Northrim BanCorp, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; balance-sheet comparisons are with December 31, 2020. Northrim is an Alaska bank holding company with Community Banking and Home Mortgage Lending segments. Figures below are in U.S. dollars; financial statement amounts are rounded to millions unless otherwise stated.
Financial performance and condition
| Metric | Q1 2021 / March 31, 2021 | Comparable period / December 31, 2020 |
|---|---|---|
| Total revenue (net interest income plus other operating income) | $35.4 million | $22.1 million in Q1 2020; up 60% |
| Net interest income | $19.5 million | $15.7 million in Q1 2020; up 24% |
| Net interest margin | 3.90% | 4.32% in Q1 2020 |
| Net income; diluted EPS | $12.2 million; $1.94 | $1.0 million; $0.16 in Q1 2020 |
| Assets; shareholders’ equity | $2.351 billion; $231.5 million | $2.122 billion; $221.6 million at December 31, 2020 |
| Loans held for investment; deposits | $1.549 billion; $2.051 billion | $1.444 billion; $1.825 billion at December 31, 2020 |
| Cash and cash equivalents | $203.6 million | $116.0 million at December 31, 2020 |
| Borrowings; junior subordinated debentures | $14.7 million; $10.3 million | $14.8 million; $10.3 million at December 31, 2020 |
- Mortgage banking income rose to $13.6 million from $4.7 million, primarily reflecting refinance activity and home purchases. Community Banking earned $7.4 million and Home Mortgage Lending $4.8 million, versus $1.1 million and a $0.1 million loss, respectively, in Q1 2020.
- Net interest income benefited from loan growth and PPP loan fees. Net interest margin fell 42 basis points, primarily due to lower interest rates and PPP loan effects. Net PPP fee income was $3.3 million in Q1; $11.9 million in deferred PPP fees remained at quarter-end.
- Other operating income was $15.9 million, up from $6.4 million; total operating expenses increased 14% to $21.3 million. Annualized return on assets was 2.25% and return on equity was 21.40%.
- Cash flow was $44.6 million provided by operations, $178.7 million used in investing, and $221.8 million provided by financing. The quarter-end cash increase was $87.6 million.
- Deposits increased 12% during the quarter, largely associated with PPP lending and customer relationships. Transaction accounts were 91% of deposits. The company reported $1.116 billion available under existing borrowing lines, in addition to other liquidity sources, and said liquidity should cover operating activities and anticipated capital needs for at least 12 months.
- Regulatory capital ratios remained above well-capitalized thresholds. At March 31, the Bank’s total risk-based capital ratio was 13.11%, Tier 1 ratio 12.15%, common equity Tier 1 ratio 12.16%, and leverage ratio 8.62%. The company paid a $0.37 per-share dividend and repurchased 61,399 shares at an average $36.02.
Material changes and credit quality
- Loans increased 7% from year-end to $1.549 billion; commercial and industrial loans were $695.8 million. PPP loans were $402.5 million, versus $304.6 million at year-end. The filing reports $579.6 million of PPP loans funded over the prior 12 months and $170.1 million forgiven by the SBA by quarter-end.
- The company early adopted CECL on January 1, 2021. Adoption increased retained earnings by $2.4 million, net of tax. The loan allowance for credit losses was $14.8 million at March 31, compared with $21.1 million before adoption; the company reported a $1.9 million loan-loss benefit and a $0.4 million provision for unfunded commitments, resulting in a net $1.5 million benefit for credit losses. Management attributed the reduction primarily to improved economic assumptions.
- Nonperforming assets, net of government guarantees, rose to $19.6 million from $16.3 million at year-end. Net nonaccrual loans increased to $13.1 million from $9.6 million. Potential problem loans declined to $1.4 million from $6.1 million, partly because a relationship moved to nonaccrual.
- COVID-related loan modifications not classified as TDRs totaled $88.3 million across 30 loans, up from $65.5 million across 34 loans at year-end. The filing says approximately $83.2 million across 26 loans had received a second modification. TDRs totaled about $6.5 million before government guarantees.
Outlook, risks and unusual items
- No earnings or revenue guidance is provided. Management said it expects to continue receiving dividends from the Bank during the remainder of 2021 and considers available liquidity sufficient for at least 12 months.
- Management described Alaska’s economy as recovering unevenly amid the pandemic. It cited continuing job losses, elevated mortgage delinquencies, and dependence on government support, while also noting improving oil prices and stronger home prices and sales. It warned that the pandemic’s ultimate effect on credit quality remains uncertain and nonperforming assets could rise.
- Loan exposures include tourism, aviation, healthcare, oil and gas, accommodations, retail, and restaurants. Direct oil-and-gas exposure was $64.7 million, about 4% of loans. The filing identifies uncertainty around Alaska’s economy, oil prices, COVID-19 effects, PPP forgiveness timing, credit quality, competition, and the ability to maintain market share and net interest margin as risks.
- At quarter-end, the company reported about $206.0 million of assets and $10.3 million of liabilities linked to USD LIBOR, plus $158.3 million of LIBOR-linked derivative notional. It is preparing for the transition to alternative reference rates.
- The filing notes a proposed federal corporate tax-rate increase from 21% to 28%; if enacted as proposed, management said it could adversely affect future results. The company reported no material change in market-risk disclosures, no material litigation expected to affect results, and effective disclosure controls.
Important facts for investors to verify
- Whether mortgage production, sale gains, and elevated mortgage banking income remain sustainable as interest rates and refinancing activity change.
- PPP forgiveness pace and the effect of PPP fee recognition, loan balances, and related deposits on future earnings and net interest margin.
- Credit trends: nonaccrual loans, nonperforming assets, COVID-related modifications, and the assumptions and sensitivity underlying the CECL allowance.
- Deposit retention, potential draws on $375.7 million of loan and letter-of-credit commitments, and the availability and terms of contingent liquidity sources.
- Exposure to Alaska’s economy and the sectors identified as pandemic-sensitive, as well as progress in transitioning LIBOR-linked contracts and derivatives.