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 credit quality, 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 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. 44 --------------------------------------------------------------------------------
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. In addition, onMarch 27, 2020 , the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was signed by the President ofthe United States that included an option for entities to delay the implementation of ASU 2016-13 until the earlier of the termination date of the national emergency declaration by the President orDecember 31, 2020 . 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.
• 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 atJune 30, 2020 , and the Company's current economic forecast, had we elected to early adopt CECL as ofJune 30, 2020 , we estimate the impact of adoption to be an overall decrease in our allowance for credit losses ("ACL") for loans between$5.0 million and$6.0 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 ofJune 30, 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. 45 -------------------------------------------------------------------------------- Update on Economic Conditions The COVID-19 pandemic has disrupted economies all around the world. InAlaska , the tourism and hospitality industries have been most affected with job losses. Oil prices dropped precipitously at the beginning of the pandemic, but have rebounded recently to healthier levels. The government's fiscal and monetary response has been far reaching. This has greatly eased the short run impacts of the virus for most of the Company's customers. TheState of Alaska Department of Labor reported that a year and a half of positive job growth came to an abrupt end in April of 2020. The seasonally adjusted unemployment rate jumped from 5.6% in March to 13.5% in April. This moderated slightly to 12.6% in May. The comparableU.S. rate peaked at 14.7% in April and decreased to 13.3% in May, according to theState of Alaska Department of Labor . InAlaska , every major job sector reported declines year-over-year ("YoY") inMay 2020 according to theState of Alaska Department of Labor . Leisure and Hospitality was the most severely impacted, declining 39.7% for a loss of 15,300 jobs inAlaska inMay 2020 . Also inAlaska , government declined by 7,400 jobs or 9.1%, primarily due to a loss of 6,200 local government jobs. State government declined by 1,000 jobs and Federal government by only 200 jobs. Other major sectors to decline in Alaska YoY in May of 2020 were: Health Care -2,900; Transportation, Warehousing and Utilities -2,700; Retail Trade -2,600; and Construction -2,400. Oil prices have been fluctuating significantly in 2020 as the global economy reacts to the COVID-19 pandemic. Average monthly Alaska North Slope ("ANS") crude oil prices began the year averaging$65.48 for the month of January. The virus concerns began to have an effect when monthly ANS prices declined to$54.48 in February and$33.21 in March. In the second quarter of 2020, ANS prices hit a monthly low of$16.54 in April and increased to$28.21 in May. The ANS price improved throughout June and averaged$41.78 . Trillions of dollars in federal assistance programs have helped mitigate some of the negative impacts of the COVID-19 pandemic in the short run. The Fed Funds rate was decreased 1.5% in March. This helped reduce borrowers' interest expense dramatically. TheFederal Reserve is buying corporate bonds, lending to state and municipal governments, and even aiding foreign central banks of our allies to help stabilize global markets.The Fed is adding liquidity to the system to ensure credit markets don't freeze up. TheU.S. Small Business Administration ("SBA") Paycheck Protection Program ("PPP") and the Economic Injury Disaster loan program have provided hundreds of billions of dollars to businesses around the country. TheFederal Reserve's Main Street Lending Program is also now available to help businesses weather current economic disruptions. Direct grants to states from the CARES Act provided approximately$1.25 billion toAlaska . An increase of$600 in weekly unemployment insurance benefits helped millions of people out of work maintain cash flow. A moratorium on housing foreclosures, coupled with widespread payment forbearance arrangements, has kept Americans in their homes.Alaska's seasonally adjusted gross state product ("GSP") was$54 billion in the first quarter of 2020, according to theU.S. Bureau of Economic Analysis ("BEA") in a report released onJuly 7, 2020 .Alaska's real GSP decreased 4% annualized for the quarter. The BEA reported real GSP decreased