NORTHRIM BANCORP, INC. This discussion should be read in conjunction with the unaudited consolidated financial statements ofNorthrim BanCorp, Inc. (the "Company") and the notes thereto presented elsewhere in this report and with the Company's Annual Report on Form 10-K for the year endedDecember 31, 2019 . Except as otherwise noted, references to "we", "our", "us" or "the Company" refer toNorthrim BanCorp, Inc. and its subsidiaries that are consolidated for financial reporting purposes. Note Regarding Forward Looking-Statements This quarterly report on Form 10-Q includes "forward-looking statements," as that term is defined for purposes of Section 21E of the Securities Exchange Act of 1934, as amended, which are not historical facts. These forward-looking statements describe management's expectations about future events and developments such as future operating results, growth in loans and deposits, continued success of the Company's style of banking, the strength of the local economy, and statements related to the expected or potential impact of the novel coronavirus ("COVID-19") pandemic and related responses of the government. All statements other than statements of historical fact, including statements regarding industry prospects, future results of operations or financial position and the expected or potential impact of COVID-19 and related responses of the government, made in this report are forward-looking. We use words such as "anticipate," "believe," "expect," "intend" and similar expressions in part to help identify forward-looking statements. Forward-looking statements reflect management's current plans and expectations and are inherently uncertain. Our actual results may differ significantly from management's expectations, and those variations may be both material and adverse. Forward-looking statements, whether concerning COVID-19 and the government response related thereto or otherwise, are subject to various risks and uncertainties that may cause our actual results to differ materially and adversely from our expectations as indicated in the forward-looking statements. These risks and uncertainties include: the uncertainties relating to the impact of COVID-19 on the Company's business, operations and employees; the availability and terms of funding from government sources related to COVID-19; the general condition of, and changes in, theAlaska economy; our ability to maintain or expand our market share or net interest margin; our ability to maintain asset quality; our ability to implement our marketing and growth strategies; and our ability to execute our business plan. Further, actual results may be affected by competition on price 40 -------------------------------------------------------------------------------- and other factors with other financial institutions; customer acceptance of new products and services; the regulatory environment in which we operate; and general trends in the local, regional and national banking industry and economy. Many of these risks, as well as other risks that may have a material adverse impact on our operations and business, are identified in Part II. Item 1A Risk Factors of this report and Item 1A in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2019 , as well as in our other filings with theSecurities and Exchange Commission . However, you should be aware that these factors are not an exhaustive list, and you should not assume these are the only factors that may cause our actual results to differ from our expectations. In addition, you should note that forward looking statements are made only as of the date of this report and that we do not intend to update any of the forward-looking statements or the uncertainties that may adversely impact those statements, other than as required by law. Critical Accounting Policies The preparation of the consolidated financial statements requires us to make a number of estimates and assumptions that affect the reported amounts and disclosures in the consolidated financial statements. On an ongoing basis, we evaluate our estimates and assumptions based upon historical experience and various other factors and circumstances. We believe that our estimates and assumptions are reasonable; however, actual results may differ significantly from these estimates and assumptions which could have a material impact on the carrying value of assets and liabilities at the balance sheet dates and on our results of operations for the reporting periods. The accounting policies that involve significant estimates and assumptions by management, which have a material impact on the carrying value of certain assets and liabilities, are considered critical accounting policies. The Company's critical accounting policies include those that address the accounting for the allowance for loan losses ("Allowance"), valuation of goodwill and other intangible assets, the valuation of other real estate owned ("OREO"), and the valuation of mortgage servicing rights. These critical accounting policies are further described in Item 7, Management's Discussion and Analysis, and in Note 1, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2019 . Management has applied its critical accounting policies and estimation methods consistently in all periods presented in these consolidated financial statements. Impact of accounting pronouncements to be implemented in future periods InJune 2016 , the FASB issued ASU 2016-13, Financial Instruments - Credit Losses ("ASU 2016-13"). ASU 2016-13 is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates, but will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. ASU 2016-13 is effective for the Company for fiscal years, and interim periods within those fiscal years, beginning on or afterDecember 15, 2019 , and must be applied prospectively. However, onOctober 16, 2019 the FASB voted to delay ASU 2016-13 for Smaller Reporting Companies. The Company has electedSmall Reporting Company status, which changes the effective date for ASU 2016-13 for the Company to fiscal years, and interim periods within those fiscal years, beginning on or afterDecember 15, 2022 . Our implementation process includes loss forecasting model development, evaluation of technical accounting topics, updates to our allowance documentation, reporting processes and related internal controls, and overall operational readiness for our adoption of the ASU 2016-13, which will continue until adoption, including parallel runs for current expected credit losses ("CECL") alongside our current allowance process. We are in the process of developing, validating, and implementing models used to estimate credit losses under CECL. We have completed substantially all of our loss forecasting models, and we expect to complete the validation process for our loan models during 2020. Our current planned approach for estimating expected life-time credit losses for loans includes the following key components: • An initial loss forecast period of one year for all loan portfolio
segments and classes of financing receivables and offbalance- sheet credit
exposures. This period reflects management's expectation of losses based
on forward-looking economic scenarios over that time.
