Northrim BanCorp, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Unaudited consolidated results cover Community Banking and Home Mortgage Lending. Balance-sheet comparisons are with December 31, 2017; income comparisons are with the corresponding 2017 periods. Dollar amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Net interest income | $14.99 | $14.24 | $29.25 | $28.08 |
| Net interest margin | 4.50% | 4.20% | 4.39% | 4.17% |
| Net income attributable to Northrim | $5.83 | $3.59 | $9.89 | $7.41 |
| Diluted earnings per share | $0.84 | $0.51 | $1.42 | $1.06 |
| Other operating income | $8.31 | $9.76 | $15.78 | $18.67 |
| Other operating expense | $16.61 | $18.51 | $33.40 | $35.13 |
| Provision (benefit) for loan losses | ($0.30) | $0.30 | ($0.30) | $0.70 |
Q2 return on average assets was 1.58% and return on average equity was 11.79%; first-half results were 1.34% and 10.13%, respectively. The effective tax rate was 17% for both Q2 and the first half, down from 28% and 30%, respectively, in 2017.
Financial position, cash flow and liquidity
- At June 30, total assets were $1.470 billion, down from $1.519 billion at year-end 2017. Portfolio loans were $967.7 million, up 1% from $955.0 million; loans held for sale were $54.3 million.
- Deposits were $1.206 billion, down $52.8 million from year-end. Transaction accounts represented 92% of deposits. Shareholders’ equity was $199.5 million, up from $192.8 million.
- Available-for-sale securities and marketable equity securities totaled $270.1 million, compared with $312.8 million at year-end. Cash and interest-bearing deposits in other banks totaled $36.1 million, versus $77.8 million.
- For the first half, operating cash flow was negative $13.5 million, investing cash flow was positive $28.0 million, and financing cash flow was negative $56.2 million; cash and cash equivalents declined $41.7 million to $36.1 million. Deposit outflows were the primary financing cash use.
- Reported liabilities included $27.7 million in repurchase agreements, $7.3 million in borrowings, and $10.3 million in junior subordinated debentures. The company reported $572.5 million available under existing borrowing lines and said liquidity was sufficient for at least 12 months.
- The Bank’s regulatory capital ratios exceeded well-capitalized thresholds: total risk-based capital 14.48%, Tier 1 risk-based capital 13.22%, common equity Tier 1 13.22%, and leverage 11.59%.
Material changes and management commentary
- Q2 net income attributable to Northrim rose 62%; first-half net income rose 33%. Management attributed the improvement chiefly to higher net interest income, lower operating expenses, lower loan-loss provisions, and reduced income taxes following federal tax-rate legislation.
- Net interest income increased 5% in Q2 and 4% in the first half. Management attributed the margin expansion mainly to higher interest rates and loan fees, with a smaller contribution from asset volume and mix.
- Other operating income fell 15% in both comparative periods. The principal factors were the 2017 sale of Northrim’s interest in Northrim Benefits Group, which reduced employee benefit plan income, and lower mortgage banking income.
- Operating expense declined partly because 2017 included core-system conversion costs. Q2 2018 occupancy expense also benefited from a one-time $670,000 depreciation correction. Management expected charitable contributions for full-year 2018 to be consistent with 2017.
- Credit indicators were mixed but improved in some respects: nonperforming assets, net of government guarantees, fell 17% from year-end to $24.0 million, and net nonperforming loans fell to $16.3 million. OREO, net of guarantees, increased to $7.7 million. Potential problem loans rose to $11.3 million from $9.5 million.
- The allowance for loan losses was $20.1 million; its coverage of net nonperforming loans was 123%, versus 100% at year-end. First-half net charge-offs were $1.05 million. Troubled debt restructurings totaled $23.8 million.
- Direct oil-and-gas industry exposure was $60.6 million, about 6% of loans, down from $70.8 million, or about 7%, at year-end. The company reported no loans to oil producers or exploration companies; exposure includes a loan associated with construction of an oil rig.
Outlook, risks and other items
- No specific earnings, loan-growth, deposit-growth, or margin guidance is provided. Management described Alaska’s economy as showing some positive indicators, including oil-price gains and a state budget plan that reduced the deficit, while noting continued wage and employment weakness.
- Management cited possible further Federal Reserve rate increases in 2018. Key stated risks include Alaska economic conditions, competition, net interest margin, asset quality, growth strategies, regulation, and execution of the business plan.
- Unfunded commitments to extend credit and letters of credit were $241.4 million; mortgage-loan origination commitments were $84.1 million. Capital commitments of $670,000 were expected in the second half of 2018.
- The company expected adoption of the new lease standard to create a significant lease asset and liability. It also expected the future credit-loss standard (CECL) to have a significant effect, but had not yet estimated the financial impact.
- Management reported no material change in risk factors, no material litigation expected to affect the company, and effective disclosure controls as of June 30, 2018.
Important facts for investors to verify
- Whether deposit outflows continue and how the company funds loan demand while preserving liquidity and its low-cost deposit mix.
- Whether improved nonperforming-loan and allowance coverage trends persist, particularly given higher potential problem loans, TDRs, and commercial credit exposure.
- How rising rates affect net interest margin, deposit costs, securities values, and mortgage banking activity.
- The sustainability of earnings growth after adjusting for the lower tax rate and the one-time depreciation correction, as well as the continuing effects of the NBG sale and lower mortgage income.
- The valuation sensitivity of mortgage servicing rights and the eventual balance-sheet and earnings effects of CECL and the lease standard.