Northrim BanCorp, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. Northrim operates Community Banking and Home Mortgage Lending segments, with 14 branches in Alaska.
Financial performance
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Net interest income | $14.3 million | $13.8 million; up 3% |
| Net interest margin | 4.28% | 4.15%; up 13 basis points |
| Total revenue (net interest income plus other operating income) | $21.7 million | $22.7 million; down about 4% |
| Income before taxes | $4.9 million | $5.7 million |
| Net income attributable to Northrim | $4.1 million | $3.8 million; up 6% |
| Diluted earnings per share | $0.58 | $0.55 |
| Effective tax rate | 18% | 32% |
| Operating cash flow | $4.7 million | $21.0 million |
Higher investment and overnight-funds income, lower deposit interest expense, and a lower federal corporate tax rate supported earnings. Lower mortgage banking income and the absence of employee benefit plan income after the 2017 sale of Northrim Benefits Group weighed on revenue. Other operating expense was $16.8 million, up 1%; the filing cites higher Community Banking costs, partly offset by lower Home Mortgage Lending expenses.
Financial position, liquidity, and credit
- At March 31, total assets were $1.525 billion, loans were $967.6 million, deposits were $1.261 billion, and shareholders’ equity was $195.0 million. Compared with December 31, 2017, loans increased $12.6 million and deposits increased $2.5 million.
- Cash and cash equivalents ended the quarter at $84.0 million, up $6.1 million from year-end. Investing activities used $2.7 million and financing activities provided $4.1 million.
- Borrowings were $7.3 million, junior subordinated debentures were $10.3 million, and repurchase-agreement funding was $31.0 million. Management reported $592.5 million of available borrowing capacity and expected liquidity to cover operating needs and anticipated capital requirements for at least 12 months.
- The allowance for loan losses was $20.4 million, or 2.11% of portfolio loans. There was no loan-loss provision in Q1; net charge-offs were $1.0 million.
- Net nonaccrual loans were $18.5 million. Nonperforming assets, net of government guarantees, were $26.1 million (1.71% of assets), down from $28.7 million at year-end but up from $18.4 million a year earlier. Potential problem loans rose to $13.8 million from $9.5 million at year-end; TDRs totaled $25.5 million.
- Company regulatory capital ratios included 16.14% total risk-based capital, 14.88% Tier 1 risk-based capital, and 12.82% leverage. Management said the Company and Bank met applicable well-capitalized requirements.
Changes, outlook, and risks
- Portfolio loans grew 1% year over year, with growth concentrated in commercial real estate; quarter-on-quarter growth included non-owner-occupied real estate term loans. Total deposits were up 1% year over year. Demand deposits represented 34% of deposits at quarter-end.
- Mortgage banking income fell $0.5 million year over year, primarily due to lower production amid a slowing Alaska economy and a smaller favorable MSR fair-value adjustment. The filing reports serviced mortgage loans of $439.6 million and MSRs of $8.0 million.
- Alaska had recorded 29 consecutive months of job losses as of February 2018, although state output had grown for three consecutive quarters, helped by higher oil prices. Management also noted stable home values and low foreclosure rates. The Federal Reserve raised its target rate to 1.75% in March.
- No specific earnings or growth guidance was provided. Management’s forward-looking statements identify Alaska economic conditions, competition, interest-rate and margin changes, asset quality, regulatory conditions, and execution of growth strategies as risks.
- The company had $63.6 million of direct oil-and-gas-related loan exposure, about 7% of loans, and $45.8 million of related unfunded commitments. It had no loans to oil producers or exploration companies.
- Accounting changes included early adoption of guidance on callable debt-security premium amortization, reducing beginning retained earnings by $62,000. Management expects the future credit-loss standard (CECL) to have a significant impact, though its amount was not yet determined; the company also expected lease accounting to add significant lease assets and liabilities.
Investor verification priorities
- Track problem credits, nonperforming assets, TDRs, charge-offs, and allowance adequacy, particularly against the rise in potential problem loans.
- Verify whether loan growth, deposit mix, and funding costs sustain net interest margin as interest rates and competition change.
- Assess mortgage production, mortgage banking income, and the sensitivity of MSR valuations to interest rates and prepayment assumptions.
- Review the effects of Alaska employment and economic trends, including the company’s oil-and-gas-related exposures.
- Confirm future CECL implementation estimates and the balance-sheet impact of lease accounting.