in all 50 states in the first quarter of 2020 and averaged a decline of 5% for the nation.Alaska's performance was above average, placing it 13th best of the 50 U.S. states for the quarter. This is following positive growth inAlaska in 2019 of 2.5%, compared toU.S. growth of 2.3% last year. The largest sectors of decline in GSP inAlaska in the first quarter of 2020 were Health Care, Accommodation and food services, and Government.Alaska's personal income grew 3.7% in 2019 according to a report by theFederal Bureau of Economic Analysis . Total income from all sources inAlaska grew from$44.4 billion at the end of 2018 to$46.1 billion in the first quarter of 2020. Most of the increase came from over$1 billion in improvement of wages in 2019. The first quarter of 2020 was an annualized growth rate of 1.3% inAlaska .Alaska's delinquency and foreclosure levels continue to be better than most of the nation. According to theMortgage Bankers Association ,Alaska's foreclosure rate was 0.60% at the end of the first quarter 2020. That compares to 0.63% at the end of 2019. The comparable national average rate was 0.73% in the first quarter of 2020 and 0.78% at the end of 2019. The national survey reported that the percentage of delinquent mortgage loans inAlaska was 3.23% in the first quarter of 2020. This compares to 2.85% at the end of 2019. The delinquency rate for the entire country was higher at 4% in the first quarter of 2020 and 4.07% at the end of 2019. 46 --------------------------------------------------------------------------------
COVID-19 Issues:
• Industry Exposure: Northrim has identified various industries that may be
adversely impacted by the COVID-19 pandemic and the significant decline in
oil prices. Though the industries affected may change through the progression
of the pandemic, the following sectors for which the Company has exposure, as
a percent of the total loan portfolio as of
Tourism (4%), Oil and Gas (5%), Aviation (non-tourism) (4%), Healthcare (4%),
Accommodations (2%), Retail (2%) and Restaurants (2%). The Company's exposure
as a percent of the total loan portfolio excluding SBA PPP loans as of June
30, 2020 are: Tourism (6%), Oil and Gas (6%), Aviation (non-tourism) (5%),
Healthcare (5%), Accommodations (3%), Retail (2%) and Restaurants (2%).
• Customer Accommodations: The Company has proactively 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 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. The PPP administered by the SBA under the
CARES Act has provided some relief on requests to modify loans. As of June
30, 2020, the Company has made the following loan modifications due to the
impacts of COVID-19:
Loan Modifications due to COVID-19
(Dollars in thousands) Interest Only Full Payment Deferral Total Portfolio loans
$64,298 $293,224 $357,522 Number of modifications 76 403 479
Consumer loans represent 1% of total loan modifications identified above.
• Loan Loss Reserve: The Company booked a loan loss provision of
the quarter ended
loan losses in the second quarter a year ago. The increased provision is the
result of growth in the loan portfolio 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.
• Credit Quality: Net adversely classified loans improved to
chargeoffs were
recoveries of
• Branch Operations: All but one branch remained open throughout the second
quarter. Branch lobbies were available by appointment from
17. All but one branch was fully reopened on June 17 with a number of
customers and employee safety measures implemented.
• Growth and Paycheck Protection Program:
• The Company's asset base increased during the quarter ended
2020, due primarily to loans originated under the SBA's PPP.
• Through
loans totaling $353.5 million to both existing and new customers. The
deadline for PPP loan applications to the SBA has been extended to
August 8, 2020 . The Company is continuing to accept new PPP
applications based on this extended deadline and is assisting small
businesses with other borrowing options a they become available.
• According to the SBA, the Company originated more SBA PPP loans in the
State of Alaska than any other financial institution, funding 23% of
the number and 28% of the value of all Alaska PPP loans for the period
ending June 30, 2020 .
• The Company initially utilized the
Protection Program Liquidity Facility ("PPPLF") to fund PPP loans but
has since repaid those funds in full and has funded the SBA PPP loans
through core deposits and maturity of long-term investments.
• Capital Management: At
ratios were well in excess of all regulatory requirements. As previously
announced, the Company suspended its previously announced stock repurchasing
activity effective March 26, 2020 .
