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, 2020 . 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 impact of the results of the recentU.S. elections on the regulatory landscape, capital markets, and the response to and management of the COVID-19 pandemic, including the effectiveness of already-enacted fiscal stimulus from the federal government and a potential infrastructure bill; the timing of Paycheck Protection Program ("PPP") loan forgiveness; 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 Part I. Item 1A in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2020 , 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
Our critical accounting policies are described in detail in Part II. 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, 2020 . TheSEC defines "critical accounting policies" as those that require application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in future periods. As ofJanuary 1, 2021 , the Company implemented ASU 2016-13, Financial Instruments - Credit Losses ("ASU 2016-13" or "CECL"), and due to the significance of the implementation, the following Allowance for Credit Losses Policy has been updated from the policies disclosed in our prior year financial statements. The Company's critical accounting policies also include valuation of goodwill and other intangible assets, the valuation of other real estate owned ("OREO"), and the valuation of mortgage servicing rights. There have been no other material changes to the valuation techniques or models during 2021.
Allowance for Credit Losses Policy: The Company's
43
--------------------------------------------------------------------------------methodology. The Company's Audit Committee provides board oversight of the ACL process and reviews and approves the ACL methodology on a quarterly basis.
CECL is not prescriptive in the methodology used to determine the expected credit loss estimate. Therefore, management has flexibility in selecting the methodology. However, the expected credit losses must be estimated over a financial asset's contractual term, adjusted for prepayments, utilizing quantitative and qualitative factors.
The estimate of current expected credit losses is based on relevant information
about past events, current conditions, and reasonable and supportable forecasts
that affect the collectability of the reported amounts. Historical loss
experience is the starting point for estimating expected credit losses.
Adjustments are made to historical loss experience to reflect differences in
asset-specific risk characteristics, such as underwriting standards, portfolio
mix or asset terms, and differences in economic conditions - both current
conditions and reasonable and supportable forecasts. When the Company is not
able to make or obtain reasonable and supportable forecasts for the entire life
of the financial asset, it has estimated expected credit losses for the
remaining life after the forecasted period, using an approach that reverts to
historical credit loss information.
Depending on the nature and size of the pool of financial assets with similar
risk characteristics, the Company uses a discounted cash flow ("DCF") method or
a weighted average remaining life method to estimate expected credit losses
quantitatively. Under the DCF method, the Company utilizes complex models to
obtain reasonable and supportable forecasts to calculate two predictive metrics,
the probability of default ("PD") and loss given default ("LGD"). The PD
measures the probability that a loan will default within a given time horizon
and is an assumption derived from regression models which determine the
relationship between historical defaults and certain economic variables. The
Company's regression models for PD utilize the Company's actual historical loan
level default data. The Company determines a reasonable and supportable forecast
and applies that forecast to the regression model to estimate defaults over the
forecast period. Management leverages economic projections from a reputable and
independent third-party to inform its loss driver forecasts over the Company's
four quarter forecast period. Management utilizes and forecasts Alaska
unemployment as a loss driver for all of the loans pools that utilized the DCF
method. Management also utilizes and forecasts either one-year percentage change
in the Alaska home price index or the one-year percentage change in the national
commercial real estate price index as a second loss driver depending on the
nature of the underlying loan pool and how well that loss driver correlates to
expected future losses. Other internal and external indicators of economic
forecasts are also considered by management when developing the forecast
metrics. Following the forecast period, the economic variables used to calculate
PD revert to a historical average at a constant rate over an 8 quarter reversion
period. Other assumptions relevant to the discounted cash flow model to derive
the quantitative allowance include the LGD, which is the estimate of loss for a
defaulted loan, prepayment speeds, and the discount rate applied to future cash
flows. The DCF method utilizes the effective interest rate of individual assets
to discount the expected credit losses over the contractual term of the loan,
adjusted for prepayments. The LGD is the expected loss which would be realized
presuming a default has occurred and primarily measures the value of the
collateral or other secondary source of repayment related to the collateral.
The Company's estimate of the ACL reflects losses expected over the remaining contractual life of the assets. The contractual term does not consider extensions, renewals or modifications unless the Company has identified an expected troubled debt restructuring.
