Northrim BanCorp, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Northrim operates Community Banking and Home Mortgage Lending businesses, with 14 banking branches in Alaska. All amounts below are in U.S. dollars; financial statement amounts are unaudited.
Financial results and position
| Metric | Q3 2016 / Sept. 30, 2016 | Comparable period / prior year-end |
|---|---|---|
| Net income attributable to Northrim | $3.1 million; diluted EPS $0.44 | Q3 2015: $5.3 million; $0.77 |
| Nine-month net income attributable to Northrim | $10.8 million; diluted EPS $1.55 | Nine months 2015: $13.7 million; $1.97 |
| Net interest income | Q3: $14.2 million; nine months: $42.5 million | Q3 2015: $14.7 million; nine months 2015: $42.5 million |
| Net interest margin | Q3: 4.11%; nine months: 4.18% | Q3 2015: 4.32%; nine months 2015: 4.35% |
| Assets / portfolio loans | $1.54 billion / $997.1 million | Dec. 31, 2015: $1.50 billion / $980.8 million |
| Deposits / shareholders’ equity | $1.278 billion / $185.8 million | Dec. 31, 2015: $1.241 billion / $177.2 million |
| Cash and cash equivalents | $45.9 million | Dec. 31, 2015: $58.7 million |
Q3 total revenue, defined by management as net interest income plus other operating income, was $26.1 million, down 3% year over year. Nine-month revenue was $75.4 million, versus $77.0 million in 2015. The Q3 return on average assets was 0.81% and return on average equity was 6.73%; nine-month figures were 0.96% and 7.93%, respectively.
For the first nine months, operating cash flow was negative $17.7 million and investing cash flow negative $27.0 million, while financing cash flow was positive $31.9 million. Cash declined by $12.8 million. The company attributed operating cash use largely to mortgage-loan originations held for sale, partly offset by loan-sale proceeds; investing cash use reflected loan growth and securities purchases.
At September 30, repurchase agreements were $27.7 million, borrowings $4.4 million, and junior subordinated debentures $18.6 million. The company reported $611.5 million available under existing borrowing lines and said liquidity was sufficient for expected operating needs and capital requirements for at least 12 months. Company and bank regulatory capital ratios exceeded “well-capitalized” thresholds; the company’s Tier 1 risk-based ratio was 14.24%.
Material changes and drivers
- Net income attributable to Northrim fell 42% in Q3 and 21% year to date. Management cited an accounting correction related to RML acquisition payments, higher operating expenses, weaker net interest margin, and slower commercial and mortgage-market loan growth.
- Net interest margin fell 21 basis points in Q3 and 17 basis points year to date, chiefly reflecting lower loan yields. Lower funding costs and increased average investment balances partly offset this pressure.
- Portfolio loans increased 2% from year-end, primarily from owner-occupied commercial real estate lending. Deposits rose 3%; non-interest-bearing demand deposits represented 37% of deposits at quarter-end.
- Net nonaccrual loans, after government guarantees, increased to $9.3 million from $2.1 million at year-end. Nonperforming assets, net of guarantees, rose to $12.1 million from $5.2 million. The allowance for loan losses was $19.5 million, versus $18.2 million at year-end.
- Goodwill declined to $15.0 million from $22.3 million following the RML accounting correction, not a reported impairment charge.
Outlook, commentary, risks, and unusual items
The filing provides no specific earnings or revenue guidance. Management reported that Alaska employment was weakening: average employment was down an estimated 0.2% for the first nine months year over year, and September employment was down 1.0%. It identified Alaska economic conditions, oil-sector effects, competition, loan and deposit growth, net interest margin, asset quality, and execution of business plans as risks.
The company corrected its accounting for contingent payments to former RML owners, determining the payments should be recognized as compensation expense as earned rather than acquisition consideration. It reduced RML’s recorded purchase price from $29.5 million to $22.2 million and acquisition goodwill by $7.3 million. The company said the correction was immaterial to prior-period financial statements and did not restate them. Q3 included $3.25 million of RML acquisition-payment compensation expense; management said the correction and accounting change reduced Q3 net income by approximately $1.6 million, including a $213,000 Q3 effect. The correction did not change total cash flows.
Other risks and items to monitor include $32.2 million of potential problem loans, $51.9 million of loans with direct oil-and-gas-industry exposure, and $231.6 million in unfunded loan and letter-of-credit commitments. The company entered into a new core banking system contract; conversion was expected in Q2 2017, with temporary staffing-related costs anticipated during conversion. Management stated that ordinary-course legal matters were not expected to have a material effect and that risk factors had not materially changed.
Key facts for investors to verify
- How much of reported earnings and the Q3 decline reflects recurring operating performance versus the RML accounting correction and acquisition-payment expense.
- Whether elevated nonaccrual, impaired, and potential problem loans—particularly in commercial and construction lending—lead to further losses or higher provisioning.
- Whether loan yields, net interest margin, mortgage production, and mortgage banking income stabilize amid slower Alaska market activity.
- Whether oil-sector weakness and broader Alaska employment trends affect borrowers, collateral values, deposits, or loan demand.
- Whether deposit funding, available borrowing capacity, capital ratios, and the planned core-system conversion remain consistent with management’s liquidity and cost expectations.