Northrim BanCorp, Inc. — FY 2019 Form 10-K
Business context and period. This summary covers the fiscal year ended December 31, 2019, with balance-sheet comparisons to December 31, 2018. Northrim is an Alaska-based bank holding company operating Community Banking and Home Mortgage Lending businesses. It reported $1.64 billion in assets and $1.37 billion in deposits at year-end.
Key financial results
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Total revenue (net interest income plus other operating income) | $101.8 million | $93.4 million |
| Net interest income | $64.4 million | $61.2 million |
| Net interest margin | 4.65% | 4.55% |
| Net income attributable to Northrim | $20.7 million | $20.0 million |
| Diluted earnings per share | $3.04 | $2.86 |
| Return on average assets | 1.33% | 1.34% |
| Efficiency ratio | 75.43% | 74.68% |
- Net income increased 3%; basic EPS was $3.08 versus $2.91.
- Other operating income was $37.3 million, up from $32.2 million. Mortgage banking income rose 16% to $24.2 million as mortgage originations and sales increased to $684 million from $528 million.
- Other operating expense increased 10% to $76.8 million, including a $6.7 million rise in salaries and personnel costs. The income-tax provision was $5.4 million, with a 21% effective tax rate versus 17%.
- Portfolio loans grew 6% to $1.043 billion; deposits grew 12% to $1.372 billion; total assets grew 9% to $1.644 billion. Shareholders’ equity was $207.1 million.
- Net cash used in operating activities was $0.8 million, compared with $25.2 million provided in 2018. Management attributed the 2019 use chiefly to mortgage-loan originations exceeding loan-sale proceeds. Investing activities used $71.9 million; financing activities provided $90.6 million, primarily reflecting deposit growth.
- Year-end cash and cash equivalents were $95.4 million. Management reported $431.3 million in current assets and $800.7 million in available borrowing lines, and considered liquidity sufficient for the foreseeable future.
- Year-end borrowings were $8.9 million, junior subordinated debentures were $10.3 million, and repurchase-agreement borrowings were zero. Deposits were the primary funding source. The company and Bank were reported as meeting capital requirements; Tier 1 risk-based capital ratios were 14.38% and 11.98%, respectively.
Changes, outlook, and risks
- Credit quality improved overall: the loan-loss provision was a benefit of $1.2 million, versus a $0.5 million benefit in 2018, reflecting recoveries and lower qualitative loss factors. Net nonperforming loans fell to $14.0 million from $14.7 million; adversely classified loans fell to $22.3 million from $27.2 million. The allowance was $19.1 million, or 1.83% of portfolio loans, versus 1.98%.
- Portfolio concentrations remain important: about 70% of loans were secured by real estate; commercial real estate represented about 47% of the portfolio. Direct oil-and-gas exposure was $79.2 million, about 8% of loans, up from $62.3 million, or 6%. Thirty-one large borrowing relationships accounted for about 40% of loans.
- Management outlook: management expected modest growth in 2020, citing Alaska’s slow recovery and lower oil prices, while intending to grow market share. It expected short-term rates to remain stable but noted that rate movements are difficult to predict. The filing gives no numerical earnings or revenue guidance.
- Capital returns: 2019 dividends totaled $1.26 per share ($8.5 million). The company repurchased 347,676 shares for $12.6 million at an average $36.15 per share. In February 2020, the Board approved a $0.34-per-share dividend and authorized repurchases of up to 327,000 shares; future distributions remain subject to capital, regulatory, and Board considerations.
- Notable items: the final RML acquisition-related payment expense was $468,000 in 2019; no further payments were scheduled. Management disclosed two immaterial prior-period error corrections recorded in 2018 without restating prior statements. The company adopted lease accounting in 2019, recognizing a $14.3 million right-of-use asset and $14.2 million lease liability at year-end.
- CECL: adoption was deferred for the company until fiscal years beginning after December 15, 2022; it did not early adopt in 2020. Management estimated that hypothetical adoption at January 1, 2020 would have decreased the loan allowance by $7.5–$9 million, but stated the ultimate effect is uncertain and depends on portfolio and economic conditions.
- Key risks: concentration in Alaska and real estate, oil-price and state-budget exposure, borrower credit losses, interest-rate and mortgage-market changes, deposit competition and liquidity, regulatory requirements, cybersecurity and third-party service disruptions, natural disasters, and the LIBOR transition. The filing also identifies the novel coronavirus outbreak as a potential source of disruption; its effect was not then predictable.
Investor facts to verify
- Whether loan growth and credit quality remain resilient, particularly in real estate, large borrower relationships, and oil-and-gas-linked credits.
- Whether mortgage production, gains on loan sales, and servicing-right valuations can sustain 2019’s contribution to revenue.
- How deposit growth, deposit pricing, and scheduled 2020 certificate-of-deposit maturities affect funding costs and liquidity.
- Actual future capital returns and the effects of repurchases on share count, capital ratios, and per-share results.
- CECL model assumptions and the eventual allowance and retained-earnings impact at adoption.
The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.