Northrim BanCorp, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; comparisons are principally with FY2019. Northrim is an Alaska-based bank holding company operating Community Banking and Home Mortgage Lending businesses. It reported $2.12 billion in assets and $1.82 billion in deposits at year-end.
Financial performance and position
| Metric | FY2020 / year-end | FY2019 / change |
|---|---|---|
| Total revenue (net interest income plus other operating income) | $134.0 million | $101.8 million; up 32% |
| Net income | $32.9 million; diluted EPS $5.11 | $20.7 million; diluted EPS $3.04 |
| Net interest income | $70.7 million | $64.4 million; up 10% |
| Net interest margin | 4.02% | 4.65% |
| Other operating income | $63.3 million | $37.3 million; up 70% |
| Other operating expense | $89.1 million | $76.8 million; up 16% |
| Provision (benefit) for loan losses | $2.4 million provision | $1.2 million benefit |
| Assets / portfolio loans / deposits | $2.12 billion / $1.44 billion / $1.82 billion | Assets $1.64 billion / loans $1.04 billion / deposits $1.37 billion |
| Shareholders’ equity | $221.6 million | $207.1 million |
- Earnings drivers: Mortgage banking income rose to $52.6 million from $24.2 million, with mortgage originations sold increasing to $1.30 billion from $684 million, primarily due to refinance activity. Net interest income benefited from higher average earning-asset balances and $5.6 million of PPP loan fees, while lower rates and PPP loan yields reduced margin.
- Cash flow: Operating activities used $36.5 million, investing activities used $382.8 million, and financing activities provided $439.8 million. The operating outflow primarily reflected mortgage originations exceeding loan-sale proceeds; investing outflow largely reflected loan growth, including PPP lending. Cash and cash equivalents ended at $116.0 million, up from $95.4 million.
- Credit and asset quality: Allowance for loan losses was $21.1 million, or 1.46% of portfolio loans, versus $19.1 million, or 1.83%, a year earlier. Net nonperforming loans were $10.0 million, down from $14.0 million; net nonperforming assets were $16.3 million, down from $19.9 million. Net charge-offs were 0.03% of average loans.
- Capital and liquidity: Northrim Bank’s year-end total risk-based capital ratio was 13.13%, Tier 1 risk-based ratio 11.88%, and leverage ratio 8.55%; it was categorized as well-capitalized. The company reported $423.8 million of current assets and $1.01 billion of available borrowing capacity under existing lines, subject to collateral and facility terms. Year-end borrowings were $14.8 million and junior subordinated debentures were $10.3 million.
Material changes and notable items
- PPP lending substantially expanded the balance sheet: the Bank originated 2,888 PPP loans totaling $375.6 million in 2020; $310.5 million remained outstanding at year-end, and $65.1 million had received SBA forgiveness. The filing says PPP loans were 100% SBA-guaranteed.
- Deposits rose 33%, principally reflecting PPP-related customer deposits and new customer relationships. Portfolio loans increased about 38%; commercial loans included $310.5 million of PPP loans.
- Mortgage banking growth was partly offset by lower purchased-receivable income, down 19% to $2.7 million, as some customers used PPP proceeds for liquidity, and lower deposit service charges amid customer accommodations.
- Operating costs increased, particularly personnel expense, which rose 19% to $61.1 million, reflecting mortgage production commissions, overtime, staffing and compensation. No further RML acquisition payments were due after the contractual earnout period ended in late 2019.
- The company repurchased 327,000 shares for approximately $10.0 million at an average $30.51 per share and paid $1.38 per share in dividends during 2020. In February 2021, the board authorized up to 313,000 additional repurchases and approved a $0.37-per-share dividend.
Outlook, risks and contingencies
- Management expected modest growth in 2021, citing COVID-19 effects, lower oil prices and a slower Alaska economy; it intended to continue pursuing market-share growth. No quantified earnings or revenue guidance was provided.
- Management expected the Bank to remain well-capitalized and the company to continue receiving Bank dividends in 2021, subject to regulatory limits. It considered liquidity sufficient for the foreseeable future, while noting deposit withdrawals and draws on $527.7 million of unfunded commitments as potential liquidity demands.
- COVID-19 remains a central uncertainty. At year-end, $65.5 million of loans across 34 modifications remained under COVID-related payment accommodations, down from $120.4 million across 75 modifications at September 30. The filing warns that pandemic developments could materially adversely affect 2021 results.
- Key exposures include Alaska’s concentrated economy, real estate and commercial lending, and industries affected by the pandemic. Excluding PPP loans, tourism represented 7% of loans, aviation 5%, healthcare 8%, oil and gas 6%, restaurants 3%, and accommodations 3%. About 43% of the portfolio was attributable to 35 large borrowing relationships.
- Interest-rate, credit, collateral-value, cyber and third-party service risks are also highlighted. The company had $7.3 million of OREO, mostly related to a commercial real estate loan, and $527.7 million in total unfunded lending commitments.
- CECL was adopted early on January 1, 2021, after the reporting date. Adoption reduced the loan-loss allowance by $4.5 million to $16.6 million, increasing equity by $3.2 million; the new unfunded-commitment reserve increased by $1.2 million, decreasing equity by $880,000.
- Management said pending legal matters were not expected to have a material effect. The independent auditor issued unqualified opinions on the financial statements and internal control; the allowance for loan losses was identified as a critical audit matter because of judgment in loan ratings and qualitative reserves.
Important facts for investors to verify
- How much of reported loan and deposit growth is durable after PPP balances and related customer funds run off, and how quickly PPP loans receive forgiveness.
- Whether mortgage production, gains and servicing economics remain sustainable as refinancing activity and interest rates change.
- Credit performance in modified loans and exposed industries, and whether the allowance remains adequate as pandemic effects and CECL estimates evolve.
- Actual capital, liquidity and dividend capacity after changes in deposits, loan commitments, collateral availability and regulatory requirements.
- The filing reports net nonperforming loans of $10.0 million in its summary table but $9.6 million for nonaccrual loans net of guarantees elsewhere; distinguish the measures when reviewing credit quality.