Northrim BanCorp, Inc. — Q2 2017 Form 10-Q
Business context and reporting period
Unaudited results for the quarter and six months ended June 30, 2017. Northrim operates Community Banking, with 14 Alaska branches, and Home Mortgage Lending, which originates and sells residential mortgages. Comparisons below are to Q2 or the first half of 2016 unless otherwise noted; balance-sheet comparisons are to December 31, 2016.
Key financial metrics
| Metric | Q2 2017 / June 30, 2017 | Comparable period / change |
|---|---|---|
| Total revenue (net interest income plus other operating income) | $24.0 million | $25.9 million in Q2 2016; down 8% |
| Net interest income | $14.2 million; net interest margin 4.20% | $14.1 million and 4.21% in Q2 2016 |
| Net income attributable to Northrim | $3.6 million; diluted EPS $0.51 | $4.4 million and $0.63 in Q2 2016 |
| First-half net income attributable to Northrim | $7.4 million; diluted EPS $1.06 | $7.7 million and $1.11 in first-half 2016 |
| Total assets / shareholders’ equity | $1.493 billion / $191.8 million | Assets were $1.527 billion and equity $186.7 million at year-end 2016 |
| Loans / deposits | $991.2 million / $1.234 billion | Loans up $16.2 million; deposits down $33.3 million from year-end 2016 |
| Allowance for loan losses | $20.1 million; 2.02% of portfolio loans | 2.02% at June 2017 versus 1.90% at June 2016 |
| Cash and cash equivalents | $25.8 million | Down $24.8 million during the first half |
For the first half, net interest income was $28.1 million versus $28.3 million, and net interest margin was 4.17% versus 4.22%. Cash flows were negative $3.9 million from operations, positive $18.8 million from investing, and negative $39.7 million from financing. The company paid $2.9 million in cash dividends during the first half.
At June 30, the company reported Tier 1 risk-based capital of 14.98% and total risk-based capital of 16.23%; the Bank’s corresponding ratios were 12.91% and 14.16%. All reported capital ratios exceeded applicable well-capitalized thresholds. The company reported $590.2 million available under existing borrowing lines.
Material changes versus comparable periods
- Q2 attributable net income fell 17%; first-half attributable net income fell 4%. Lower mortgage banking income was the principal revenue pressure, partly offset by lower operating expenses.
- Mortgage banking income declined to $6.4 million in Q2 from $8.5 million, and to $11.8 million for the first half from $14.2 million. Management attributed the decline mainly to lower mortgage production amid Alaska’s economic slowdown.
- Portfolio loans grew 2% from year-end, mainly from commercial lending; investment securities declined 10% as proceeds were redirected toward loans.
- Net nonperforming assets rose to $25.8 million from $19.3 million at year-end, largely after a commercial relationship of approximately $10.2 million moved to adversely classified and nonperforming status. Net nonaccrual loans were $21.1 million versus $12.5 million.
- Troubled debt restructurings increased to $25.4 million from $16.2 million, primarily reflecting the restructuring of one commercial loan. Potential problem loans declined to $11.3 million from $18.2 million.
Outlook, management commentary, risks, and unusual items
- Management expects 2017 mortgage originations to be lower than in 2016. The filing provides no specific earnings or revenue guidance.
- Management described Alaska’s contraction as moderate and gradual, but reported June 2017 employment was down an estimated 1.6% year over year. Risks include Alaska’s economy and oil-sector conditions, competition, net interest margin, credit quality, and execution of growth strategies.
- The core banking system conversion was completed in May. One-time costs were $633,000 in Q2 and $764,000 in the first half, reducing diluted EPS by an estimated $0.09 and $0.11, respectively. Management said other operating expenses still decreased year over year.
- The company announced in July its intention to redeem $8 million of trust preferred securities in August 2017. The filing also cites $271,000 of planned corporate-office improvements expected in Q3.
- Oil-and-gas-related borrowers represented $60.6 million, or about 6% of loans, and $61.2 million of unfunded commitments. The company reported no loans to oil producers or exploration companies.
- Management believes liquidity is sufficient for ongoing operations and anticipated capital needs for at least 12 months. A new credit-loss accounting standard is being evaluated; management had not yet determined its financial-statement impact and expects significant effects on credit-loss estimation and disclosure processes.
- Management said routine legal matters are not expected to have a material effect. Risk factors were reported as not materially changed from the 2016 Form 10-K.
Important facts for investors to verify
- Developments, collateral support, and potential loss exposure related to the commercial relationship moved to nonperforming status, and the resulting trend in nonaccrual loans, TDRs, and the allowance.
- Whether Alaska employment and oil-sector conditions further affect commercial credit quality, loan growth, and mortgage production.
- Mortgage banking volume and income, and whether lower mortgage activity continues to weigh on total revenue and earnings.
- Deposit trends and available liquidity after the announced $8 million trust-preferred redemption, including the funding implications of unfunded commitments.
- Completion and ongoing costs of the core-system conversion, as well as the timing and effect of adopting the expected-credit-loss standard.