Northrim BanCorp, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; audited consolidated financial statements. Northrim is an Alaska-focused bank holding company operating Community Banking and Home Mortgage Lending segments. It reported $1.503 billion in assets and $1.228 billion in deposits at year-end.
Financial performance and condition
- Earnings: Net income attributable to Northrim rose 52% to $20.0 million ($2.86 diluted EPS), from $13.2 million ($1.88) in 2017. Fourth-quarter 2018 net income was $4.8 million ($0.69 diluted EPS), compared with $0.2 million ($0.03) in fourth-quarter 2017.
- Revenue and margin: Total revenue (net interest income plus other operating income) declined 5% to $93.4 million. Net interest income increased 6% to $61.2 million; net interest margin improved to 4.55% from 4.22%, as earning assets repriced faster than funding costs. Other operating income fell 21% to $32.2 million, principally due to lower mortgage banking income and the absence of the 2017 gain on the NBG asset sale.
- Profitability and expenses: Return on average assets was 1.34%, versus 0.87%; return on average equity was 9.95%, versus 6.81%. The efficiency ratio increased to 74.68% from 72.39%. Operating expenses declined 2% to $69.8 million.
- Credit: The company recorded a $0.5 million provision benefit, versus a $3.2 million provision in 2017. Net nonperforming loans fell to $14.7 million from $21.4 million; nonperforming assets were $22.6 million, down from $28.7 million. The allowance was $19.5 million, or 1.98% of portfolio loans, versus $21.5 million, or 2.25%. Potential problem loans increased to $17.1 million from $9.5 million.
- Balance sheet and liquidity: Portfolio loans grew 3% to $984.3 million; deposits declined 2% to $1.228 billion; total assets declined 1% to $1.503 billion. Cash and cash equivalents were $77.5 million. Operating cash flow was $25.2 million; investing activities provided $5.6 million, while financing activities used $31.1 million, mainly reflecting lower deposits. Management cited $439.7 million of current assets and $739.5 million of available borrowing capacity, and considered liquidity sufficient for the foreseeable future.
- Capital and debt: Shareholders’ equity increased to $205.9 million. The Bank’s year-end ratios were 13.05% common equity Tier 1, 14.30% total risk-based capital, and 11.28% leverage; it was classified as well-capitalized. Year-end obligations included $34.3 million in repurchase agreements, $7.2 million in FHLB advances, and $10.3 million in junior subordinated debentures. The company paid $1.02 per share in 2018 dividends and repurchased 15,468 shares.
- Cash returns: The Board approved a $0.30 per-share dividend in February 2019, payable in March, subject to regulatory and capital constraints.
Changes, outlook, and risks
- Profit improvement reflected higher net interest income, lower credit-loss provisioning, and a lower tax provision. The 2018 effective tax rate was 17%, compared with 43% in 2017, which included a $2.7 million deferred-tax-asset revaluation charge following federal tax reform.
- Mortgage originations and sales declined to $528 million from $554 million in 2017 and $736 million in 2016. Management attributed weaker mortgage activity to Alaska’s slower economy, rising rates, and competitive pressure. The 2018 mortgage banking income decline was partly offset by higher purchased-receivable income and bankcard fees.
- Management expected 2019 growth opportunities to be muted, citing lower oil prices relative to pre-2014 levels and slower Alaska economic conditions. It planned to pursue market-share growth and maintain capital above well-capitalized requirements.
- Key exposures include Alaska’s oil-dependent economy, concentration in Alaska real estate lending (about 73% of Bank loans secured by real estate, including about 50% commercial real estate), and large borrower relationships (40% of portfolio loans across 27 relationships). Direct oil-and-gas industry exposure was approximately 6% of loans.
- Other risks include interest-rate changes, borrower repayment capacity, real estate collateral values, mortgage origination volatility, cybersecurity and third-party service disruptions, competition, regulation, and the adequacy of the loan-loss allowance. Management warned that sustained low oil prices, state budget pressures, and regional job weakness could constrain growth or asset quality.
- Unusual items and accounting: 2018 included a $625,000 loss on marketable equity securities, an $804,000 impairment of an equity-method investment, and a $670,000 depreciation correction that reduced occupancy expense. The company also recorded commercial servicing rights for the first time, including a cumulative correction that increased 2018 net income by $737,000 after tax. Management deemed prior-period errors immaterial and did not restate prior periods. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
- Management said ordinary-course disputes and litigation were not expected to have a material effect. The filing identifies no unresolved SEC staff comments.
Important facts for investors to verify
- Whether the reduction in nonperforming loans is durable, given the increase in potential problem loans and continued real estate exposure.
- Whether net interest margin can be sustained as deposit costs rise or interest rates change; management’s simulations show sensitivity to falling rates.
- The assumptions and valuation sensitivity underlying mortgage and commercial servicing rights, OREO, and the allowance for loan losses.
- The effect of Alaska oil prices, state fiscal decisions, employment trends, and property values on borrowers and collateral.
- The expected impact of adopting the current expected credit losses standard (CECL), which management said was not yet determined and could be significant.
- Available liquidity and capital after considering deposit trends, $308.8 million of unfunded commitments, regulatory constraints, dividends, and repurchases.