Northrim BanCorp, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. All amounts are in U.S. dollars; financial statement amounts are generally unaudited and in millions unless otherwise noted. Northrim operates Community Banking and Home Mortgage Lending businesses, with 14 branches in Alaska.
Financial performance and position
- Q2 earnings: Net income attributable to Northrim was $4.35 million, down 9% from $4.78 million a year earlier; diluted EPS was $0.63 versus $0.69. First-half attributable income was $7.73 million, down 7%, and diluted EPS was $1.11 versus $1.20.
- Revenue and interest: Q2 total revenue—net interest income plus other operating income—rose 1% to $25.9 million. Net interest income was $14.08 million for the quarter, down 1%, and $28.25 million for the first half, up 2%. Net interest margin declined to 4.21% in Q2 from 4.37%, and to 4.22% year to date from 4.36%.
- Other income and expenses: Q2 other operating income increased 3% to $11.86 million, largely on mortgage banking income. First-half other operating income fell 5% to $20.97 million, primarily due to lower mortgage banking income. Q2 operating expenses rose 9% to $19.37 million; first-half expenses rose 1% to $36.74 million.
- Credit costs and asset quality: Loan-loss provision was $0.20 million in Q2 versus $0.38 million; first-half provision was $0.90 million versus $0.70 million. The allowance was $18.39 million against $967.35 million of portfolio loans. Net nonaccrual loans increased to $9.58 million from $2.13 million at year-end; nonperforming assets, net of government guarantees, rose to $12.2 million. Potential problem loans were $31.8 million, versus $28.9 million. Troubled debt restructurings totaled $12.5 million, with no newly restructured loans in the first half.
- Balance sheet: Total assets were $1.518 billion at June 30, up from $1.499 billion at December 31, 2015. Portfolio loans fell to $967.35 million from $980.79 million, mainly as construction lending declined; loans held for sale rose to $60.36 million from $50.55 million. Deposits increased to $1.256 billion from $1.241 billion. Shareholders’ equity was $183.97 million; reported equity-to-assets was 12.12%.
- Cash flow and liquidity: First-half operating cash flow was negative $8.36 million, investing cash flow was positive $15.45 million, and financing cash flow was positive $9.00 million. Cash and cash equivalents ended the period at $74.76 million. Management reported $613.5 million available under existing borrowing lines and believed liquidity was sufficient for at least 12 months. Unfunded loan and letter-of-credit commitments totaled $227.6 million.
- Debt and capital: Repurchase-agreement funding was $26.05 million; borrowings were $4.36 million, including FHLB advances; junior subordinated debentures were $18.56 million. Northrim reported a 13.85% Tier 1 risk-based capital ratio and said the Company and Bank exceeded well-capitalized thresholds.
- Returns and dividends: Q2 return on average assets was 1.17% and return on average equity 9.42%, versus 1.33% and 11.46% a year earlier. The quarterly dividend was $0.19 per share, compared with $0.18 a year earlier.
Material changes and notable items
- Lower quarterly earnings primarily reflected higher operating expenses, including increased personnel costs, OREO expense, and a $358,000 loss on sale of premises and equipment. The premises sale involved a branch leased back on a long-term basis.
- Personnel expense also reflected accelerated recognition of an executive’s remaining stock-option and restricted-stock-unit costs following retirement, alongside salary, medical, and benefit cost increases.
- Nonaccrual loans increased mainly after two lending relationships totaling $8.2 million were placed on nonaccrual. One involved an Anchorage-area residential land-development project; the other involved a transportation business. The filing also identifies a $4.7 million oil-and-gas-related equipment-rental relationship among potential problem loans.
- Direct oil-and-gas industry exposure was $41.8 million, about 4% of loans, down from $47.3 million at year-end. The company reported no loans to oil producers or exploration companies.
- Q2 mortgage banking income benefited from higher interest-rate-lock commitment values and mortgage servicing revenue. For the first half, mortgage banking income was lower, mainly due to reduced refinance activity in Q1.
Outlook, risks, and contingencies
- The filing provides no specific earnings, revenue, or margin guidance. Management described uncertainty in Alaska from lower oil prices and expected state job losses, while noting employment was essentially flat in the first half and Alaska had been more resilient than some other energy-dependent regions.
- Key stated risks include Alaska economic conditions, net interest margin and market-share pressures, asset quality, competition, regulatory requirements, and execution of growth and business plans. Concentrations in commercial, construction, and commercial real-estate lending expose the company to local economic and property-market conditions.
- Management said the allowance depends on estimates and could require adjustment if conditions differ from assumptions; regulators could require an increase. The company also noted the phase-in of a capital conservation buffer beginning in 2016 could affect the Bank’s ability to pay dividends to the holding company.
- Ordinary-course legal matters were not expected by management to have a material effect. The filing reported no material change in risk factors from the 2015 Form 10-K and no material change in market-risk disclosures.
Important facts for investors to verify
- Whether the increase in nonaccrual and potential problem loans, particularly the identified commercial and real-estate relationships, leads to further credit losses or provision increases.
- How the Alaska economy, oil-related business activity, and state fiscal conditions affect borrowers and collateral values.
- Whether mortgage banking and refinance activity recover, and how their variability affects earnings.
- Whether the higher expense base and lower net interest margin persist, and how deposit pricing and asset yields evolve.
- Whether reported liquidity, capital ratios, and access to borrowing lines remain adequate as commitments are funded and regulatory capital requirements change.