Northrim BanCorp, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Northrim operates Community Banking and Home Mortgage Lending businesses, principally in Alaska. Amounts below are in U.S. dollars; financial statement figures are in millions unless otherwise noted.
Financial results and position
| Metric | Q1 2020 / Mar. 31, 2020 | Comparable period / prior year-end |
|---|---|---|
| Total revenue (net interest income plus other operating income) | $22.1 million | $23.3 million, Q1 2019 |
| Net interest income | $15.7 million | $15.8 million, Q1 2019 |
| Net interest margin | 4.32% | 4.83%, Q1 2019 |
| Provision for loan losses | $2.1 million | $0.75 million, Q1 2019 |
| Net income / diluted EPS | $1.0 million / $0.16 | $4.3 million / $0.62, Q1 2019 |
| Total assets | $1,691.3 million | $1,644.0 million, Dec. 31, 2019 |
| Portfolio loans | $1,081.9 million | $1,043.4 million, Dec. 31, 2019 |
| Deposits | $1,395.5 million | $1,372.4 million, Dec. 31, 2019 |
| Allowance for loan losses | $21.0 million | $19.1 million, Dec. 31, 2019 |
| Cash and cash equivalents | $85.8 million | $95.4 million, Dec. 31, 2019 |
Net income fell 76% year over year. The company reported return on average assets of 0.25% and return on average equity of 2.00%, versus 1.18% and 8.36%, respectively, in Q1 2019. The dividend payout ratio was 215.2%.
Net cash used in operating activities was $16.9 million and net cash used in investing activities was $35.3 million; financing activities provided $42.6 million. The net decrease in cash and cash equivalents was $9.6 million. Operating cash use primarily reflected mortgage-loan originations exceeding proceeds from loan sales; investing cash use reflected loan growth and securities purchases.
Borrowings were $36.9 million, up from $8.9 million at year-end, including $25 million in overnight advances and $3 million of Federal Reserve discount-window advances. The company reported $10.3 million of junior subordinated debentures. Regulatory capital ratios remained above well-capitalized thresholds: company total risk-based capital was 14.50% and the Bank’s was 12.66%; leverage ratios were 11.93% and 10.27%, respectively. Management said liquidity sources were sufficient for anticipated needs for at least 12 months and reported $793.4 million available under existing borrowing lines.
Material changes and management commentary
- Loan growth and higher interest income were more than offset by higher deposit funding costs, lower asset yields, increased credit-loss provision, higher operating expense, and weaker marketable-equity results. The net unrealized loss on marketable equity securities was $0.9 million, compared with a $0.5 million gain in Q1 2019.
- Mortgage banking income increased to $4.7 million from $4.3 million, supported by refinance activity and higher loan-sale gains. These benefits were partly offset by lower mortgage servicing rights fair value and mortgage-commitment valuation effects.
- Portfolio loans increased 4% from year-end. Nonperforming assets, net of government guarantees, were $19.6 million, down from $19.9 million at year-end; net nonperforming loans were $13.4 million. Management cautioned that pandemic effects could increase nonperforming assets in subsequent quarters.
- The allowance rose to $21.0 million, or 157% of net nonperforming loans, from $19.1 million, or 137%, at year-end. Management cited loan growth, specific impairment, COVID-19 and lower oil prices in explaining the higher provision.
- Alaska’s economy had shown improvement before COVID-19, but management described a sharp reversal in the outlook, citing travel disruption, lower oil prices, unemployment claims, and reduced oil-sector spending. The filing identifies loan exposure to tourism (6%), oil and gas (8%), non-tourism aviation (5%), healthcare (4%), accommodations (3%), retail (2%), and restaurants (2%) of the loan portfolio.
Outlook, risks and subsequent events
The filing provides no quantified earnings or revenue guidance. Management stated that the pandemic and government responses could materially adversely affect 2020 results; the extent and duration were uncertain. Risks include borrower repayment and collateral deterioration, draws on unfunded commitments, funding costs and interest-rate volatility, operational and cybersecurity exposure from remote work, and constraints or delays involving third-party providers.
After quarter-end, as of May 4, 2020, the company had originated $324 million of Paycheck Protection Program loans and had another $55 million in its pipeline. It had borrowed $104 million through the Federal Reserve’s Paycheck Protection Program Liquidity Facility, secured by PPP loans. These are subsequent-period figures, not March 31 balances.
The company repurchased 192,709 shares during Q1 at an average price of $32.74 and paid a $0.34-per-share dividend. It reported suspending further buybacks as of March 31. Management said it had not made COVID-19-related loan modifications by quarter-end, although it had introduced payment deferrals, interest-only options and fee waivers. It elected CARES Act relief allowing qualifying pandemic-related modifications not to be treated as troubled debt restructurings.
The company had $321.2 million of commitments to extend credit and letters of credit, plus $197.9 million of commitments to originate loans for sale. It reported no material expected effect from routine legal proceedings. Management estimated that early adoption of CECL using the March 31 portfolio and its then-current economic forecast would decrease the allowance by $6–$7 million; the estimate is subject to change, and required adoption for this smaller reporting company was deferred to 2023.
Important facts for investors to verify
- How subsequent quarters’ credit quality, loan modifications, charge-offs, and allowance needs develop as COVID-19 and Alaska’s economic conditions evolve.
- Whether PPP originations, forgiveness, funding through the PPPLF, and associated fees or costs affect liquidity, earnings, and capital as expected.
- Whether deposit costs, asset yields, mortgage refinance volumes, and mortgage servicing rights valuations sustain or further pressure net interest margin and earnings.
- Whether borrowing needs, deposit maturities, and draws on the $321.2 million of credit and letter-of-credit commitments materially change liquidity.
- How management’s estimated CECL allowance impact changes before adoption, and whether the stated capital ratios remain comfortably above regulatory requirements.