• A historical loss forecast period covering the remaining contractual life,
adjusted for prepayments, by segment and class of financing receivables
based on the change in key historical economic variables during
representative historical expansionary and recessionary periods.
• A reversion period of up to two years connecting the initial loss forecast
to the historical loss forecast based on economic conditions at the
measurement date.
41--------------------------------------------------------------------------------
• Utilization of discounted cash flow ("DCF") methods to measure credit
impairment for loans modified in a troubled debt restructuring, unless
they are collateral dependent and measured at the fair value of
collateral. The DCF methods would obtain estimated life-time credit losses
using the conceptual components described above.
As aSmaller Reporting Company , the Company is not required to adopt CECL beforeJanuary 1, 2023 , and we have elected not to early adopt as ofJanuary 1, 2020 . However, we have the option to early adopt CECL as of eitherJanuary 1, 2021 , orJanuary 1, 2022 . Based on our loan portfolio composition atMarch 31, 2020 , and the Company's current economic forecast, had we elected to early adopt CECL as ofMarch 31, 2020 , we estimate the impact of adoption to be an overall decrease in our allowance for credit losses ("ACL") for loans between$6.0 million and$7.0 million . The reduction reflects an expected decrease for all loan segments given their short contractual maturities. The Company does not hold a material amount of residential mortgage loans with long or indeterminate maturities as ofMarch 31, 2020 . In most instances the Company believes that the ACL for these types of loans would lead to an increase in the ACL. We will continue to evaluate and refine the results of our loss estimates until adoption of ASU 2016-13. The ultimate effect of CECL on our ACL will depend on the size and composition of our loan portfolio, the loan portfolio's credit quality and economic conditions at the time of adoption, as well as any refinements to our models, methodology and other key assumptions. At adoption, we will have a cumulative-effect adjustment to retained earnings for our change in the ACL. We currently estimate an overall decrease in our ACL, which will result in an increase to our retained earnings and regulatory capital amounts and ratios. 42 -------------------------------------------------------------------------------- Update on Economic Conditions TheAlaska economy continued positive improvements throughout 2019 and into the beginning of 2020. The most recent macro-economic indicators showed a healthy economy that was growing and adding jobs. However, a new paradigm arose from the COVID-19 virus that is expected to bring an end to positive growth. National and local economies have been significantly altered from government rules implemented to help slow the spread of the virus around the country. These impacts have only begun to take effect in the latter half of the first quarter of the year.The Alaska State Department of Labor reported growth of 1,300 jobs in February of 2020 compared to February of 2019. This is an increase of 0.4% year-over-year. October of 2018 was the first month of year-over-year increase in employment since September of 2015. After 37 months of year-over-year declines,Alaska now had 14 consecutive months of year-over-year job increases prior to the impacts from COVID-19. According to theAlaska State Department of Labor , Oil and Gas led theFebruary 2020 year-over-year growth with a positive 500 jobs for a 5% growth rate. Health Care also grew by 500 jobs over the prior year, which is an increase of 1.3% for the larger direct employment sector. The Construction industry has grown by 400 jobs or 2.9% during the same 12 month period. Tourism helped boost Leisure & Hospitality employment by 300 jobs or 1%. The largest decline was 500 government jobs. State jobs decreased by 400, local government jobs declined by 200, while federal government jobs grew by 100. This was primarily a response to state budget cuts. The other two major sectors to shrink were Manufacturing (primarily seafood processing) down 300 jobs or -2.5% and Information Services down 200 