Northrim BanCorp, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. The company operates Community Banking and Home Mortgage Lending businesses, with 14 branches in Alaska. Unaudited results are compared with the same 2017 periods unless otherwise noted.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net interest income | $15.8 million | $14.9 million | $45.1 million | $43.0 million |
| Net interest margin | 4.69% | 4.28% | 4.49% | 4.21% |
| Net income attributable to Northrim | $5.3 million | $5.5 million | $15.2 million | $12.9 million |
| Diluted earnings per share | $0.75 | $0.79 | $2.17 | $1.85 |
| Provision (benefit) for loan losses | $0 | $2.5 million | ($0.3 million) | $3.2 million |
| Other operating income | $8.7 million | $13.9 million | $24.4 million | $32.5 million |
| Other operating expense | $18.1 million | $17.7 million | $51.5 million | $52.8 million |
At September 30, 2018, total assets were $1.503 billion, down from $1.519 billion at December 31, 2017. Portfolio loans were $982.0 million, up 3%; deposits were $1.233 billion, down $25.0 million. Shareholders’ equity was $203.2 million, up from $192.8 million. Cash and cash equivalents were $70.2 million, compared with $77.8 million at year-end 2017.
For the first nine months, operating activities used $2.2 million of cash, investing activities provided $19.9 million, and financing activities used $25.4 million. Cash declined $7.7 million from the beginning of the period. The cash-flow profile reflects loan originations and sales, investment activity, deposit outflows, and dividend payments.
At quarter-end, liabilities included $32.4 million of repurchase agreements, $7.3 million of borrowings, and $10.3 million of junior subordinated debentures. The company reported $744.4 million available under existing borrowing lines and said liquidity was sufficient for anticipated needs for at least 12 months. The Bank and holding company exceeded applicable well-capitalized thresholds; the Bank’s total risk-based capital ratio was 14.36% and leverage ratio was 11.48%.
Changes and drivers
- Third-quarter attributable earnings fell 5% year over year, primarily because Q3 2017 included a $4.4 million gain on the sale of Northrim Benefits Group (NBG). Higher net interest income, lower loan-loss provisioning, and lower taxes partly offset the decline.
- Nine-month attributable earnings rose 17%. Higher net interest income, a $3.5 million year-over-year reduction in loan-loss provision, lower taxes, and lower prior-year core-conversion costs more than offset the absence of the NBG sale gain and lower mortgage banking and employee-benefit income.
- Net interest income increased as loan and investment yields benefited from higher rates. Deposit interest expense also rose; management reported that the September 2018 federal funds target rate was 2.00%–2.25% and the FOMC projected further increases.
- Mortgage banking income declined to $5.9 million in Q3 from $6.2 million, and to $16.3 million for nine months from $18.0 million, which management attributed mainly to lower mortgage-loan sale volume and yield.
Credit, outlook, and risks
- The allowance for loan losses was $20.2 million, down from $21.5 million at year-end; allowance coverage of nonperforming loans, net of government guarantees, was 121%, versus 100%. Management cited improved qualitative allowance factors. Net nonperforming loans were $16.4 million; nonperforming assets, net of guarantees, were $24.0 million.
- Potential problem loans increased to $15.2 million from $9.5 million at year-end, including nine commercial relationships totaling $9.6 million. Troubled debt restructurings declined to $17.9 million from $23.8 million; three restructured loans totaling $1.9 million subsequently defaulted during the period.
- Direct oil-and-gas industry exposure was $55.7 million, about 6% of loans, down from $70.8 million, or 7%, at year-end. The company reported no loans to oil producers or exploration companies. Alaska wage and employment conditions remained weak, although management noted the pace of wage contraction was slowing.
- Q3 included an $804,000 impairment of an equity-method investment related to another mortgage origination business. Available-for-sale securities had $2.5 million of gross unrealized losses, which management attributed to interest-rate changes and did not consider other-than-temporary.
- No specific earnings or growth guidance was provided. Management expected continued Bank dividends and stated liquidity should cover operating and anticipated capital needs for at least 12 months. The company estimated that adopting lease accounting in January 2019 would add $15–$25 million of right-of-use assets and lease liabilities and could affect regulatory capital ratios. The impact of the expected-credit-loss standard, effective in 2020, had not been determined; management expected a significant change to the allowance-calculation process.
- Risks identified include Alaska economic conditions, competition, interest-rate and margin changes, credit quality, execution of growth plans, and regulatory conditions. Ordinary-course legal matters were not expected to have a material effect. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the rise in potential problem commercial loans translates into increased nonaccrual loans, charge-offs, or allowance needs.
- Whether net interest margin gains persist as deposit costs respond to further rate changes and loan growth develops.
- Mortgage banking volume, profitability, and the valuation assumptions supporting mortgage servicing rights.
- The effects of the $804,000 investment impairment and the absence of the prior-year NBG sale gain on comparisons.
- Actual lease-accounting transition and expected-credit-loss impacts on reported liabilities, capital, and credit-loss expense.