Northrim BanCorp, Inc. — Q1 2017 Form 10-Q
Business context and reporting period. The Alaska-based bank holding company reported unaudited results for the three months ended March 31, 2017. Operations comprise Community Banking and Home Mortgage Lending. Amounts below are in U.S. dollars; financial statement amounts are generally in millions.
Financial performance and condition
- Profit and revenue: Net income attributable to Northrim was $3.825 million, up 13% from $3.376 million in Q1 2016. Diluted EPS was $0.55 versus $0.48. Total revenue, defined as net interest income plus other operating income, declined 2% to $22.729 million. Return on average assets was 1.04% (0.91% prior year); return on average shareholders’ equity was 8.30% (7.61%).
- Interest income and margins: Net interest income fell 2% to $13.833 million. Net interest margin declined 8 basis points to 4.15%. Management attributed the decrease mainly to lower portfolio loan balances and yields, including a shift toward lower-yielding real estate loans. Interest expense was $0.632 million.
- Credit costs and asset quality: Loan-loss provision was $0.400 million, down from $0.703 million. Net charge-offs were $0.204 million; the allowance for loan losses was $19.893 million, about 2.1% of reported portfolio loans. Net nonaccrual loans were $12.0 million. Nonperforming assets, net of government guarantees, were $18.4 million, down from $19.3 million at year-end. Potential problem loans increased to $18.8 million from $18.2 million; management cited two newly identified commercial relationships totaling $12.1 million. Troubled debt restructurings were $16.2 million.
- Balance sheet and liquidity: Total assets were $1.513 billion, down from $1.527 billion at December 31, 2016. Portfolio loans were $960.8 million, down $14.2 million; deposits were $1.247 billion, down $20.6 million. Cash and cash equivalents increased to $80.9 million from $50.6 million. Q1 operating cash flow was $21.0 million, investing cash flow was $27.3 million, and financing cash flow was negative $17.9 million. Management reported $608.5 million available under existing borrowing lines and said liquidity was sufficient for anticipated operating and capital needs for at least 12 months.
- Funding and capital: Securities sold under repurchase agreements totaled $31.8 million; borrowings were $4.3 million and junior subordinated debentures were $18.6 million. The company reported Tier 1 risk-based capital of 15.19% and a leverage ratio of 12.95%; the Bank’s corresponding ratios were 13.61% and 11.59%. All reported capital ratios exceeded applicable well-capitalized thresholds. Shareholders’ equity was $189.5 million, or 12.53% of assets. Book value per share was $27.42.
Material changes versus the prior comparable period
- Higher earnings reflected lower loan-loss provision and operating expenses, partly offset by lower net interest income and other operating income.
- Other operating expense declined 4% to $16.6 million. Management cited lower personnel costs and one-time reductions, including a $100,000 reversal of estimated loan collection costs and a $122,000 Washington business-tax refund; these benefits were partly offset by increased OREO expense, including a property write-down.
- Mortgage banking income decreased $0.246 million, primarily due to lower production volume. Purchased receivable income increased $0.155 million.
- Mortgage servicing rights rose to $5.3 million from $4.2 million. Loans held for sale fell to $28.0 million from $43.6 million.
- The allowance increased from $19.7 million at year-end, while portfolio loans and deposits contracted. Nonperforming assets declined, but potential problem loans rose.
Outlook, management commentary, and risks
- No quantified company earnings or growth guidance was provided. Management expected mortgage originations to be lower in 2017 than in 2016.
- Management cited Alaska Department of Labor preliminary data showing employment down an estimated 2.2% year over year in March 2017, following a forecast of 7,500 job losses for 2017. It characterized the state’s economic contraction as moderate and gradual.
- The Federal Reserve raised its target rate by 25 basis points in March to 0.75%–1.00%; management noted expectations for gradual further increases. Rate changes may affect margins, funding costs, and asset values.
- Direct oil-and-gas-related loan exposure was $56.2 million, approximately 6% of loans; the company reported no loans to oil producers or exploration companies. Related unfunded commitments were $57.0 million.
- Key risks include Alaska’s economy, competition, loan and asset quality, net interest margin, execution of growth plans, regulatory requirements, and the possibility that actual credit losses exceed allowance estimates. The filing also notes $251.1 million of commitments to extend credit and letters of credit, plus $67.6 million of mortgage-origination commitments; not all are expected to be drawn.
- Conversion to a new core banking system was expected in Q2 2017, with temporary conversion-related costs anticipated. Management said operating costs after conversion were expected to remain relatively consistent. The filing reported no material change in market-risk disclosures, risk factors, or internal control over financial reporting.
Important facts for investors to verify
- Whether Alaska’s economic and employment trends affect commercial borrowers, credit quality, and demand for loans.
- Trends in potential problem loans, nonaccruals, OREO, and the adequacy of the loan-loss allowance.
- Whether reduced loan volume and a lower net interest margin persist, and how rate changes affect funding costs and earnings.
- Mortgage originations and mortgage banking income relative to management’s expectation of lower 2017 production.
- Execution, timing, and temporary costs of the planned core banking system conversion.
- Deposit trends, near-term certificate maturities, liquidity capacity, and the likelihood that off-balance-sheet commitments are drawn.