jobs or -3.7%.Alaska's seasonally adjusted gross state product ("GSP") was$55.4 billion in the third quarter of 2019, according to theU.S. Bureau of Economic Analysis ("BEA") in a report released onJanuary 10, 2020 .Alaska's GSP increased 1.8% annualized in the first quarter of 2019, 4.1% in the second quarter, and 2.4% in the third quarter.Alaska's real GSP increased by 0.7% in 2018.Alaska's personal income grew 3.7% in 2019 according to a report by the BEA. Total income from all sources inAlaska grew from$43.8 billion in 2018 to$45.4 billion in 2019. The increase in 2019 was mostly driven by an improvement in wages. Personal income from wages rose$1.03 billion , government transfer receipts were up$406 million and dividends, interest and rents increased by$177 million in 2019. Management believes that the 2019 gains in GSP and personal income have primarily been a result of billions of dollars in investment by the oil and gas sector and record years in tourism. Job growth had been positive for over a year after three years of a mild recession. Unfortunately, with the economic issues resulting from the COVID-19 virus we expect these improvements to end. A decline in tourist numbers and significantly lower oil prices are expected to change this growth pattern. This is further evidenced by the spike in weekly initial unemployment claims inAlaska to 14,600 the week ofMarch 28, 2020 and 12,007 the week ofApril 4, 2020 according to a news release from theState of Alaska Department of Labor onApril 17, 2010 . For the prior year period endingMarch 31, 2019 the initial unemployment insurance claims were 891 and the week ofApril 6, 2019 they were 992. Additionally, ConocoPhillips has announced that they will be reducing capital spending inAlaska by roughly$400 million , or 25%, in 2020 as compared to their previous plans. Average monthly Alaska North Slope ("ANS") crude oil prices ranged between approximately$60 and$80 in 2018 and 2019. This helped increase industry investment and employment after a difficult period of prices averaging between approximately$30 and$60 from 2015 to 2017. However, in the first quarter of 2020 prices began to fall rapidly in response to lower demand from COVID-19 quarantining and over production in theMiddle East andRussia . In January of 2020, ANS prices averaged$65.48 and fell to$54.48 in February. TheMarch 2020 monthly average was only$33.21 . The ANS spot price at the end of the quarterMarch 31, 2020 was$23.18 .Alaska's crude oil production averaged 511,800 barrels per day ("bpd") in fiscal year ("FY") 2019. This was a decrease of 4.2% compared to the previous year end. Total output declined 1.2% to 534,000 bpd in FY 2018.The State Department of Revenue forecasted production on theNorth Slope to decline 0.6% in FY 2020, though this forecast was made prior to COVID-19 impacts.Alaska's home mortgage delinquency and foreclosure levels continue to be better than most of the nation. According to theMortgage Bankers Association ,Alaska's foreclosure rate was 0.63% at the end of 2019. The comparable national average rate was 0.78% at the end of the year. The national survey reported that the percentage of mortgage loans more than 30 days delinquent inAlaska was 2.85% at the end of 2019, compared to 4.07% for the entire country. 43 -------------------------------------------------------------------------------- TheFederal Open Market Committee ("FOMC") cut the target federal funds rate 150 basis points from a range of 1.50%-1.75% to 0-0.25% in March of 2020. At a press conference onMarch 15, 2020 Chairman Powell stated that theFOMC would maintain the rate at this low level until they are confident that the economy has weathered recent events and is on track to achieve employment and price stability goals.
COVID-19 Issues:
• Industry Exposure: Northrim has identified various industries that may be
adversely impacted by the COVID-19 pandemic and a significant decline in oil
prices. Though the industries affected may change through the progression of
the pandemic, the following sectors, with the
exposure as a percent of the total loan portfolio as of
being impacted: Tourism (6%), Oil and Gas (8%), Aviation (non-tourism) (5%),
Healthcare (4%), Accommodations (3%), Retail (2%) and Restaurants (2%).
