NORTHRIM BANCORP, INC.
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:
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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.
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TABLE OF CONTENTS |
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| 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 | |
| Part III | |
Item 10. | | |
Item 11. | | |
Item 12. | | |
Item 13. | | |
Item 14. | | |
| Part IV | |
Item 15. | | |
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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.
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
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.
Management believes that our real estate construction and term real estate loan departments have developed a strong level of expertise and will continue to compete favorably in our markets. We have also targeted the acquisition of new customers in professional fields including physicians, dentists, accountants, and attorneys. In addition to lending products, in many cases commercial customers also require multiple deposit and affiliateaffiliated services that add franchise value to the Company. While we expect that opportunities for growth in 2020 will be modest mainly due to the lower oil prices compared to pre-2014 levels, which has led to a slower economy in Alaska, weWe believe that these strategies will continue to benefit the Company in 2022, and we intend to continue to grow our balance sheet through increasing our market share. The Company benefits from solid capital and liquidity positions, and management believes that this provides a competitive advantage in the current business environment. (See “Liquidity and Capital Resources” in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.)
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.
EmployeesHuman Capital Resources
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.
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
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
Insured cash sweep•IntraFi® Network Deposits℠ and business sweep.sweep;
•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
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")
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.
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.
After three consecutive years of a mild recession, the Alaska economy began to show a positive change in the fourth quarter of 2018, with improvements continuing throughout 2019. The State Department of Labor reported growth of 1,900 jobs, or 0.6%, in December of 2019 compared to December of 2018. After 37 months of year-over-year declines, Alaska had 15 consecutive months of year-over-year job increases as of December 2019. The Alaska Department of Labor predicts a recovery of another 1,100 jobs, or an approximately 0.3% increase in total employment in 2020. While this is an improvement compared to the job losses that occurred in 2016-2018, the Company anticipates this relatively slow growth rate will have an impact on our ability to grow organically in the next few years.
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 was 0.71% at the end of the third quarter of 2019. The comparable national average rate was 0.84% for the same time period 2019. The national rate continues to improve, while the Alaska rate remains relatively lower. The survey also reported that the percentage of delinquent mortgage loans in Alaska was 3.16% for the third quarter of 2019. The comparable delinquency rate for the entire country was higher at 4.09%.
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.
A material portion of our loans at December 31, 2019, were secured by real estate located in greater Anchorage, Matanuska-Susitna Valley, Fairbanks, and Southeast Alaska. In 2019, 31% 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 29% and 30% in 2018 and 2017, 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. At December 31, 2019, $412.7 million, or 39%, of our loan portfolio was represented by commercial loans in Alaska.
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.
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.
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 Trump administrationIn December 2013, the Federal Reserve, the Office of the Comptroller of the Currency, the FDIC, the Securities and various members of Congress from timeExchange Commission (“SEC”), and the Commodities Futures Trading Commission issued final rules to time have expressed a desire to modify or repeal partsimplement certain provisions of the Dodd-Frank Act. We cannot predict whether any modificationAct commonly known as the “Volcker Rule.” The Volcker Rule, as amended on August 20, 2019, generally prohibits U.S. banks from engaging in proprietary trading and restricts those banking entities from sponsoring, investing in, or repeal will be enacted or, if so, any effect they would have on our business, operation or financial condition orhaving certain relationships with hedge funds and private equity funds. The prohibitions under the Volcker Rule are subject to a number of statutory exemptions, restrictions, and definitions. The Volcker Rule has not had a material impact on the financial services industry in general. Company’s Consolidated Financial Statements, but we continue to evaluate its application to our current and future operations.
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.
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
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-
weightedrisk-weighted value will generally be its percentage weight multiplied by the asset's value as determined under generally accepted accounting principles. In addition, certain off-balance-sheet items are converted to balance-sheet credit equivalent amounts, and each amount is then assigned to one of the risk categories. An institution's federal regulator may require the institution to hold more capital than would otherwise be required under the Rules if the regulator determines that the institution's capital requirements under the Rules are not commensurate with the institution's credit, market, operational or other risks.
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
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
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
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
An investment in the Company’s common stock is subject to risks inherent to the Company’s business. The material risks and uncertainties that management believes affect the Company are described below. Before making an investment decision, you should carefully consider the risks and uncertainties described below together with all of the other information included or incorporated by reference in this report. The risks and uncertainties described below are not the only ones facing the Company. Additional risks and uncertainties that management is not aware of or focused on or that management currently deems immaterial may also impair the Company’s business operations. This report is qualified in its entirety by these 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.
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.
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
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:
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▪ | 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
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.
Changes in Residential mortgage lending is a market interest rates could adversely impact the Company.
Our earnings are impacted by changing interest rates. Changes in interest rates affect the demand for new loans, the credit profile of existing loans, the rates received on loanssector that experiences significant volatility and securities, and rates paid on deposits and borrowings. These impacts may negatively impact our ability to 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 commercial loan portfolio.
Interest rates may be affectedis influenced by many factors beyond our control, includingcontrol.
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.
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 SEC 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 operations. 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, 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 Consumer Financial Protection Bureau 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 debt card interchange fees, and requires
banking regulators, the SEC and national stock exchanges to adopt significant new corporate governance and executive compensation reforms.
Certain provisions of these new rules have phase-in periods, including a 2.5% conservation buffer, which began to be phased-in in 2016 and took full effect on January 1, 2019. Further, regulators have significant discretion and authority to prevent or remedy practices that they deem to be unsafe or unsound, or violations of laws or regulations by financial institutions and holding companies in the performance of their supervisory and enforcement duties. These powers have been utilized more frequently in recent years due to the serious national economic conditions that faced the financial system in late 2008 and early 2009. The exercise of regulatory authority may have a negative impact on our financial condition and results of operations. Additionally, our business is affected significantly by the fiscal and monetary policies of the U.S. federal government and its agencies, including the FRB.
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 operationsfuture loan origination volume and the trading price of our common stock.
We are subject to more stringent capital and liquidity requirements which may adversely affect our net income and future growth.
In July 2013, the FRB and the FDIC announced the new capital rules, which apply to both depository institutions and (subject to certain exceptions not applicable to the Company) their holding companies. As described in further detail above in “Item 1 Business - Supervision and Regulation” these rules created increased capital requirements for United States depository institutions and their holding companies. These rules include risk-based and leverage capital ratio requirements, which became effective on January 1, 2015. These rules also revise the prompt corrective action framework, which is designed to place restrictions on insured depository institutions, including the Bank, if their capital levels do not meet certain thresholds. These revisions also became effective January 1, 2015.
Our failure to comply with the minimum capital requirements could result in our regulators taking formal or informal actions against us which could restrict our future growth or operations. margins.
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.
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.
Residential mortgage lending is a market sector that experiences significant volatility and is influenced by many factors beyond our control.
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 has experienced substantial volatility in recent periods primarily due to changes in interest rates and 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 earningsOur business, financial condition and results of operations are subject to risk from changes in customer behavior.
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
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 established a reserve for probable losses we expect to incur in connection withon loans, in oursecurities and off-balance sheet credit portfolio. Thisexposures. The amount of each allowance reflects ouraccount represents management's best estimate of current expected credit losses on these financial instruments considering available information, from internal and external sources, relevant to assessing exposure to credit loss over the collectabilitycontractual term of certain identified loans, as well as an overall risk assessment of total loans outstanding. Ourthe instrument. Relevant available information includes historical credit loss experience, current conditions and reasonable and supportable forecasts. As a result, the determination of the amountappropriate level of loan loss allowance is highly subjective; although management personnel apply criteria such as risk ratings and historical loss rates; these factors may not be adequate predictors of future loan performance. Accordingly, we cannot offer assurances that these estimates ultimately will prove correct or that the loan loss allowance will be sufficient to protect against losses that ultimately may occur. If our loan loss allowance proves to be inadequate, we may suffer unexpected charges to income, which would adversely impact our results of operations and financial condition. Moreover, bank regulators frequently monitor banks' loan loss allowances, and if regulators were to determine that the allowance is inadequate, theyfor credit losses inherently involves a high degree of subjectivity and requires us to make significant estimates related to current and expected future credit risks and trends, all of which may undergo material changes. Continuing deterioration in economic conditions affecting borrowers and securities issuers; new information regarding existing loans, credit commitments and securities holdings; the continuation of the COVID-19 pandemic or other global pandemics; natural disasters and risks related to climate change; and identification of additional problem loans, ratings down-grades and other factors, both within and outside of our control, may require usan increase in the allowances for credit losses on loans, securities and off-balance sheet credit exposures. In addition, bank regulatory agencies periodically review our allowance for credit losses and may require an increase in credit loss expense or the recognition of further loan charge-offs, based on judgments different than those of management. Furthermore, if any charge-offs related to loans, securities or off-balance sheet credit exposures in future periods exceed our allowances for credit losses on loans, securities or off-balance sheet credit exposures, we will need to recognize additional credit loss expense to increase the applicable allowance. Any increase in the allowance which also would adversely impactfor credit losses on loans, securities and/or off-balance sheet credit exposures will result in a decrease in net income and, possibly, capital, and may have a material adverse effect on our business, financial condition and results of operations.