In addition to the quantitative portion of the ACL derived using either the DCF or weighted average remaining life method, the Company also considers the effects of the following qualitative factors in its calculation of expected losses in the loan portfolio:
•Lending strategy, policies, and procedures; •Quality of internal loan review; •Lending management and staff; •Trends in underlying collateral values; •Competition, legal, and regulatory changes; •Economic and business conditions including fluctuations in the price ofAlaska North slope crude oil •Changes in trends, volume and severity of adversely classified loans, nonaccrual loans, and delinquencies; •Concentration of credit; and •Changes in the nature and volume of the loan portfolio. The qualitative factor methodology is based on quantitative metrics, but also includes a high degree of subjectivity and changes in any of the metrics could have a significant impact on our calculation of the ACL. 44 -------------------------------------------------------------------------------- Loans that do not share risk characteristics with other loans in the portfolio are individually evaluated for expected credit losses and are not included in the collective evaluation. Loans are identified for individual evaluation during regular credit reviews of the portfolio. A loan is generally identified for individual evaluation when management determines that we will probably not be able to collect all amounts due according to the loan contract, including scheduled interest payments. When we identify a loan for individual evaluation, we measure expected credit losses using discounted cash flows, except when the sole remaining source of the repayment for the loan is the liquidation of the collateral. In these cases, we use the current fair value of the collateral, less selling costs, instead of discounted cash flows. The analysis of collateral dependent loans includes appraisals on loans secured by real property, management's assessment of the current market, recent payment history and an evaluation of other sources of repayment.
Update on Economic Conditions
2020 was a challenging year for the global economy as the COVID-19 pandemic
and related governmental policies related to its mitigation led to significant
disruption in normal business activity. Management believes that it is
counter-intuitive to have a year where payroll jobs declined by 7% and real
gross state product ("GSP") fell 4.9% in Alaska , yet per capita income rose over
3% and housing prices and sales activity increased substantially. This was only
possible because billions of dollars of federal stimulus money reached Alaska
and helped support businesses and individuals through the most challenging
times. Record low interest rates and low levels of building activity also
contributed to home price increases in Alaska . Oil prices were shocked much
lower at the beginning of 2020 at the height of the virus fears and low level of
travel activity. However, as the year progressed, oil prices returned to a more
stable level and oil production levels in Alaska also followed a similar path.
February 2021 employment data from the Alaska Department of Labor ("DOL") shows
a 7% reduction in total payroll jobs, a decline of 22,300 compared to February
of 2020. Leisure and hospitality was hit hard, down 23% year over year, a loss
of 7,300 jobs. Direct Oil and Gas jobs fell 38% or 3,900 jobs. A decline in
public education positions led to a 2,000 job decrease in local government,
according to the DOL. Transportation, Warehousing and Utilities declined 9% or
1,800 jobs since last February. Professional and Business Services has also been
negatively impacted, down 6% or 1,600 fewer positions over the past year.
According to the DOL report, State Government was the only sector to grow year
over year. The 1% or 200 job increase was attributed to hiring people for
contact tracing and to process unemployment insurance claims. The level of
jobless claims reported by the DOL in the middle of February were 3.75 times
higher than the same week in 2020.
Alaska's GSP was $52.1 billion in 2020, compared to $54.7 billion in 2019,
according to the Federal Bureau of Economic Analysis ("BEA") in a preliminary
report released on March 26, 2021 . The U.S. GDP declined 3.5% for 2020. Alaska's
reduction was 4.9% and the worst state was Hawaii at 8%. Based on the report,
both states were more negatively affected by travel restrictions reducing
tourism. 2020 was very erratic due to COVID-19's impact on the economy.
According to the BEA, Alaska's GSP declined by 6% and 34% in the first two
quarters of the year and then grew 32% and 6% in the third and fourth quarters
of 2020 at a seasonally adjusted annualized rate. This is very similar to the
nationwide averages for the U.S. which saw a decline of 5% and 31% in the first
two quarters of 2020, and then increased 33% and 4% in third and fourth
quarters. Alaska's largest GSP declines in 2020 came from Transportation and
Warehousing, followed by Accommodation and Food Services, Oil & Gas and Health
Care. All of these sectors showed positive recovery in the 4th quarter of 2020
in Alaska , helping place it 9th fastest growing for the quarter of the 50 U.S.
states.
Alaska's seasonally adjusted personal income for 2020 was $47.4 billion compared
to $46 billion in 2019, according to a report released by the BEA on March 24,
2021 . Personal income in the U.S. in 2020 increased 6.1% and Alaska rose 3.1%.
