Northrim BanCorp, Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012. Unaudited consolidated results; the company reports one operating segment and is primarily focused on Alaska banking.
Financial performance
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Net interest income | $10.50 million | $10.58 million | $20.85 million | $21.26 million |
| Other operating income | $3.73 million | $3.07 million | $6.93 million | $5.85 million |
| Provision for loan losses | $89,000 | $550,000 | $178,000 | $1.10 million |
| Net income attributable to Northrim | $3.14 million | $3.18 million | $5.72 million | $5.64 million |
| Diluted EPS | $0.48 | $0.49 | $0.87 | $0.86 |
| Tax-equivalent net interest margin | 4.51% | 4.65% | 4.52% | 4.68% |
Q2 pretax income was $4.84 million, versus $4.51 million; income tax expense was $1.55 million versus $1.20 million. The Q2 effective tax rate rose to 32% from 27%, primarily because of lower tax-exempt income. The company declared a $0.13 quarterly dividend per share, compared with $0.12 a year earlier.
Balance sheet, liquidity and capital
- At June 30, 2012, total assets were $1.072 billion, down 1% from December 31, 2011 and up 2% year over year. Portfolio loans were $656.9 million, up 2% from year-end and 4% year over year, led by real estate term lending.
- Deposits were $894.8 million, down $16.5 million from year-end but up from $884.2 million a year earlier. Shareholders’ equity was $130.4 million, compared with $125.4 million at year-end.
- Reported first-half cash flows: $11.3 million provided by operating activities, $25.8 million provided by investing activities, and $19.5 million used in financing activities. Financing outflows chiefly reflected the decline in deposits and $1.7 million in cash dividends.
- Management reported $110.7 million in cash and deposits at other banks, $156.0 million in unpledged available-for-sale securities, and approximately $134.2 million in additional borrowing sources. The FHLB borrowing line was $130.3 million, with no outstanding advances on that line.
- Financial-statement debt included $18.6 million of junior subordinated debentures, $15.3 million in repurchase agreements, and $4.6 million on the office-property loan. All company and bank capital ratios exceeded the then-applicable “well-capitalized” thresholds; company Tier 1 risk-based capital was 15.44% and leverage was 13.33%.
Changes, credit quality and notable items
- Q2 net income attributable to Northrim slipped 1% year over year; first-half net income increased 1%. Lower net interest income and higher operating expenses offset stronger noninterest income and lower credit-loss provisions.
- Net interest margin contracted 14 basis points in Q2 and 16 basis points for the first half. Management attributed the decline to lower yields on loans and investments as assets repriced, partly offset by lower funding costs.
- Nonaccrual loans declined to $5.9 million from $9.6 million a year earlier. Nonperforming assets were $12.5 million, or 1.16% of assets, versus $16.9 million, or 1.61%, a year earlier. The allowance was $16.5 million, or 2.51% of portfolio loans, and equaled 274% of nonperforming loans.
- Impaired loans increased to $14.2 million from $9.5 million at year-end 2011. Troubled debt restructurings (TDRs) rose to $12.1 million from $4.5 million at year-end; $4.0 million of TDRs were nonaccrual. Seven TDRs totaling $2.7 million that had been restructured in the prior 12 months subsequently defaulted in 2012.
- Other real estate owned was $6.4 million, up from $5.2 million at year-end. Management cited a newly added Fairbanks property with 37 building lots and additional acreage; Q2 OREO expense increased as rental income and sale gains declined.
- Other operating income benefited from purchased-receivable income, securities gains, and earnings from mortgage affiliate RML. The company sold $30.4 million of available-for-sale securities during the first half, recognizing $273,000 in gains.
Outlook, risks and contingencies
- Management expects loan growth during the rest of 2012, mainly in commercial and real estate term loans. It launched the “100% 907” campaign in April to broaden local relationships and expects the campaign to support deposit growth. No earnings or margin guidance was provided.
- Management cited progress on Alaska resource-development projects, including proposed Arctic offshore exploration, while emphasizing the company’s dependence on Alaska’s economy and natural-resource development.
- Risks highlighted include Alaska economic conditions, net interest margin pressure, asset quality, competition, customer acceptance of new products, and regulatory and broader banking-industry conditions. Management’s estimates for loan-loss reserves, goodwill and OREO are subject to uncertainty.
- Proposed capital rules, including Basel III-related requirements, could raise or revise capital standards and alter risk weightings; implementation and final requirements were uncertain. The company said it could not predict the final rules.
- Off-balance-sheet commitments to extend credit and letters of credit totaled $245.3 million. The filing notes that many may expire undrawn. Routine debtor-creditor litigation was not expected by management to have a material effect. Risk factors were reported as not materially changed from the 2011 Form 10-K.
Important facts for investors to verify
- Whether loan and deposit growth can continue without further margin compression, given lower asset yields and the expected shift toward commercial and real estate term lending.
- Whether the rise in TDRs and impaired loans, including recent TDR defaults, leads to renewed losses or higher allowance needs despite lower nonaccrual loans.
- The quality and valuation of OREO, including the Fairbanks property, and the potential for additional write-downs or delayed sale proceeds.
- The composition, availability and conditions attached to reported liquidity sources, and the effect of deposit fluctuations and maturing certificates of deposit.
- How final capital regulations may affect the company and bank, and how Alaska economic and resource-development conditions affect credit demand and borrower performance.