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
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.
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, 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.
Epidemics, climate change, severe weather, natural disasters, and other external events could significantly impact our business.
Public health or similar issues, such as epidemics or pandemics, including the current outbreak of novel coronavirus (“2019-nCoV”), for which the World Health Organization declared a global emergency on January 30, 2020, may result in health or other government authorities requiring the closure of our branch offices and the offices or other businesses of our customers and could significantly disrupt our operations and the operations of our customers. The extent of the adverse impact that any expansion of the current 2019-nCoV outbreak could have on the economy and on us cannot be predicted at this time. In addition, 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.
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 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 member banks are subject. 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, we cannot predict the nature or impact of future changes in monetary and fiscal policies.
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.
Changes in accounting standards may require us to increase our Allowance for Loan Losses and could materially impact our financial statements.
From time to time, the Financial Accounting Standards Board (the "FASB") and the SEC change the financial accounting and reporting standards that govern the preparation of our financial statements. These changes can materially impact how we record and report our financial condition and results of operations. For example, in June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (“ASU 2016-13”) which changes, among other things, the way companies must record expected credit losses on financial instruments that are not accounted for at fair value through net income, including loans held for investment, available for sale and held-to-maturity debt securities, trade and other receivables, net investment in leases and other commitments to extend credit held by a reporting entity at each reporting date. ASU 2016-13 requires that financial assets measured at amortized cost be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. This differs from current US GAAP which is based on incurred losses inherent in the loan portfolio and moves to a current estimate of all expected credit losses based on relevant information about past events including historical experience, current conditions and reasonable and supportable forecasts that affect the collectability of the reported amount. However, on October 16, 2019 the FASB voted to delay ASU 2016-13 for Smaller Reporting Companies, which will change the effective date for the Company to fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2022. Based on our loan portfolio composition at December 31, 2019, we currently estimate that the impact of this standard would result in an overall decrease in our allowance for loan losses; however, given that this standard will not apply to the Company until late 2022, the ultimate effect of this standard will depend on the size and composition of our loan portfolio, the loan portfolio’s credit quality and economic conditions at the time of adoption, as well as any refinements to our models, methodology and other key assumptions. The actual impact on the Company’s consolidated financial position and results of operations upon adoption cannot be determined at this time; in the event that our loan portfolio, the credit quality of the loan portfolio or economic conditions change materially prior to adoption of the standard the implementation of this standard and may result in an increase in the allowance for loan losses as compared to current levels.
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.
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.
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.
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.
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.
On July 27, 2017, Certain provisions of these new rules have phase-in periods, including a 2.5% conservation buffer, which began to be phased-in in 2016 and took full effect on January 1, 2019. Further, regulators have significant discretion and authority to prevent or remedy practices that they deem to be unsafe or unsound, or violations of laws or regulations by financial institutions and holding companies in the performance of their supervisory and enforcement duties. These powers have been utilized more frequently in recent years due to the serious national economic conditions that faced the financial system in late 2008 and early 2009. The exercise of regulatory authority may have a negative impact on our financial condition and results of operations. Additionally, our business is affected significantly by the fiscal and monetary policies of the U.S. federal government and its agencies, including the FRB.
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.
with the same, may be adversely affected. Furthermore, failure to adequately manage this transition process with our customers could adversely impact our reputation.
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.
Accounting, Tax and Financial Risks
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.
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.
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.
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 9170 Jewel Lake Road 4000 W. Dimond Boulevard, Suite 101,No. 02, Anchorage, AK
| 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 |
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
11901 Business Boulevard, #203, 12812 Old Glenn Highway, Suite C-4, Eagle River, AK | Leased |
Fairbanks Office
308 324 Old Steese Highway, Suite 7, Fairbanks, AK | Leased |
Fairbanks Northrim Office
360 Merhar Avenue, Fairbanks, AK | Leased |
Fairbanks Office
711 Gaffney Road, Suite 202,201, Fairbanks, AK | Leased |
Juneau Office
8800 Glacier Highway, #232, Juneau, AK | Leased |
Kodiak Office
2011 Mill Bay Road, #101,#1, Kodiak, AK | Leased |
Soldotna Office
44296 44384 Sterling Highway, #1,Suite 102, Soldotna, AK | 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.
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.
The following are high and low closing prices as reported by NASDAQ. Prices do not include retail markups, markdowns or commissions.
|
| | | | | |
| | 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 |
In 2019, we paid cash dividends of $0.30 per share in the first and second quarters and $0.33 per share in the third and fourth quarters. In 2018, we paid cash dividends of $0.24 per share in the first and second quarters and $0.27 per share in the third and fourth quarters. Cash dividends totaled $8.5 million, $7.1 million, and $6.0 million in 2019, 2018, and 2017, respectively. On February 27, 2020, the Board of Directors approved payment of a $0.34 per share cash dividend on March 20, 2020, to shareholders of record on March 12, 2020. The Company and the Bank are subject to restrictions on the payment of dividends pursuant to applicable federal and state banking regulations and Alaska corporate law. The dividends that the Bank pays to the Company are limited to the extent necessary for the Bank to meet the regulatory requirements of a “well-capitalized” bank. Given the fact that the Bank believes it will remain “well-capitalized” and exceed the capital conservation buffer; the Company expects to receive dividends from the Bank in 2020.
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.
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.
![capture.jpg](https://files.docoh.com/10-K/0001163370-20-000008/capture.jpg)
![nrim-20211231_g1.jpg](https://files.docoh.com/10-K/0001163370-22-000008/nrim-20211231_g1.jpg)
| | | | | | | | | | | | | | | | | | | | |
| 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 | |
|
| | | | | | | | | | | | |
| 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 |
| — | % |
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 2019 and 2018 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 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 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. 2018 number of banking offices includes 15 full service branches and 1 loan production office.
8FTE includes 311, 320, 314, 321, 317, and 309 Community Banking employees in 2019, 2018, 2017, 2016, 2015 and 2014, respectively. FTE includes 120, 110, 115, 130, 124, and 117 Home Mortgage Lending employees in 2019, 2018, 2017, 2016, 2015 and 2014, respectively.
Reconciliation of Selected Financial Data to GAAP Financial Measures
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.
Reconciliationoftotal shareholders' equity to tangiblecommonshareholders’equity (Non-GAAP)and total assets totangible assets:
|
| | | | | | | | | | | | | | | | | | |
(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 | % |
Reconciliation of tangible book value per share to book value per share
|
| | | | | | | | | | | | | | | | | | |
(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 |
|
Reconciliation of tax-equivalent net interest margin to net interest margin
|
| | | | | | | | | | | | | | | | | | |
(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 | % |
Calculation of efficiency ratio
|
| | | | | | | | | | | | | | | | | | |
(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 | % |
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.
ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussionWe have prepared this Management's Discussion and Analysis as an aid to understanding our financial results. It highlights key information as determined by management but may not contain all of the information that is important to you. For a more complete understanding, the followingIt should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto as of December 31, 2019, 2018 and 2017 included in Part II. Item 8 of this report. Discussions of 20172019 items and year-to-year comparisons between 20182020 and 20172019 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II,II. Item 7 of our Annual Report on Form 10-K for fiscal year ended December 31, 2018.2020.