In a typical year, the majority of personal income is derived from wage
earnings. Additionally, some people receive government transfer payments, such
as social security, Medicare and Medicaid. Personal income is further supported
by earnings from dividends, interest and rents. However, in 2020 earnings from
wages and investments decreased in the U.S. and Alaska . The growth in personal
income in the U.S. was primarily from a net $1.1 trillion increase in government
transfer payments. About half of the transfer payment increase was from
unemployment insurance. Direct stimulus payments accounted for a large part of
the remainder.
Per capita income in the U.S. was $59,729 compared to $64,780 in Alaska ,
according to the BEA. This places Alaska as the 9th highest income of the 50
U.S. states. In Alaska , earnings from wages decreased 1.5% or $435 million in
2020 and investment income fell 0.7% or $65 million . Government transfer
payments rose 24.2% or $1.9 billion over 2019 levels. By far the largest drop in
wage earnings came in Accommodations and Food Services, followed by State and
Local Government and Oil & Gas. There were positive increases in wages in the
Professional and Technical Services Industry and Health Care.
Alaska North Slope ("ANS") crude oil had monthly average prices in 2018 and 2019
ranging from $58.86 to $80.03 a barrel. ANS began 2020 at $65.48 . Prices fell
quickly at the beginning of 2020, responding to fears that COVID-19 would
45
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devastate the global economy and reduce the demand for travel. The low month was
April when ANS averaged
Alaska's crude oil production averaged 485,300 barrels per day ("bpd") in fiscal year ("FY") 2020, which ended in June. This was a decrease of 4.8% compared to the previous FY end. Total output declined 1.2% in FY 2018 and 4.5% in FY 2019.The State Department of Revenue forecasts production on theNorth Slope to increase by 0.7% in FY 2021 to 488,900 bpd. The production average for the month ofMarch 2021 was 494,176 bpd. In February of 2021 there was an average of 495,076 bpd and 498,176 bpd in January.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 0.45% at the end of 2020, compared to 0.49% in the third quarter 2020. This was an improvement from 0.63% at the end of 2019. The comparable national average rate was slightly higher thanAlaska at 0.56% at the end of 2020, 0.59% in the third quarter of 2020, and 0.78% at the end of 2019. We believe that the foreclosure rates are somewhat misleading because the federal moratorium on foreclosure activity on occupied homes led to declining foreclosure numbers, even though job losses strained the economy and borrowers' ability to pay. TheMortgage Bankers Association survey reported that the percentage of delinquent mortgage loans at the end of 2020 inAlaska was 6.21%, down considerably from 6.78% at the end ofSeptember 2020 . However, this is significantly higher than 2.85% at the end of 2019 before the effects of COVID-19 impacted the market. The comparable delinquency rate for the entire country was higher thanAlaska at 7.19% at the end of 2020, compared to 7.6% in the third quarter of 2020, and 4.07% at the end of 2019.
Management believes that many people across the country took advantage of mortgage forbearance plans available from lenders to delay payments or pay interest only on their homes. Until these borrowers catch up on past due payments these loans will appear delinquent because they are still behind according to the original terms of the mortgage.
According to the Alaska Multiple Listing Services, the average sales price of a single family home inAnchorage rose 5.9% in 2020 to$396,826 . This is following increases of 0.5% and 2.3% in 2019 and 2018, respectively. Average sales prices in the Matanuska Susitna Borough rose 9.9% in 2020, continuing a decade of consecutive price gains. These two markets represent where the vast majority of the bank's residential building activity occurs. The number of units sold inAnchorage was up significantly in 2020 by 19.5%, climbing from 2,719 homes sold in 2019 to 3,249 last year. The main difference was a record number of sales occurred in the last quarter of the year, when sales activity typically declines in the winter. The Matanuska Susitna Borough also had strong sales activity, up 9.7% in 2020 to 2,135 units sold compared to 1,946 in 2019. The Matanuska Susitna Borough also had stronger than normal sales in the second half of 2020. We believe that the low interest rate environment has been a major factor. According to theFederal Reserve Bank of St. Louis , the average 30 year fixed rate mortgage in theU.S. hit all-time record lows last year. Rates began 2020 at 3.72% in the first week of January and fell more than a percent to 2.67% in the last week ofDecember 2020 . Rates have begun to rise in the first quarter of 2021 and finished March at 3.18%.
