Prepared by Stephanie, Analyst at BAD BEAT Investing
Have you ever looked for exposure to the Alaskan economy? Well, one way to do that is to consider investing in a bank that does business in the area. We have analyzed a ton of financials lately, but Northrim BanCorp (NRIM) is growing, and is trading at a discount-to-book value, and a discount-to-tangible book. We think if you are looking for a financial to add to your portfolio, and want to consider having some exposure to Alaska, this stock is for you. Low interest rates have weighed, and pressure on bond yields have kept these stocks down, and of course, with the COIVD-19 crisis, loan loss provisions are a concern, given the economic pressure on many borrowers.
There has a been a lot of mixed performance in this regard in the banking sector. One thing we note about Northrim is that it has been a huge beneficiary of the Paycheck Protection Program, or the PPP, as it has brought in a lot of new business. In this column, we will look at the key metrics we look at for banks and Northrim has just reported earnings. The stock is a good buy under $30 in our opinion.
The bank’s operational results have followed a path similar to that of other regional and major banks, though Northrim really got a boost from PPP activity. We thought the quarter was strong thanks to continued loan growth and deposit strength. Thanks to increased activity, the bank saw revenues continue to improve. With the present quarter’s revenues of $39.9 million, the company registered a 48.8% increase in this metric year-over-year. Those are stunning numbers we have to tell you. Many other regional banks have seen flat to down revenues versus last year. What is more, we saw great performance on earnings. Increased production in the Home Mortgage Lending segment and fee and interest income from PPP loans, as well as significant loan and deposit growth contributed to record profitability for the quarter.
The surge in revenues year-over-year was offset slightly by increased expenditures and growth in loan loss provisions. Northrim reported net income of $11.9 million, or $1.84 per share, which was a massive increase of $0.32 from the same quarter of 2019. We think 2021 will be even better based on the trends we are seeing for banks, but especially with the volumes we are seeing. The strong residential mortgage business along with continued production of PPP and commercial loans during the quarter generated increased income and had a meaningful impact on loan and deposit growth. It also led to a big move in book value. That is strong in our opinion.
Book value impresses
The stock’s value proposition is attractive when we consider the equity price is actually way below book value now. The bank’s stock is pretty attractive at $28.56 relative to the book value per share on September 30, 2020. It came in then at $34.18, an increase of $3.00 during the year. Further, tangible book value rose a good amount too. Tangible book value rose to $31.62 from $28.74 a year ago and was up over 5% from Q2 2020. We think shares are at a very attractive price. Much of the book value move came from movement in loan and deposits, as well as asset quality.
A glimpse at loans and deposits
There was significant progress on loans and deposits and such growth in loans and deposits is key for any bank, small or large. That is how you make money as a bank. You take in deposits at a low interest rate, and lend at a higher one. Net loans increased 4% to $1.47 billion on September 30, 2020, compared to $1.41 billion on June 30, 2020, and increased 45% compared to $1.02 billion on September 30, 2019. Total deposits increased 4% to $1.81 billion on September 30, 2020, compared to $1.74 billion on June 30, 2020, and increased 34% compared to $1.35 billion a year earlier. This is solid growth, but are they quality loans?
A look at asset quality
Loan growth is a strength, but only if they are quality loans. We have said this many times but risky loans may offer a higher return but not if the debt cannot be repaid and turns to toxic debts. With COVID-19 we had to be worried that borrowers could not repay loans. A true concern. This quarter saw the loan loss provision increase from a year ago. The provision for loan losses increased to $3.0 million in the first nine months of 2020, compared to a $1.0 million benefit for loan loss provisions in the first nine months of 2019. The increase in the provision for loan losses reflects increases in certain qualitative factors during the current quarter as a result of continued impacts from the COVID-19 crisis.
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 Northrim has exposure, as a percent of the total loan portfolio excluding PPP loans as of September 30, 2020, are: Tourism (6%), Oil and Gas (6%), Aviation (non-tourism) (5%), Healthcare (7%), Accommodations (3%), Retail (2%) and Restaurants (2%).
Nonperforming loans, net of government guarantees, improved during the quarter to $11.0 million on September 30, 2020, compared to $12.7 million on June 30, 2020, and $15.5 million on September 30, 2019. The allowance for loan losses was 196% of nonperforming loans, net of government guarantees at the end of the third quarter of 2020, compared to 162% three months earlier and 123% a year earlier. All in all, good news here.
Final thoughts here
All things considered Northrim stock is a buy. When we look at loans, deposits, and loan loss provisions, it still looks like a mixed quarter, but followed the trend of some similar banks. Despite the loan loss provisions, the company’s strategic moves significantly boosted earnings. Loans and deposits mostly grew. Considering the share prices relative to book value and tangible book value, this bank is a good value buy under $30.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.