (371 | ) | |||||||
| Subtotal | (193 | ) | (451 | ) | (175 | )% | 258 | (579 | ) | (69 | )% | 837 | |||||||
| Other expenses | 5,990 | (1,026 | ) | (15 | )% | 7,016 | 47 | 1 | % | 6,969 | |||||||||
| Total other operating expense | $76,838 | $7,038 | 10 | % | $69,800 | ($1,353 | ) | (2 | )% | $71,153 | |||||||||
| (In Thousands) | Amortized Cost | Fair Value | |||||
| Securities Available for Sale: | |||||||
| 2019: | |||||||
| U.S. Treasury and government sponsored entities | $210,756 | $211,852 | |||||
| Municipal Securities | 3,288 | 3,297 | |||||
| Corporate Bonds | 34,764 | 35,066 | |||||
| Collateralized Loan Obligations | 25,980 | 25,923 | |||||
| Total | $274,788 | $276,138 | |||||
| 2018: | |||||||
| U.S. Treasury and government sponsored entities | $209,908 | $208,860 | |||||
| Municipal Securities | 9,089 | 9,084 | |||||
| Corporate Bonds | 40,139 | 39,780 | |||||
| Collateralized Loan Obligations | 13,990 | 13,886 | |||||
| Total | $273,126 | $271,610 | |||||
| 2017: | |||||||
| U.S. Treasury and government sponsored entities | $250,794 | $249,461 | |||||
| Municipal Securities | 14,395 | 14,421 | |||||
| Corporate Bonds | 36,654 | 37,132 | |||||
| Collateralized Loan Obligations | 6,000 | 6,005 | |||||
| Preferred Stock | 5,422 | 5,731 | |||||
| Total | $313,265 | $312,750 | |||||
| Marketable Equity Securities: | |||||||
| 2019: | |||||||
| Preferred Stock | $7,349 | $7,945 | |||||
| Total | $7,349 | $7,945 | |||||
| 2018: | |||||||
| Preferred Stock | $7,580 | $7,265 | |||||
| Total | $7,580 | $7,265 | |||||
| Maturity | |||||||||||||||
| Within | Over | ||||||||||||||
| (In Thousands) | 1 Year | 1-5 Years | 5-10 Years | 10 Years | Total | ||||||||||
| Securities Available for Sale: | |||||||||||||||
| U.S. Treasury and government sponsored entities | |||||||||||||||
| Balance | $52,668 | $159,184 | $— | $— | $211,852 | ||||||||||
| Weighted average yield | 2.30 | % | 2.07 | % | — | % | — | % | 2.13 | % | |||||
| Municipal securities | |||||||||||||||
| Balance | $994 | $2,303 | $— | $— | $3,297 | ||||||||||
| Weighted average yield | 2.15 | % | 3.97 | % | — | % | — | % | 3.42 | % | |||||
| Corporate bonds | |||||||||||||||
| Balance | $12,027 | $17,975 | $5,064 | $— | $35,066 | ||||||||||
| Weighted average yield | 2.74 | % | 2.95 | % | 2.91 | % | — | % | 2.87 | % | |||||
| Collateralized loan obligations | |||||||||||||||
| Balance | $— | $— | $5,999 | $19,924 | $25,923 | ||||||||||
| Weighted average yield | — | % | — | % | 3.88 | % | 3.64 | % | 3.70 | % | |||||
| Total | |||||||||||||||
| Balance | $65,689 | $179,462 | $11,063 | $19,924 | $276,138 | ||||||||||
| Weighted average yield | 2.38 | % | 2.18 | % | 3.44 | % | 3.64 | % | 2.38 | % | |||||
| Marketable Equity Securities | |||||||||||||||
| Preferred Stock | |||||||||||||||
| Balance | $— | $— | $— | $7,945 | $7,945 | ||||||||||
| Weighted average yield | — | % | — | % | — | % | 4.70 | % | 4.70 | % | |||||
| December 31, 2019 | December 31, 2018 | December 31, 2017 | December 31, 2016 | December 31, 2015 | |||||||||||||||||||||
| Dollar Amount | Percent of Total | Dollar Amount | Percent of Total | Dollar Amount | Percent of Total | Dollar Amount | Percent of Total | Dollar Amount | Percent of Total | ||||||||||||||||
| (In Thousands) | |||||||||||||||||||||||||
| Commercial | $412,690 | 39.5 | % | $342,420 | 34.8 | % | $313,514 | 32.8 | % | $277,802 | 28.5 | % | $271,946 | 27.8 | % | ||||||||||
| Real estate construction one-to-four family | 38,818 | 3.7 | % | 37,111 | 3.8 | % | 31,201 | 3.3 | % | 26,061 | 2.7 | % | 44,488 | 4.5 | % | ||||||||||
| Real estate construction other | 61,808 | 5.9 | % | 72,256 | 7.3 | % | 80,093 | 8.4 | % | 72,159 | 7.4 | % | 74,956 | 7.7 | % | ||||||||||
| Real estate term owner occupied | 138,891 | 13.3 | % | 126,414 | 12.8 | % | 132,042 | 13.8 | % | 152,112 | 15.6 | % | 143,667 | 14.7 | % | ||||||||||
| Real estate term non-owner occupied | 312,960 | 30.0 | % | 325,720 | 33.1 | % | 319,313 | 33.4 | % | 356,411 | 36.6 | % | 347,284 | 35.4 | % | ||||||||||
| Real estate term other | 42,506 | 4.1 | % | 42,039 | 4.3 | % | 40,411 | 4.2 | % | 45,402 | 4.7 | % | 46,672 | 4.8 | % | ||||||||||
| Consumer secured by 1st deeds of trust | 16,198 | 1.6 | % | 19,228 | 2.0 | % | 22,616 | 2.4 | % | 23,280 | 2.4 | % | 26,369 | 2.7 | % | ||||||||||
| Consumer other | 24,585 | 2.4 | % | 23,645 | 2.4 | % | 19,919 | 2.1 | % | 25,281 | 2.6 | % | 28,912 | 3.0 | % | ||||||||||
| Subtotal | $1,048,456 | $988,833 | $959,109 | $978,508 | $984,294 | ||||||||||||||||||||
| Less: Unearned origination fee, | |||||||||||||||||||||||||
| net of origination costs | (5,085 | ) | (0.5 | )% | (4,487 | ) | (0.5 | )% | (4,156 | ) | (0.4 | )% | (4,434 | ) | (0.5 | )% | (4,612 | ) | (0.5 | )% | |||||
| Total portfolio loans | $1,043,371 | $984,346 | $954,953 | $974,074 | $979,682 | ||||||||||||||||||||
| (In Thousands) | Commercial | Real estate construction one-to-four family | Real estate construction other | Real estate term owner occupied | Real estate term non-owner occupied | Real estate term other | Consumer secured by 1st deeds of trust | Consumer other | Total | ||||||||||||||||||||||||||
| December 31, 2019 | |||||||||||||||||||||||||||||||||||
| AQR Pass | $62,345 | $— | $— | $4,153 | $— | $— | $— | $361 | $66,859 | ||||||||||||||||||||||||||
| AQR Special Mention | 450 | — | — | 1,900 | 6,916 | — | — | — | 9,266 | ||||||||||||||||||||||||||
| AQR Substandard | 3,070 | — | — | — | — | — | — | — | 3,070 | ||||||||||||||||||||||||||
| Total loans | $65,865 | $— | $— | $6,053 | $6,916 | $— | $— | $361 | $79,195 | ||||||||||||||||||||||||||
| December 31, 2018 | |||||||||||||||||||||||||||||||||||
| AQR Pass | $44,512 | $— | $— | $5,216 | $— | $— | $— | $399 | $50,127 | ||||||||||||||||||||||||||
| AQR Special Mention | 857 | — | — | 2,242 | 7,364 | — | — | — | 10,463 | ||||||||||||||||||||||||||
| AQR Substandard | $1,723 | $— | $— | $— | $— | $— | $— | $— | $1,723 | ||||||||||||||||||||||||||