• Loan Accommodations: The Company has implemented several forms of assistance
to help our customers in the event that they experience financial hardship as
a result of COVID-19 in addition to our participation in Payroll Protection
Program ("PPP") lending. These accommodations include interest only and
deferral options on loan payments, as well as the waiver of various fees
related to loans, deposits and other services. As of
Company has not made a material number of loan accommodations and only began
to see requests for changes near the end of the quarter. The PPP administered
by the
Relief, and Economic Security Act ("CARES Act") has provided some relief on
requests to modify loans.
• Loan Loss Reserve: Although several of the Company's asset quality metrics
improved over the first quarter, management determined it is appropriate to
increase its loan loss reserves through the addition of
loss provisions for the quarter ended March 31, 2020 . This compares to a
$750,000 provision for loan losses in the first quarter a year ago. The
increased provision is the result of growth in the loan portfolio, anincrease in specific impairment, and an increase in qualitative factors based
on management's assessment of increased risks in our loan portfolio primarily
associated with the COVID-19 pandemic and the reduction in oil prices
compared to the prior year.
• IT Changes: To protect the well-being of our staff and customers, Northrim
has dedicated resources for a majority of employees to work from home. To
facilitate the move, we allocated excess computers and VOIP system phones to
staff resulting in no significant increase in data processing expenses.
• Growth and Paycheck Protection Program:
• Northrim's asset base increased during the quarter endedMarch 31, 2020 , due primarily to normal loan growth, much of which related to the funding of loans that were in the pipeline as ofDecember 31, 2019 .
• Through
approximately 1,600 loans totaling $324 million in PPP loans, and we
have approximately 800 loans totaling $55 million in the PPP loan
pipeline.
• The Company has been approved for, and intends to utilize the Federal
Facility to fund PPP loans.
.
• Capital Management: At
ratios were well in excess of all regulatory requirements. As of
2020, the Company had suspended its previously announced stock repurchasing
activity.
Highlights and Summary of Performance - First Quarter of 2020
The Company reported net income and diluted earnings per share of $1.0 million
and $0.16 , respectively, for the first quarter of 2020 compared to net income
and diluted earnings per share of $4.3 million and $0.62 , respectively, for the
first quarter of 2019. The decrease in net income in the first quarter of 2020
compared to the same quarter last year is primarily due to an increase in the
provision for loan losses, an increase in other operating expense, and a
decrease in other operating income.
• Total revenue in the first quarter of 2020, which includes net interest
income plus other operating income, decreased 5% to
million in the first quarter a year ago, primarily due to a
decrease in gain (loss) on marketable equity securities that was only
partially offset by a
• Net interest income decreased slightly in the first quarter of 2020 compared
to the same period in 2019 mainly due to a lower net yields on earning assets
due to lower interest rates that was only partially offset by an increase in
average earning asset balances.
• Net interest margin decreased to 4.32% in the first quarter of 2020 as
compared to 4.83% in the first quarter a year ago.
• The Company repurchased 192,709 shares of its common stock in the first
quarter of 2020 at an average price of
available under the previously announced stock repurchase authorization.
44
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• The Company paid cash dividends of
quarter of 2020, up 13% from
Other financial measures are shown in the table below:
Three Months Ended March 31,
2020 2019
Return on average assets 0.25 % 1.18 %
Return on average shareholders' equity 2.00 % 8.36 % Dividend payout ratio
215.20 % 48.40 %
Credit Quality
Nonperforming assets: Nonperforming assets, net of government guarantees at
March 31, 2020 decreased $386,000 , or 2% to $19.6 million as compared to $19.9
million at December 31, 2019 . OREO, net of government guarantees, increased
$162,000 to $5.9 million at March 31, 2020 as compared to $5.8 million at
December 31, 2019 due to the transfer of one loan to OREO during the period.
Nonperforming loans, net of government guarantees decreased $548,000 during the
first three months of 2020 as compared to December 31, 2019 , as paydowns
exceeded additions in the first three months of 2020. $11.2 million , or 53% are
nonaccrual loans related to ten commercial relationships. Two of these
relationships, which totaled $5.2 million at the end of the first quarter of
2020, are businesses in the medical industry. While it is too early to determine
the effect that the COVID-19 pandemic will ultimately have on our non-performing
assets, based on the current trajectory, significant increases may occur in
subsequent quarters.
