Northrim BanCorp, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Northrim is an Alaska-based bank holding company operating Community Banking and Home Mortgage Lending businesses. Financial statements are unaudited; amounts below are in millions unless noted.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue (net interest income plus other operating income) | $33.1 | $39.9 | $101.8 | $97.0 |
| Net interest income | $20.4 | $18.3 | $59.1 | $51.4 |
| Net income | $8.9 | $11.9 | $29.4 | $22.8 |
| Diluted EPS | $1.42 | $1.84 | $4.69 | $3.52 |
| Net interest margin | 3.45% | 3.90% | 3.60% | 4.05% |
- Q3 net income declined about 25% year over year, principally because mortgage banking income fell $8.0 million as mortgage production and refinancing activity slowed. Community Banking earnings partly offset the decline.
- Nine-month net income rose about 29%, led by Community Banking, including PPP-related fees and lower credit-loss expense; lower mortgage production partly offset the improvement.
- Q3 other operating income was $12.7 million, down 41% year over year. Nine-month other operating income was $42.7 million, down 6%. Mortgage banking income was $9.9 million for Q3 and $34.9 million year to date.
- Credit-loss benefit was $1.1 million for Q3 and $3.0 million for the first nine months, versus provisions of $0.6 million and $3.0 million, respectively, in 2020. The company attributed the change mainly to improved economic assumptions and loan-quality trends.
Financial position, cash flow and capital
- At September 30, total assets were $2.610 billion, up from $2.122 billion at December 31, 2020. Loans were $1.451 billion, broadly stable; deposits rose 26% to $2.297 billion. Management attributed deposit growth substantially to PPP-related funding and customer relationships.
- Cash and cash equivalents were $492.3 million, versus $116.0 million at year-end. The company also held $407.7 million in portfolio investments. Management cited deposit inflows not lent out as a reason for increased securities purchases.
- For the first nine months, operating cash flow was $75.3 million, investing cash flow was negative $160.0 million, and financing cash flow was positive $461.0 million; cash increased $376.3 million.
- Borrowings were $14.6 million and junior subordinated debentures were $10.3 million. The company reported $1.219 billion available under existing borrowing lines. It stated liquidity was sufficient for operating needs and anticipated capital requirements for at least 12 months.
- Shareholders’ equity was $242.5 million. September 30 regulatory capital ratios were 15.00% total risk-based capital and 9.48% leverage at the Company; the Bank’s ratios were 12.18% and 7.57%, respectively. Both were above applicable well-capitalized thresholds.
- Dividends were $0.38 per share in Q3, up from $0.35 a year earlier. The company repurchased 29,613 shares in Q3, with 221,988 shares remaining under the authorization at quarter-end.
Material changes and credit quality
- Early adoption of CECL on January 1, 2021 increased opening retained earnings by $2.4 million. The loan allowance for credit losses was $13.8 million at September 30, down from $21.1 million at December 31, 2020; adoption and subsequent estimates affect comparability with 2020.
- Net nonperforming assets were $16.1 million, compared with $16.3 million at year-end. Net nonaccrual loans increased to $11.5 million from $9.6 million. Classified loans totaled $46.0 million before government guarantees and $32.5 million net of guarantees.
- COVID-related loan modifications totaled $57.4 million across 24 modifications at quarter-end, down from $65.5 million across 34 at year-end. Management noted all 24 had undergone more than one modification and approximately 82% represented three relationships.
- PPP lending totaled nearly 5,800 loans and $612.6 million since program inception. By September 30, $405.8 million had received SBA forgiveness; $203.4 million in PPP loans remained outstanding. PPP-related net fee income was $3.0 million in Q3 and $8.9 million year to date.
Outlook, risks and other items
- No specific earnings or financial guidance is provided. Management described Alaska’s economy as recovering, citing higher oil prices, improving tourism, job growth and a strong housing market, while noting oil-and-gas employment remained below prior levels and supply-chain constraints could moderate construction activity.
- Management said improved forecasts for Alaska unemployment, housing and commercial real estate, along with better qualitative credit factors, contributed to the lower allowance. The estimate remains judgmental and could change materially with economic conditions, portfolio quality or regulator assessments.
- Key disclosed uncertainties include COVID-19 effects on borrowers and operations; Alaska economic conditions and oil prices; interest rates, inflation and supply-chain constraints; PPP forgiveness timing; competition; and the company’s ability to maintain asset quality, market share and net interest margin.
- The company had $371.9 million of commitments to extend credit and letters of credit, plus $169.4 million of commitments to originate loans for sale. It maintained a $1.2 million reserve for off-balance-sheet credit exposures.
- LIBOR transition exposure included approximately $191.8 million of assets and $10.0 million of liabilities linked to USD LIBOR, plus $154.8 million notional of related derivatives. The filing describes transition planning; the timing and terms of replacement arrangements remain relevant to monitor.
- Management expected ordinary-course legal proceedings not to have a material effect. Risk factors were reported as not materially changed from the 2020 Form 10-K.
Important facts for investors to verify
- Whether mortgage banking production and income continue to decline, and whether Community Banking growth offsets that pressure.
- Whether deposit inflows remain stable and can be deployed profitably, given the large cash and investment balances and lower net interest margin.
- Whether credit quality, nonaccrual loans and the CECL allowance remain consistent with management’s improving economic assumptions, especially for modified borrowers and exposed industries.
- The pace of PPP forgiveness and the remaining deferred PPP fees, which materially supported reported net interest income.
- Whether capital, liquidity and funding capacity remain adequate if deposits decline or unfunded commitments are drawn, and how LIBOR transition affects contracts and derivatives.