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:
an increase in mortgage banking income due to increased mortgage production;
an2020. The increase in net interest income resulting from higher average net interest-earning asset balances and higher average rates;
is the result of an $11.6 million increase in the gain on marketable equity securities from changes in fair value; and
a benefitnet income in the provision for loan losses primarily resulting from improvementsCommunity Banking segment, which was only partially offset by a $7.0 million decrease in credit quality and recoveries.net income in the Home Mortgage Lending segment.
Highlights for the year ended December 31, 20192021 are as follows:
Total revenues, which include net interest•Net income plus other operating income,in the Community Banking segment increased 9%74% or $11.6 million, to $101.8$27.2 million in 2019 from $93.42021 as compared to 2020. This increase was primarily the result of the following:
◦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 net interest margin increased to 4.65% in 2019 from 4.55% in 2018 mostly due to an increase in average loans to $1.01 billion in 2019forgiven compared to $971.5$65.1 million in 2018, as well as increases2020. As of December 31, 2021, there is $4.5 million in average interest rates.deferred PPP loan fees, net of deferred costs, remaining to be recognized. Management expects the majority of the remaining deferred fees to be recognized in 2022.
◦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.
Return on average assets was 1.33%◦Interest expense decreased $2.3 million to $3.8 million in 20192021 from $6.1 million in 2020 due to lower interest rates.
◦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.
•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.
•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 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| 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
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.
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 | |
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.
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.
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.
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.
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.
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.
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.
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 | $— | | | $— | |
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.
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 | |
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 | |
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 | % |
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
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.
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.
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
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
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:
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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:
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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 |
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.
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| 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.
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.
Regular credit reviews of the portfolio also identify loans that are considered potentially impaired. A loan is considered impaired when based on current information and events, we determine that we will probably not be able to collect all amounts due according to the loan contract, including scheduled interest payments. When we identify a loan as impaired, we measure the impairment using discounted cash flows, except when the sole remaining source of the repayment for the loanprepayments. The LGD is the liquidation ofexpected loss which would be realized presuming a default has occurred and primarily measures the collateral. In these cases, we use the current fair value of the collateral less selling costs, insteador other secondary source of discounted cash flows. repayment related to the collateral.
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.
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.
If we determine that the valuecannot properly be reported in one of the impaired loan is less thanpreceding categories. The Company utilizes the recorded investmentweighted average remaining life method to quantitatively estimate credit losses for this pool.
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.
Finally, the Company assesses the overall adequacy of the Allowance based on several factors including the level of the Allowance as compared to totalnonaccrual loans, and nonperforming loansdelinquencies;
•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.
The unallocated portion of the Allowance is based upon management’s evaluation of various factors that are not directly measured in the determination of the allocated portions of the Allowance. Such factors include uncertainties in identifying triggering events that directly correlate to subsequent loss rates, uncertainties in economic conditions, risk factors that have not yet manifested themselves in loss allocation factors, and historical loss experience data that may not precisely correspond to the current portfolio. In addition, the unallocated reserve may fluctuate based upon the direction of various risk indicators. Examples of such factors include the risk as to current and prospective economic conditions, the level and trend of charge offs or recoveries, and the risk of heightened imprecision or inconsistency of appraisals used in estimating real estate values. Although this allocation process may not accurately predict credit losses by loan type or in aggregate, the total allowance for credit losses is available to absorb losses that may arise from any loan type or category. Due to the subjectivity involved in the determination of the unallocated portion of the Allowance, the relationship of the unallocated component to the total Allowance may fluctuate from period to period.
Based on our methodology and its components, management believes the resulting Allowance is adequate and appropriate for the risk identified in the Company's loan portfolio. Given current processes employed by the Company, management believes the segments, classes, and estimated loss rates currently assigned are appropriate. It is possible that others, given the same information, may at any point in time reach different reasonable conclusions that could be material to the Company's financial statements. In addition, current loan classes and fair value estimates of collateral are subject to change as we continue to review loans within our portfolio and as our borrowers are impacted by economic trends within their market areas. Although we have established an Allowance that we consider adequate, there can be no assurance that the established Allowance will be sufficient to offset losses on loans in the future. In addition, a substantial percentage of our loan portfolio is secured by real estate; as a result, a significant decline in real estate market values may require an increase in the Allowance.
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
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.
Impact of accounting pronouncements to be implemented in future periods
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (“ASU 2016-13”). ASU 2016-13 is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates, but will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. ASU 2016-13 is effective for the Company for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2019, and must be applied prospectively. However, on October 16, 2019 the FASB voted to delay ASU 2016-13 for Smaller Reporting Companies. The Company has elected Small Reporting Company status, which changes the effective date for ASU 2016-13 for the Company to fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2022.
Our implementation process includes loss forecasting model development, evaluation of technical accounting topics, updates to our allowance documentation, reporting processes and related internal controls, and overall operational readiness for our adoption of the ASU 2016-13, which will continue until adoption, including parallel runs for CECL alongside our current allowance process.
We are in the process of developing, validating, and implementing models used to estimate credit losses under CECL. We have completed substantially all of our loss forecasting models, and we expect to complete the validation process for our loan models during 2020. Our current planned approach for estimating expected life-time credit losses for loans includes the following key components:
An initial loss forecast period of one year for all loan portfolio segments and classes of financing receivables and off-balance-sheet credit exposures. This period reflects management’s expectation of losses based on forward-looking economic scenarios over that time.
A historical loss forecast period covering the remaining contractual life, adjusted for prepayments, by segment and class of financing receivables based on the change in key historical economic variables during representative historical expansionary and recessionary periods.
A reversion period of up to two years connecting the initial loss forecast to the historical loss forecast based on economic conditions at the measurement date.
Utilization of discounted cash flow ("DCF") methods to measure credit impairment for loans modified in a troubled debt restructuring, unless they are collateral dependent and measured at the fair value of collateral. The DCF methods would obtain estimated life-time credit losses using the conceptual components described above.
As a Smaller Reporting Company, the Company is not required to adopt CECL before January 1, 2023, and we have elected not to early adopt as of January 1, 2020. However, we have the option to early adopt CECL as of either January 1, 2021, or January 1, 2022. Based on our loan portfolio composition at December 31, 2019, and the Company's current economic forecast, had we elected to early adopt CECL as of January 1, 2020, we estimate the impact of adoption to be an overall decrease in our allowance for credit losses ("ACL") for loans between $7.5 million and $9 million. The reduction reflects an expected decrease for all loan segments given their short contractual maturities. The Company does not hold a material amount of residential mortgage loans with long or indeterminate maturities as of December 31, 2019. In most instances the Company believes that the ACL for these types of loans would lead to an increase in the ACL. We will continue to evaluate and refine the results of our loss estimates until adoption of ASU 2016-13.
The ultimate effect of CECL on our ACL will depend on the size and composition of our loan portfolio, the loan portfolio’s credit quality and economic conditions at the time of adoption, as well as any refinements to our models, methodology and other key assumptions. At adoption, we will have a cumulative-effect adjustment to retained earnings for our change in the ACL. We currently estimate an overall decrease in our ACL, which will result in an increase to our retained earnings and regulatory capital amounts and ratios.
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, sales of employee benefit plans (through August of 2017, when we sold our interest in the assets of NBG), service charges and fees, and bankcard fees. Our operating expenses consist in large part of salaries and other personnel costs, occupancy, data processing, marketing, and professional services expenses. Interest income and cost of funds, or interest expense, 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 attributable to the Company of $20.7 million in 2019, compared to net income of $20.0 million in 2018. During these periods, net income per diluted share was $3.04 and $2.86, respectively. The increase in net income in 2019 compared to 2018 was primarily due to increases in other operating income, net interest income, and the benefit for loan losses.
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 2019 was $64.4 million, compared to $61.2 million in 2018. The increase in 2019 as compared to 2018 was the result of higher net average interest-earning asset balances as well as higher average interest rates. During 2019 and 2018, net interest margins were 4.65% and 4.55%, respectively. The increase in net interest margin in 2019 as compared to 2018 is the result of increases in the spread between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.