45
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The following table summarizes nonperforming activity for the three-month
periods ending
Writedowns Transfers to
Balance at Additions Payments Balance at
December this this /Charge-offs
Transfers to Performing Status Sales this
OREO this quarter quarter 2020
Commercial loans $9,153 $1,153 ($653 ) ($151 ) ($162 ) $- $- $9,340
Commercial real estate 4,665 - (30 ) - - - - 4,635
Construction loans 1,349 - (434 ) - - - - 915
Consumer loans 189 14 (5 ) (14 ) - - - 184
Nonperforming loans
guaranteed by
government (1,405 ) (268 ) 2 - - - - (1,671 )
Total nonperforming
loans 13,951 899 (1,120 ) (165 ) (162 ) - - 13,403
Other real estate
owned 7,043 162 - - - - - 7,205
Repossessed assets 231 - - - - - - 231
Other real estate
owned guaranteed
by government (1,279 ) - - - - - - (1,279 )
Total nonperforming
assets,
net of government
guarantees $19,946 $1,061 ($1,120 ) ($165 ) ($162 ) $- $- $19,560
Writedowns Transfers to
Balance at Additions Payments Balance at
December this this /Charge-offs Transfers to Performing Status Sales this March 31,
(In Thousands) 31, 2018 quarter quarter this quarter
OREO this quarter quarter 2019
Commercial loans
$- $- ($1,400 ) $11,686
Commercial real estate 2,273 2,730 (2 ) - - - - 5,001
Construction loans - 2,423 - - - - - 2,423
Consumer loans 266 152 (12 ) - - - - 406
Non-performing loans
guaranteed by
government (516 ) (694 ) 172 - - - - (1,038 )
Total non-performing
loans 14,694 6,900 (1,607 ) (109 ) - - (1,400 ) 18,478
Other real estate owned 7,962 - - - - - (919 ) 7,043
Repossessed assets 1,242 - - - - - - 1,242
Other real estate owned
guaranteed
by government (1,279 ) - - - - - - (1,279 )
Total non-performing
assets,
net of government
guarantees $22,619 $6,900 ($1,607 ) ($109 ) $- $- ($2,319 ) $25,484
Potential problem loans: Potential problem loans are loans which are currently
performing in accordance with contractual terms but that have developed negative
indications that the borrower may not be able to comply with present payment
terms and which may later be included in nonaccrual, past due, or impaired
loans. These loans are closely monitored and their performance is reviewed by
management on a regular basis. At March 31, 2020 , management had identified
potential problem loans of $4.5 million as compared to potential problem loans
of $9.0 million at December 31, 2019 . The decrease in potential problem loans
from December 31, 2019 to March 31, 2020 is primarily the result of $3.0 million
in paydowns and the addition of a government guarantee on one loan totaling $1.5
million . One commercial relationship totaling $423,000 as of December 31, 2019 ,
net of government guarantees, was transferred to nonaccrual status, and there
was one new potential problem loan during the first quarter of 2020 totaling
$337,000 .
Troubled debt restructurings ("TDRs"): TDRs are those loans for which
concessions, including the reduction of interest rates below a rate otherwise
available to that borrower, have been granted due to the borrower's weakened
financial condition. Interest on TDRs will be accrued at the restructured rates
when it is anticipated that no loss of original principal will occur, and the
interest can be collected, which is generally after a period of six months. The
Company had $4.4 million in loans classified as TDRs that were performing and
$8.2 million in TDRs included in nonaccrual loans at March 31, 2020 for a total
of approximately $12.6 million . There are $3.0 million in government guarantees
associated with TDRs, so total TDRs, net of government guarantees,
46
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total $9.6 million at March 31, 2020 . At December 31, 2019 there were $1.4
million in loans classified as TDRs that were performing and $8.7 million in
TDRs included in nonaccrual loans for a total of $10.1 million . See Note 5 of
the Notes to Consolidated Financial Statements included in Item 1 of this report
for further discussion of TDRs.
RESULTS OF OPERATIONS
Income Statement
Net Income
Net income for the first quarter of 2020 decreased $3.3 million , or 76%, to $1.0
million as compared to $4.3 million for the same period in 2019. The decrease in
net income in the first quarter of 2020 compared to the first quarter of 2019 is
primarily due to an increase in the provision for loan losses, an increase in
other operating expense primarily in salaries and other personnel expense and
OREO (income) expense, net of rental income, and a decrease in other operating
income which is primarily attributable to a decrease in gain (loss) on
marketable equity securities.
