Northrim BanCorp, Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This is an annual filing; it also presents unaudited quarterly results, including Q4. Northrim is an Alaska-based bank holding company operating Community Banking and Home Mortgage Lending businesses. At year-end it had $1.53 billion in assets, $1.27 billion in deposits, 14 banking branches, and 15 mortgage offices.
Financial performance and condition
| Metric | 2016 | 2015 | Change / context |
|---|---|---|---|
| Total revenue (net interest income plus other operating income) | $99.6 million | $101.5 million | Down 2% |
| Net interest income | $56.4 million | $56.9 million | Down 1%; net interest margin fell to 4.14% from 4.27% |
| Provision for loan losses | $2.3 million | $1.8 million | Higher provision reflected increased problem loans and softer Alaska economic conditions |
| Net income attributable to Northrim | $14.4 million | $17.8 million | Down 19%; diluted EPS was $2.06 versus $2.56 |
| Return on average assets / equity | 0.96% / 7.93% | 1.20% / 10.47% | Both declined |
| Total assets / portfolio loans / deposits | $1.53 billion / $975.0 million / $1.27 billion | $1.50 billion / $980.8 million / $1.24 billion | Assets and deposits grew; portfolio loans declined slightly |
| Operating cash flow | $20.1 million | $10.5 million | Investing used $47.5 million; financing provided $19.3 million |
| Shareholders’ equity / equity-to-assets | $186.7 million / 12.23% | $177.2 million / 11.82% | Capital position strengthened |
| Nonperforming assets, net of guarantees | $19.3 million; 1.27% of assets | $5.2 million; 0.35% | Significant deterioration year over year |
Q4 2016 unaudited net income attributable to Northrim was $3.59 million, or $0.51 diluted EPS, compared with $4.11 million, or $0.59 diluted EPS, in Q4 2015.
Deposits remained the primary funding source. Year-end cash and cash equivalents were $50.6 million. The company reported $348.4 million of current assets and $616.0 million of available borrowing capacity under existing lines. Year-end borrowings were $4.3 million, repurchase agreements were $27.6 million, and junior subordinated debentures were $18.6 million. The Bank’s regulatory capital ratios exceeded “well-capitalized” thresholds: total risk-based capital 14.33%, Tier 1 risk-based 13.07%, common equity Tier 1 13.07%, and leverage 11.30%.
Material changes versus 2015
- Net income declined primarily due to higher operating expenses, increased loan-loss provision, and lower net interest income and other operating income.
- Other operating income decreased 3% to $43.3 million. Mortgage banking income was broadly stable at $29.5 million, while gains on disposition of acquired Alaska Pacific loans fell.
- Other operating expense rose 5% to $76.3 million. This included higher personnel costs and RML acquisition-payment expense.
- Average portfolio loans grew 1%, led by commercial real estate growth, partly offset by a smaller construction portfolio. Year-end total portfolio loans fell about 1%.
- Nonperforming assets increased sharply, largely because two lending relationships totaling $11.2 million entered nonaccrual and a $3.3 million relationship moved to OREO. OREO rose to $6.6 million from $3.1 million.
- The allowance for loan losses rose to $19.7 million, or 2.02% of portfolio loans, from $18.2 million, or 1.85%. Net charge-offs increased to $754,000 from $324,000.
- Book value per share increased to $27.07 from $25.77; tangible book value per share increased to $24.70 from $22.31. The annual dividend rose to $0.78 per share from $0.74.
Outlook, risks, contingencies, and unusual items
- Management expected 2017 growth opportunities to be lower than in prior years, principally because of depressed oil prices and weaker Alaska economic conditions. It nevertheless cited opportunities for sustainable lending and deposit growth and intended to maintain capital above well-capitalized requirements.
- Management identified Alaska’s oil-dependent economy, expected state budget pressure and job losses, and exposure to local real estate markets as key risks. Approximately 74% of Bank loans were secured by real estate; commercial real estate was about 57% of the loan portfolio. Direct oil-and-gas exposure was approximately 6% of loans.
- Credit concentration is notable: 27 large borrowing relationships represented approximately 41% of the loan portfolio, with $98.7 million of additional unfunded commitments to those borrowers. Total unfunded lending commitments were $309 million.
- A correction to the accounting for payments to former RML owners changed the payments from acquisition consideration to compensation expense. The 2016 statements include a $2.3 million noncash cumulative correction and $765,000 of additional expense from prospective accounting treatment; together these reduced 2016 net income by approximately $1.8 million. Prior periods were not restated because management judged the error immaterial to those statements. The correction reduced recorded RML purchase price and goodwill by $7.3 million.
- Northrim entered a contract for a new core banking system, with conversion expected in Q2 2017. It anticipated $1.7–$2.0 million of additional 2017 conversion expenses, mainly temporary staffing, and disclosed execution, timing, cost, and compliance risks.
- The board approved a $0.21 per-share dividend payable in March 2017; future dividends remain subject to regulatory and capital restrictions. Management said it expected to receive Bank dividends, but gave no assurance of future declarations or increases.
- Management reported no legal matters expected to have a material effect. The auditor gave an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective; management also reported effective disclosure controls.
Important facts for investors to verify
- Whether the rise in nonperforming assets, nonaccrual loans, impaired loans, and OREO leads to further losses or additional allowance needs.
- Borrower and geographic concentration, including the largest relationships’ repayment capacity and collateral values amid Alaska’s economic and real-estate conditions.
- Whether net interest margin and earnings stabilize, and how mortgage production, refinancing activity, and RML acquisition payments affect results.
- The assumptions and future expense profile for the RML payment accounting, and the implications of the disclosed correction despite no prior-period restatement.
- Core banking conversion progress, total costs, and any operational or regulatory issues; also assess the expected effect of the new credit-loss accounting standard, which management said it was still evaluating.
- Liquidity and capital disclosures, including available borrowing capacity and restrictions on subsidiary dividends; reconcile stated borrowing capacity with collateral and facility conditions.