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:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
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 | % | | |
1Interest income includes loan fees. Loan fees recognized during the period and included in the yield calculation totaled $3.3 million, $3.0 million and $3.2 million for 2019, 2018 and 2017, respectively.
2Nonaccrual loans are included with a zero effective yield. Average nonaccrual loans included in the computation of the average loans were $16.9 million, $17.5 million, and $18.1 million in 2019, 2018 and 2017, respectively.
3Consists of investment securities available for sale, investment securities held to maturity, marketable equity securities, and investment in Federal Home Loan Bank stock.
4Consists of interest bearing deposits in other banks and domestic CDs.
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:
|
| | | | | | | | | | | | | | | | | | |
| 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 |
|
Provision for Loan Losses
We recorded a benefit for loan losses in 2019 of $1.2 million, compared to a benefit for loan losses of $500,000 in 2018. The loan loss provision decreased in 2019 compared to 2018 primarily due to an improvement in credit quality as nonperforming loans and adversely classified loans decreased, the Alaskan economy improved, and the Company recorded net recoveries for the year. See the “Allowance for Loan Losses” section under “Financial Condition” and Note 6 of the Notes to Consolidated Financial Statements included in Item 8 of this report for further discussion of these decreases and changes in the Company’s Allowance.
Other Operating Income
The following table details the major components of other operating income for the years ended December 31:
|
| | | | | | | | | | | | | | | | | | | |
(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 |
|
2019 Compared to 2018
The most significant changes in other operating income in 2019 were increases in mortgage banking income and gains on marketable equity securities, as well as higher interest rate swap 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 65% of total other operating income in 2019. Mortgage banking income increased in 2019 compared to 2018 mainly due to an increase in mortgage loans originated and sold as this volume increased to $684 million in 2019 from $528 million in 2018. The overall increase in mortgage originations is primarily the result of the decrease in interest rates during the year. The Company recognized $964,000 in interest rate swap income in 2019 on the execution of five interest rate swaps which totaled $40.6 million in notional value compared to the execution of two interest rate swaps with a total notional value of $2.8 million in 2018. These interest rate swaps are related to the Company's commercial lending operations. Lastly, commercial servicing revenue decreased in 2019 because in 2018 the Company recorded for the first time in other operating income the fair value of its commercial loan servicing portfolio of $1.0 million. In 2019, only changes in the fair value of the Company's commercial loan servicing portfolio are reflected in other operating income, which comprised a portion of the decrease in other income in 2019 as compared to 2018.
Other Operating Expense
The following table details the major components of other operating expense for the years ended December 31:
|
| | | | | | | | | | | | | | | | | | | |
(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 |
|
2019 Compared to 2018
Other operating expense increased in 2019 as compared to the prior year primarily due to increases in salaries and other personnel expense, data processing expense, occupancy expense, and compensation expense related to RML acquisition payments. These increases were only partially offset by a decrease in other expenses. The fourth quarter of 2019 marked the end of the five-year period following the acquisition of RML during which the Company was required to make additional payments to the former owners of RML when profitability hit certain targets. Per the terms of the purchase agreement, no further payments are scheduled, and therefore no additional expense for RML acquisition payments will be recorded in the future. The $6.7 million increase in salaries and other personnel expense is the result of the following items. Salaries increased $2.2 million, or approximately 8% in 2019 compared to 2018 due to salary increases as total FTE remained consistent from 2018 to 2019. Profit sharing expense increased $1.5 million, or 112%, in 2019 as compared to 2018. While a portion of this increase is due to improvement in the Company's financial results in 2019, the majority of the increase is due to a redesign of the profit sharing plan that results in a higher payout to employees when the Company's financial results are higher. Commission expense for mortgage originations increased $1.4 million, or 27%, as a result of higher mortgage production in 2019. Lastly, group medical expense increased $1.1 million, or 23%, due to higher claims in the Company's self-insured medical benefit plan in 2019 compared to 2018. Data processing expense increased $1.1 million in 2019 as compared to 2018 due to costs associated with the addition of two new branches in 2019, costs for improved functionality for digital products and services, and the addition of various software applications related to our lending activities. Occupancy expense increased in 2019 as compared to 2018 primarily due to a one-time technical correction that decreased depreciation expense by $670,000 in 2018. The reserve for purchased receivable losses decreased $87,000 and employee recruitment expense decreased $76,000 in 2019 as compared to 2018.
Income Taxes
The provision for income taxes increased $1.4 million or 33%, to $5.4 million in 2019 as compared to 2018. The increase in 2019 is primarily due to higher pretax income, less tax exempt income, and fewer low income housing tax credits as a percentage of pre-tax income as compared to 2018. Additionally, in 2018 the Company finalized its valuation of net deferred tax assets related to the decrease in the federal tax rate after completing a fixed asset cost segregation study for tax planning purposes which resulted in a $470,000 decrease in tax expense that was not repeated in 2019. The Company's effective tax rates were 21% and 17% in 2019 and 2018, respectively. The changes in the Company's effective tax rates for 2019 and 2018 are primarily due to the items discussed regarding the changes in tax expense for these periods.
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 97% of the portfolio as of December 31, 2019 and are available to meet liquidity requirements.
Our investment portfolio consists primarily of government sponsored entity securities, corporate securities, collateralized loan obligations, and municipal securities. Investment securities at December 31, 2019 increased $5.2 million, or 2%, to $284.1 million from $278.9 million at December 31, 2018. The increase at December 31, 2019 as compared to December 31, 2018 is primarily due to investment of funds received as deposit balances increased, as well as proceeds from sales, maturities, and security calls being reinvested as of December 31, 2019. The average maturity of the investment portfolio was approximately one and a half years at December 31, 2019.
Investment securities may be pledged as collateral to secure public deposits or borrowings. At December 31, 2019 and 2018, $30.6 million and $58.4 million in securities were pledged for deposits and borrowings, respectively. Pledged securities decreased at December 31, 2019 as compared to December 31, 2018 because the Company had decreased balances in securities sold under agreements to repurchase accounts at December 31, 2019.
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: | |
|
| |
|
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 |
|
The following table sets forth the market value, maturities, and weighted average pretax yields of our investment portfolio as of December 31, 2019:
|
| | | | | | | | | | | | | | | |
| 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 | % |
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. At December 31, 2019, we held no securities of any single issuer (other than government sponsored entities) that exceeded 10% of our shareholders’ equity.
Loans
Our loan products include short and medium-term commercial loans, commercial credit lines, construction and real estate loans, and consumer loans. To a lesser extent, through our wholly-owned subsidiary RML, we also originate mortgage loans which we sell to the secondary market. We retain servicing rights on mortgage loans originated by RML and sold to the Alaska Housing Finance Corporation ("AHFC"). We emphasize providing financial services to small and medium-sized businesses and to individuals. From our inception, we have emphasized commercial, land development and home construction, and commercial real estate lending. These types of lending 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 involve greater risks, including greater exposure to changes in local economic conditions.
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 loan-to-one-borrower limitation for the Bank was $27.8 million at December 31, 2019. At December 31, 2019, the Company had two relationships whose total direct and indirect commitments exceeded $27.8 million; however, no individual direct relationship exceeded the loans-to-one borrower limitation. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Provision for Loan Losses” for further discussion of the Company's concentration of loans to large borrowers.
Our lending operations are guided by loan policies, which outline the basic policies and procedures by which lending operations are conducted. Generally, the policies address our desired loan types, target markets, underwriting and collateral requirements, terms, interest rate and yield considerations, and compliance with laws and regulations. The policies are reviewed and approved annually by the board of directors 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 manage various concentrations of 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.