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 ofMarch 31, 2021 are being impacted: Healthcare (6%), Tourism (5%), Oil and Gas (4%), Aviation (non-tourism) (4%), Accommodations (2%), Retail (2%) and Restaurants (2%). The Company's exposure as a percent of the total loan portfolio excludingU.S. Small Business Administration ("SBA") PPP loans as ofMarch 31, 2021 are: Healthcare (8%), Tourism (7%), Oil and Gas (6%), Aviation (non-tourism) (5%), Accommodations (3%), Retail (3%) and Restaurants (3%). 46 -------------------------------------------------------------------------------- •Customer 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 PPP lending. The provisions of the CARES Act included an election to not apply the guidance on accounting for certain troubled debt restructurings related to COVID-19 and allow certain accommodations to borrowers. 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 Company has elected to adopt these provisions of the CARES Act. The outstanding principal balance of loan modifications due to the impacts of COVID-19 were as follows: Loan Modifications due to COVID-19 as of March 31, 2021 (Dollars in thousands) Interest Only Full Payment Deferral Total Portfolio loans$65,201 $23,096 $88,297 Number of modifications 21 9 30 Loan Modifications due to COVID-19 as of December 31, 2020 (Dollars in thousands) Interest Only Full Payment Deferral Total Portfolio loans$43,379 $22,165 $65,544 Number of modifications 23 11 34 Consumer loans represent 1% of total loan modifications identified above. Of the$88.3 million and 30 loan modifications as ofMarch 31, 2021 , approximately$83.2 million and 26 loans have entered into a second modification. •Branch Operations: No branch operations are limited as a result of COVID-19, while a number of customer and employee safety measures continue to be implemented. •Remote Workers: As ofMarch 31, 2021 , approximately 39% of the Company's employees are working remotely either on a full- or part-time basis directly due to the pandemic caused by COVID-19. These employees primarily hold non-customer facing positions within the Company. Prior to the pandemic, less than 8% of the Company's employees worked remotely. The increase in the number of employees that work remotely has had no material impact on the Company's operations. •Growth and Paycheck Protection Program: •Over the last twelve months, Northrim funded a total of 5,025 PPP loans totaling$579.6 million to both existing and new customers. Of this amount, 2,125 loans totaling$204 million were originated during the first quarter of 2021 through the second round of PPP funding. •As ofMarch 31, 2021 , the second round of PPP resulted in 459 new customers totaling$21.3 million in PPP loans, no non-PPP loans, and$10.4 million in new deposit balances. •PPP round one and two has resulted in 1,844 new customers, with non-PPP loan balances of$26.6 million and deposit balances of$97.4 million as ofMarch 31, 2021 . •Management estimates that we funded approximately 27% of the number and 34% of the value of all Alaska PPP loans for the quarter endingMarch 31, 2021 . •As ofMarch 31, 2021 , Northrim customers had received forgiveness through the SBA on 1,704 PPP loans totaling$170.1 million , of which 1,167 PPP loans totaling$105 million were forgiven in the first quarter of 2021. •The Company initially utilized theFederal Reserve Bank's Paycheck Protection Program Liquidity Facility ("PPPLF") to fund PPP loans, but paid back those funds in full during the second quarter of 2020 and has since funded the SBA PPP loans through core deposits and maturity of long-term investments. •Capital Management: AtMarch 31, 2021 , the capital ratios of the Company andNorthrim Bank (the "Bank") were well in excess of all regulatory requirements. During the first quarter of 2021, the Company repurchased 61,399 shares of common stock at an average price of$36.02 . Highlights and Summary of Performance - First Quarter of 2021 The Company reported net income and diluted earnings per share of$12.2 million and$1.94 , respectively, for the first quarter of 2021 compared to net income and diluted earnings per share of$1.0 million and$0.16 , respectively, for the first quarter of 2020. The increase in net income for the three-month period endingMarch 31, 2021 compared to the same period last year is attributable to significant increases in net income in both the Home Mortgage Lending segment, as a result of increased production, and in the Community Banking segment for a variety of reasons, which are discussed below. 47 -------------------------------------------------------------------------------- •Total revenue in the first quarter of 2021, which includes net interest income plus other operating income, increased 60% to$35.4 million from$22.1 million in the first quarter a year ago, primarily due to a$9.0 million increase in mortgage banking income. •Net interest income increased 24% to$19.5 million in the first quarter of 2021 compared to the same period in 2020 mainly due to increased loans and loans held for sale balances and fees on PPP loans. •Net interest margin decreased to 3.90% in the first quarter of 2021 as compared to 4.32% in the first quarter a year ago primarily due to lower interest rates. •The Company booked a benefit for credit losses of$1.5 million for the three-month period endingMarch 31, 2021 , compared to a provision of$2.1 million in the same period in 2020. The provision for the current quarter was recorded using the CECL accounting standard and reflects expected lifetime credit losses on loans and off-balance sheet unfunded loan commitments. The decrease in the provision for loan credit loss in the first quarter of 2021 is primarily the result of improvement in economic assumptions used to estimate lifetime credit losses, which was only partially offset by an increase in the provision for unfunded commitments resulting from increased balances. •The Company paid cash dividends of$0.37 per common share in the first quarter of 2021, up 9% from$0.34 in the first quarter of 2020.