| Total loans | $47,092 | $— | $— | $7,458 | $7,364 | $— | $— | $399 | $62,313 | ||||||||||||||||||||||||||
| Maturity | ||||||||||||
| (In Thousands) | Within 1 Year | 1-5 Years | Over 5 Years | Total | ||||||||
| Commercial | $133,784 | $117,941 | $160,965 | $412,690 | ||||||||
| Real estate construction one-to-four family | 36,153 | 2,665 | — | 38,818 | ||||||||
| Real estate construction other | 40,331 | 10,300 | 11,177 | 61,808 | ||||||||
| Real estate term owner occupied | 7,469 | 37,064 | 94,358 | 138,891 | ||||||||
| Real estate term non-owner occupied | 18,657 | 88,581 | 205,722 | 312,960 | ||||||||
| Real estate term other | 3,993 | 14,622 | 23,891 | 42,506 | ||||||||
| Consumer secured by 1st deeds of trust | 119 | 1,269 | 14,810 | 16,198 | ||||||||
| Consumer other | 819 | 5,676 | 18,090 | 24,585 | ||||||||
| Total | $241,325 | $278,118 | $529,013 | $1,048,456 | ||||||||
| Fixed interest rate | $89,162 | $118,274 | $88,693 | $296,129 | ||||||||
| Floating interest rate | 152,163 | 159,844 | 440,320 | 752,327 | ||||||||
| Total | $241,325 | $278,118 | $529,013 | $1,048,456 | ||||||||
| (In Thousands) | 2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||
| Nonperforming loans | |||||||||||||||
| Nonaccrual loans | $15,356 | $15,210 | $21,626 | $13,893 | $3,686 | ||||||||||
| Loans 90 days past due and accruing | — | — | 252 | 456 | — | ||||||||||
| Government guarantees on nonperforming loans | (1,405 | ) | (516 | ) | (467 | ) | (1,413 | ) | (1,561 | ) | |||||
| Net nonperforming loans | $13,951 | $14,694 | $21,411 | $12,936 | $2,125 | ||||||||||
| Other real estate owned | 7,043 | 7,962 | 8,651 | 6,574 | 3,053 | ||||||||||
| Repossessed assets | 231 | 1,242 | — | — | — | ||||||||||
| Other real estate owned guaranteed by government | (1,279 | ) | (1,279 | ) | (1,333 | ) | (195 | ) | — | ||||||
| Net nonperforming assets | $19,946 | $22,619 | $28,729 | $19,315 | $5,178 | ||||||||||
| Nonperforming loans, net of government guarantees to portfolio loans | 1.34 | % | 1.49 | % | 2.24 | % | 1.33 | % | 0.22 | % | |||||
| Nonperforming assets, net of government guarantees to total assets | 1.21 | % | 1.50 | % | 1.89 | % | 1.27 | % | 0.35 | % | |||||
| Performing restructured loans | $1,448 | $3,413 | $7,668 | $6,131 | $11,804 | ||||||||||
| Nonperforming loans plus performing restructured loans, net of government guarantees | $15,399 | $18,107 | $29,079 | $19,067 | $13,929 | ||||||||||
| Nonperforming loans plus performing restructured loans to portfolio loans, net of government guarantees | 1.48 | % | 1.84 | % | 3.05 | % | 1.96 | % | 1.42 | % | |||||
| Nonperforming assets plus performing restructured loans to total assets, net of government guarantees | 1.30 | % | 1.73 | % | 2.40 | % | 1.67 | % | 1.13 | % | |||||
| Adversely classified loans, net of government guarantees | $22,330 | $27,217 | $33,845 | $35,634 | $30,825 | ||||||||||
| Loans 30-89 days past due and accruing, net of government guarantees to portfolio loans | 0.15 | % | 0.36 | % | 0.22 | % | 0.22 | % | 0.12 | % | |||||
| Allowance for loan losses to portfolio loans | 1.83 | % | 1.98 | % | 2.25 | % | 2.02 | % | 1.85 | % | |||||
| Allowance for loan losses to nonperforming loans, net of government guarantees | 137 | % | 133 | % | 100 | % | 152 | % | 854 | % | |||||
| (In Thousands) | 2019 | 2018 | 2017 | ||||||
| Balance, beginning of the year | $7,962 | $8,651 | $6,574 | ||||||
| Transfers from loans | — | 686 | 5,912 | ||||||
| Investment in other real estate owned | — | 144 | — | ||||||
| Proceeds from the sale of other real estate owned | (1,299 | ) | (1,522 | ) | (3,302 | ) | |||
| Gain on sale of other real estate owned, net | 380 | 3 | 371 | ||||||
| Impairment on other real estate owned | — | — | (904 | ) | |||||
| Balance, end of year | 7,043 | 7,962 | 8,651 | ||||||
| Government guarantees | (1,279 | ) | (1,279 | ) | (1,333 | ) | |||
| Balance, end of year, net of government guarantees | $5,764 | $6,683 | $7,318 | ||||||
| 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||||||||
% of Loans(1) | % of Loans(1) | % of Loans(1) | % of Loans(1) | % of Loans(1) | |||||||||||||||||||||
| (In Thousands) | Amount | Amount | Amount | Amount | Amount | ||||||||||||||||||||
| Commercial | $6,604 | 39 | % | $5,660 | 35 | % | $6,172 | 34 | % | $5,535 | 28 | % | $5,906 | 28 | % | ||||||||||
| Real estate construction one-to-four family | 643 | 4 | % | 675 | 4 | % | 629 | 3 | % | 550 | 3 | % | 854 | 4 | % | ||||||||||
| Real estate construction other | 1,017 | 6 | % | 1,275 | 7 | % | 1,566 | 8 | % | 1,465 | 7 | % | 1,439 | 8 | % | ||||||||||
| Real estate term owner occupied | 2,188 | 13 | % | 2,027 | 13 | % | 2,194 | 14 | % | 2,358 | 16 | % | 1,657 | 15 | % | ||||||||||
| Real estate term non-owner occupied | 5,180 | 30 | % | 5,799 | 33 | % | 6,043 | 33 | % | 6,853 | 37 | % | 5,515 | 35 | % | ||||||||||
| Real estate term other | 671 | 4 | % | 716 | 4 | % | 725 | 4 | % | 819 | 5 | % | 628 | 4 | % | ||||||||||
| Consumer secured by 1st deeds of trust | 270 | 2 | % | 306 | 2 | % | 315 | 2 | % | 313 | 2 | % | 264 | 3 | % | ||||||||||
| Consumer other | 436 | 2 | % | 426 | 2 | % | 307 | 2 | % | 408 | 2 | % | 397 | 3 | % | ||||||||||
| Unallocated | 2,079 | — | % | 2,635 | — | % | 3,510 | — | % | 1,396 | — | % | 1,493 | — | % | ||||||||||
| Total | $19,088 | 100 | % | $19,519 | 100 | % | $21,461 | 100 | % | $19,697 | 100 | % | $18,153 | 100 | % | ||||||||||
| (In Thousands) | 2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||||||
| Balance at beginning of year | $19,519 | $21,461 | $19,697 | $18,153 | $16,723 | ||||||||||||||
| Charge-offs: | |||||||||||||||||||
| Commercial | (195 | ) | (1,716 | ) | (1,611 | ) | (903 | ) | (616 | ) | |||||||||
| Real estate construction one-to-four family | — | — | — | (535 | ) | — | |||||||||||||
| Real estate term other | — | (28 | ) | (5 | ) | — | (81 | ) | |||||||||||
| Consumer secured by 1st deeds of trust | (4 | ) | (143 | ) | (85 | ) | (36 | ) | (28 | ) | |||||||||