The following table sets forth the composition of our loan portfolio by loan segment:
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 |
| |
Commercial Loans: Our commercial loan portfolio includes both secured and unsecured loans for working capital and expansion. Short-term working capital loans generally are secured by accounts receivable, inventory, or equipment. We also make longer-term commercial loans secured by equipment and real estate. We also make commercial loans that are guaranteed in large part by the Small Business Administration or the Bureau of Indian Affairs and to a lesser extent guaranteed by the United States Department of Agriculture, as well as commercial real estate loans that are purchased by the Alaska Industrial Development and Export Authority (“AIDEA”). Commercial loans increased to $412.7 million at December 31, 2019 from $342.4 million at December 31, 2018 and represented approximately 39% and 35% of our total loans outstanding as of December 31, 2019 and December 31, 2018, respectively. Commercial loans reprice more frequently than other types of loans, such as real estate loans. More frequent repricing means that interest cash flows from commercial loans are more sensitive to changes in interest rates. In a rising interest rate environment, our philosophy is to emphasize the pricing of loans on a floating rate basis, which allows these loans to reprice more frequently and to contribute positively to our net interest margin.
Commercial Real Estate:We are an active lender in the commercial real estate market. At December 31, 2019, commercial real estate loans increased slightly to $494.4 million from $494.2 million at December 31, 2018, and represented approximately 47% and 50% of our loan portfolio as of December 31, 2019 and December 31, 2018, respectively. These loans are typically secured by office buildings, apartment complexes or warehouses. Loan amortization periods range from 10 to 25 years and generally have a maximum maturity of 10 years.
We may sell all or a portion of a commercial real estate loan to two State of Alaska entities, AIDEA and AHFC, which were both established to provide long-term financing in the State of Alaska. The loans that AIDEA purchases typically feature a maturity twice that of the loans retained by us and bear a lower interest rate. The blend of our and AIDEA’s loan terms allows us to provide competitive long-term financing to our customers, while reducing the risk inherent in this type of lending. We also originate and sell to AHFC loans secured by multifamily residential units. Typically, 100% of these loans are sold to AHFC and we provide ongoing servicing of the loans for a fee. AIDEA and AHFC make it possible for us to originate these commercial real estate loans and enhance fee income while reducing our exposure to interest rate risk.
Construction Loans:We provide construction lending for commercial real estate projects. Such loans generally are made only when the Company has also committed to finance the completed project with a commercial real estate loan, or if there is a firm take-out commitment upon completion of the project by a third party lender. Additionally, we provide land development and residential subdivision construction loans. We also originate one-to-four-family residential and condominium construction loans
to builders for construction of homes. The Company’s construction loans decreased in 2019 to $100.6 million, down from $109.4 million in 2018, and represented approximately 10% and 11% of our loan portfolio in December 31, 2019 and December 31, 2018, respectively. As of December 31, 2019, approximately $24.0 million or 24%, of the Company's construction loans were for low income housing tax credit projects as compared to $43.1 million or 39% as of December 31, 2018.
Consumer Loans:We provide personal loans for automobiles, recreational vehicles, boats, and other larger consumer purchases. We provide both secured and unsecured consumer credit lines to accommodate the needs of our individual customers, with home equity lines of credit serving as the major product in this area.
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 $79.2 million, or approximately 8% of loans as of December 31, 2019 have direct exposure to the oil and gas industry as compared to $62.3 million, or approximately 6% of loans as of December 31, 2018. The Company has no loans to oil producers or drilling and exploration companies as of the end of 2019 or 2018, but the $79.2 million outstanding as of December 31, 2019 noted above does include $14.2 million related to the construction of an oil rig. The Company's unfunded commitments to borrowers that have direct exposure to the oil and gas industry were $31.1 million and $32.5 million at December 31, 2019 and 2018, 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 $1.6 million and $1.4 million as of December 31, 2019 and 2018, respectively.
The following table details loan balances by loan segment asset quality rating ("AQR") and class of financing receivable for loans with direct oil and gas exposure as of the dates indicated:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(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 |
|
Maturities and Sensitivities of Loans to Change in Interest Rates: The following table presents the aggregate maturity data of our loan portfolio, excluding loans held for sale, at December 31, 2019:
|
| | | | | | | | | | | | |
| 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 |
|
At December 31, 2019, 57% of the portfolio was scheduled to mature or reprice in 2020 with 39% scheduled to mature or reprice between 2021 and 2024.
As of December 31, 2019, approximately 73% of commercial loans are variable rate loans, of which 66% reprice within one year. The majority of these loans reprice to an index based upon the prime rate of interest or the respective Federal Home Loan Bank of Boston (the "Boston FHLB") rate. The Company also uses floors in its commercial loan pricing as loans are originated or renewed during the year.
At December 31, 2019, the interest rates for approximately 81% of commercial real estate loans are variable, of which 46% reset within one year. Approximately 40% of commercial real estate variable rate loans reprice in greater than one year but within three years. The indices for these loans include the prime rate of interest or the respective Treasury or FHLB-Boston rate. The Company also uses floors in its commercial real estate loan pricing as loans are originated or renewed during the year.
Loans Held for Sale and Mortgage Servicing Rights: The Company originates residential mortgage loans and sells them in the secondary market through our wholly-owned subsidiary, RML. All residential mortgage loans originated and sold in 2019 and 2018 were newly originated loans that did not affect nonperforming loans. The Company also has a mortgage servicing portfolio which is comprised of 1-4 family loans serviced for Freddie Mac Home Loan Corporation ("FHLMC") and AHFC. The Company retains servicing rights on all mortgage loans originated by RML and sold to AHFC. Mortgages originated by RML and sold to AHFC represent approximately 23% and 32% of the mortgages originated by RML in 2019 and 2018, respectively. MSRs are adjusted to fair value quarterly with the change recorded in mortgage banking income. The value of MSRs at December 31, 2019 and 2018 were $11.9 million and $10.8 million, respectively. The value of MSRs is impacted by market rates for mortgage loans primarily due to how changes in interest rates affect prepayments of mortgage loans. To the extent loans are prepaid sooner than estimated at the time servicing assets are originally recorded, it is possible that certain residential MSR assets may decrease in value. Generally, the fair value of our residential MSRs are expected to increase as market rates for mortgage loans rise and decrease if market rates fall.
Credit Quality and Nonperforming Assets
Nonperforming assets consist of nonaccrual loans, accruing loans that are 90 days or more past due, repossessed assets and OREO. The following table sets forth information regarding our nonperforming loans and total nonperforming assets:
|
| | | | | | | | | | | | | | | |
(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 | % |
The Company’s nonperforming loans, net of government guarantees decreased in 2019 to $14.0 million as compared to $14.7 million in 2018. This decrease was mostly due to a large nonaccrual loan payoff, as well as principal paydowns and charge-offs on nonaccrual loans in 2019. There was interest income of $301,000 and $159,000 recognized in net income for 2019 and 2018, respectively, related to interest collected on nonaccrual loans whose principal has been paid down to zero. The Company had three relationships that represented more than 10% of nonaccrual loans as of December 31, 2019.
The Company had $1.4 million and $3.4 million in loans classified as troubled debt restructuring loans ("TDRs") that were performing as of December 31, 2019 and 2018, respectively. Additionally, there were $8.7 million and $11.4 million in TDRs included in nonaccrual loans at December 31, 2019 and 2018 for total TDRs of $10.1 million and $14.8 million at December 31, 2019 and 2018, respectively. The decrease in TDRs at December 31, 2019 as compared to 2018 was primarily due to payoffs and paydowns on loans classified as TDRs that were only partially offset by additions to TDRs in 2019. See Note 5 of the Notes to Consolidated Financial Statements included in Item 8 of this report for further discussion of TDRs.
At December 31, 2019, management had identified potential problem loans of $9.0 million as compared to potential problem loans of $17.1 million at December 31, 2018. 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 $8.1 million decrease in potential problem loans at December 31, 2019 from December 31, 2018 was primarily due to the transfer of eight relationships totaling $7.0 million to nonaccrual loans, the payoff of two relationships totaling $3.8 million and $1.7 million of other loan paydowns. These decreases were partially offset by the addition of several relationships totaling $3.5 million in 2019.
The Company acquired other assets consisting of aircraft totaling $1.2 million in the fourth quarter of 2018 through foreclosure proceedings related to one lending relationship. These assets were sold in the third quarter of 2019. The Company acquired a vessel totaling $231,000 in the third quarter of 2019 through foreclosure proceedings related to one lending relationship.
