Northrim BanCorp, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Northrim is an Alaska-based bank holding company operating Community Banking and Home Mortgage Lending businesses. Unless noted otherwise, dollar amounts below are in millions.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue (net interest income plus other operating income) | $35.0 | $25.5 | $57.1 | $48.8 |
| Net interest income | $17.5 | $16.0 | $33.1 | $31.7 |
| Provision for loan losses | $0.4 | $0.3 | $2.5 | $1.1 |
| Net income | $9.9 | $4.3 | $10.9 | $8.6 |
| Diluted EPS | $1.52 | $0.62 | $1.68 | $1.24 |
| Net interest margin | 3.98% | 4.71% | 4.14% | 4.77% |
- Q2 revenue increased 37% year over year, led by mortgage banking income, which rose to $15.2 million from $6.0 million. Management attributed the increase mainly to higher refinance activity following lower mortgage rates. Q2 net income rose 132%; first-half net income increased 28%.
- Mortgage banking income for the first half was $19.9 million, versus $10.2 million a year earlier. Higher mortgage production also contributed to increased personnel expenses.
- Net interest income grew, reflecting larger loan and loans-held-for-sale balances, but margin declined as interest rates fell and PPP loans affected portfolio yields. Management reported Q2 margin down 73 basis points and first-half margin down 63 basis points year over year.
- The effective tax rate was 17% for both Q2 and the first half, versus 21% in the comparable 2019 periods. The 2020 rate benefited from reversal of a $454,000 tax accrual related to an Alaska tax audit; the company appealed the state’s position and believes it is more likely than not to prevail.
Balance sheet, funding and credit
- At June 30, total assets were $2.017 billion, up from $1.644 billion at year-end 2019. Total loans were $1.433 billion, up 37%, including $353.5 million of SBA Paycheck Protection Program (PPP) loans. Loans held for sale were $134.0 million.
- Deposits increased 27% to $1.737 billion, primarily reflecting PPP-related funding and new customer relationships. Transaction accounts represented 90% of deposits. Cash and cash equivalents were $89.4 million, compared with $95.4 million at year-end.
- Shareholders’ equity was $206.9 million. Borrowings were $11.8 million and junior subordinated debentures were $10.3 million. Management said company and bank capital ratios exceeded regulatory requirements; the bank’s total risk-based capital ratio was 13.44% and leverage ratio was 9.06%.
- First-half cash flows were $(46.6) million from operating activities, $(316.6) million from investing activities and $357.2 million from financing activities. Investing outflows principally reflected loan growth, including PPP lending; financing inflows principally reflected deposit growth.
- The allowance for loan losses was $20.7 million, versus $19.1 million at year-end. First-half provision was $2.5 million and net charge-offs were $0.9 million. Management cited portfolio growth and increased qualitative risk factors associated with COVID-19 and lower oil prices.
- Nonperforming assets, net of government guarantees, were $20.8 million, up 4% from year-end. Net nonperforming loans were $12.7 million, down from $14.0 million; net adversely classified loans declined to $15.7 million from $22.3 million. Management cautioned that nonperforming assets could rise in later quarters.
Outlook, risks and unusual items
- No specific earnings or revenue guidance was provided. Management expected liquidity to be sufficient for operations and anticipated capital needs for at least 12 months, and expected to continue receiving dividends from the bank during the remainder of 2020.
- The company had $964.9 million available under existing borrowing lines and $239.2 million of PPP loans eligible for the Federal Reserve’s PPP Liquidity Facility. It reported $335.4 million of unfunded loan and letter-of-credit commitments and $206.3 million of mortgage-origination commitments.
- COVID-19-related loan modifications totaled $357.5 million across 479 loans: $64.3 million interest-only and $293.2 million full-payment deferrals. These were treated as non-TDR modifications under the company’s CARES Act election. PPP lending reached approximately 2,500 loans; the company reported originating the largest number of Alaska PPP loans among financial institutions.
- Management highlighted exposure to industries affected by COVID-19 and the oil-price decline, including tourism, oil and gas, aviation, healthcare, accommodations, retail and restaurants. It identified pandemic-related credit deterioration, collateral values, loan demand, interest-rate volatility, liquidity needs, operations, cybersecurity and third-party disruptions as risks, and warned that COVID-19 could materially adversely affect 2020 results.
- The company suspended stock repurchases on March 26, 2020. It repurchased approximately 193,000 shares during the first half before the suspension; there were no repurchases in Q2. The Q2 dividend was $0.34 per share.
- The company had not adopted CECL and reported an effective date beginning in 2023. Management estimated that hypothetical early adoption using the June 30 portfolio and current forecast would reduce the allowance by $5–$6 million; the ultimate effect remains dependent on portfolio and economic conditions.
Important facts for investors to verify
- Whether PPP loan forgiveness, fees and repayments sustain loan growth and deposits, and how deposit balances change as PPP funds are used.
- Whether COVID-19 deferrals convert to renewed payment performance or produce rising delinquencies, nonperforming assets, charge-offs or allowance needs.
- How durable elevated mortgage banking income is, and whether lower rates, refinancing and prepayments further affect mortgage servicing rights and net interest margin.
- Whether Alaska’s economic conditions, including employment, tourism and oil-related activity, worsen the company’s borrower and collateral risks.
- The outcome of the disputed Alaska tax assessment and the eventual CECL allowance impact; the filing’s CECL estimate is preliminary and scenario-dependent.