| Consumer other | (18 | ) | (39 | ) | (43 | ) | (8 | ) | (101 | ) | |||||||||
| Total charge-offs | (217 | ) | (1,926 | ) | (1,744 | ) | (1,482 | ) | (826 | ) | |||||||||
| Recoveries: | |||||||||||||||||||
| Commercial | 908 | 442 | 293 | 699 | 379 | ||||||||||||||
| Real estate term other | 28 | 3 | 2 | — | 107 | ||||||||||||||
| Consumer secured by 1st deeds of trust | — | 12 | 2 | — | 3 | ||||||||||||||
| Consumer other | 25 | 27 | 11 | 29 | 13 | ||||||||||||||
| Total recoveries | 961 | 484 | 308 | 728 | 502 | ||||||||||||||
| Net, recoveries (charge-offs) | 744 | (1,442 | ) | (1,436 | ) | (754 | ) | (324 | ) | ||||||||||
| Provision (benefit) for loan losses | (1,175 | ) | (500 | ) | 3,200 | 2,298 | 1,754 | ||||||||||||
| Balance at end of year | $19,088 | $19,519 | $21,461 | $19,697 | $18,153 | ||||||||||||||
| Ratio of net (recoveries) charge-offs to average loans | |||||||||||||||||||
| outstanding during the period | (0.07 | )% | 0.15 | % | 0.15 | % | 0.08 | % | 0.03 | % | |||||||||
| (In Thousands) | 2019 | 2018 | 2017 | ||||||
| Balance at beginning of year | $190 | $200 | $171 | ||||||
| Charge-offs | — | — | — | ||||||
| Recoveries | — | — | — | ||||||
| Net recoveries (charge-offs) | — | — | — | ||||||
| Reserve for (recovery from) purchased receivables | (96 | ) | (10 | ) | 29 | ||||
| Balance at end of year | $94 | $190 | $200 | ||||||
| Ratio of net charge-offs (recoveries) to average purchased receivables during the period | — | % | — | % | — | % | |||
| 2019 | 2018 | 2017 | |||||||||||||||
| Average balance | Average rate paid | Average balance | Average rate paid | Average balance | Average rate paid | ||||||||||||
| (In Thousands) | |||||||||||||||||
| Interest-bearing demand accounts | $272,895 | 0.17 | % | $243,000 | 0.07 | % | $220,449 | 0.03 | % | ||||||||
| Money market accounts | 209,245 | 0.55 | % | 225,014 | 0.31 | % | 238,830 | 0.17 | % | ||||||||
| Savings accounts | 233,057 | 0.46 | % | 241,807 | 0.31 | % | 249,641 | 0.21 | % | ||||||||
| Certificates of deposit | 135,005 | 1.67 | % | 99,987 | 0.70 | % | 120,998 | 0.57 | % | ||||||||
| Total interest-bearing accounts | 850,202 | 0.58 | % | 809,808 | 0.28 | % | 829,918 | 0.21 | % | ||||||||
| Noninterest-bearing demand accounts | 426,205 | 417,464 | 418,415 | ||||||||||||||
| Total average deposits | $1,276,407 | $1,227,272 | $1,248,333 | ||||||||||||||
| Time Certificates of Deposits | ||||||
| of $100,000 or More | ||||||
| Percent of Total Deposits | ||||||
| (In Thousands) | Amount | |||||
| Amounts maturing in: | ||||||
| Three months or less | $14,779 | 12 | % | |||
| Over 3 through 6 months | 4,631 | 4 | % | |||
| Over 6 through 12 months | 41,545 | 35 | % | |||
| Over 12 months | 57,940 | 49 | % | |||
| Total | $118,895 | 100 | % | |||
| Payments Due by Period | |||||||||||||||||||
| Within 1 Year | Over 5 Years | ||||||||||||||||||
| (In Thousands) | 1-3 Years | 3-5 Years | Total | ||||||||||||||||
| December 31, 2019: | |||||||||||||||||||
| Certificates of deposit | $90,554 | $70,734 | $1,390 | $1,794 | $164,472 | ||||||||||||||
| Short-term borrowings | — | — | — | — | — | ||||||||||||||
| Long-term borrowings | 187 | 444 | 471 | 7,789 | 8,891 | ||||||||||||||
| Junior subordinated debentures | — | — | — | 10,310 | 10,310 | ||||||||||||||
| Operating lease obligations | 2,665 | 4,718 | 3,592 | 6,453 | 17,428 | ||||||||||||||
Other long-term liabilities(1) | 2,937 | 9,484 | 1,341 | 4,001 | 17,763 | ||||||||||||||
| Capital commitments | 1,389 | — | — | — | 1,389 | ||||||||||||||
| Total | $97,732 | $85,380 | $6,794 | $30,347 | $220,253 | ||||||||||||||
| December 31, 2018: | |||||||||||||||||||
| Certificates of deposit | $57,451 | $52,529 | $1,494 | $1,799 | $113,273 | ||||||||||||||
| Short-term borrowings | 34,278 | — | — | — | 34,278 | ||||||||||||||
| Long-term borrowings | 167 | 351 | 373 | 6,350 | 7,241 | ||||||||||||||
| Junior subordinated debentures | — | — | — | 10,310 | 10,310 | ||||||||||||||
| Operating lease obligations | 2,668 | 4,908 | 3,750 | 8,121 | 19,447 | ||||||||||||||
| Other long-term liabilities | 1,010 | 1,703 | 1,453 | 3,196 | 7,362 | ||||||||||||||
| Capital commitments | 57 | — | — | — | 57 | ||||||||||||||
| Total | $95,631 | $59,491 | $7,070 | $29,776 | $191,968 | ||||||||||||||
| Years Ending: | Diluted EPS as Reported | Diluted EPS without Stock Repurchase | |
| 2019 | $3.04 | $2.59 | |
| 2018 | $2.86 | $2.56 | |
| 2017 | $1.88 | $1.69 | |
| 2016 | $2.06 | $1.87 | |
| 2015 | $2.56 | $2.31 | |
| Minimum Required Capital | Well-Capitalized | Actual Ratio Company | Actual Ratio Bank | ||||
| December 31, 2019 | |||||||
| Total risk-based capital | 8.00% | 10.00% | 15.63% | 13.24% | |||
| Tier 1 risk-based capital | 6.00% | 8.00% | 14.38% | 11.98% | |||
| Common equity tier 1 capital | 4.50% | 6.50% | 13.69% | 11.98% | |||
| Leverage ratio | 4.00% | 5.00% | 12.41% | 10.36% | |||
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is defined as the sensitivity of income, expense, fair value measurements, and capital to changes in interest rates, foreign currency rates, commodity prices, and other relevant market rates or prices. The primary market risks that we are exposed to are interest rate and price risks, in addition to risk in the Alaska economy due to our community banking focus. Price risk is the risk to current or future earnings or capital arising from changes in the value of either assets or liabilities that are entered into as part of distributing or managing risk. Interest rate risk is the risk to current or future earnings or capital arising from changes in interest rates. Generally, there are four sources of interest rate risk as described below:
•Re-pricing Risk:Risk:Generally, re-pricing risk is the risk of adverse consequences from a change in interest rates that arises because of differences in the timing of when those interest rate changes affect an institution’s assets and liabilities.