Other financial measures are shown in the table below:
Three Months Ended
2021 2020
Return on average assets, annualized 2.25 % 0.25 %
Return on average shareholders' equity, annualized 21.40 % 2.00 %
Dividend payout ratio 18.99 % 215.20 %
Credit Quality
Nonperforming assets: Nonperforming assets, net of government guarantees at
March 31, 2021 increased $3.2 million , or 20% to $19.5 million as compared to
$16.3 million at December 31, 2020 . OREO, net of government guarantees,
increased $274,000 to $6.3 million at March 31, 2021 as compared to $6.0 million
at December 31, 2020 due to the addition of one OREO property in the first
quarter of 2021. Nonperforming loans, net of government guarantees increased
$3.0 million during the first three months of 2021 as compared to December 31,
2020 , primarily due to the addition of two relationships in the first three
months of 2021. $10.4 million , or 53% of nonperforming assets are nonaccrual
loans related to seven commercial relationships. While it is too early to
determine the effect that the COVID-19 pandemic will ultimately have on our
non-performing assets, significant increases may occur in subsequent quarters.
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The following table summarizes nonperforming asset activity for the
three-month periods ending
Writedowns Transfers to
Balance at December /Charge-offs Performing Status Balance at March 31 ,
(In Thousands) 31, 2020 Additions thisquarter Payments this quarter this quarter Transfers to OREO
this quarter Sales this quarter 2021
Nonperforming loans $11,569 $5,995 ($2,215 ) ($163 ) ($274 ) ($449 ) $- $14,463
Nonperforming loans guaranteed by
government (1,483) - 101 - - - - (1,382)
Nonperforming loans, net 10,086 5,995 (2,114) (163) (274) (449) - 13,081
Other real estate owned 7,289 274 - - - - - 7,563
Repossessed assets 231 - - (6) - - - 225
Other real estate owned guaranteed
by government (1,279) - - - - - - (1,279)
Total nonperforming assets,
net of government guarantees $16,327 $6,269 ($2,114 ) ($169 ) ($274 ) ($449 ) $- $19,590
Writedowns Transfers to
Balance at December /Charge-offs Performing Status Balance at March 31 ,
(In Thousands) 31, 2019 Additions this quarter Payments this quarter this quarter Transfers to OREO/REPO this quarter Sales this quarter
2020
Nonperforming loans $15,356 $1,167 ($1,122 ) ($165 ) ($162 ) $- $- $15,074
Nonperforming loans guaranteed by
government (1,405) (268) 2 - - - - (1,671)
Nonperforming loans, net 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
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, 2021 , management had identified
potential problem loans of $1.4 million as compared to potential problem loans
of $6.1 million at December 31, 2020 . The decrease in potential problem loans
from December 31, 2020 to March 31, 2021 is primarily the result of one $3.9
million relationship moving to nonaccrual as well as paydowns to existing
potential problem loans in the first quarter of 2021.
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 $2.4 million in loans classified as TDRs that were performing and
$4.2 million in TDRs included in nonaccrual loans at March 31, 2021 for a total
of approximately $6.5 million . There are $1.5 million in government guarantees
associated with TDRs, so total TDRs, net of government guarantees, are $5.0
million at March 31, 2021 . At December 31, 2020 there were $832,000 in loans
classified as TDRs, net of government guarantees that were performing and $4.5
million in TDRs included in nonaccrual loans for a total of $5.3 million . See
Note 4 of the Notes to Consolidated Financial Statements included in Item 1 of
this report for further discussion of TDRs.
