Northrim BanCorp, Inc. — 2017 Form 10-K Summary
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2017, with comparisons primarily to 2016. Northrim is an Alaska-based bank holding company operating Community Banking and Home Mortgage Lending businesses. At year-end, it reported $1.52 billion in assets, $1.26 billion in deposits, 14 bank branches and 14 mortgage offices. Amounts below are in U.S. dollars.
Key financial metrics
| Metric | 2017 | 2016 |
|---|---|---|
| Total revenue (net interest income plus other operating income) | $98.2 million | $99.6 million |
| Net interest income | $57.7 million | $56.4 million |
| Net income attributable to Northrim | $13.2 million | $14.4 million |
| Diluted earnings per share | $1.88 | $2.06 |
| Net interest margin | 4.22% | 4.14% |
| Portfolio loans, year-end | $955.7 million | $975.0 million |
| Deposits, year-end | $1.258 billion | $1.268 billion |
| Shareholders’ equity, year-end | $192.8 million | $186.7 million |
| Cash and cash equivalents, year-end | $77.8 million | $50.6 million |
| Operating cash flow | $19.3 million | $20.1 million |
The efficiency ratio was 72.39%, improving from 76.44%. Return on average assets was 0.87% (0.96% in 2016), and return on average equity was 6.81% (7.93%). The company paid $0.86 per share in dividends during 2017, up from $0.78.
Material changes versus 2016
- Net income attributable to the company fell 9%, although pre-tax income rose to $23.8 million from $21.0 million. Income tax expense increased to $10.3 million from $6.1 million, including a $2.7 million charge to revalue deferred tax assets following U.S. tax reform.
- Mortgage banking income declined 21% to $23.3 million, reflecting weaker mortgage production and lower realized gains on loan sales. Home Mortgage Lending segment income attributable to Northrim fell to $2.9 million from $4.5 million.
- A $4.4 million gain from selling Northrim Benefits Group assets in August partly offset lower mortgage and employee benefit plan income. The company retained a referral relationship with the buyer.
- Provision for loan losses increased to $3.2 million from $2.3 million; net charge-offs rose to $1.4 million from $0.8 million. Nonperforming loans, net of government guarantees, rose to $21.4 million from $12.9 million. The allowance was $21.5 million, or 2.25% of portfolio loans, versus 2.02%; coverage of nonperforming loans declined to 100% from 152%.
- Total assets decreased slightly, and portfolio loans declined despite modest growth in average loans. Commercial and construction lending increased, while commercial real estate lending declined.
Liquidity, debt and capital
- Deposits remained the primary funding source. Northrim reported $466.6 million of current assets and $593.4 million in funds available through existing borrowing lines; management said liquidity was sufficient for the foreseeable future.
- Year-end liabilities included $27.7 million in repurchase agreements, $7.4 million in borrowings and $10.3 million in junior subordinated debentures. The company redeemed $8.0 million of trust preferred securities in August 2017 and entered into a swap to fix the rate on its remaining $10.0 million subordinated debt at 3.72% through maturity.
- The company’s year-end regulatory capital ratios included a 14.65% Tier 1 risk-based ratio; the Bank’s was 12.83%. The Bank was categorized as well-capitalized. The company repurchased 58,341 shares during 2017.
Outlook, risks and unusual items
- Management expected Alaska growth opportunities in 2018 to be muted, citing low oil prices and a slower state economy, while stating an intention to grow market share and the balance sheet. Management expected the effective tax rate to decline to 19%–20% in 2018 following federal tax reform.
- Alaska’s unemployment rate was 7.3% in December 2017 versus 4.1% nationally. Management cited projected state job losses and uncertainty around oil-related revenues and major resource projects. The company’s results are concentrated in Alaska and exposed to local economic and real estate conditions.
- Credit risk is concentrated in real estate: approximately 71% of Bank loans were secured by real estate, and commercial real estate loans were about 51% of the portfolio. Direct oil-and-gas exposure was approximately 7%; 36% of loans were attributable to 26 large borrowing relationships.
- Year-end other real estate owned was $8.7 million, including a $5.7 million commercial building; OREO impairment expense was $904,000. Troubled debt restructurings totaled $23.8 million, compared with $16.2 million in 2016.
- Other notable items included one-time core-system conversion costs, a $686,000 impairment of an equity-method investment, and the deferred-tax revaluation. The filing identifies interest-rate, credit, liquidity, regulatory, cybersecurity, vendor and mortgage-servicing risks. Management said pending legal matters were not expected to have a material effect.
- Auditors gave unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective. The filing says the expected impact of the upcoming credit-loss accounting standard had not been determined but was expected to be significant.
Important facts for investors to verify
- Whether rising nonperforming loans, charge-offs, TDRs and OREO balances lead to additional provisions or collateral write-downs.
- Whether mortgage production and related income stabilize, and how the NBG asset sale affects ongoing fee revenue.
- Whether Alaska’s employment, oil-related fiscal outlook and real estate markets support the loan portfolio and management’s growth expectations.
- Whether the forecast 2018 tax rate is achieved and how tax reform and the deferred-tax revaluation affect reported earnings.
- Whether the Bank maintains capital and liquidity buffers while funding commitments, dividends and any further share repurchases.