The following summarizes OREO activity for the periods indicated:
|
| | | | | | | | | |
(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 |
|
At December 31, 2019 and 2018 the Company held $5.8 million and $6.7 million, respectively, of OREO assets, net of government guarantees. At December 31, 2019, OREO consists of $1.4 million in residential lots in various stages of development and a $5.6 million commercial building. All OREO property is located in Alaska. The Bank initiates foreclosure proceedings to recover and sell collateral pledged by a debtor to secure a loan based on various events of default and circumstances related to loans that are secured by either commercial or residential real property. These events and circumstances include delinquencies, the Company’s relationship with the borrower, and the borrower’s ability to repay the loan via a source other than the collateral. If the loan has not yet matured, the debtors may cure the events of default up to the time of sale to retain their interest in the collateral. Failure to cure the defaults will result in the debtor losing ownership interest in the property, which is taken by the creditor, or high bidder at a foreclosure sale.
During 2019, the Company had no additions to OREO. During 2019, the Company received approximately $1.3 million in proceeds from the sale of OREO which included $1.1 million from the sale of lots and land and $214,000 from the sale of single-family residences. The Company recognized $380,000 and $144,000 in gains and $0 and $141,000 in losses on the sale of OREO properties in 2019 and 2018, respectively, for net gains of $380,000 and $3,000 in 2019 and 2018, respectively. The Company had remaining accumulated deferred gains on the sale of OREO properties of $231,000 and $262,000 at December 31, 2019 and 2018, respectively.
The Company did not make any loans to facilitate the sale of OREO in 2019 or 2018. Our underwriting policies and procedures for loans to facilitate the sale of OREO are no different than our standard loan policies and procedures.
The Company recognized impairments of zero in both 2019 and 2018 due to adjustments to the Company’s estimate of the fair value of certain properties based on changes in estimated costs to complete the projects, decrease in expected sales prices, and changes in the Anchorage and the Southeastern Alaska real estate markets.
Allowance for Loan Losses
The Company maintains an Allowance to reflect management's assessment of probable, estimable losses inherent in the loan portfolio. The Allowance is increased by provisions for loan losses and loan recoveries and decreased by loan charge-offs. The size of the Allowance is determined through quarterly assessments of probable estimated losses in the loan portfolio. Our methodology for making such assessments and determining the adequacy of the Allowance includes the following key elements:
A specific allocation for impaired loans. Management determines the fair value of the majority of these loans based on the underlying collateral values. This analysis is based upon a specific analysis for each impaired loan, including external appraisals on loans secured by real property, management’s assessment of the current market, recent payment history, and an evaluation of other sources of repayment. In-house evaluations of fair value are used in the impairment analysis in some situations. Inputs to the in-house evaluation process include information about sales of comparable properties in the appropriate markets and changes in tax assessed values. The Company obtains appraisals on real and personal property that secure its loans during the loan origination process in accordance with regulatory guidance and its loan policy. The Company obtains updated appraisals on loans secured by real or personal property based
upon its assessment of changes in the current market or particular projects or properties, information from other current appraisals, and other sources of information. Appraisals may be adjusted downward by the Company based on its evaluation of the facts and circumstances on a case by case basis. External appraisals may be discounted when management believes that the absorption period used in the appraisal is unrealistic, when expected liquidation costs exceed those included in the appraisal, or when management’s evaluation of deteriorating market conditions warrants an adjustment. Additionally, the Company may also adjust appraisals in the above circumstances between appraisal dates. The Company uses the information provided in these updated appraisals along with its evaluation of 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. The specific allowance for impaired loans, as well as the overall Allowance, may increase based on the Company’s assessment of updated appraisals. See Note 26 of the Notes to Consolidated Financial Statements included in Item 8 of this report for further discussion of the Company’s estimation of impaired loans measured at fair value.
When the Company determines that a loss has occurred on an impaired loan, a charge-off equal to the difference between carrying value and fair value is recorded. If a specific allowance is deemed necessary for a loan, and then that loan is partially charged off, the loan remains classified as a nonperforming loan after the charge-off is recognized.
A general allocation - The Company has identified segments and classes of loans not considered impaired for purposes of establishing the general allocation allowance. The Company disaggregates the loan portfolio into segments and classes based on its assessment of how different pools of loans with like characteristics in the portfolio behave over time. This determination is based on historical experience and management’s assessment of how current facts and circumstances are expected to affect the loan portfolio.
The Company first disaggregates the loan portfolio into the following eight segments: 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, and other consumer loans.
After division of the loan portfolio into segments, the Company then further disaggregates each of the segments into classes. The Company has a total of five classes, which are based off of the Company's loan risk grading system known as the Asset Quality Rating (“AQR”) system. The risk ratings are discussed in Note 5 to the Consolidated Financial Statements included in Item 8 of this report. There are five loan classes: pass (pass AQR grades, which are grades 1 – 6), special mention, substandard, doubtful, and loss. There have been no changes to these loan classes in 2019.
After the portfolio has been disaggregated into segments and classes, the Company calculates a general reserve for each segment and class based on the average loss history for each segment and class. The Company utilizes a look-back period of five years in the calculation of average historical loss rates.
After the Company calculates a general allocation using our loss history, the general reserve 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 our concentration of large borrowers; national and local economic trends; general business conditions; trends in local real estate markets; economic, political, and industry specific factors that affect resource development in Alaska; effects of various political activities; peer group data; and internal factors such as underwriting policies and expertise of the Company’s employees.
An unallocated reserve - The unallocated portion of the Allowance provides for other credit losses inherent in our loan portfolio that may not have been contemplated in the specific and general components of the Allowance, and it acknowledges the inherent imprecision of all loss prediction models. The unallocated component is reviewed periodically based on trends in credit losses and overall economic conditions. At December 31, 2019 and 2018, the unallocated allowance as a percentage of the total Allowance was 11% and 13%, respectively.
The following table shows the allocation of the Allowance for the years indicated:
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | % |
1Represents percentage of this category of loans to total portfolio loans.
The following table sets forth information regarding changes in our Allowance for the years indicated:
|
| | | | | | | | | | | | | | | | | | | |
(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 accordance with GAAP, loans acquired in connection with our acquisition of Alaska Pacific on April 1, 2014 were recorded at their fair value at the acquisition date. Credit discounts were included in the determination of fair value; therefore, an allowance for loan losses was not recorded at the acquisition date. Purchased credit impaired loans were evaluated on a loan by loan basis and the valuation allowance for these loans was netted against the carrying value. Loans acquired from Alaska Pacific have been classified as impaired loans and evaluated for specific impairment using the same methodology as all other loans since April 1, 2014. A general allowance for loans acquired from Alaska Pacific was established if there was deterioration in credit quality of the acquired loans subsequent to acquisition from April 1, 2014 through December 31, 2017. As of December 31, 2019 and 2018, loans acquired from Alaska Pacific are included in the Company's general allowance using the same methodology as all other loans as described above due to the amount of time that has passed since the loans were purchased. There was no specific
impairment on acquired loans at December 31, 2019 or 2018. The purchase discount related to acquired credit impaired loans was $345,000 and $375,000 as of December 31, 2019 and 2018, respectively.
The provision for loan losses in 2019 as compared to 2018 decreased $675,000 to a benefit of $1.2 million compared to a benefit of $500,000 in 2018. This decrease is primarily due to net recoveries on loans and a decrease in qualitative factors mostly due to strengthening in the Alaska economy in 2019. The Company determined that an Allowance of $19.1 million, or 1.83% of portfolio loans, is appropriate as of December 31, 2019 based on our analysis of the current credit quality of the portfolio and current economic conditions. The provision for loan losses in 2018 as compared to 2017 decreased $3.7 million to a benefit of $500,000 compared to a provision of $3.2 million in 2017. This decrease is primarily due to a decrease in nonperforming loans and the portion of the Allowance specific to impaired loans. The provision for loan losses in 2017 as compared to 2016 increased $902,000 to $3.2 million compared to $2.3 million in 2016. This increase was primarily due to an increase in nonperforming loans and the portion of the Allowance specific to impaired loans. The provision for loan losses in 2016 as compared to 2015 increased $544,000 to $2.3 million compared to $1.8 million in 2015. This increase was primarily due to an increase in nonperforming loans in 2016 compared to the prior year as well as an increase in qualitative factors mostly due to softening in the Alaska economy in 2016.