•Basis Risk:Risk: Basis risk is the risk of adverse consequences resulting from unequal changes in the spread between two or more rates for different instruments with the same maturity.
•Yield Curve Risk:Risk: Also called yield curve twist risk, yield curve risk is the risk of adverse consequences resulting from unequal changes in the spread between two or more rates for different maturities for the same instrument.
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•Option Risk:Risk: In banking, option risks are known as borrower options to prepay loans and depositor options to make deposits, withdrawals, and early redemptions. Option risk arises whenever bank products give customers the right, but not the obligation, to alter the quantity of the timing of cash flows.
The Company is exposed to price and interest rate risks in the financial instruments and positions we hold. This includes investment securities, loans, loans held for sale, mortgage servicing rights, deposits, borrowings, and derivative financial instruments. Market risks such as foreign currency exchange risk and commodity price risk do not arise in the normal course of the Company's business.
The Company's price and interest rate risks are managed by the Asset and Liability Committee, a management committee that identifies and manages the sensitivity of earnings and capital to changing interest rates to achieve our overall financial objectives. Based on economic conditions, asset quality and various other considerations, the Asset and Liability Committee establishes overall balance sheet management policies as well as tolerance ranges for interest rate sensitivity and manages within these ranges.
A number of measures are used to monitor and manage interest rate risk, including interest sensitivity (gap) analysis and income simulations. An income simulation model is the primary tool used to assess the direction and magnitude of changes in net interest income resulting from changes in interest rates. Key assumptions in the model include loan and deposit volumes and pricing, prepayment speeds on fixed rate assets, and cash flows and maturities of investment securities. These assumptions are inherently uncertain and, as a result, the model cannot precisely estimate net interest income or precisely predict the impact of higher or lower interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes, changes in market conditions and management strategies, among other factors.
Although analysis of interest rate gap (the difference between the repricing of interest-earning assets and interest-bearing liabilities during a given period of time) is one standard tool for the measurement of exposure to interest rate risk, we believe that because interest rate gap analysis does not address all factors that can affect earnings performance it should not be used as the primary indicator of exposure to interest rate risk and the related volatility of net interest income in a changing interest rate
environment. Interest rate gap analysis is primarily a measure of liquidity based upon the amount of change in principal amounts of assets and liabilities outstanding, as opposed to a measure of changes in the overall net interest margin.
The Company uses derivatives in the Home Mortgage Lending segment, including commitments to originate residential mortgage loans at fixed prices, and it enters into forward delivery contracts to sell mortgage-backed securities to broker/dealers at specific prices and dates in order to hedge the interest rate risk in its residential mortgage loan commitments. The Company does not use derivatives outside of these activities in the Home Mortgage Lending segment to manage our interest rate risk exposures. However, the Company does enter into commercial loan interest rate swap agreements in its Community Banking segment in order to provide commercial loan customers the ability to convert from variable to fixed interest rates. Commercial loan interest rate swap agreements are offset with corresponding swap agreements with a third party swap dealer in order to offset the Company's exposure on the fixed component of the customer’s interest rate swap. Additional information regarding the Company’s customer interest rate swap program is presented in Note 2120 of the Notes to Consolidated Financial Statements included in Part II. Item 8 of this report.
The following table sets forth the estimated maturity or repricing, and the resulting interest rate gap, of our interest-earning assets (which exclude nonaccrual loans) and interest-bearing liabilities at December 31, 2019.2021. The amounts shown below could be significantly affected by external factors such as changes in prepayment assumptions, early withdrawals of deposits, and competition.
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| Estimated maturity or repricing at December 31, 2019 | Estimated maturity or repricing at December 31, 2021 | |||||||||||||||||||||||||||||||||||||
| (In Thousands) | Within 1 year | 1-5 years | >5 years | Total | (In Thousands) | Within 1 year | 1-5 years | >5 years | Total | |||||||||||||||||||||||||||||
| Interest -Earning Assets: | Interest -Earning Assets: | |||||||||||||||||||||||||||||||||||||
| Interest bearing deposits in other banks | $74,906 | $— | $— | $74,906 | Interest bearing deposits in other banks | $625,022 | $— | $— | $625,022 | |||||||||||||||||||||||||||||
| Portfolio investments and FHLB Stock | 197,807 | 88,414 | — | 286,221 | ||||||||||||||||||||||||||||||||||
| Portfolio loans | 586,115 | 407,180 | 39,805 | 1,033,100 | ||||||||||||||||||||||||||||||||||
| Investments securities and FHLB Stock | Investments securities and FHLB Stock | 144,270 | 313,941 | — | 458,211 | |||||||||||||||||||||||||||||||||
| Loans | Loans | 650,478 | 675,118 | 88,183 | 1,413,779 | |||||||||||||||||||||||||||||||||
| Loans held for sale | 67,834 | — | — | 67,834 | Loans held for sale | 73,650 | — | — | 73,650 | |||||||||||||||||||||||||||||
| Total interest-earning assets | $926,662 | $495,594 | $39,805 | $1,462,061 | Total interest-earning assets | $1,493,420 | $989,059 | $88,183 | $2,570,662 | |||||||||||||||||||||||||||||
| Percent of total interest-earning assets | 63.4 | % | 33.9 | % | 2.7 | % | 100.0 | % | Percent of total interest-earning assets | 58.09 | % | 38.47 | % | 3.43 | % | 99.99 | % | |||||||||||||||||||||
| Interest-Bearing Liabilities: | Interest-Bearing Liabilities: | |||||||||||||||||||||||||||||||||||||
| Interest-bearing demand accounts | $320,264 | $— | $— | $320,264 | Interest-bearing demand accounts | $692,683 | $— | $— | $692,683 | |||||||||||||||||||||||||||||
| Money market accounts | 205,801 | — | — | 205,801 | Money market accounts | 314,996 | — | — | 314,996 | |||||||||||||||||||||||||||||
| Savings accounts | 229,918 | — | — | 229,918 | Savings accounts | 348,164 | — | — | 348,164 | |||||||||||||||||||||||||||||
| Certificates of deposit | 94,226 | 68,927 | 1,319 | 164,472 | Certificates of deposit | 121,515 | 55,131 | 1,318 | 177,964 | |||||||||||||||||||||||||||||
| Securities sold under repurchase agreements | — | — | — | — | Securities sold under repurchase agreements | — | — | — | — | |||||||||||||||||||||||||||||
| Borrowings | 448 | 1,933 | 6,510 | 8,891 | Borrowings | 812 | 3,540 | 10,156 | 14,508 | |||||||||||||||||||||||||||||
| Junior subordinated debentures | — | — | 10,310 | 10,310 | Junior subordinated debentures | — | — | 10,310 | 10,310 | |||||||||||||||||||||||||||||
| Total interest-bearing liabilities | $850,657 | $70,860 | $18,139 | $939,656 | Total interest-bearing liabilities | $1,478,170 | $58,671 | $21,784 | $1,558,625 | |||||||||||||||||||||||||||||
| Percent of total interest-bearing liabilities | 90.5 | % | 7.5 | % | 1.9 | % | 99.9 | % | Percent of total interest-bearing liabilities | 94.84 | % | 3.76 | % | 1.40 | % | 100.00 | % | |||||||||||||||||||||
| Interest sensitivity gap | $76,005 | $424,734 | $21,666 | $522,405 | Interest sensitivity gap | $15,250 | $930,388 | $66,399 | $1,012,037 | |||||||||||||||||||||||||||||
| Cumulative interest sensitivity gap | $76,005 | $500,739 | $522,405 | Cumulative interest sensitivity gap | $15,250 | $945,638 | $1,012,037 | |||||||||||||||||||||||||||||||
| Cumulative interest sensitivity gap as a percentage | Cumulative interest sensitivity gap as a percentage | |||||||||||||||||||||||||||||||||||||
| of total interest-earning assets | 5.2 | % | 34.2 | % | 35.7 | % | of total interest-earning assets | 0.6 | % | 36.8 | % | 39.4 | % | |||||||||||||||||||||||||
As stated previously, certain shortcomings, including those described below, are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market interest rates. Additionally, certain assets have features that restrict changes in their interest rates, both on a short-term basis and over the lives of the assets. Further, in the event of a change in market interest rates, prepayment and early withdrawal levels could deviate significantly from those assumed in calculating the tables as can the relationship of rates between different loan and deposit categories. Moreover, the ability of many borrowers to service their adjustable-rate debt may decrease in the event of an increase in market interest rates.
