Northrim BanCorp: High oil prices, interest rates to save profits

John Pennell

Earnings of Northrim BanCorp, Inc. (NASDAQ: NRIM) will most likely weaken this year due to higher loan loss provisioning and lower mortgage bank revenues. On the positive side, the size of the loan portfolio and the net interest margin are is expected to trend higher over the last nine months of 2022. Overall, I expect Northrim BanCorp to report 2022 earnings of $4.63 per share, down 23% from one year to the next. Compared to my last report on Northrim, I have barely changed my earnings estimate, as my downward revision to the loan growth estimate negates the downward revision to operating expenses. The year-end target price suggests a strong upside from the current market price. Therefore, I maintain a buy rating on Northrim BanCorp.

Loan growth to pivot on Alaskan oil prices

Northrim BanCorp’s loan portfolio declined 2.6% in the first quarter of 2022, which was the fourth consecutive quarter of decline. The prolonged downward trend in lending is expected to reverse soon, as most of the Paycheck Protection Program (“PPP”) forgiveness was complete by the end of March 2022. As mentioned in the filing 10-Q, approximately 99% of PPP round one and 74% of PPP round two loans had been canceled by the end of March 2022. Outstanding PPP loans were $64.3 million at the end of March, or 5% of total loans.

Moreover, the persistence of high oil prices over the past year bodes well for credit demand in the future. As shown below, Alaska North Slope crude oil is near multi-year highs.

Chart
Data by YCharts

The high price of oil is one of the reasons Alaska’s job market is at its highest level in decades. As shown below, the unemployment rate now stands at 4.7%, which is above the national average but still at its lowest in several decades.

Chart
Data by YCharts

Additionally, Northrim BanCorp continually strives to expand its presence in Alaska. As mentioned in the earnings release, the company opened a new loan production office in Nome, Alaska in the first quarter of 2022. Nome is a small town of just 3,869 people representing just 0.5% of the Alaskan population. By comparison, Anchorage, the city where Northrim is headquartered, has a population of 280,437.

Given these factors, I expect the loan book to grow 3% in the last nine months of 2022. Combined with the decline in the first quarter, I expect the loan book to n only increased by 0.4% this year. In my last report on Northrim BanCorp, I estimated loan growth at 2%. I have now reduced my loan growth estimate mainly due to poor first quarter performance.

Meanwhile, other balance sheet items will likely grow in line with lending. 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 1,407
Net loan growth (2.3)% 3.4% 6.2% 38.9% (1.5)% 0.4%
Other productive assets 353 365 429 506 1,157 1,105
Deposits 1,258 1,228 1,372 1,825 2,422 2,414
Loans and sub-debts 45 52 19 25 36 36
Common Equity 193 206 207 222 238 239
Book value per share ($) 27.6 29.5 30.4 35.0 38.5 39.9
Silk. Book value per share ($) 25.3 27.2 28.1 32.5 35.9 37.2

Source: SEC Filings, Author’s Estimates

(In millions of dollars, unless otherwise indicated)

Highly rate sensitive loan portfolio to increase margin

The asset side of Northrim BanCorp’s balance sheet is quite sensitive to interest rate increases. Indeed, 73% of the loans in the core portfolio are based on adjustable rates, as mentioned in the earnings press release. These adjustable rate loans are subject to rate increases based on changes in the prime rate and other indices.

Unfortunately, the passive side is also quick to reevaluate. Indeed, current, savings and interest-bearing money market accounts accounted for 57.8% of total deposits at the end of March 2022. However, there is excess liquidity in the banking sector, which has given banks a more power than usual for prize deposits. As a result, deposit beta (i.e. the sensitivity of the cost of deposits to interest rate increases) may remain low this year.

Meanwhile, the decline in accelerated recognition of PPP fees will also hurt the net interest margin. Overall, I expect the margin to increase by 30 basis points in the last nine months of 2022, from 3.2% in the first quarter of the year. Compared to last year, the margin will probably be about 30 basis points lower this year.

High interest rates to maintain high provisioning

Northrim BanCorp’s non-performing loans represented 0.70% of total loans at the end of March 2022. In comparison, provisions represented 0.82% of total loans. The coverage of the provision for non-performing loans seems a bit tight, especially as the spike in interest rates in the coming months may affect the debt service capacity of borrowers who pay adjustable rates. In addition, the threat of recession will encourage management to rebuild its reserves immediately.

Overall, I expect the provision charge to be slightly higher than normal for the last nine months of 2022. However, combined with the large first quarter provision reversal, the net provision charge for the whole year is likely to remain below normal. I expect net provisioning expense to be 0.03% of total loans in 2022. By comparison, provisioning expense averaged 0.06% of total loans from 2017 to 2019.

Profits are expected to fall by 23%

Higher than normal provisioning in the last nine months of 2022 is likely to be one of the main reasons for lower earnings this year compared to last year. Additionally, lower mortgage bank revenues will weigh on earnings. Meanwhile, net interest income will likely remain almost unchanged from last year. Overall, I expect Northrim to report earnings of $4.63 per share for 2022, down 23% year over year. The following table shows my income statement estimates.

EX17 EX18 FY19 FY20 FY21 FY22E
income statement
Net interest income 58 61 64 71 81 81
Allowance for loan losses 3 (1) (1) 2 (4) 0
Non-interest income 40 32 37 63 52 40
Non-interest charges 71 70 77 89 89 86
Net income – Common Sh. 13 20 21 33 38 28
BPA – Diluted ($) 1.88 2.87 3.04 5.11 6.00 4.63

Source: SEC Filings, Author’s Estimates

(In millions of dollars, unless otherwise indicated)

In my last report on Northrim Bancorp, I estimated earnings of $4.64 per share for 2022. My earnings estimate has barely changed as the downward revision to the loan growth estimate negates the decline proportional to the estimated operating expenses.

Actual earnings may differ materially from estimates due to the risks and uncertainties associated with inflation and, therefore, the timing and magnitude of interest rate increases. Also, the threat of a recession may increase the provisioning of expected loan losses beyond my expectations. The new Omicron sub-variant should also be watched.

NRIM Trading at a significant discount to its target price

Northrim BanCorp offers a dividend yield of 4.0% at the current quarterly dividend rate of $0.41 per share. Earnings and dividend estimates suggest a payout ratio of 35% for 2022, which is the same as the five-year average. Therefore, the anticipated decline in earnings poses no threat to the level of dividend distribution.

I use historical price/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 Medium
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 $37.2 yields a price target of $44.4 for the end of 2022. This price target implies an upside of 7.7% compared to the closing price on July 20. 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 ($) 37.2 37.2 37.2 37.2 37.2
Target price ($) 40.7 42.6 44.4 46.3 48.2
Market price ($) 41.3 41.3 41.3 41.3 41.3
Up/(down) (1.3)% 3.2% 7.7% 12.2% 16.7%
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 Medium
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 $4.63 yields a price target of $50.4 for the end of 2022. This price target implies a 22.2% upside from at the July 20 closing price. 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 ($) 4.63 4.63 4.63 4.63 4.63
Target price ($) 41.1 45.8 50.4 55.0 59.7
Market price ($) 41.3 41.3 41.3 41.3 41.3
Up/(down) (0.3)% 10.9% 22.2% 33.4% 44.6%
Source: Author’s estimates

Equal weighting of target prices from both valuation methods gives a combined result target price of $47.4, implying a 14.9% upside from the current market price. Adding the forward dividend yield gives an expected total return of 18.9%. Therefore, I adopt a buy rating on Northrim BanCorp.

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