Borrowing money

Northrim BanCorp: revenue growth to counter the normalization of mortgage refinancing (NRIM)

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After a phenomenal year, earnings at Northrim BanCorp, Inc. (NASDAQ: NRIM) are likely to decline this year due to reduced mortgage bank revenue amid rising interest rates. On the other hand, low single-digit loan growth will likely support the bottom line. In addition, the excess cash position, smooth loan yields and sticky deposit costs will help boost turnover when interest rates start to rise. Overall, I expect the company to report earnings of $4.64 per share in 2022, down 23% year over year. Despite the drop, revenue this year will likely be much higher than the pre-pandemic level. The year-end target price suggests a decent upside from the current market price. Accordingly, I adopt a buy rating on Northrim BanCorp.

Loan growth will turn positive again but will remain weak

Northrim BanCorp’s loan portfolio decreased by 1.5% in 2021, primarily due to the sharp reduction in the Paycheck Protection Program (“PPP”) portfolio. According to details given in the earnings release, PPP loans increased from $310.5 million at the end of December 2020 to $122.7 million at the end of December 2021. The remaining PPP balance still represents 9% of total loans. Therefore, their discount this year will cause considerable downward pressure on the total size of the loan portfolio.

Additionally, new loan origination may be muted as actual economic metrics show that Alaska’s economy is lagging the rest of the country. According to official sources. Further away, Alaska’s unemployment rate was reported at 5.7% for December 2021, which was much higher than the national unemployment rate.

However, the recent rise in oil prices bodes well for Alaska’s economy in general and Northrim’s portfolio in particular. The Alaska North Slope price trend is shown below.

Graphic
Data by Y-Charts

The high Alaska North Slope price bodes well for asset quality and demand for short-term credit. However, my longer-term outlook for oil prices, and therefore the oil industry, remains negative in light of the green energy push.

A bright spot that could drive loan growth this year is the success of Northrim’s PPP program, through which the company has been able to attract new customers. As mentioned in the earnings release, the PPP generated $62.8 million in non-PPP loans and $119.0 million in new deposit balances. That’s pretty impressive considering $62.8 million was 4.4% of total loans at the end of 2021.

Given these factors, I expect loan growth to be moderate this year at around 2%. Meanwhile, deposits will likely grow in line with loans. The following table shows my balance sheet estimates.

EX17 EX18 FY19 FY20 FY21 FY22E
Financial situation
Net loans 933 965 1,024 1,423 1,402 1,430
Net loan growth (2.3)% 3.4% 6.2% 38.9% (1.5)% 2.0%
Other productive assets 353 365 429 506 1,157 1,180
Deposits 1,258 1,228 1,372 1,825 2,422 2,470
Loans and sub-debts 45 52 19 25 36 37
Common Equity 193 206 207 222 238 257
Book value per share ($) 27.6 29.5 30.4 35.0 38.5 41.2
Silk. Book value per share ($) 25.3 27.2 28.1 32.5 35.9 38.6

Source: SEC Filings, Author’s Estimates

(In millions of dollars, unless otherwise indicated)

Positioning of the balance sheet likely to increase the line of turnover

The remaining net revenue from deferred PPP fees was $4.5 million at the end of December 2021, as mentioned in the earnings release. Northrim accrues all unaccrued fees at the time of loan cancellation. Therefore, the net interest margin will remain high at the time of the discount in early 2022. After the discount, however, the net interest income will decline as the deployment of the funds freed up by the PPP discount will take some time.

Partly as a result of the PPP discount, cash and cash equivalents have piled up on Northrim’s books throughout 2021. In fact, interest-bearing deposits at other banks accounted for 23% of total assets. at the end of December 2021. The following graph shows the development of remunerated deposits in other banks.

Northrim Bancorp Interest-bearing deposits in other banks

SEC Filings

While the excess cash position troubled Northrim BanCorp last year, it will pay off this year in a rising interest rate environment. The excess cash position can be reassessed immediately if rates rise.

Additionally, approximately 74% of the total loan portfolio is based on adjustment rates, as reported in the earnings release. Therefore, the composition of the loans will ensure that the average yield of the portfolio will increase shortly after a rise in rates. Additionally, non-interest bearing demand deposits accounted for 37% of total deposits at the end of December 2021, which will make the average cost of deposits stable on the upside in a rising interest rate environment.

Given these factors, I expect the net interest margin to remain stable in the first half of 2022 and then increase by 10 basis points in the second half.

Mortgage income normalization to drag income

Northrim BanCorp’s earnings have surged over the past two years as interest rate declines in late 2019 and early 2020 sparked mortgage refinancing activity. Mortgage banking revenue was 32% of total revenue in 2021 and 39% of total revenue in 2020, compared to a normal level of 24% in 2019.

