Northrim BanCorp, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Northrim is an Alaska-based bank holding company; the filing reports one operating segment. Dollar amounts below are in millions unless otherwise noted.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total interest income | $11.44 | $11.12 | $22.53 | $22.18 |
| Net interest income | $10.93 | $10.50 | $21.49 | $20.85 |
| Provision for loan losses | $0 | $0.09 | $0.15 | $0.18 |
| Net income attributable to Northrim | $3.50 | $3.14 | $6.17 | $5.72 |
| Diluted earnings per share | $0.53 | $0.48 | $0.94 | $0.87 |
- Q2 net interest margin on a tax-equivalent basis was 4.34%, down 17 basis points year over year; the six-month margin was 4.33%, down 19 basis points. Loan growth and lower funding costs supported net interest income, while lower loan and investment yields pressured margins.
- Other operating income was $3.70 million in Q2, nearly flat year over year, and $6.84 million for the first half, down slightly. Other operating expense was $9.39 million in Q2 and $19.09 million for the first half; higher personnel costs were partly offset by lower occupancy and OREO expenses.
- At June 30, total assets were $1.165 billion, net loans $717.4 million, investment securities $225.6 million, and deposits $958.9 million. Compared with December 31, 2012, loans rose $17.9 million and securities rose $18.9 million, while deposits fell $11.2 million.
- Six-month operating cash flow was $4.8 million, versus $11.3 million in 2012. Investing activities used $42.3 million and financing activities used $9.9 million; cash and cash equivalents declined $47.3 million to $94.0 million. A $3.4 million refund of prepaid FDIC premiums contributed to operating cash flow.
- Borrowings were $6.6 million, repurchase agreements $20.3 million, and junior subordinated debentures $18.6 million. The company reported $107.5 million in cash and bank deposits, $185 million in unpledged available-for-sale securities, and approximately $132.9 million in additional borrowing sources.
- Regulatory capital remained above well-capitalized thresholds: company Tier 1 risk-based capital was 15.65% and total risk-based capital 16.91%; the bank’s corresponding ratios were 14.06% and 15.31%. Total equity was 12.02% of assets.
Changes, credit quality, and outlook
- Compared with Q2 2012, Q2 net income rose 11% and diluted EPS increased from $0.48 to $0.53. Management attributed the improvement mainly to higher net interest income and a lower loan-loss provision. For the first half, net income increased 8%.
- Gross loans grew 2% from year-end, led by commercial lending. Commercial loans rose to $299.0 million, while non-owner-occupied real estate term loans declined to $224.1 million.
- Nonperforming assets declined to $8.1 million, or 0.70% of assets, from $9.1 million, or 0.78%, at year-end. Nonaccrual loans were $3.8 million, down from $4.5 million; impaired loans were $11.2 million, down from $13.1 million. The allowance was $16.5 million, 2.30% of gross loans and 431% of nonperforming loans.
- Potential problem loans increased to $8.4 million from $2.7 million at year-end, primarily because six loans from four borrowers were added, including a $4.9 million commercial real estate loan. TDRs totaled $9.1 million, down from $12.1 million; no new TDRs were reported in the first half.
- Management said Alaska economic activity was improving and expects loan growth during 2013, mainly in commercial and real estate term lending. The filing gives no quantified earnings or margin guidance. Management noted that a referendum to repeal recently enacted Alaska oil-tax legislation may be on the 2014 ballot.
- Rental income declined as office space was vacant during improvements; management expected it to remain vacant through 2013, with new tenants anticipated in 2014. The company also recorded $138,000 of Q2 interest-rate-swap fee income; matched swap positions had $137,000 fair values as both an asset and liability.
- Key risks include Alaska economic conditions, net interest margin pressure, asset quality, competition, regulation, and the accuracy of estimates for the loan-loss allowance, goodwill, and OREO. Management reported no material change in market-risk disclosures, effective disclosure controls, and no material change in risk factors. Ordinary-course legal matters were not expected to have a material effect.
Important facts for investors to verify
- Whether the increase in potential problem loans signals further deterioration, particularly in the identified commercial and commercial real estate exposures.
- Whether loan growth and lower funding costs can offset continued yield pressure and declining net interest margin.
- The adequacy of the $16.5 million loan-loss allowance, including the assumptions underlying collateral valuations and the unallocated reserve.
- Deposit trends, upcoming certificate maturities ($66.9 million scheduled within 12 months), and the sustainability of available liquidity and capital levels.
- Whether Alaska oil-tax policy, local economic conditions, and office-space vacancies affect lending, credit quality, and noninterest income.