While the analysis above sets forth the estimated maturity or repricing and the resulting interest rate gap of our interest-earning assets and interest-bearing liabilities, the following tables show the estimated impact on net interest income and net income at one and two year time horizons with instantaneous parallel rate shocks of up 400 basis points, up 300 basis points, up 200 basis points, up 100 basis points, and up 50 basis points, down 50 basis points, and down 100 basis points. The Company did not perform analyses for rate shock scenarios where interest rates instantaneously drop as of December 31, 2021 because those scenarios do not produce meaningful results in the current low interest rate environment. Due to the various assumptions used for this modeling and potential balance sheet strategies management may implement to mitigate interest rate risk, no assurance can be given that projections will reflect actual results.
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The following table shows the estimated impact on net interest income under for the stated interest rate scenarios:
| 1st Year Change in net interest income from base scenario | Percentage change | 2nd Year Change in net interest income from base scenario | Percentage change | |||||||||||||||||
| (In Thousands) | ||||||||||||||||||||
| Scenario: | ||||||||||||||||||||
| Up 400 basis points | $22,226 | 31.06 | % | $30,206 | 43.61 | % | ||||||||||||||
| Up 300 basis points | $16,926 | 23.65 | % | $22,966 | 33.16 | % | ||||||||||||||
| Up 200 basis points | $11,235 | 15.70 | % | $15,302 | 22.09 | % | ||||||||||||||
| Up 100 basis points | $5,590 | 7.81 | % | $7,653 | 11.05 | % | ||||||||||||||
| Up 50 basis points | $4,552 | 6.36 | % | $5,730 | 8.27 | % | ||||||||||||||
| Up 25 basis points | $2,321 | 3.24 | % | $2,892 | 4.18 | % | ||||||||||||||
| Down 50 basis points | NM | NM | NM | NM | ||||||||||||||||
| Down 100 basis points | NM | NM | NM | NM | ||||||||||||||||
| 1st Year Change in net interest income from base scenario | Percentage change | 2nd Year Change in net interest income from base scenario | Percentage change | |||||||||
| (In Thousands) | ||||||||||||
| Scenario: | ||||||||||||
| Up 400 basis points | $10,233 | 15.87 | % | $21,346 | 33.38 | % | ||||||
| Up 300 basis points | $7,909 | 12.27 | % | $16,374 | 25.60 | % | ||||||
| Up 200 basis points | $5,242 | 8.13 | % | $10,923 | 17.08 | % | ||||||
| Up 100 basis points | $2,502 | 3.88 | % | $5,405 | 8.45 | % | ||||||
| Up 50 basis points | $2,211 | 3.43 | % | $3,771 | 5.90 | % | ||||||
| Down 50 basis points | ($2,628 | ) | (4.08 | )% | ($4,452 | ) | (6.96 | )% | ||||
| Down 100 basis points | ($4,771 | ) | (7.40 | )% | ($7,870 | ) | (12.31 | )% | ||||
The following table shows the estimated impact on net income under the stated interest rate scenarios:scenarios. The trends in the estimated impact on net income under the stated interest rate scenarios differ from the table above primarily due to the inclusion of the estimated impact of changes in other operating income and expense related to mortgage banking activities:
| 1st Year Change in net income from base scenario | Percentage change | 2nd Year Change in net income from base scenario | Percentage change | |||||||||||||||||
| (In Thousands) | ||||||||||||||||||||
| Scenario: | ||||||||||||||||||||
| Up 400 basis points | $11,151 | 59.21 | % | $17,223 | 147.02 | % | ||||||||||||||
| Up 300 basis points | $10,187 | 54.09 | % | $14,757 | 125.97 | % | ||||||||||||||
| Up 200 basis points | $6,968 | 37.00 | % | $10,044 | 85.74 | % | ||||||||||||||
| Up 100 basis points | $3,786 | 20.10 | % | $5,342 | 45.61 | % | ||||||||||||||
| Up 50 basis points | $3,222 | 17.11 | % | $4,095 | 34.96 | % | ||||||||||||||
| Up 25 basis points | $1,841 | 9.77 | % | $2,260 | 19.29 | % | ||||||||||||||
| Down 50 basis points | NM | NM | NM | NM | ||||||||||||||||
| Down 100 basis points | NM | NM | NM | NM | ||||||||||||||||
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| 1st Year Change in net income from base scenario | Percentage change | 2nd Year Change in net income from base scenario | Percentage change | |||||||||
| (In Thousands) | ||||||||||||
| Scenario: | ||||||||||||
| Up 400 basis points | $1,708 | 11.17 | % | $10,896 | 73.34 | % | ||||||
| Up 300 basis points | $3,162 | 20.70 | % | $10,161 | 68.39 | % | ||||||
| Up 200 basis points | $2,308 | 15.10 | % | $7,005 | 47.15 | % | ||||||
| Up 100 basis points | $1,393 | 9.12 | % | $3,794 | 25.54 | % | ||||||
| Up 50 basis points | $1,423 | 9.31 | % | $2,713 | 18.26 | % | ||||||
| Down 50 basis points | ($1,768 | ) | (11.57 | )% | ($3,275 | ) | (22.05 | )% | ||||
| Down 100 basis points | ($3,269 | ) | (21.40 | )% | ($5,832 | ) | (39.25 | )% | ||||
ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following report, audited consolidated financial statements and the notes thereto are set forth in this Annual Report on Form 10-K on the pages indicated:
Report of Independent Registered Public Accounting Firm(Moss Adams LLP,Everett, Washington, PCAOB ID: 659) | |||||
| For the Years Ended December | |||||
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Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of
Northrim BanCorp, Inc. and Subsidiaries
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Northrim BanCorp, Inc. and Subsidiariessubsidiaries (the “Company”) as of December 31, 20192021 and 2018,2020, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2019,2021, and the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2019,2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 20192021 and 2018,2020, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2019,2021, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019,2021, based on criteria established in Internal Control - Integrated Framework (2013)issued by COSO.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for credit losses effective January 1, 2021, due to the adoption of Accounting Standards Codification Topic 326: Financial Instruments – Credit Losses (“Topic 326”). The Company adopted the new credit loss standard using the modified retrospective approach such that prior period amounts are not adjusted and continue to be reported in accordance with previously applicable generally accepted accounting principles. The adoption of the new credit loss standard and its subsequent application is also communicated as a critical audit matter below.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
65
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Credit Losses - Loans
As described in Notes 1 and 5 to the consolidated financial statements, the Company’s allowance for credit losses - loans balance was $11.7 million at December 31, 2021. The allowance for credit losses – loans is management’s best estimate of current expected credit losses in its loan portfolio and is estimated using either a discounted cash flow method or a weighted average remaining life method, depending on the nature and size of the loan pool. The estimate of current expected credit losses is based on relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of loans. Historical loss experience is the starting point for estimating expected credit losses. Adjustments are made to historical loss experience to reflect differences in asset-specific risk characteristics using qualitative factors.