47-------------------------------------------------------------------------------- Highlights and Summary of Performance - Second Quarter of 2020 The Company reported net income and diluted earnings per share of$9.9 million and$1.52 , respectively, for the second quarter of 2020 compared to net income and diluted earnings per share of$4.3 million and$0.62 , respectively, for the second quarter of 2019. The Company reported net income and diluted earnings per share of$10.9 million and$1.68 , respectively, for the first six months of 2020 compared to net income and diluted earnings per share of$8.6 million and$1.24 , respectively, for the same period in 2019. The increase in net income in the second quarter of 2020 compared to the same quarter last year is primarily due to an increase in mortgage banking income. • Total revenue in the second quarter of 2020, which includes net interest
income plus other operating income, increased 37% to
million in the second quarter a year ago, primarily due to a
increase in mortgage banking income.
• Net interest income increased 9% to
2020 compared to the same period in 2019 mainly due to increased loans and
loans held for sale balances.
• Net interest margin decreased to 3.98% in the second quarter of 2020 as
compared to 4.71% in the second quarter a year ago primarily due to lower
interest rates.
• The Company paid cash dividends of
quarter of 2020, up 13% from
Other financial measures are shown in the table below:
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
Return on average assets 2.04 % 1.12 % 1.23 % 1.15 %
Return on average shareholders' equity 19.44 % 8.13 % 10.65 % 8.24 %
Dividend payout ratio 22.11 % 48.35 % 40.35 % 48.38 %
Credit Quality
Nonperforming assets: Nonperforming assets, net of government guarantees at
June 30, 2020 increased $855,000 , or 4% to $20.8 million as compared to $19.9
million at December 31, 2019 . OREO, net of government guarantees, increased
$162,000 to $5.9 million at June 30, 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 $1.2 million during
the first six months of 2020 as compared to December 31, 2019 , as paydowns and
chargeoffs exceeded additions in the first six months of 2020. $10.4 million , or
50% of nonperforming assets are nonaccrual loans and nonperforming purchased
receivables related to five commercial relationships. Two of these
relationships, which totaled $5.8 million at the end of the second 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.
48
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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
March 31, this this /Charge-offs
Transfers to Performing Status Sales this
2020 quarter quarter this quarter OREO this quarter quarter 2020
Commercial loans $9,340 $1,055 ($534 ) ($804 ) ($695 ) $- $- $8,362
Commercial real estate 4,635 508 (20 ) - - - - 5,123
Construction loans 915 - (213 ) - - - - 702
Consumer loans 184 - (6 ) - - - - 178
Nonperforming loans
guaranteed by
government (1,671 ) (54 ) 90 - - - - (1,635 )
Total nonperforming
loans 13,403 1,509 (683 ) (804 ) (695 ) - - 12,730
Other real estate
owned 7,205 - - - - - - 7,205
Repossessed assets 231 695 (7 ) - - - - 919
Nonperforming
purchased receivables - 1,226 - - - - - 1,226
Other real estate
owned guaranteed
by government (1,279 ) - - - - - - (1,279 )
Total nonperforming
assets,
net of government
guarantees $19,560 $3,430 ($690 ) ($804 ) ($695 ) $- $- $20,801
Writedowns Transfers to
Balance at Additions Payments Balance at
March 31, this this /Charge-offs Transfers to Performing Status Sales this June 30,
(In Thousands) 2019 quarter quarter this quarter
OREO this quarter quarter 2019
Commercial loans
($64 ) $- $- $- $11,207
Commercial real estate 4,230 1,087 (276 ) - - - - 5,041
Construction loans 2,423 - (931 ) - - - - 1,492
Consumer loans 406 97 (159 ) (4 ) - - - 340
Nonperforming loans
guaranteed by
government (1,038 ) (101 ) - - - - - (1,139 )
Total nonperforming
loans 18,478 1,488 (2,957 ) (68 ) - - - 16,941
Other real estate
owned 7,043 - - - - - - 7,043
Repossessed assets 1,242 - - - - - (60 ) 1,182
Other real estate
owned guaranteed
by government (1,279 ) - - - - - - (1,279 )
Total nonperforming
assets,
net of government
guarantees $25,484 $1,488 ($2,957 ) ($68 ) $- $- ($60 ) $23,887
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 June 30, 2020 , management had identified
potential problem loans of $3.6 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 June 30, 2020 is primarily the result of $3.1 million
in paydowns and the addition of a government guarantee on one loan totaling $1.4
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 six months of 2020 totaling
$281,000 .
