Northrim BanCorp, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Unaudited consolidated results include Community Banking and Home Mortgage Lending.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue (net interest income plus other operating income) | $39.9 million | $26.8 million | $97.0 million | $75.6 million |
| Net interest income | $18.3 million | $16.3 million | $51.4 million | $48.0 million |
| Net interest margin | 3.90% | 4.60% | 4.05% | 4.71% |
| Provision (benefit) for loan losses | $0.6 million | ($2.1 million) | $3.0 million | ($1.0 million) |
| Net income | $11.9 million | $7.5 million | $22.8 million | $16.1 million |
| Diluted EPS | $1.84 | $1.11 | $3.52 | $2.35 |
Q3 revenue rose 49% year over year and nine-month revenue rose 28%. Higher mortgage banking income—$17.9 million in Q3 versus $7.6 million a year earlier, and $37.8 million for nine months versus $17.8 million—was the main driver, reflecting strong refinancing and home-purchase activity. Higher mortgage production also drove much of the earnings increase. Net interest income grew with loan balances, but lower rates and PPP loan yields reduced net interest margin. Operating expenses increased 22% in Q3 and 16% for nine months, primarily from mortgage-related personnel and other costs.
Balance sheet, cash flow and capital
- Total assets were $2.10 billion at September 30, 2020, up from $1.64 billion at year-end 2019. Portfolio loans were $1.49 billion, up 43%; $375.6 million consisted of SBA Paycheck Protection Program (PPP) loans.
- Deposits increased 32% to $1.81 billion, primarily reflecting PPP-related funding and customer relationships. Transaction accounts were 90% of deposits.
- Cash and cash equivalents were $101.1 million. Borrowings were $13.7 million and junior subordinated debentures were $10.3 million. The company reported $1.001 billion available under existing borrowing lines; liquidity was considered sufficient for at least 12 months.
- For the first nine months, operating cash flow was negative $27.0 million, investing cash flow negative $390.7 million, and financing cash flow positive $423.4 million. Loan growth, particularly PPP lending, drove investing outflows; deposit growth funded much of the activity.
- Shareholders’ equity was $214.6 million. The Bank’s reported regulatory capital ratios exceeded well-capitalized thresholds: total risk-based capital 13.37%, Tier 1 12.12%, common equity Tier 1 12.13%, and leverage 8.85%.
- The allowance for loan losses was $21.7 million, or 1.45% of portfolio loans; it covered 196% of nonperforming loans net of government guarantees. Net nonperforming assets were $17.9 million, down from $19.9 million at year-end 2019.
Material changes, outlook and risks
- COVID-19 loan modifications outstanding fell to $120.4 million across 75 loans at September 30, from $357.5 million across 479 loans at June 30. About $11.4 million across 12 loans had received a second modification. These eligible CARES Act modifications were not classified as TDRs.
- Management increased loan-loss provisions because of uncertainty from COVID-19, lower oil prices, Alaska’s slowing economy, and growth in unguaranteed loans, despite improvement in certain credit-quality measures. Management cautioned that nonperforming assets could rise in later quarters.
- The filing identifies material uncertainty around the pandemic’s duration and effects. Alaska experienced sharply elevated unemployment, while tourism, oil and gas, aviation, healthcare, accommodations, retail and restaurants were among the exposed borrower sectors. PPP forgiveness timing and borrower eligibility also create uncertainty.
- PPP lending was a major balance-sheet driver: approximately 2,888 loans totaling $375.6 million were outstanding. The company had submitted 17 loans totaling $9.2 million for forgiveness by September 30. It had repaid PPPLF funding and was financing PPP loans through deposits and investment maturities.
- No earnings or financial guidance was provided. Management expects liquidity to be adequate for at least 12 months and stated the Bank remained well capitalized. The company resumed share repurchases in late August and bought 88,742 shares during Q3 at an average $26.66; 45,549 authorized shares remained.
- CECL adoption is scheduled for fiscal years beginning on or after December 15, 2022; early adoption is optional. Management’s preliminary estimate, if adopted using September 2020 portfolio conditions, was a $2–$3 million decrease in the allowance, but the ultimate effect depends on portfolio composition, credit quality, economic conditions and model assumptions.
- Other notable items: a $454,000 tax accrual related to an Alaska tax audit was reversed in Q2 2020 while the company pursued an appeal. Mortgage servicing rights were $10.6 million and were sensitive to prepayment and discount-rate assumptions. The filing describes ordinary-course litigation but does not expect it to have a material effect.
Most important facts for investors to verify
- PPP forgiveness progress, remaining PPP balances, and the resulting effects on loan yields, deposits and liquidity as PPP funds are spent or withdrawn.
- Whether COVID-related payment accommodations expire without renewed stress, particularly in exposed industries, and how nonperforming loans, charge-offs and allowance coverage evolve.
- Whether mortgage banking income remains elevated as refinancing activity and mortgage rates change, and how production costs and mortgage servicing valuations respond.
- Deposit retention and certificate-of-deposit maturities: $150.7 million, or 83% of certificates, were scheduled to mature within 12 months.
- The assumptions and eventual impact of CECL adoption, and the status and outcome of the Alaska tax audit appeal.