Net Interest Income/Net Interest Margin
Net interest income for the first quarter of 2020 decreased $79,000 , or less
than 1%, to $15.7 million as compared to $15.8 million for the first quarter of
2019. Net interest margin decreased 51 basis points to 4.32% in the first
quarter of 2020 as compared to 4.83% in the first quarter of 2019. The decrease
in net interest income in the first quarter of 2020 compared to the first
quarter of 2019 was primarily the result of higher interest expense on deposits
and borrowings, which was only partially offset by higher interest income on
loans and deposits in other banks. Changes in net interest margin in the three
months ended March 31, 2020 as compared to the same period in the prior year are
detailed below:
Three Months Ended March
31, 2020 vs. March 31, 2019
Nonaccrual interest adjustments 0.03 %
Interest rates and loan fees (0.46 )%
Volume and mix of interest-earning assets (0.08 )%
Change in net interest margin (0.51 )%
47-------------------------------------------------------------------------------- Components of Net Interest Margin The following table compares average balances and rates as well as net tax equivalent margins on earning assets for the three-month periods endedMarch 31, 2020 and 2019: (Dollars in Thousands) Three Months Ended March 31, Interest income/ Average Yields/Costs Average Balances Change expense Change Tax Equivalent 2020 2019 $ % 2020 2019 $ % 2020 2019 Change Loans1,2$1,059,023 $988,920 $70,103 7 %$14,919 $14,629 $290 2 % 5.69 % 6.04 % (0.35 )% Loans held for sale 50,375 31,203 19,172 61 % 440 348 92 26 % 3.51 % 4.52 % (1.01 )% Short-term investments3 68,076 24,199 43,877 181 % 236 143 93 65 % 1.37 % 2.36 % (0.99 )% Long-term investments4 284,068 280,419 3,649 1 % 1,744 1,758 (14 ) (1 )% 2.59 % 2.65 % (0.06 )% Total investments 352,144 304,618 47,526 16 % 1,980 1,901 79 4 % 2.20 % 2.63 % (0.43 )% Interest-earning assets 1,461,542 1,324,741 136,801 10 % 17,339 16,878 461 3 % 4.82 % 5.23 % (0.41 )% Nonearning assets 174,049 162,241 11,808 7 % Total$1,635,591 $1,486,982 $148,609 10 % Interest-bearing demand$320,767 $241,024 $79,743 33 %$164 $53 $111 209 % 0.21 % 0.09 % 0.12 % Savings deposits 229,639 235,745 (6,106 ) (3 )% 237 256 (19 ) (7 )% 0.42 % 0.44 % (0.02 )% Money market deposits 206,043 207,520 (1,477 ) (1 )% 257 248 9 4 % 0.50 % 0.49 % 0.01 % Time deposits 169,410 116,199 53,211 46 % 826 381 445 117 % 1.96 % 1.33 % 0.63 % Total interest-bearing deposits 925,859 800,488 125,371 16 % 1,484 938 546 58 % 0.64 % 0.48 % 0.16 % Borrowings 22,188 51,515 (29,327 ) (57 )% 165 171 (6 ) (4 )% 2.95 % 1.32 % 1.63 % Total interest-bearing liabilities 948,047 852,003 96,044 11 % 1,649 1,109 540 49 % 0.70 % 0.53 % 0.17 % Demand deposits and other noninterest-bearing liabilities 479,578 425,734 53,844 13 % Equity 207,966 209,245 (1,279 ) (1 )% Total$1,635,591 $1,486,982 $148,609 10 % Net interest income$15,690 $15,769 ($79 ) (1 )% Net interest margin 4.32 % 4.83 % (0.51 )% Average loans to average interest-earning assets 72.46 % 74.65 % Average loans to average total deposits 77.91 % 82.79 % Average non-interest deposits to average total deposits 31.88 % 32.99 % Average interest-earning assets to average interest-bearing liabilities 154.16 % 155.49 % 1Interest income includes loan fees. Loan fees recognized during the period and included in the yield calculation totaled$847,000 and$819,000 in the first quarter of 2020 and 2019, respectively. 2Nonaccrual loans are included with a zero effective yield. Average nonaccrual loans included in the computation of the average loan balances were$15.0 million and$16.1 million in the first quarter of 2020 and 2019, respectively. 3Consists of interest bearing deposits in other banks. 4Consists of investment debt securities available for sale, equity securities, investment securities held to maturity, and investment inFederal Home Loan Bank stock. 48