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 $2.9 million in loans classified as TDRs that were performing and
$7.7 million in TDRs included in nonaccrual loans at June 30, 2020 for a total
of approximately
49
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$10.6 million . There are $1.9 million in government guarantees associated with
TDRs, so total TDRs, net of government guarantees, total $8.7 million at
June 30, 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 4 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 second quarter of 2020 increased $5.6 million , or 132%, to
$9.9 million as compared to $4.3 million for the same period in 2019. Net income
for the first half of 2020 increased $2.4 million , or 28%, to $10.9 million
compared to $8.6 million for the first half of 2019. The increase in net income
in both periods is primarily due to an increase in mortgage banking income.
Net Interest Income/Net Interest Margin
Net interest income for the second quarter of 2020 increased $1.5 million , or
9%, to $17.5 million as compared to $16.0 million for the second quarter of
2019. Net interest margin decreased 73 basis points to 3.98% in the second
quarter of 2020 as compared to 4.71% in the second quarter of 2019. Net interest
income for the first half of 2020 increased $1.4 million , or 4%, to $33.1
million as compared to $31.7 million for the first half of 2019. Net interest
margin decreased 63 basis points to 4.14% in the first half of 2020 as compared
to 4.77% in the first half of 2019. The increase in net interest income in the
second quarter and first six months of 2020 compared to the same periods of 2019
was primarily the result of higher interest income on loans and loans held for
sale due to increased balances. The decrease in net interest margin in the
second quarter and the first half of 2020 as compared to the same periods a year
ago was primarily the result of the reduction in short-term interest rates in
the first quarter of 2020 and the impact of the SBA PPP loans on the resulting
yields in the loan portfolio. Changes in net interest margin in the three and
six months ended June 30, 2020 as compared to the same period in the prior year
are detailed below:
Three Months Ended June 30,
2020 vs. June 30, 2019
Nonaccrual interest adjustments 0.03 %
Impact of SBA Paycheck Protection Program loans (0.15 )%
Interest rates and loan fees (0.55 )%
Volume and mix of interest-earning assets (0.06 )%
Change in net interest margin (0.73 )%
Six Months Ended June 30,
2020 vs. June 30, 2019
Nonaccrual interest adjustments 0.03 %
Impact of SBA Paycheck Protection Program loans (0.09 )%
Interest rates and loan fees (0.51 )%
Volume and mix of interest-earning assets (0.06 )%
Change in net interest margin (0.63 )%
50-------------------------------------------------------------------------------- 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 endedJune 30, 2020 and 2019: (Dollars in Thousands)
Three Months Ended
Interest income/
Average Balances Change expense Change Average Yields/Costs
2020 2019 $ % 2020 2019 $ % 2020 2019 Change
Loans1,2 $1,342,717 $1,003,019 $339,698 34 % $16,584 $14,825 $1,759 12 % 4.97 % 5.94 % (0.97 )%
Loans held for sale 111,475 51,280 60,195 117 % 870 528 342 65 % 3.14 % 4.14 % (1.00 )%
Short-term investments3 51,448 22,850 28,598 125 %
31 135 (104 ) (77 )% 0.24 % 2.38 % (2.14 )% Long-term investments4 256,500 281,450 (24,950 ) (9 )%
1,519 1,818 (299 ) (16 )% 2.38 % 2.60 % (0.22 )%
Total investments 307,948 304,300 3,648 1 %
1,550 1,953 (403 ) (21 )% 2.02 % 2.58 % (0.56 )%
Interest-earning
assets 1,762,140 1,358,599 403,541 30 %
19,004 17,306 1,698 10 % 4.34 % 5.12 % (0.78 )% Nonearning assets
186,583 167,414 19,169 11 %
Total $1,948,723 $1,526,013 $422,710 28 %
Interest-bearing demand
