Northrim BanCorp, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017; unaudited. Comparisons are with the corresponding 2016 periods unless otherwise noted. Northrim operates Community Banking, with 14 Alaska branches, and Home Mortgage Lending.
Financial performance
- Q3 earnings: Net income attributable to Northrim was $5.5 million, or $0.79 diluted EPS, versus $3.1 million, or $0.44, a year earlier. For the first nine months, attributable net income was $12.9 million and diluted EPS was $1.85, versus $10.8 million and $1.55.
- Interest income and margin: Q3 net interest income rose 5% to $14.9 million; net interest margin was 4.28%, up 17 basis points. Nine-month net interest income increased 1% to $43.0 million, and margin was 4.21%, up 3 basis points.
- Credit provision: Provision for loan losses was $2.5 million in Q3 versus $652,000, and $3.2 million for nine months versus $1.6 million. Q3 net charge-offs were $1.1 million. The allowance was $21.5 million, or 2.17% of portfolio loans.
- Noninterest income and expense: Q3 other operating income was $13.8 million, including a $4.4 million pretax gain on the sale of Northrim Benefits Group (NBG); mortgage banking income was $6.2 million versus $8.3 million. Other operating expense was $17.6 million, down from $21.2 million. Nine-month other income was $32.4 million versus $32.9 million, while expense was $52.7 million versus $57.9 million.
- Balance sheet at September 30: Assets were $1.523 billion; portfolio loans were $989.3 million, up from $975.0 million at year-end 2016. Deposits were $1.258 billion, down from $1.268 billion. Shareholders’ equity was $194.4 million; equity was 12.76% of assets.
- Cash flow, first nine months: Operating cash flow was $(4.5) million, investing cash flow was $58.7 million, and financing cash flow was $(17.5) million. Cash and cash equivalents ended at $87.3 million, compared with $50.6 million at the start of the period.
- Funding and capital: The company redeemed $8.0 million of junior subordinated debentures in August, leaving $10.3 million outstanding, and entered a swap fixing the remaining $10.0 million trust debt at 3.72%. Company total risk-based capital was 14.75%, and the Bank’s was 13.20%; all reported regulatory capital ratios exceeded applicable well-capitalized thresholds.
Material changes and unusual items
- The NBG sale closed August 14, 2017. The $4.4 million pretax gain contributed approximately $2.6 million after tax, or $0.38 per diluted share, to Q3 earnings; Q3 included two months of NBG income. Management said revenue excluding the gain decreased 7% year over year in Q3.
- Management attributed the higher loan-loss provision principally to increased specific impairment, including a $2.9 million medical-industry commercial relationship placed on nonaccrual, and higher qualitative reserves. Net nonaccrual loans, after government guarantees, were approximately $22.5 million, versus $12.5 million at December 31, 2016. Nonperforming assets, net of guarantees, rose to $26.2 million from $19.3 million.
- Troubled debt restructurings increased to approximately $26.0 million from $16.2 million at year-end; $18.3 million were nonaccrual. Potential problem loans declined to $7.7 million from $18.2 million, partly because a commercial loan was removed from that category after a co-borrower was added.
- The core banking system conversion was completed in May. Related one-time costs were $179,000 in Q3 and $943,000 year to date. Q3 2016 included a one-time, noncash accounting correction related to RML acquisition earn-out payments, increasing expenses net of tax by $1.4 million, or $0.20 per diluted share.
- The company repurchased 58,341 shares in Q3 at an average $27.56 per share; 168,901 shares remained authorized for repurchase. The quarterly dividend increased to $0.22 per share from $0.20.
Outlook, risks and contingencies
- No specific earnings or financial guidance was provided. Management expected 2017 mortgage originations to be lower than in 2016 and described the Alaska economic contraction as moderate, while noting continued job losses. Alaska employment was down an estimated 1.3% year over year in September; August seasonally adjusted unemployment was 7.2%.
- Management believed available liquidity was sufficient for operating needs and anticipated capital requirements for at least 12 months. Available borrowing capacity under existing lines was reported at $596.4 million. Unfunded loan and letter-of-credit commitments totaled $306.2 million; commitments to originate loans held for sale were $68.6 million.
- Alaska economic conditions, oil-and-gas activity, competition, net interest margin, asset quality, and execution of growth strategies were identified as risks. Direct oil-and-gas-related loan exposure was $60.1 million, approximately 6% of loans; the company reported no loans to oil producers or exploration companies. It had $54.0 million of unfunded commitments to borrowers with direct exposure.
- The company reported no material change in market-risk disclosures or risk factors. Management did not expect ordinary-course legal proceedings to have a material effect. Adoption of the expected-credit-loss standard (ASU 2016-13) was under evaluation; management anticipated a significant effect on credit-loss processes, but had not determined the financial impact.
Investor verification priorities
- Assess whether earnings growth persists excluding the NBG sale gain and the prior-year RML accounting correction.
- Review the impaired commercial relationships, rising nonaccrual and restructured loans, charge-offs, and adequacy of the $21.5 million allowance.
- Track mortgage production and mortgage banking income amid Alaska’s economic contraction.
- Monitor deposit trends, certificate maturities, liquidity commitments, and capital ratios following the debt redemption and share repurchases.
- Verify post-sale NBG effects on recurring revenue and earnings, and the implementation timeline and eventual impact of expected-credit-loss accounting.