We identified management’s estimation and application of management’s forecast of economic conditions used in the calculation of probabilities of default in the allowance for credit losses – loans as a critical audit matter. The forecast of economic conditions component of the allowance for credit losses - loans is used to compare the conditions that existed during the historical period to current conditions and future expectations, and to make adjustments to the historical data accordingly. Auditing management’s judgments regarding the estimation and application of forecasted economic conditions portion of the allowance for credit losses - loans involved a high degree of subjectivity.
The primary procedures we performed to address the critical audit matters included:
•Testing the design, implementation, and operating effectiveness of controls relating to management’s calculation of the allowance for credit losses – loans, including controls over the estimation and application of forecast of economic conditions.
•Obtaining management’s analysis and supporting documentation related to the forecast of economic conditions used to determine the probabilities of default, and testing whether the forecasts of economic conditions used in the calculation of the allowance for credit losses on loans are reasonable and supportable.
•Testing the appropriateness of the methodology and assumptions used in the calculation of the allowance for credit losses – loans, and testing the calculation itself, including completeness and accuracy of the data used in the calculation, application of forecasted economic conditions used in the calculation of determining probabilities of default, and recalculation of the impact of the forecast on the allowance for credit losses – loans balance.
/s/ Moss Adams LLP
March 6, 20204, 2022
We have served as the Company’s auditor since 2010.
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CONSOLIDATED FINANCIAL STATEMENTS
NORTHRIM BANCORP, INC.
Consolidated Balance Sheets
December 31, 20192021 and 20182020
| December 31, 2019 | December 31, 2018 | December 31, 2021 | December 31, 2020 | |||||||||||||||
| (In Thousands, Except Share Data) | (In Thousands, Except Share Data) | |||||||||||||||||
| ASSETS | ASSETS | |||||||||||||||||
| Cash and due from banks | $20,518 | $26,771 | Cash and due from banks | $20,805 | $23,304 | |||||||||||||
| Interest bearing deposits in other banks | 74,906 | 50,767 | Interest bearing deposits in other banks | 625,022 | 92,661 | |||||||||||||
| Investment securities available for sale | 276,138 | 271,610 | ||||||||||||||||
| Investment securities available for sale, at fair value | Investment securities available for sale, at fair value | 426,684 | 247,633 | |||||||||||||||
| Marketable equity securities | 7,945 | 7,265 | Marketable equity securities | 8,420 | 9,052 | |||||||||||||
| Total portfolio investments | 284,083 | 278,875 | ||||||||||||||||
| Investment securities held to maturity, at amortized cost | Investment securities held to maturity, at amortized cost | 20,000 | 10,000 | |||||||||||||||
| Investment in Federal Home Loan Bank stock | 2,138 | 2,101 | Investment in Federal Home Loan Bank stock | 3,107 | 2,551 | |||||||||||||
| Loans held for sale | 67,834 | 34,710 | Loans held for sale | 73,650 | 146,178 | |||||||||||||
| Loans | 1,043,371 | 984,346 | Loans | 1,413,886 | 1,444,050 | |||||||||||||
| Allowance for loan losses | (19,088 | ) | (19,519 | ) | ||||||||||||||
| Allowance for credit losses, loans | Allowance for credit losses, loans | (11,739) | (21,136) | |||||||||||||||
| Net loans | 1,024,283 | 964,827 | Net loans | 1,402,147 | 1,422,914 | |||||||||||||
| Purchased receivables, net | 24,373 | 14,406 | Purchased receivables, net | 6,987 | 13,922 | |||||||||||||
| Mortgage servicing rights, at fair value | 11,920 | 10,821 | Mortgage servicing rights, at fair value | 13,724 | 11,218 | |||||||||||||
| Other real estate owned, net | 7,043 | 7,962 | Other real estate owned, net | 5,638 | 7,289 | |||||||||||||
| Premises and equipment, net | 38,422 | 39,090 | Premises and equipment, net | 37,164 | 38,102 | |||||||||||||
| Operating lease right-of-use asset | 14,306 | — | ||||||||||||||||
| Operating lease right-of-use assets | Operating lease right-of-use assets | 11,001 | 12,440 | |||||||||||||||
| Goodwill | 15,017 | 15,017 | Goodwill | 15,017 | 15,017 | |||||||||||||
| Other intangible assets, net | 1,077 | 1,137 | Other intangible assets, net | 992 | 1,029 | |||||||||||||
| Other assets | 58,076 | 56,504 | Other assets | 54,361 | 68,488 | |||||||||||||
| Total assets | $1,643,996 | $1,502,988 | Total assets | $2,724,719 | $2,121,798 | |||||||||||||
| LIABILITIES | LIABILITIES | |||||||||||||||||
| Deposits: | Deposits: | |||||||||||||||||
| Demand | $451,896 | $420,988 | Demand | $887,824 | $643,825 | |||||||||||||
| Interest-bearing demand | 320,264 | 248,056 | Interest-bearing demand | 692,683 | 459,095 | |||||||||||||
| Savings | 229,918 | 239,054 | Savings | 348,164 | 308,725 | |||||||||||||
| Money market | 205,801 | 206,717 | Money market | 314,996 | 237,705 | |||||||||||||
| Certificates of deposit less than $250,000 | 90,702 | 75,318 | Certificates of deposit less than $250,000 | 100,851 | 92,047 | |||||||||||||
| Certificates of deposit $250,000 and greater | 73,770 | 37,955 | Certificates of deposit $250,000 and greater | 77,113 | 83,584 | |||||||||||||
| Total deposits | 1,372,351 | 1,228,088 | Total deposits | 2,421,631 | 1,824,981 | |||||||||||||
| Securities sold under repurchase agreements | — | 34,278 | ||||||||||||||||
| Borrowings | 8,891 | 7,241 | Borrowings | 14,508 | 14,817 | |||||||||||||
| Junior subordinated debentures | 10,310 | 10,310 | Junior subordinated debentures | 10,310 | 10,310 | |||||||||||||
| Operating lease liability | 14,229 | — | ||||||||||||||||
| Operating lease liabilities | Operating lease liabilities | 10,965 | 12,378 | |||||||||||||||
| Other liabilities | 31,098 | 17,124 | Other liabilities | 29,488 | 37,737 | |||||||||||||
| Total liabilities | 1,436,879 | 1,297,041 | Total liabilities | 2,486,902 | 1,900,223 | |||||||||||||
