Northrim BanCorp, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; unaudited. Northrim is an Alaska bank holding company operating Community Banking and Home Mortgage Lending segments.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Net income | $4.3 million | $5.8 million | $8.6 million | $9.9 million |
| Diluted EPS | $0.62 | $0.84 | $1.24 | $1.42 |
| Net interest income | $16.0 million | $15.0 million | $31.7 million | $29.3 million |
| Provision for loan losses | $0.3 million | ($0.3 million benefit) | $1.1 million | ($0.3 million benefit) |
| Other operating income | $9.6 million | $8.3 million | $17.1 million | $15.8 million |
| Other operating expense | $19.8 million | $16.6 million | $36.9 million | $33.4 million |
- Q2 total revenue, defined by the company as net interest income plus other operating income, rose 10% to $25.5 million. Net interest margin increased to 4.71% from 4.50%; first-half margin was 4.77% versus 4.39%.
- Net income declined 27% in Q2 and 13% in the first half. Management attributed the declines chiefly to higher employee benefit and personnel costs, new-branch and technology expenses, higher loan-loss provisions, and non-core items that lifted Q2 2018 results.
- Q2 return on average assets was 1.12% and return on average equity was 8.13%, compared with 1.58% and 11.79% a year earlier.
Financial position, cash flow and capital
- At June 30, total assets were $1.553 billion, up from $1.503 billion at year-end 2018. Portfolio loans were $1.016 billion, up 3%; deposits were $1.288 billion, up 5%.
- Allowance for loan losses was $20.5 million, compared with $19.5 million at December 31. Net loans were $995.2 million. Nonaccrual loans net of government guarantees were $16.9 million, up from $14.7 million at year-end; the allowance equaled 121% of net nonperforming loans.
- Cash and cash equivalents ended the half at $70.8 million, down from $77.5 million at the start of the year. First-half cash flow was negative $17.8 million from operating activities, negative $6.0 million from investing activities, and positive $17.1 million from financing activities. Operating cash use primarily reflected mortgage-loan originations exceeding sale proceeds.
- Interest-bearing funding included $0.9 million in repurchase agreements, $7.2 million in borrowings and $10.3 million in junior subordinated debentures. The Bank reported no discount-window advances outstanding. The company cited $760.4 million available under borrowing lines and assessed liquidity as sufficient for operations and anticipated capital needs for at least 12 months.
- Both the company and Bank exceeded well-capitalized thresholds. At June 30, company and Bank total risk-based capital ratios were 16.28% and 13.94%, respectively; leverage ratios were 13.22% and 11.16%.
- The company repurchased 149,373 shares in Q2 at an average $34.79; 192,193 shares remained authorized for repurchase at quarter-end. It declared $4.1 million in dividends during the first half.
Changes, outlook and risks
- Interest costs rose materially: Q2 deposit interest expense was $1.17 million versus $0.45 million a year earlier. Growth in loan and investment income more than offset this increase in net interest income.
- Q2 other income included $734,000 of new commercial interest-rate-swap fee income. Mortgage banking income increased with higher origination volume. Personnel expense rose $1.6 million in Q2, with additional pressure from branch occupancy, data processing and marketing.
- Nonperforming assets, net of government guarantees, were $23.9 million, up from $22.6 million at year-end. Six commercial relationships accounted for $13.3 million, or 56%, of the total; two were medical businesses. Troubled debt restructurings were $11.3 million, down from $14.8 million. Potential problem loans fell to $10.1 million from $17.1 million.
- Direct oil-and-gas industry exposure was $64.4 million, about 6% of loans; related unfunded commitments were $32.0 million. The company reported no loans to oil producers or exploration companies, but exposure includes a loan tied to construction of an oil rig.
- Management described Alaska’s economy as showing modest recovery, citing job gains, higher income and improving gross state product. Uncertainty over the State’s budget and long-term fiscal plan remains a risk. Other stated risks include local economic conditions, competition, net interest margin, asset quality, execution of growth plans and regulation.
- No earnings or financial forecast was provided. Management expected continued Bank dividends during the rest of 2019, subject to regulatory requirements. Adoption of lease accounting added a $14.9 million right-of-use asset and $14.8 million lease liability at quarter-end, with no income-statement impact. The company was implementing the expected-credit-loss standard effective in 2020; it had not yet determined the financial impact and expected a significant effect on its allowance-estimation process.
- Routine debtor-creditor litigation was disclosed; management did not expect it to have a material effect. Risk factors were reported as not materially changed from the 2018 Form 10-K.
Important facts for investors to verify
- Whether rising nonaccrual commercial exposures and medical-industry concentrations lead to additional losses or provisions.
- Whether deposit costs continue to rise and affect net interest margin as funding needs and rates change.
- How employee-benefit, staffing, branch and technology costs develop relative to revenue growth.
- The eventual allowance and capital effects of adopting the expected-credit-loss standard.
- Whether Alaska’s fiscal outlook, oil-and-gas activity and local economic recovery affect borrowers, loan quality and growth.
- Mortgage production, sale volumes and servicing-rights valuations, which are sensitive to interest rates, refinancing and valuation assumptions.