While management believes that it uses the best information available to determine the Allowance, unforeseen market conditions and other events could result in an adjustment to the Allowance, and net income could be significantly affected if circumstances differed substantially from the assumptions used in making the final determination of the Allowance.
Purchased Receivables
We purchase accounts receivable from our business customers and provide them with short-term working capital. We provide this service to our customers in Alaska, Washington, Oregon, and some other states through NFS.
Our purchased receivable activity is guided by policies that outline risk management, documentation, and approval limits. The policies are reviewed and approved annually by the Company's Board of Directors. Purchased receivables are recorded on the balance sheet net of a reserve for purchased receivable losses.
Purchased receivable balances increased at December 31, 2019 to $24.4 million from $14.4 million at December 31, 2018, and year-to-date average purchased receivable balances were $18.8 million and $17.4 million in 2019 and 2018, respectively. Purchased receivable income was $3.3 million in both 2019 and 2018. Purchased receivable income in 2019 remained consistent with 2018 despite an increase in average balances due to a decrease in average yield which varies depending on the makeup of the purchased receivable portfolio.
The following table sets forth information regarding changes in the purchased receivable reserve for the years indicated:
|
| | | | | | | | | |
(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 | — | % | — | % | — | % |
Deposits
Deposits are our primary source of funds. Total deposits increased 12% to $1.372 billion at December 31, 2019 from $1.228 billion at December 31, 2018. Our deposits generally are expected to fluctuate according to the level of our market share, economic conditions, and normal seasonal trends.
The following table sets forth the average balances outstanding and average interest rates for each major category of our deposits, for the periods indicated:
|
| | | | | | | | | | | | | | | | | |
| 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 |
| |
Certificates of Deposit: The only deposit category with stated maturity dates is certificates of deposit. At December 31, 2019, we had $164.5 million in certificates of deposit, of which $90.5 million, or 55%, are scheduled to mature in 2020. The Company’s certificates of deposit increased to $164.5 million during 2019 as compared to $113.3 million at December 31, 2018. The aggregate amount of certificates of deposit in amounts of $100,000 or more at December 31, 2019 and 2018, was $118.9 million and $70.7 million, respectively. The following table sets forth the amount outstanding of certificates of deposits in amounts of $100,000 or more by time remaining until maturity and percentage of total deposits as of December 31, 2019:
|
| | | | | | |
| 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 | % |
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 $1.2 million CDARS certificates of deposits at December 31, 2019 and no CDARS certificates of deposits at December 31, 2018.
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, 2019, our maximum borrowing line from the FHLB was $734.0 million, approximately 45% of the Bank’s assets, subject to the FHLB’s collateral requirements. The Company has outstanding advances of $8.9 million as of December 31, 2019 which were originated to match fund low income housing projects that qualify for long term fixed interest rates. The first advance is a $1.9 million FHLB Community Investment Program advance which was originated on March 22, 2013. It has an eighteen year term with a 30 year amortization period, which mirrors the term of the term real estate loan made to the borrower, and a fixed rate of 3.12%. The second advance is a $2.1 million FHLB Community Investment Cash Advance Program advance that was originated in the second quarter of 2016. This advance has a 20 year term with a 30 year amortization period, which mirrors the term of the term real estate loan made to the borrower, and a fixed interest rate of 2.61%. The third advance is a $3.0 million FHLB Community Investment Cash Advance Program advance that was originated in the third quarter of 2017. This advance has a 20 year term with a 30 year amortization period and a fixed interest rate of 3.25%, which mirrors the term of the loan made to the borrower. The fourth advance
is a $1.0 million FHLB Community Investment Cash Advance Program advance that was originated in the third quarter of 2019. This advance has a 20 year term with a 30 year amortization period and a fixed interest rate of 2.69%, which mirrors the term of the loan made to the borrower. The last advance is a $769,000 FHLB Community Investment Cash Advance Program advance that was originated in the third quarter of 2019. This advance has a 20 year term with a 30 year amortization period and a fixed interest rate of 2.69%, which mirrors the term of the loan made to the borrower. All of these FHLB advances are included in borrowings.
Federal Reserve Bank: The Federal Reserve Bank of San Francisco (the "Federal Reserve Bank") is holding $79.5 million of loans as collateral to secure advances made through the discount window as of December 31, 2019. There were no discount window advances outstanding at December 31, 2019 or 2018.
Other Short-term Borrowings: Securities sold under agreements to repurchase were zero and $34.3 million, as of December 31, 2019 and 2018, respectively. The average balance outstanding of securities sold under agreements to repurchase during 2019 and 2018 was $15.2 million and $29.9 million, respectively, and the maximum outstanding at any month-end was $36.6 million and $36.5 million, respectively, during the same time periods. The securities sold under agreements to repurchase are held by the FHLB under the Company’s control.
The Company is subject to provisions under Alaska state law which generally limit the amount of outstanding debt to 15% of total assets or $244.7 million and $222.6 million at December 31, 2019 and 2018, respectively.
Long-term Borrowings: The Company had no long-term borrowings outstanding other than the FHLB advances noted above as of December 31, 2019 or 2018.
Contractual Obligations
The following table references contractual obligations of the Company for the periods indicated. This table does not include interest payments:
|
| | | | | | | | | | | | | | | | | | | |
| 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 |
|
(1) Includes principal payments related to employee benefit plans. If a benefit payment schedule is established, payments are recorded in the corresponding dates listed in the table above. Unscheduled payments for all remaining benefits are recorded "Over 5 Years". Additional information about employee benefit plans is provided in Note 19 of the Notes to the Consolidated Financial Statements in Item 8 below.
Short and long-term borrowings included in the table above are described in the "Borrowings" section above. Junior subordinated debentures include $10.3 million that was originated on December 16, 2005, matures on March 15, 2036, and bears interest at a rate of 90-day LIBOR plus 1.37%, adjusted quarterly. 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 Northrim Statutory Trust 2 ("NST2") at 3.72% through its maturity date. Operating lease obligations are more fully described in Note 12 of the Company’s Consolidated Financial Statements included in Item 8 of this report. Other long-term liabilities consist of amounts that the Company owes for its investments in Delaware limited partnerships that develop low-income housing projects throughout the United States. Additional information about these partnerships is included at Note 8. The Company purchased a $10.7 million interest in R4 Frontier Housing Partners L.P., Coronado Park Senior Village L.P. ("R4-Coronado") in March 2013. The investment in R4-Coronado was 95% funded at the end of 2019 and is expected to be fully funded in 2029. The Company purchased an $8.5 million interest in R4 Frontier Housing Partners L.P., Mountain View Village V L.P. ("R4-MVV") in May 2014. The investment in R4-MVV was 97% funded at the end of 2019 and is expected to be fully funded in 2030. The Company purchased a $6.8 million interest in R4 Frontier Housing Partners L.P., PJ33 L.P. ("R4-PJ33") in June 2016. The investment in R4-PJ33 was 94% funded at the end of 2019 and is expected to be fully funded in 2032. The Company purchased a $7.3 million interest in R4 Frontier Housing Partners L.P., Parkscape L.P. ("R4-Coronado II") in June 2019. The investment in R4-Coronado II was 5% funded at the end of 2019 and is expected to be fully funded in 2035. The Company also purchased a $4.0 million interest in R4 Frontier Housing Partners L.P., Duke Apartments L.P. ("R4-Duke") in November 2019. The investment in R4-Duke was 9% funded at the end of 2019 and is expected to be fully funded in 2035.
Off-Balance Sheet Arrangements
The Company is a party to financial instruments with off-balance sheet risk. Among the off-balance sheet items entered into in the ordinary course of business are commitments to extend credit, commitments to originate loans held for sale and the issuance of letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized on the balance sheet. Certain commitments are collateralized. We apply the same credit standards to these commitments as in all of our lending activities and include these commitments in our lending risk evaluations.