| COMMITMENTS AND CONTINGENTCIES (NOTE 20) | ||||||||||||||||||
| COMMITMENTS AND CONTINGENCIES (NOTE 19) | COMMITMENTS AND CONTINGENCIES (NOTE 19) | 0 | 0 | |||||||||||||||
| SHAREHOLDERS' EQUITY | SHAREHOLDERS' EQUITY | |||||||||||||||||
| Preferred stock, $1 par value, 2,500,000 shares authorized, none issued or outstanding | — | — | Preferred stock, $1 par value, 2,500,000 shares authorized, none issued or outstanding | — | — | |||||||||||||
| Common stock, $1 par value, 10,000,000 shares authorized, 6,558,809 and 6,883,216 shares issued and outstanding at December 31, 2019 and December 31, 2018, respectively | 6,559 | 6,883 | ||||||||||||||||
Common stock, $1 par value, 10,000,000 shares authorized, 6,014,813 and 6,251,004 shares issued and outstanding at December 31, 2021 and December 31, 2020, respectively | Common stock, $1 par value, 10,000,000 shares authorized, 6,014,813 and 6,251,004 shares issued and outstanding at December 31, 2021 and December 31, 2020, respectively | 6,015 | 6,251 | |||||||||||||||
| Additional paid-in capital | 50,512 | 62,132 | Additional paid-in capital | 31,162 | 41,808 | |||||||||||||
| Retained earnings | 149,615 | 137,452 | Retained earnings | 204,046 | 173,498 | |||||||||||||
| Accumulated other comprehensive income (loss), net of tax | 431 | (520 | ) | |||||||||||||||
| Accumulated other comprehensive (loss) income, net of tax | Accumulated other comprehensive (loss) income, net of tax | (3,406) | 18 | |||||||||||||||
| Total shareholders' equity | 207,117 | 205,947 | Total shareholders' equity | 237,817 | 221,575 | |||||||||||||
| Total liabilities and shareholders' equity | $1,643,996 | $1,502,988 | Total liabilities and shareholders' equity | $2,724,719 | $2,121,798 | |||||||||||||
See notes to consolidated financial statements
67
NORTHRIM BANCORP, INC.
Consolidated Statements of Income
Years Ended December 31, 2019, 2018,2021, 2020, and 20172019
| (In Thousands, Except Share and Per Share Data) | 2019 | 2018 | 2017 | (In Thousands, Except Share and Per Share Data) | 2021 | 2020 | 2019 | |||||||||||||||||||||
| Interest Income | ||||||||||||||||||||||||||||
| Interest and Dividend Income | Interest and Dividend Income | |||||||||||||||||||||||||||
| Interest and fees on loans and loans held for sale | $62,150 | $57,542 | $55,041 | Interest and fees on loans and loans held for sale | $79,241 | $71,091 | $62,150 | |||||||||||||||||||||
| Interest on investment securities available for sale | 6,572 | 5,481 | 4,230 | Interest on investment securities available for sale | 3,339 | 4,832 | 6,572 | |||||||||||||||||||||
| Dividends on marketable equity securities | 439 | 348 | 345 | Dividends on marketable equity securities | 440 | 466 | 439 | |||||||||||||||||||||
| Interest on investment securities held to maturity | — | — | 59 | Interest on investment securities held to maturity | 1,037 | 18 | — | |||||||||||||||||||||
| Dividends on Federal Home Loan Bank stock | Dividends on Federal Home Loan Bank stock | 102 | 84 | 76 | ||||||||||||||||||||||||
| Interest on deposits in other banks | 922 | 806 | 433 | Interest on deposits in other banks | 447 | 225 | 846 | |||||||||||||||||||||
| Total Interest Income | 70,083 | 64,177 | 60,108 | Total Interest Income | 84,606 | 76,716 | 70,083 | |||||||||||||||||||||
| Interest Expense | Interest Expense | |||||||||||||||||||||||||||
| Interest expense on deposits | 4,961 | 2,307 | 1,707 | Interest expense on deposits | 3,077 | 5,279 | 4,961 | |||||||||||||||||||||
| Interest expense on securities sold under agreements to repurchase | 40 | 50 | 34 | Interest expense on securities sold under agreements to repurchase | — | — | 40 | |||||||||||||||||||||
| Interest expense on borrowings | 251 | 223 | 173 | Interest expense on borrowings | 320 | 387 | 251 | |||||||||||||||||||||
| Interest expense on junior subordinated debentures | 389 | 389 | 516 | Interest expense on junior subordinated debentures | 382 | 385 | 389 | |||||||||||||||||||||
| Total Interest Expense | 5,641 | 2,969 | 2,430 | Total Interest Expense | 3,779 | 6,051 | 5,641 | |||||||||||||||||||||
| Net Interest Income | 64,442 | 61,208 | 57,678 | Net Interest Income | 80,827 | 70,665 | 64,442 | |||||||||||||||||||||
| (Benefit) provision for loan losses | (1,175 | ) | (500 | ) | 3,200 | |||||||||||||||||||||||
| Net Interest Income After (Benefit) Provision for Loan Losses | 65,617 | 61,708 | 54,478 | |||||||||||||||||||||||||
| (Benefit) provision for credit losses | (Benefit) provision for credit losses | (4,099) | 2,432 | (1,175) | ||||||||||||||||||||||||
| Net Interest Income After (Benefit) Provision for Credit Losses | Net Interest Income After (Benefit) Provision for Credit Losses | 84,926 | 68,233 | 65,617 | ||||||||||||||||||||||||
| Other Operating Income | Other Operating Income | |||||||||||||||||||||||||||
| Mortgage banking income | 24,201 | 20,844 | 23,287 | Mortgage banking income | 42,144 | 52,635 | 24,201 | |||||||||||||||||||||
| Bankcard fees | Bankcard fees | 3,389 | 2,837 | 2,976 | ||||||||||||||||||||||||
| Purchased receivable income | 3,271 | 3,255 | 2,975 | Purchased receivable income | 2,259 | 2,650 | 3,271 | |||||||||||||||||||||
| Bankcard fees | 2,976 | 2,811 | 2,597 | |||||||||||||||||||||||||
| Service charges on deposit accounts | 1,557 | 1,508 | 1,614 | Service charges on deposit accounts | 1,297 | 1,102 | 1,557 | |||||||||||||||||||||
| Gain (loss) on marketable equity securities | 911 | (625 | ) | — | ||||||||||||||||||||||||
| Interest rate swap income | 964 | 84 | 26 | Interest rate swap income | 452 | 949 | 964 | |||||||||||||||||||||
| Commercial servicing revenue | 624 | 1,422 | 372 | Commercial servicing revenue | 306 | 527 | 624 | |||||||||||||||||||||
| Gain on sale of securities | 23 | — | 11 | |||||||||||||||||||||||||
| Gain on sale of Northrim Benefits Group | — | — | 4,445 | |||||||||||||||||||||||||
| Employee benefit plan income | — | — | 2,506 | |||||||||||||||||||||||||
| Gain on sale of marketable equity securities, net | Gain on sale of marketable equity securities, net | 67 | 98 | — | ||||||||||||||||||||||||