$156 $92 $64 70 % 0.17 % 0.15 % 0.02 % Savings deposits 246,379 232,675 13,704 6 % 176 289 (113 ) (39 )% 0.29 % 0.50 % (0.21 )% Money market deposits 214,532 205,364 9,168 4 % 164 295 (131 ) (44 )% 0.31 % 0.58 % (0.27 )% Time deposits 176,782 126,530 50,252 40 % 835 498 337 68 % 1.90 % 1.58 % 0.32 % Total interest-bearing deposits 1,017,544 818,122 199,422 24 % 1,331 1,174 157 13 % 0.53 % 0.58 % (0.05 )% Borrowings 73,349 44,938 28,411 63 % 216 175 41 23 % 1.18 % 1.57 % (0.39 )% Total interest-bearing liabilities 1,090,893 863,060 227,833 26 % 1,547 1,349 198 15 % 0.57 % 0.63 % (0.06 )% Demand deposits and other noninterest-bearing liabilities 652,989 452,623 200,366 44 % Equity 204,841 210,330 (5,489 ) (3 )% Total$1,948,723 $1,526,013 $422,710 28 % Net interest income$17,457 $15,957 $1,500 9 % Net interest margin 3.98 % 4.71 % (0.73 )% Average loans to average interest-earning assets 76.20 % 73.83 % Average loans to average total deposits 82.88 % 80.93 % Average non-interest deposits to average total deposits 37.19 % 33.99 % Average interest-earning assets to average interest-bearing liabilities 161.53 % 157.42 % 1Interest income includes loan fees. Loan fees recognized during the period and included in the yield calculation totaled$2.0 million and$766,000 in the second 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$14.6 million and$18.5 million in the second 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. 51
-------------------------------------------------------------------------------- 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 endingJune 30, 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 June 30, 2020 vs. 2019 Increase (decrease) due to Volume Rate Total Interest Income: Loans$2,120 ($361 )$1,759 Loans held for sale 432 (90 ) 342 Short-term investments 79 (183 ) (104 ) Long-term investments (161 ) (138 ) (299 ) Total interest income$2,470 ($772 )$1,698 Interest Expense: Interest-bearing deposits$243 ($86 )$157 Borrowings 88 (47 ) 41 Total interest expense$331 ($133 )$198 52
-------------------------------------------------------------------------------- The following table compares average balances and rates as well as net tax equivalent margins on earning assets for the six-month periods endedJune 30, 2020 and 2019: (Dollars in Thousands) Six Months Ended June 30, Interest income/ Average Balances Change expense Change Average Yields/Costs 2020 2019 $ % 2020 2019 $ % 2020 2019 Change Loans1,2$1,200,870 $996,009 $204,861 21 %$31,503 $29,454 $2,049 7 % 5.28 % 5.95 % (0.67 )% Loans held for sale 80,925 41,297 39,628 96 % 1,310 876 434 50 % 3.26 % 4.27 % (1.01 )% Short-term investments3 59,762 23,521 36,241 154 % 267 278 (11 ) (4 )% 0.90 % 2.38 % (1.48 )% Long-term investments4 270,284 280,937 (10,653 ) (4 )% 3,263 3,576 (313 ) (9 )% 2.43 % 2.56 % (0.13 )% Total investments 330,046 304,458 25,588 8 % 3,530 3,854 (324 ) (8 )% 2.15 % 2.55 % (0.40 )% Interest-earning assets 1,611,841 1,341,764 270,077 20 %
36,343 34,184 2,159 6 % 4.53 % 5.12 % (0.59 )% Nonearning assets
180,316 164,841 15,475 9 %
Total $1,792,157 $1,506,605 $285,552 19 %
Interest-bearing demand
238,009 234,201 3,808 2 % 413 544 (131 ) (24 )% 0.35 % 0.47 % (0.12 )% Money market deposits 210,288 206,436 3,852 2 %
421 544 (123 ) (23 )% 0.40 % 0.53 % (0.13 )% Time deposits
173,096 121,393 51,703 43 % 1,661 879 782 89 % 1.93 % 1.46 % 0.47 %
Total interest-bearing deposits 971,701 809,354 162,347 20 %
2,815 2,112 703 33 % 0.58 % 0.52 % 0.06 % Borrowings
47,769 48,208 (439 ) (1 )% 381 346 35 10 % 1.60 % 1.44 % 0.16 %
Total interest-bearing
liabilities 1,019,470 857,562 161,908 19 % 3,196 2,458 738 30 % 0.63 % 0.58 % 0.05 %
Demand deposits and other
noninterest-bearing
liabilities 566,284 439,253 127,031 29 %
Equity 206,403 209,790 (3,387 ) (2 )%
Total $1,792,157 $1,506,605 $285,552 19 %
Net interest income $33,147 $31,726 $1,421 4 %
Net interest margin 4.14 % 4.77 % (0.63 )%
Average loans to average
interest-earning assets 74.50 % 74.23 %
Average loans to average
total deposits 80.62 % 81.84 %
Average non-interest
deposits to average total
deposits 34.77 % 33.50 %
Average interest-earning
assets to average
interest-bearing
liabilities 158.11 % 156.46 %
1Interest income includes loan fees. Loan fees recognized during the period and
included in the yield calculation totaled $2.9 million and $1.6 million in the
first six months 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 $14.7
million and $17.0 million in the first six months 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 in Federal Home Loan Bank
stock.
