Northrim BanCorp, Inc. — Q2 2011 Form 10-Q
Business context and reporting period. This unaudited quarterly filing covers the three and six months ended June 30, 2011. Northrim operates as a single banking segment, with lending and deposit activities concentrated in Alaska.
Financial performance and condition
- Q2 earnings: Net income attributable to Northrim was $3.18 million, or $0.49 diluted per share, versus $2.14 million, or $0.33, a year earlier. For the first half, it was $5.64 million, or $0.86 diluted per share, versus $4.04 million, or $0.62.
- Revenue and net interest: Q2 net interest income was $10.58 million, down 5%; other operating income was $3.07 million, down 5%. Combined, these reported components totaled $13.65 million, compared with $14.33 million in Q2 2010. First-half net interest income was $21.26 million, down 5%; other operating income was $5.85 million, approximately flat.
- Margins: Tax-equivalent net interest margin was 4.65% in Q2 versus 5.06% a year earlier, and 4.68% for the first half versus 5.20%. Management attributed pressure to lower yields on loans and investments; lower funding costs partly offset the decline.
- Credit costs and asset quality: Q2 provision for loan losses was $550,000, versus $1.38 million; first-half provision was $1.10 million, versus $2.75 million. The allowance was $15.57 million, or 2.46% of loans. Nonaccrual loans were $9.63 million, down from $14.4 million a year earlier. Nonperforming assets were $16.9 million, or 1.61% of assets, versus $28.4 million, or 2.82%, a year earlier. Eight troubled debt restructurings totaling about $1.9 million were included in nonperforming assets; borrowers were current but had received concessions.
- Balance sheet and funding: Total assets were $1.049 billion, down slightly from year-end 2010 and up 4% year over year. Loans were $634.1 million, down 6% from year-end but up 1% year over year. Deposits were $884.2 million, down $8.0 million from year-end and up $32.7 million year over year. Cash, due from banks, and overnight investments totaled $143.8 million; available-for-sale securities were $182.9 million, of which $158.6 million were reported as unpledged.
- Debt and capital: Balance-sheet borrowings were $4.7 million, repurchase agreements $11.6 million, and junior subordinated debentures $18.6 million. The company and bank exceeded regulatory well-capitalized thresholds; company Tier 1 risk-based capital was 15.59% and total risk-based capital 16.84%. Total equity was $122.0 million, or 11.63% of assets.
- Cash flow: First-half operating cash flow was $12.7 million, investing cash flow was $76.8 million, and financing cash flow was negative $11.7 million. Cash and cash equivalents increased $77.8 million to $143.8 million, largely reflecting security maturities and sales and net loan paydowns. Financing outflows primarily reflected lower deposits and dividends.
Changes and notable items
- Higher net income year over year reflected lower operating expenses and loan-loss provisions, partly offset by reduced net interest income and higher income taxes.
- OREO fell to $5.1 million from $10.4 million at year-end 2010. Q2 property sales generated $6.2 million in proceeds, including a bulk sale of 23 condominium units; the company reported $449,000 gain on that sale and $284,000 in net gains on other OREO sales. These gains contributed to lower reported operating expense.
- Loan balances declined in the first half, primarily in commercial and real estate construction lending. Management said it expected loan growth in the remainder of 2011, mainly in commercial and real estate term loans.
- The company continued its quarterly cash dividend; management cited an approximately 2.60% yield at then-current market prices. No share repurchases occurred in the first half.
Outlook, risks, and contingencies
- Management described Alaska’s economy and housing market as relatively strong, while identifying local economic conditions, net interest margin, and asset quality as important uncertainties. Other cited risks include competition, regulation, and broader banking and economic trends.
- The Durbin Amendment’s debit-card interchange pricing and routing rules were scheduled to take effect October 1, 2011. The company was still refining its estimate of the potential income impact.
- Other risks include potential losses from loan deterioration, collateral valuations, and OREO; management cautioned that allowance estimates may change. Continued deterioration in the financial position of the Federal Home Loan Bank of Seattle could also result in impairment of Northrim’s $2.0 million FHLB stock investment.
- Commitments to extend credit and standby letters of credit totaled $223 million; many may expire undrawn and therefore do not necessarily represent future cash needs. Ordinary-course debtor-creditor legal proceedings could be material individually or in aggregate.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No material change in market-risk disclosures was reported.
Important facts for investors to verify
- Whether the expected loan growth materialized and how loan mix and balances evolved after June 30.
- Whether declining yields continued to pressure net interest margin and earnings, and the realized effect of the Durbin Amendment.
- Whether credit quality improvements persisted, including trends in nonperforming assets, TDRs, potential problem loans, charge-offs, and allowance coverage.
- How much of earnings and expense improvement depended on OREO sales and related gains, and whether further OREO dispositions occurred.
- Liquidity and deposit trends, including the $89.2 million of certificates of deposit scheduled to mature within 12 months, and the availability of stated funding sources.
- The filing reports $143.8 million of cash, due from banks, and overnight investments on the balance sheet, while MD&A cites $145.8 million of cash and cash equivalents; verify the scope or reconciliation of these figures.