| Unrealized (loss) gain on marketable equity securities | Unrealized (loss) gain on marketable equity securities | (101) | 61 | 911 | ||||||||||||||||||||||||
| Gain on sale of investment securities available for sale, net | Gain on sale of investment securities available for sale, net | — | — | 23 | ||||||||||||||||||||||||
| Other income | 2,819 | 2,868 | 2,641 | Other income | 2,450 | 2,469 | 2,819 | |||||||||||||||||||||
| Total Other Operating Income | 37,346 | 32,167 | 40,474 | Total Other Operating Income | 52,263 | 63,328 | 37,346 | |||||||||||||||||||||
| Other Operating Expense | Other Operating Expense | |||||||||||||||||||||||||||
| Salaries and other personnel expense | 51,317 | 44,650 | 44,721 | Salaries and other personnel expense | 60,412 | 61,137 | 51,317 | |||||||||||||||||||||
| Data processing expense | 7,128 | 6,035 | 5,549 | Data processing expense | 8,567 | 7,668 | 7,128 | |||||||||||||||||||||
| Occupancy expense | 6,607 | 6,136 | 6,752 | Occupancy expense | 7,078 | 6,624 | 6,607 | |||||||||||||||||||||
| Professional and outside services | 2,531 | 2,453 | 2,365 | Professional and outside services | 2,801 | 3,157 | 2,531 | |||||||||||||||||||||
| Marketing expense | 2,373 | 2,318 | 2,566 | Marketing expense | 2,741 | 2,320 | 2,373 | |||||||||||||||||||||
| Insurance expense | 557 | 862 | 1,161 | Insurance expense | 1,593 | 1,228 | 557 | |||||||||||||||||||||
| Intangible asset amortization expense | Intangible asset amortization expense | 37 | 48 | 60 | ||||||||||||||||||||||||
| Compensation expense - RML acquisition payments | 468 | — | 130 | Compensation expense - RML acquisition payments | — | — | 468 | |||||||||||||||||||||
| Intangible asset amortization expense | 60 | 70 | 100 | |||||||||||||||||||||||||
| Impairment of equity method investment | — | 804 | 686 | |||||||||||||||||||||||||
| OREO (income) expense, net of rental income and gains on sale | (193 | ) | 258 | 837 | OREO (income) expense, net of rental income and gains on sale | (432) | (242) | (193) | ||||||||||||||||||||
| Other operating expense | 5,990 | 6,214 | 6,286 | Other operating expense | 6,399 | 7,174 | 5,990 | |||||||||||||||||||||
| Total Other Operating Expense | 76,838 | 69,800 | 71,153 | Total Other Operating Expense | 89,196 | 89,114 | 76,838 | |||||||||||||||||||||
| Income Before Provision for Income Taxes | 26,125 | 24,075 | 23,799 | Income Before Provision for Income Taxes | 47,993 | 42,447 | 26,125 | |||||||||||||||||||||
| Provision for income taxes | 5,434 | 4,071 | 10,321 | Provision for income taxes | 10,476 | 9,559 | 5,434 | |||||||||||||||||||||
| Net Income | 20,691 | 20,004 | 13,478 | Net Income | $37,517 | $32,888 | $20,691 | |||||||||||||||||||||
| Less: Net income attributable to the noncontrolling interest | — | — | 327 | |||||||||||||||||||||||||
| Net Income Attributable to Northrim BanCorp, Inc. | $20,691 | $20,004 | $13,151 | |||||||||||||||||||||||||
| Earnings Per Share, Basic | $3.08 | $2.91 | $1.91 | Earnings Per Share, Basic | $6.07 | $5.18 | $3.08 | |||||||||||||||||||||
| Earnings Per Share, Diluted | $3.04 | $2.86 | $1.88 | Earnings Per Share, Diluted | $6.00 | $5.11 | $3.04 | |||||||||||||||||||||
| Weighted Average Shares Outstanding, Basic | 6,708,622 | 6,877,573 | 6,889,621 | Weighted Average Shares Outstanding, Basic | 6,180,801 | 6,354,687 | 6,708,622 | |||||||||||||||||||||
| Weighted Average Shares Outstanding, Diluted | 6,808,209 | 6,981,557 | 6,977,910 | Weighted Average Shares Outstanding, Diluted | 6,249,313 | 6,431,367 | 6,808,209 | |||||||||||||||||||||
See notes to consolidated financial statements
68
NORTHRIM BANCORP, INC.
Consolidated Statements of Comprehensive Income
Years Ended December 31, 2019, 2018,2021, 2020, and 20172019
2010
| (In Thousands) | 2019 | 2018 | 2017 | (In Thousands) | 2021 | 2020 | 2019 | |||||||||||||||||||||
| Net income | $20,691 | $20,004 | $13,478 | Net income | $37,517 | $32,888 | $20,691 | |||||||||||||||||||||
| Other comprehensive income (loss), net of tax: | Other comprehensive income (loss), net of tax: | |||||||||||||||||||||||||||
| Securities available for sale: | Securities available for sale: | |||||||||||||||||||||||||||
| Unrealized holding gains (losses) arising during the period | $2,866 | ($692 | ) | $175 | ||||||||||||||||||||||||
| Unrealized holding (losses) gains arising during the period | Unrealized holding (losses) gains arising during the period | ($5,564) | $411 | $2,866 | ||||||||||||||||||||||||
| Reclassification of net gains included in net income (net of tax | Reclassification of net gains included in net income (net of tax | |||||||||||||||||||||||||||
| expense of $7, $0, and $5 in 2019, 2018, and 2017, | ||||||||||||||||||||||||||||
| expense of $—, $—, and $7 in 2021, 2020, and 2019, | expense of $—, $—, and $7 in 2021, 2020, and 2019, | |||||||||||||||||||||||||||
respectively) | (16 | ) | — | (6 | ) | respectively) | — | — | (16) | |||||||||||||||||||
| Derivatives and hedging activities: | Derivatives and hedging activities: | |||||||||||||||||||||||||||
| Unrealized holding (losses) gains arising during the period | (1,142 | ) | 423 | 184 | ||||||||||||||||||||||||
| Income tax (expense) benefit related to unrealized gains and losses | (757 | ) | 210 | (141 | ) | |||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | 951 | (59 | ) | 212 | ||||||||||||||||||||||||
| Unrealized holding gains (losses) during the period | Unrealized holding gains (losses) during the period | 780 | (1,201) | (1,142) | ||||||||||||||||||||||||
| Income tax benefit (expense) related to unrealized gains and losses | Income tax benefit (expense) related to unrealized gains and losses | 1,360 | 377 | (757) | ||||||||||||||||||||||||
| Other comprehensive (loss) income, net of tax | Other comprehensive (loss) income, net of tax | (3,424) | (413) | 951 | ||||||||||||||||||||||||
| Comprehensive income | 21,642 | 19,945 | 13,690 | Comprehensive income | $34,093 | $32,475 | $21,642 | |||||||||||||||||||||
| Less: comprehensive income attributable to the noncontrolling interest | — | — | 327 | |||||||||||||||||||||||||
| Comprehensive income attributable to Northrim BanCorp, Inc. | $21,642 | $19,945 | $13,363 | |||||||||||||||||||||||||