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RESULTS OF OPERATIONS
Income Statement
Net Income
Net income for the first quarter of 2021 increased$11.1 million to$12.2 million as compared to$1.0 million for the same period in 2020. The increase in net income is attributable to significant increases in net income in both the Home Mortgage Lending segment, as a result of increased production, and in the Community Banking segment for a variety of reasons, which are discussed below.
Net Interest Income/Net Interest Margin
Net interest income for the first quarter of 2021 increased$3.8 million , or 24%, to$19.5 million as compared to$15.7 million for the first quarter of 2020. Net interest margin decreased 42 basis points to 3.90% in the first quarter of 2021 as compared to 4.32% in the first quarter of 2020. The increase in net interest income in the first quarter of 2021 compared to the same periods of 2020 was primarily the result of higher interest income on loans due in large part to full recognition of the deferred PPP loan fees upon loan forgiveness through the SBA. During the first quarter of 2021, Northrim received$105.0 million in loan forgiveness through the SBA, compared to none in the first quarter of 2020, resulting in total net PPP fee income of$3.3 million . As ofMarch 31, 2021 , there was$3.1 million of net PPP fee income from round one remaining and$8.8 million remaining from round two for total net deferred fees on PPP loans of$11.9 million . The decrease in net interest margin in the first quarter of 2021 as compared to the same period a year ago was primarily the result of the reduction in short-term interest rates in 2020 and the impact of the PPP loans on the resulting yields in the loan portfolio. Changes in net interest margin in the three months endedMarch 31, 2021 as compared to the same period in the prior year are detailed below: Three
Months Ended
vs. March 31, 2020
Nonaccrual interest adjustments 0.01 %
Impact of SBA Paycheck Protection Program loans 0.19 %
Interest rates and loan fees (0.46) %
Volume and mix of interest-earning assets (0.16) %
Change in net interest margin (0.42) %
50-------------------------------------------------------------------------------- Components of Net Interest Margin The following table compares average balances and rates as well as margins on earning assets for the three-month periods endedMarch 31, 2021 and 2020: (Dollars in Thousands) Three Months Ended March 31, Interest income/ Average Balances Change expense Change Average Yields/Costs 2021 2020 $ % 2021 2020 $ % 2021 2020 Change Loans1,2$1,492,906 $1,059,023 $433,883 41 %$18,642 $14,919 $3,723 25 % 5.06 % 5.67 % (0.61) % Loans held for sale 114,585 50,375 64,210 127 % 782 440 342 78 % 2.77 % 3.51 % (0.74) % Short-term investments3 120,875 68,076 52,799 78 % 38 236 (198) (84) % 0.13 % 1.39 % (1.26) % Long-term investments4 298,776 284,068 14,708 5 % 1,134 1,744 (610) (35) % 1.54 % 2.47 % (0.93) % Total investments 419,651 352,144 67,507 19 % 1,172 1,980 (808) (41) % 1.13 % 2.26 % (1.13) % Interest-earning assets 2,027,142 1,461,542 565,600 39 % 20,596 17,339 3,257 19 % 4.12 % 4.77 % (0.65) % Nonearning assets 170,565 174,049 (3,484) (2) % Total$2,197,707 $1,635,591 $562,116 34 % Interest-bearing demand$470,382 $320,767 $149,615 47 %$118 $164 ($46 ) (28) % 0.10 % 0.21 % (0.11) % Savings deposits 317,520 229,639 87,881 38 % 129 237 (108) (46) % 0.16 % 0.42 % (0.26) % Money market deposits 246,009 206,043 39,966 19 % 114 257 (143) (56) % 0.19 % 0.50 % (0.31) % Time deposits 173,168 169,410 3,758 2 % 588 826 (238) (29) % 1.38 % 1.96 % (0.58) % Total interest-bearing deposits 1,207,079 925,859 281,220 30 % 949 1,484 (535) (36) % 0.32 % 0.64 % (0.32) % Borrowings 25,100 22,188 2,912 13 % 154 165 (11) (7) % 2.49 % 2.99 % (0.50) % Total interest-bearing liabilities 1,232,179 948,047 284,132 30 % 1,103 1,649 (546) (33) % 0.36 % 0.70 % (0.34) % Demand deposits and other noninterest-bearing liabilities 734,711 479,578 255,133 53 % Equity 230,817 207,966 22,851 11 % Total$2,197,707 $1,635,591 $562,116 34 %
Net interest income$19,493 $15,690 $3,803 24 % Net interest margin 3.90 % 4.32 % (0.42) % Average loans to average interest-earning assets 73.65 % 72.46 % Average loans to average total deposits 78.79 % 77.91 % Average non-interest deposits to average total deposits 36.30 % 31.88 % Average interest-earning assets to average interest-bearing liabilities 164.52 %
154.16 %