-------------------------------------------------------------------------------- The following tables set forth the changes in consolidated net interest income attributable to changes in volume and to changes in interest rates for the three-month periods endingMarch 31, 2020 and 2019. Changes attributable to the combined effect of volume and interest rate have been allocated proportionately to the changes due to volume and the changes due to interest rates: (In Thousands) Three Months Ended March 31, 2020 vs. 2019 Increase (decrease) due to Volume Rate Total Interest Income: Loans$1,147 ($857 )$290 Loans held for sale 145 (53 ) 92 Short-term investments 121 (28 ) 93 Long-term investments 19 (33 ) (14 ) Total interest income$1,432 ($971 )
Interest Expense:
Interest-bearing deposits$171 $375
Borrowings (135 ) 129
(6 )
Total interest expense $36 $504 $540
Provision for Loan Losses
The provision for loan losses increased to $2.1 million for the first quarter of
2020 compared to $750,000 in the first quarter of 2019 due to the growth in loan
balances, an increase in specific impairment, and an increase in qualitative
factors based on management's assessment of increased risks in our loan
portfolio primarily associated with the COVID-19 pandemic and the reduction in
oil prices compared to the prior year. These increases were only partially
offset by decreases in nonaccrual and adversely classified loans in the first
quarter of 2020. The ratio of the Allowance to total nonperforming loans, net of
government guarantees was 157% at March 31, 2020 and 137% at December 31, 2019 .
See "Analysis of Allowance for Loan Losses" under the "Financial
Condition-Balance Sheet Overview" and Note 6 of the Notes to Consolidated
Financial Statements included in Item 1 of this report for more information on
changes in the Company's Allowance.
Other Operating Income
Other operating income for the three-month period ended March 31, 2020 ,
decreased $1.1 million , or 15%, to $6.4 million as compared to $7.5 million the
same period in 2019, primarily due to the $1.4 million decrease in gain (loss)
on marketable equity securities in the first quarter of 2020 compared to the
same quarter in 2019. This decrease was only partially offset by a $367,000
increase in mortgage banking income in the three months ended March 31, 2020 as
compared to the same period in 2019. Net realized gains on mortgage loans sold
increased $1.7 million in the first quarter of 2020 as compared to the first
quarter of 2019 primarily due to increased volume driven by lower interest rates
and the resulting refinance activity. However, this increase in revenue was
largely offset by a decrease in the fair value of mortgage loan commitments
which decreased $901,000 in the three-month period ended March 31, 2020 as
compared to the same period in 2019 due to lower pricing in the secondary market
for home mortgages hit by an abnormally large volume of refinance activity. The
increase in gains on sale was also partially offset by a decrease in the fair
value of mortgage servicing rights, which decreased mortgage banking income by
$930,000 during the first quarter of 2020.
49--------------------------------------------------------------------------------
Other Operating Expense Other operating expense for the first quarter of 2020 increased$1.7 million , or 10%, to$18.8 million as compared to the same period in 2019 primarily due to a$954,000 , or 8%, increase in the salaries and other personnel expense primarily due to a$583,000 increase in employee commissions related to the increase in production volume in the Home Mortgage Lending segment and a$293,000 , or 4% increase in salary expense primarily due to annual salary increases. Additionally, OREO expense, net of rental income and gains on sale increased$284,000 in the first quarter of 2020 compared to the same period in 2019 due to lower gains on the sale of OREO. Income Taxes The provision for income taxes for the first quarter of 2020 decreased$917,000 , or 79%, as compared to the same period in 2019 primarily due to the decrease in pretax income. The effective tax rate decreased to 19% in the three-month period endingMarch 31, 2020 as compared to 21% in both the three-month periods endingMarch 31, 2019 due to less tax-exempt income and fewer estimated tax credits as a percentage of pre-tax income in 2020 as compared to 2019.
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