53-------------------------------------------------------------------------------- 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 six-month periods endingJune 30, 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) Six Months Ended June 30, 2020 vs. 2019 Increase (decrease) due to Volume Rate Total Interest Income: Loans$3,235 ($1,186 )$2,049 Loans held for sale 581 (147 ) 434 Short-term investments 237 (248 ) (11 ) Long-term investments (210 ) (103 ) (313 ) Total interest income$3,843 ($1,684 )$2,159
Interest Expense:
Interest-bearing deposits$458 $245 $703 Borrowings (3 ) 38 35 Total interest expense$455 $283 $738 Provision for Loan Losses The provision for loan losses increased to$404,000 for the second quarter of 2020 compared to$300,000 in the second quarter of 2019 due to 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. The ratio of the Allowance to total nonperforming loans, net of government guarantees was 162% atJune 30, 2020 and 137% atDecember 31, 2019 . The provision for loan losses was$2.5 million for the first half of 2020 as compared to$1.1 million for the first six months of 2019. Similar to the second quarter of 2020 compared to the second quarter of 2019, the increase is mostly due to an increase in the 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. See "Analysis of Allowance for Loan Losses" under the "Financial Condition-Balance Sheet Overview" and Note 5 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 endedJune 30, 2020 , increased$8.0 million , or 83%, to$17.5 million as compared to$9.6 million the same period in 2019, primarily due to the$9.3 million increase in mortgage banking income in the second quarter of 2020 compared to the same quarter in 2019. This increase in mortgage banking income in the three months endedJune 30, 2020 as compared to the same period in 2019 was primarily due to increased refinance activity due to changes in the mortgage interest rates. The increase in mortgage banking income in the second quarter of 2020 was only partially offset by a decrease of$717,000 in interest rate swap income, as well as a smaller decrease in purchased receivable income, due to customers reportedly using PPP funds instead of selling receivables, and a decrease in service charges on deposit accounts due to customer accommodations related to the impacts of COVID19 as compared to the second quarter of 2019. 54
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Other Operating Expense Other operating expense for the second quarter of 2020 increased$2.9 million , or 14%, to$22.7 million as compared to the same period in 2019 primarily due to higher salaries and other personnel expense related to mortgage banking operations, which fluctuate with production volumes, as well as higher data processing costs in the community banking segment due to charges for additional products and services. Income Taxes The provision for income taxes for the second quarter of 2020 increased$868,000 , or 76%, as compared to the same period in 2019. The provision for income taxes in the first half of 2020 decreased$49,000 , or 2%, as compared to the first half of 2019. The increase in the three-month period endingJune 30, 2020 as compared to the same period in 2019 was primarily due to the increase in pretax income. The effective tax rate decreased to 17% in the three and six-month periods endingJune 30, 2020 as compared to 21% in both the three and six-month periods endingJune 30, 2019 primarily due to the reversal of a$454,000 accrual for a potential increase in tax expense related to an audit that was performed in 2018 by theState of Alaska for tax years 2014-2016. The Company appealed theState of Alaska's decision on this matter and reversed this accrual in the second quarter of 2020 because the Company believes that it is more likely than not that the court will rule in the Company's favor.
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