1Interest income includes loan fees. Loan fees recognized during the period and included in the yield calculation totaled$4.1 million and$847,000 in the first quarter of 2021 and 2020, respectively. 2Nonaccrual loans are included with a zero effective yield. Average nonaccrual loans included in the computation of the average loan balances were$11.2 million and$15.0 million in the first quarter of 2021 and 2020, respectively. 3Consists of interest bearing deposits in other banks. 4Consists of investment in 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 endingMarch 31, 2021 and 2020. 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, 2021 vs. 2020 Increase (decrease) due to Volume Rate Total Interest Income: Loans$2,985 $738 $3,723 Loans held for sale 414 (72) 342 Short-term investments 105 (303) (198) Long-term investments 81 (691) (610) Total interest income$3,585 ($328 )
Interest Expense:
Interest-bearing deposits$370 ($905 )
(
Borrowings 19 (30)
(11)
Total interest expense $389 ($935 )
(
Provision for Credit Losses
The provision for credit loss expense is the amount of expense that, based on
our judgment, is required to maintain the ACL at an appropriate level under
CECL. The determination of the amount of the ACL is complex and involves a high
degree of judgment and subjectivity. Refer to Note 1 of the notes to
Consolidated Financial Statements included in Item 1 of this report for detailed
discussion regarding ACL methodologies for loans, available for sale debt
securities, held to maturity securities, loans held for investment, unfunded
commitments, and purchased receivables.
The following table presents the major categories of credit loss expense:
Three Months Ended March 31,
(In Thousands) 2021 2020
Credit loss expense on loans held for investment ($1,905 ) $2,060
Credit loss expense on unfunded commitments 417 -
Credit loss expense on available for sale debt securities - -
Credit loss expense on held to maturity securities - -
Credit loss expense on purchased receivables - -
Total credit loss expense ($1,488 ) $2,060
The decrease in the provision for credit losses on loans is primarily the result
of improvement in economic assumptions used to estimate lifetime credit losses.
The increase in the provision for credit losses on unfunded commitments is
primarily due to an increase in total unfunded commitments, which was only
partially offset by lower lifetime expected loss rates due to improvement in
economic assumptions.
52
--------------------------------------------------------------------------------Other Operating Income
Other operating income for the three-month period endedMarch 31, 2021 , increased$9.5 million , or 147%, to$15.9 million as compared to$6.4 million for the same period in 2020, primarily due to the$9.0 million increase in mortgage banking income in the first quarter of 2021 compared to the same quarter in 2020. This increase in mortgage banking income in the three-month period endedMarch 31, 2021 as compared to the same period in 2020 was primarily due to increased refinance activity and home purchases due to changes in the mortgage interest rates. Also, changes in the fair value mark-to-market of the marketable equity securities portfolio decreased other income by$84,000 in the first quarter of 2021 as compared to$871,000 in the first quarter of 2020. Additionally, the Company recognized$92,000 in interest rate swap fee income in the first quarter of 2021. These increases were only partially offset by a decrease in purchased receivable income due to customers reportedly using PPP funds instead of selling receivables. Other Operating Expense Other operating expense for the first quarter of 2021 increased$2.5 million , or 14%, to$21.3 million as compared to the same period in 2020 primarily due to higher salaries and other personnel expense and other miscellaneous operating expenses related to mortgage banking operations, which fluctuate with production volumes.
Income Taxes
The provision for income taxes for the first quarter of 2021 increased$3.1 million , or 1,286%, as compared to the same period in 2020. The increase in the three-month period endingMarch 31, 2021 as compared to the same period in 2020 was primarily due to the increase in pretax income. The effective tax rate increased to 22% in the three-month period endingMarch 31, 2021 as compared to 19% in the same period in 2020. The increased rate in three-month period endingMarch 31, 2021 was primarily due to decreased tax credits and tax exempt interest income as a percentage of net income.
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