As of December 31, 2019, we had commitments to extend credit of $301.9 million, which were not reflected on our balance sheet, compared to $260.6 million as of December 31, 2018. Commitments to extend credit are agreements to lend to customers. These commitments have specified interest rates and generally have fixed expiration dates but may be terminated by the Company if certain conditions of the contract are violated. Collateral held relating to these commitments varies, but generally includes real estate, inventory, accounts receivable, and equipment. Our exposure to credit loss under commitments to extend credit is represented by the amount of these commitments. Since many of the commitments are expected to expire without being drawn upon, these total commitment amounts do not necessarily represent future cash requirements.
As of December 31, 2019, we had commitments to originate loans held for sale of $48.8 million, which were not reflected in the balance sheet compared to $45.0 million as of December 31, 2018. Mortgage loans sold to investors may be sold with servicing rights released, for which the Company makes only standard legal representations and warranties as to meeting certain underwriting and collateral documentation standards. In the past two years, the Company has had to repurchase one loan due to deficiencies in underwriting or loan documentation and has not realized significant losses related to this repurchase. Management currently believes that any liabilities that may result from such recourse provisions are not significant.
As of December 31, 2019, we had standby letters of credit of $2.0 million, which were not reflected on our balance sheet compared to $3.2 million as of December 31, 2018. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Credit risk arises in these transactions from the possibility that a customer may not be able to repay the Company upon default of performance. Collateral held for standby letters of credit is based on an individual evaluation of each customer’s creditworthiness.
Our total unfunded lending commitments at December 31, 2019, which includes commitments to extend credit, commitments to originate loans held for sale and standby letters of credit, were $352.7 million, compared to $308.8 million as of December 31, 2018. We do not expect that all of these commitments are likely to be fully drawn upon at any one time. The Company has established reserves of $152,000 and $130,000 at December 31, 2019 and 2018, respectively, for estimated losses related to these commitments that are recorded in other liabilities on the consolidated balance sheet.
Additional information regarding Off-Balance Sheet Arrangements is included in Notes 20 and 21 of the Notes to Consolidated Financial Statements included in Item 8 of this report.
Liquidity and Capital Resources
Our shareholders’ equity at December 31, 2019, was $207.1 million, as compared to $205.9 million at December 31, 2018. The Company earned net income of $20.7 million, issued 23,269 shares of common stock through the exercise of stock options, and repurchased 347,676 shares during 2019. At December 31, 2019, the Company had approximately 6.6 million shares of its common stock outstanding.
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, including the conservation buffer that is now in full effect, the Company expects to continue to receive dividends from the Bank during 2020.
The Bank manages its liquidity through its Asset and Liability Committee. Our primary sources of funds are customer deposits and advances from the FHLB. These funds, together with loan repayments, loan sales, other borrowed funds, retained earnings, and equity 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. Our total unfunded commitments to fund loans, loans held for sale, and letters of credit at December 31, 2019, were $352.7 million. We do not expect that all of these loans are likely to be fully drawn upon at any one time. Additionally, as noted above, our total deposits at December 31, 2019, were $1.4 billion.
As shown in the Consolidated Statements of Cash Flows, net cash used by operating activities was $821,000 in 2019 and net cash provided by operating activities was $25.2 million in 2018. The primary source of cash provided by operating activities for all periods presented was positive net income; however, in 2019 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 2019. Net cash used by investing activities was $71.9 million in 2019 and primarily due to the fact that purchases of investment securities and net investment in loans and purchased receivables exceeded proceeds from sales and maturities of securities available for sale. Net cash provided by investing activities was $5.6 million in 2018 as the Company's proceeds from sales and maturities of securities available for sale were greater than funds used to purchase additional investment securities in those years. Financing activities provided cash of $90.6 million in 2019 and used cash of $31.1 million in 2018. Financing activities provided cash in 2019 due to an increase in deposits that was only partially offset by a decrease in securities sold under repurchase agreements, repurchase of 347,676 shares of the Company's common stock for $12.6 million, and the payment of cash dividends to shareholders. Financing activities used net cash in 2018 primarily as a result of a decrease in deposit balances and payment of cash dividends to shareholders.
The sources by which we meet the liquidity needs of our customers are current assets and borrowings available through our correspondent banking relationships and our credit lines with the Federal Reserve Bank and the FHLB. At December 31, 2019, our current assets were $431.3 million and our funds available for borrowing under our existing lines of credit were $800.7 million. 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.
During 2019, the Company's Board of Directors approved a quarterly cash dividend of $0.30 per common share for the first and second quarters and $0.33 per common share for the third and fourth quarters. These dividends were made pursuant to our existing dividend policy and in consideration of, among other things, earnings, regulatory capital levels, liquidity, asset quality, and the overall payout ratio. We expect that dividend payments will be reassessed on a quarterly basis by the Board of Directors in accordance with the dividend policy. The payment of cash dividends is subject to regulatory limitations as described under the Supervision and Regulation section of Part I of this report. There is no assurance that future cash dividends on common shares will be declared or increased.
On February 27, 2020, the Board of Directors approved payment of a $0.34 per share dividend on March 20, 2020, to shareholders of record on March 12, 2020. This dividend is $0.01, or 3%, higher than the Company’s dividend of $0.33 that was paid in the fourth quarter of 2019.
In September 2002, our Board of Directors approved a plan whereby we would periodically repurchase for cash up to approximately 5% of our shares of common stock in the open market. We purchased an aggregate of 688,442 shares of our common stock under this program through December 31, 2009 at a total cost of $14.2 million at an average price of $20.65 per share, which left a balance of 227,242 shares available under the stock repurchase program. The Company did not repurchase any of its shares in 2010 through 2016. In 2017, we purchased an aggregate of 58,341 shares at an average price of $27.56 per share. In 2018, we purchased an aggregate of 15,468 shares at an average price of $31.90 per share. In April 2019, the Company’s Board of Directors
approved a plan whereby it would periodically repurchase for cash up to approximately 5% of its shares of common stock in the open market where 340,000 shares were available for repurchase. In 2019 we purchased an aggregate of 347,676 shares at an average price of $36.15 per share. At December, 31, 2019, there were zero shares available under the stock repurchase program. However, on January 27, 2020, the Board authorized the repurchase of up to an additional 327,000 shares of common stock. We intend 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 this effect on diluted earnings per share.
|
| | | |
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 |
On May 8, 2003, the Company’s subsidiary, NCT1, issued trust preferred securities in the principal amount of $8 million. These securities carried an interest rate of 90-day LIBOR plus 3.15% per annum that was initially set at 4.45% adjusted quarterly. The securities had a maturity date of May 15, 2033, and were callable by the Company on or after May 15, 2008. These securities were treated as Tier 1 capital by the Company’s regulators for capital adequacy calculations. The Company redeemed these trust preferred securities on August 15, 2017.
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 $398,000 in 2019. At December 31, 2019, the securities had an interest rate of 3.26%. 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 $389,000 in 2019 and 2018.
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, 2019, 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 2019 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 2020, 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 that the Company completed in the fourth quarter of 2005 is included in the Company’s capital for regulatory purposes, although they are accounted for as a long-term debt in our financial statements. The trust preferred securities are not accounted for on the Bank’s financial statements nor are they included in its capital. As a result, the Company has $10 million more in regulatory capital than the Bank at December 31, 2019 and 2018, 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, 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% |
See Note 24 of the Consolidated Financial Statements for a detailed discussion of the capital ratios. The requirements for "well-capitalized" come from the Prompt Correction Action rules. See 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.
Effects of Inflation and Changing Prices: The primary impact of inflation on our operations is increased operating costs. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution’s performance than the effects of general levels of inflation. Although interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services, increases in inflation generally have resulted in increased interest rates, which could affect the degree and timing of the repricing of our assets and liabilities. In addition, inflation has an impact on our customers’ ability to repay their loans. See additional discussion below in Item 7A regarding how various market risks affect the Company.
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.
•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.
| | | 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.
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 |
| | | | | | |
|
| | | | | | | | | | | | |
| 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:
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| | | | |
| |
| |
For the Years Ended December 2019, 20182021, 2020 and 2017:2019: | |
| |
| |
| |
| |
| |
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
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
Portland, OregonEverett, Washington
March 6, 20204, 2022
We have served as the Company’s auditor since 2010.
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
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
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 |
| |