Mortgage Banking revenues exceeded my expectations in the last quarter of 2021. Going forward, I expect Mortgage Banking revenues to stabilize at the fourth quarter level as the current interest rate environment interest will not encourage any out-of-the-ordinary mortgages. refinancing. Accordingly, I am now revising my estimate of non-interest revenue for 2022 down to $39 million from my previous estimate of $52 million given in my last Northrim BanCorp report.

2022 earnings expected to fall to $4.64 per share

Lower non-interest income will likely lead to lower earnings this year. Also, I don’t expect any further loan loss reserve releases this year, unlike last year. The level of the provision is now fairly close to the level of non-performing loans in the portfolio; therefore, further funding reversals are unlikely. Provisions represented 0.83% of total loans, while non-performing loans represented 0.75% of total loans at end-December 2021, as mentioned in the earnings release.

On the other hand, low single-digit loan growth and substantial margin expansion will likely support the bottom line this year. Overall, I expect the company to report earnings of $4.64 per share in 2022, down 23% year over year. Despite the decline, revenues will most likely remain above pre-pandemic levels. The following table shows my income statement estimates.

EX17 EX18 FY19 FY20 FY21 FY22E
income statement
Net interest income 58 61 64 71 81 93
Allowance for loan losses 3 (1) (1) 2 (4) 0
Non-interest income 40 32 37 63 52 39
Non-interest charges 71 70 77 89 89 94
Net income – Common Sh. 13 20 21 33 38 29
BPA – Diluted ($) 1.88 2.87 3.04 5.11 6.00 4.64

Source: SEC Filings, Author’s Estimates

(In millions of dollars, unless otherwise indicated)

The earnings estimate given above is slightly lower than my previous estimate given in my last report on Northrim BanCorp. I have lowered my income estimate because I now expect lower mortgage bank income than before.

Actual earnings may differ materially from estimates due to the risks and uncertainties associated with the COVID-19 pandemic and the timing of an interest rate hike.

Adopting a Buy rating due to a moderately high expected total return

Northrim offers a dividend yield of 3.5% at the current quarterly dividend rate of $0.38 per share. Earnings and dividend estimates suggest a payout ratio of 33% for 2022, which is in line with the five-year average of 35%. Therefore, I don’t think the earnings outlook threatens to cut dividends.

I use historical price/accounting tangible (“P/TB”) and price/earnings (“P/E”) multiples to value Northrim BanCorp. The stock has traded at an average P/TB ratio of 1.19 in the past, as shown below.

EX17 EX18 FY19 FY20 FY21 Average
T. Book value per share ($) 25.3 27.2 28.1 32.5 35.9
Average market price ($) 31.3 37.8 36.5 28.5 41.9
Historical P/TB 1.24x 1.39x 1.30x 0.88x 1.17x 1.19x
Source: Company Financials, Yahoo Finance, Author’s Estimates

Multiplying the average P/TB multiple by the expected tangible book value per share of $38.6 yields a target price of $46.1 for the end of 2022. This price target implies an upside of 6.1% compared to the closing price on February 16. The following table shows the sensitivity of the target price to the P/TB ratio.

Multiple P/TB 1.09x 1.14x 1.19x 1.24x 1.29x
TBVPS – Dec 2022 ($) 38.6 38.6 38.6 38.6 38.6
Target price ($) 42.3 44.2 46.1 48.1 50.0
Market price ($) 43.5 43.5 43.5 43.5 43.5
Up/(down) (2.8)% 1.6% 6.1% 10.5% 14.9%
Source: Author’s estimates

The stock has traded at an average P/E ratio of around 10.9x in the past, as shown below.

EX17 EX18 FY19 FY20 FY21 Average
Earnings per share ($) 1.88 2.87 3.04 5.11 6.00
Average market price ($) 31.3 37.8 36.5 28.5 41.9
Historical PER 16.6x 13.2x 12.0x 5.6x 7.0x 10.9x
Source: Company Financials, Yahoo Finance, Author’s Estimates

Multiplying the average P/E multiple by the expected earnings per share of $4.64 yields a price target of $50.5 for the end of 2022. This price target implies a 16% upside from the stock price. closing on February 16. The following table shows the sensitivity of the target price to the P/E ratio.

Multiple P/E 8.9x 9.9x 10.9x 11.9x 12.9x
EPS 2022 ($) 4.64 4.64 4.64 4.64 4.64
Target price ($) 41.2 45.8 50.5 55.1 59.7
Market price ($) 43.5 43.5 43.5 43.5 43.5
Up/(down) (5.3)% 5.3% 16.0% 26.6% 37.3%
Source: Author’s estimates

Equal weighting of target prices from both valuation methods gives a combined result target price of $48.3, which implies an increase of 11.0% compared to the current market price. Adding the forward dividend yield gives an expected total return of 14.5%. Therefore, I adopt a buy rating on Northrim BanCorp.