Northrim BanCorp, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2019. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions where appropriate. Northrim operates Community Banking and Home Mortgage Lending, with 16 branches in Alaska.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue (net interest income plus other operating income) | $26.8 million | $24.5 million | $75.6 million | $69.5 million |
| Net interest income | $16.3 million | $15.8 million | $48.0 million | $45.1 million |
| Net income | $7.5 million | $5.3 million | $16.1 million | $15.2 million |
| Diluted earnings per share | $1.11 | $0.75 | $2.35 | $2.17 |
| Net interest margin | 4.60% | 4.69% | 4.71% | 4.49% |
- Q3 net income rose 43%; nine-month net income rose 6%. Management attributed the improvement principally to higher net interest income and mortgage banking income and lower loan-loss provision expense.
- Q3 mortgage banking income was $7.6 million versus $5.9 million; nine-month income was $17.8 million versus $16.3 million. Q3 other operating expense rose 7% to $19.3 million; nine-month expense rose 9% to $56.2 million, reflecting personnel, mortgage commissions, branch, technology, and benefit costs.
- The company recorded a loan-loss provision benefit of $2.1 million in Q3 and $1.0 million for the first nine months, compared with no Q3 provision and a $0.3 million benefit for the first nine months of 2018. The Q3 benefit reflected improved credit-related qualitative factors, partly offset by loan growth and other reserve allocations.
- At September 30, total assets were $1.617 billion, loans $1.037 billion, and shareholders’ equity $204.0 million. Deposits were $1.351 billion, up 10% from year-end 2018. Cash and cash equivalents were $92.2 million.
- Borrowings were $8.9 million and junior subordinated debentures were $10.3 million; repurchase-agreement balances were zero, compared with $34.3 million at year-end 2018. The company reported no other long-term borrowings beyond the described FHLB advances.
- For the first nine months, operating cash flow was negative $22.3 million, investing cash flow negative $34.5 million, and financing cash flow positive $71.5 million. Cash and cash equivalents increased $14.7 million from the beginning of the period.
- Regulatory capital ratios remained above applicable well-capitalized thresholds: the Bank’s total risk-based capital ratio was 13.84% and leverage ratio 10.99%; the company’s were 15.82% and 12.68%, respectively.
Material changes and credit quality
- Portfolio loans grew 5% from December 31, 2018, principally from commercial lending; commercial loans reached $398.2 million. Available-for-sale investment securities declined to $257.3 million from $271.6 million.
- Net nonaccrual loans, after government guarantees, increased to $15.5 million from $14.7 million at year-end. Nonperforming assets, net of government guarantees, declined to $21.5 million from $22.6 million. Six commercial relationships accounted for $13.0 million, or 61%, of nonperforming assets; two were medical businesses.
- Potential problem loans decreased to $9.8 million from $17.1 million. Troubled debt restructurings declined to $10.2 million from $14.8 million. The allowance for loan losses was $19.1 million at quarter-end, versus $19.5 million at year-end.
- Direct oil-and-gas industry exposure was $66.3 million, approximately 6% of loans, up from $62.3 million. The company reported no loans to oil producers or exploration companies; exposure includes an $11.3 million oil-rig construction loan.
- The company repurchased 192,193 shares in Q3 at an average price of $37.29, exhausting its then-current authorization. Nine-month repurchases totaled 347,676 shares, with $12.6 million of cash used.
Outlook, risks, and unusual items
- Management described improving Alaska employment and economic indicators but cited potential effects from state budget cuts and uncertainty around the BP Alaska operations sale. It noted exposure to local economic conditions, oil-and-gas activity, competition, interest rates, credit quality, and regulation.
- Management expected liquidity sources to be sufficient for operating needs and anticipated capital requirements for at least 12 months. Available borrowing capacity under existing lines was reported at $789.3 million; unfunded loan and letter-of-credit commitments totaled $260.2 million, plus $86.0 million of commitments to originate loans for sale.
- No specific earnings or growth guidance was provided. Management expected to continue receiving dividends from the Bank during the remainder of 2019, subject to regulatory limits.
- The company adopted lease accounting on January 1, 2019, recognizing $14.3 million in operating lease right-of-use assets and $14.2 million in lease liabilities at quarter-end; adoption did not affect income. The expected-loss accounting standard (CECL) was expected to be implemented on the delayed schedule for smaller reporting companies, beginning in 2023; management said the impact was not yet determined and expected the allowance process impact to be significant.
- Mortgage servicing rights were $11.2 million and are sensitive to prepayment and discount-rate assumptions. Ordinary-course legal matters were not expected by management to have a material effect. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the improvement in earnings and the loan-loss provision benefit are sustainable, including the effects of credit conditions and future allowance estimates.
- Trends in nonaccrual commercial relationships, impaired loans, TDRs, and oil-and-gas-linked borrowers, including collateral values and borrower performance.
- Deposit growth, funding costs, certificate-of-deposit maturities, and the effect of interest-rate changes on net interest margin.
- Mortgage origination volumes, mortgage banking income, and the valuation sensitivity of mortgage servicing rights.
- The eventual CECL implementation impact and any subsequent developments in Alaska’s economy, state finances, and oil-and-gas activity.