Northrim BanCorp, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Northrim is an Alaska-based bank holding company with Community Banking and Home Mortgage Lending segments. Figures below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue (net interest income plus other operating income) | $33.3 | $35.0 | $68.7 | $57.1 |
| Net interest income | $19.2 | $17.5 | $38.7 | $33.1 |
| Net income | $8.3 | $9.9 | $20.5 | $10.9 |
| Diluted earnings per share | $1.33 | $1.52 | $3.27 | $1.68 |
| Net interest margin | 3.48% | 3.98% | 3.68% | 4.14% |
Q2 net income fell 16% year over year, chiefly reflecting lower Home Mortgage Lending income as mortgage production declined. Mortgage banking income was $11.4 million versus $15.2 million. Six-month net income rose 88%, supported by stronger first-quarter mortgage production, Community Banking results, PPP-related fee income, and lower credit-loss expense.
Net interest income increased in both comparison periods as earning assets and loan fees grew and funding costs fell. Margin contracted, however, because of lower market rates and a less favorable earning-asset mix, including more low-yielding short-term investments. Net PPP fee income was $2.6 million in Q2 and $5.9 million for the first half; $11.0 million in deferred PPP fees remained at June 30.
Balance sheet, cash flow, debt and liquidity
- Total assets were $2.454 billion at June 30, up from $2.122 billion at December 31, 2020. Portfolio loans were $1.488 billion, up 3%; loans held for sale were $105.8 million.
- Deposits increased 18% to $2.146 billion, primarily reflecting PPP-related funding and new customer relationships. Transaction accounts represented 91% of deposits.
- Cash and cash equivalents were $346.9 million, versus $116.0 million at year-end. For the first six months, operating cash flow was $68.5 million, investing cash flow was negative $152.0 million, and financing cash flow was positive $314.5 million.
- Borrowings were $14.7 million and junior subordinated debentures were $10.3 million. Shareholders’ equity was $237.2 million, up from $221.6 million at year-end.
- Management reported $1.161 billion available under existing borrowing lines, against $393.9 million of unfunded loan and letter-of-credit commitments. It considered liquidity sufficient for operations and anticipated capital needs for at least 12 months.
- At June 30, the Bank’s total risk-based capital ratio was 12.65%, common equity Tier 1 ratio 11.75%, and leverage ratio 7.88%; the filing says capital exceeded applicable well-capitalized requirements.
Credit quality and material developments
- The company early adopted CECL on January 1, 2021. Adoption increased retained earnings by $2.4 million. The loan allowance was $14.5 million at June 30, down from $21.1 million at year-end; the company cited improved economic forecasts. Q2 included a $427,000 benefit for credit losses, compared with a $404,000 provision a year earlier.
- Nonperforming assets, net of government guarantees, were $17.8 million, compared with $16.3 million at year-end. Net nonperforming loans were $12.0 million versus $10.0 million. Management noted that the eventual pandemic impact on nonperforming assets remained uncertain.
- COVID-related payment modifications covered $83.1 million across 24 loans at June 30, including $75.6 million interest-only and $7.4 million full-payment deferrals. About $64.0 million across 22 loans had received a second modification.
- PPP loans totaled $300.9 million on the balance sheet. Since the program began, Northrim had originated nearly 5,800 PPP loans totaling $612.6 million; $303 million had received SBA forgiveness by June 30.
- Direct oil-and-gas industry exposure was approximately $65.0 million, or 4% of loans; the company reported no loans to oil producers or exploration companies. It also disclosed lending exposure to tourism, aviation, healthcare, restaurants, fishing, retail, and accommodations.
- The company paid a $0.37-per-share Q2 dividend, 9% above the prior-year quarter, and repurchased no shares during Q2. It repurchased approximately 61,400 shares during the first half.
Outlook, risks and contingencies
The filing provides no quantified earnings or revenue guidance. Management described Alaska’s economy as recovering, while noting that several sectors remained below pre-pandemic employment levels and that oil-and-gas employment had continued to decline. Management expected to continue receiving dividends from the Bank during the rest of 2021, subject to capital requirements and regulatory limits.
Key uncertainties include COVID-19 effects on borrowers and credit quality, Alaska’s economy and oil prices, interest rates and net interest margin, PPP forgiveness timing, loan growth and asset quality. The company also identified LIBOR transition risk: at June 30, approximately $164.9 million of assets and $10.3 million of liabilities were linked to USD LIBOR, alongside $156.7 million of LIBOR-linked derivative notional. It reported work on fallback terms, contract amendments, systems, and alternative-rate products.
Management stated that ordinary-course debtor-creditor claims and litigation were not expected to have a material effect. A disclosed potential risk is proposed federal corporate tax-rate legislation, which could adversely affect future results if enacted. The company also cautioned that CECL estimates involve judgment and could change with economic conditions or regulatory review.
Important facts for investors to verify
- Whether mortgage production and mortgage banking income continue to decline, and how that affects quarterly earnings.
- Whether deposit growth and PPP-related cash balances persist, and how excess liquidity is deployed without further pressuring margin.
- Trends in nonperforming loans, COVID-modified credits, classified loans, and the adequacy of the CECL allowance as economic assumptions change.
- PPP forgiveness and fee recognition timing, including the remaining $11.0 million in deferred fees.
- Exposure to Alaska’s oil-and-gas, tourism, aviation, and other pandemic-sensitive sectors, as well as progress on LIBOR-linked contract transitions.
- Future capital, dividend, and share-repurchase decisions; reported capital ratios and liquidity are as of June 30, 2021.