Northrim BanCorp, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Northrim is an Alaska bank holding company operating Community Banking and Home Mortgage Lending businesses, including 15 Alaska branches. Income-statement comparisons are with Q1 2018; balance-sheet comparisons are with December 31, 2018. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2019 / March 31, 2019 | Comparable period |
|---|---|---|
| Total revenue (net interest income plus other operating income) | $23.3 | $21.7 in Q1 2018 |
| Net interest income | $15.8 | $14.3 in Q1 2018 |
| Net interest margin | 4.83% | 4.28% in Q1 2018 |
| Net income | $4.3 | $4.1 in Q1 2018 |
| Diluted EPS | $0.62 | $0.58 in Q1 2018 |
| Provision for loan losses | $0.75 | Zero in Q1 2018 |
| Total assets | $1,520.1 | $1,503.0 at December 31, 2018 |
| Loans, net of unearned fees | $982.3 | $984.3 at December 31, 2018 |
| Total deposits | $1,228.0 | $1,228.1 at December 31, 2018 |
| Shareholders’ equity | $208.8 | $205.9 at December 31, 2018 |
| Cash and cash equivalents | $78.9 | $83.96 at March 31, 2018 |
| Operating cash flow | $9.0 | $4.7 in Q1 2018 |
| Investing / financing cash flow | $(5.6) / $(2.0) | $(2.7) / $4.1 in Q1 2018 |
Interest expense rose to $1.1 million from $0.5 million, principally reflecting higher deposit costs. Other operating income was $7.5 million, nearly flat year over year; mortgage banking income declined to $4.3 million from $4.9 million. Operating expenses increased 2% to $17.1 million. The effective tax rate rose to 21% from 18%. Return on average assets was 1.18% (1.10% prior year) and return on average equity was 8.36% (8.43%).
At March 31, the allowance for loan losses was $20.2 million, versus $19.5 million at year-end. Nonaccrual loans, net of government guarantees, rose to $18.5 million from $14.7 million; nonperforming assets, net of guarantees, increased to $25.5 million from $22.6 million. The allowance equaled 109% of net nonperforming loans. Troubled debt restructurings totaled $13.2 million, including $9.8 million in nonaccrual status. Potential problem loans declined to $9.6 million from $17.1 million.
Deposits were stable, with transaction accounts making up 90% of deposits. Certificates of deposit totaled $121.2 million, of which $60.1 million mature within 12 months. The company reported $7.2 million of borrowings, $34.6 million in repurchase agreements and $10.3 million of junior subordinated debentures. The bank reported a $675.6 million FHLB borrowing line, subject to collateral requirements; total funds available under existing credit lines were $742.4 million. Management stated liquidity was sufficient for expected operating needs and capital requirements for at least 12 months. The company and bank exceeded applicable well-capitalized thresholds; the bank’s total risk-based capital ratio was 14.23% and leverage ratio 11.52%.
Material changes and notable items
- Net interest income increased 11%, primarily from higher loan and investment yields; the reported net interest margin expanded 55 basis points.
- Loan balances were nearly unchanged, but credit indicators weakened: net nonaccrual loans rose by $3.8 million during the quarter, and $6.9 million of nonperforming loans were added, partly offset by payments and sales.
- Six commercial relationships accounted for $15.4 million, or 61%, of nonperforming assets. Two medical-industry relationships represented $6.6 million.
- Direct oil-and-gas-related exposure increased to $67.6 million, about 7% of loans, from $62.3 million, or about 6%, at year-end. Northrim reported no loans to oil producers or exploration companies; exposure includes a $10.0 million oil-rig construction loan.
- Mortgage production declined to $92.4 million from $109.1 million, which management attributed primarily to higher interest rates and low housing inventory. Mortgage banking income fell $0.6 million.
- The company recognized a $0.534 million gain on marketable equity securities. OREO sales generated $0.316 million of gains; net OREO declined to $7.0 million on the balance sheet.
- Adoption of lease accounting on January 1, 2019 added a $15.9 million right-of-use asset and lease liability at adoption; the filing says adoption did not affect income. At quarter-end, these balances were $15.5 million and $15.4 million, respectively.
- The company repurchased 6,110 shares at an average $33.58 and paid $2.1 million in dividends. It had 147,323 shares remaining under its repurchase authorization at quarter-end.
Outlook, risks and contingencies
No specific earnings, revenue, margin or loan-growth guidance is provided. Management described Alaska’s economy as showing gradual improvement, including modest job and income gains, while warning that proposed reductions in state spending could weigh on employment and economic activity. Tourism, military and oil-and-gas activity were identified as expected economic drivers. The Federal Reserve had left its target rate at 2.50% in March, with the possibility of no near-term change.
Key disclosed risks include Alaska economic conditions, competition, net interest margin and asset quality, execution of growth plans, regulation, and local real-estate and industry conditions. Management highlighted uncertainty in loan-loss estimates and collateral valuations; regulators could require a higher allowance. The expected impact of the forthcoming credit-loss standard (CECL) had not yet been determined, although the company expected a significant effect on its allowance-calculation process. Mortgage servicing-right valuations are sensitive to prepayment and discount-rate assumptions. The company had $253.0 million of unfunded loan and letter-of-credit commitments, $66.3 million of commitments to originate loans for sale, and $0.624 million of capital commitments, including a planned Soldotna branch. Management did not expect routine legal proceedings to have a material effect, and reported no material change in risk factors or market-risk disclosures.
Important facts for investors to verify
- Whether nonperforming commercial exposures, particularly the six relationships highlighted by management, stabilize, resolve or require further provisions.
- Whether the $20.2 million allowance remains adequate as credit conditions, collateral values and the Alaska economy evolve.
- Trends in deposit pricing and mix, loan yields, net interest margin and the upcoming maturity of certificates of deposit.
- Mortgage origination volumes, mortgage banking income and the sensitivity of servicing-right valuations to rate and prepayment assumptions.
- CECL implementation progress and its eventual effect on reserves, capital and reported earnings.
- How Alaska budget decisions and oil-and-gas exposure affect borrowers, loan quality and demand.