Northrim BanCorp, Inc. — Q3 2011 Form 10-Q
Business context and period. Northrim is an Alaska-based bank holding company reporting unaudited consolidated results for the quarter and nine months ended September 30, 2011. Amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net interest income | $10.35 | $10.90 | $31.61 | $33.30 |
| Provision for loan losses | $0.55 | $0.42 | $1.65 | $3.17 |
| Other operating income | $3.36 | $3.20 | $9.21 | $9.02 |
| Other operating expense | $9.43 | $8.71 | $27.34 | $28.39 |
| Net income attributable to Northrim | $2.51 | $3.18 | $8.14 | $7.22 |
| Diluted EPS | $0.38 | $0.49 | $1.24 | $1.11 |
| Net interest margin, tax-equivalent | 4.45% | 4.77% | 4.60% | 5.05% |
Q3 net income attributable to Northrim fell about 21% year over year, as lower net interest income and higher operating expenses and loan-loss provision outweighed higher other operating income and lower taxes. Nine-month attributable net income rose about 13%, reflecting lower expenses and provision, partly offset by weaker net interest income. Total interest income was $11.23 million in Q3 and $34.37 million for nine months.
Financial position, cash flow and credit
- Balance sheet: Total assets were $1.066 billion, up 1% from December 31, 2010 and 3% year over year. Deposits were $893.6 million, nearly unchanged from year-end and up from $878.7 million a year earlier. Shareholders’ equity was $123.3 million.
- Loans: Gross loans were $629.7 million, down 6% from year-end and 1% year over year. Commercial and construction loans declined from year-end; real estate term loans increased. Management expected loan growth in the remainder of 2011, particularly commercial and real estate term lending.
- Credit quality: Nonperforming assets were $16.3 million, or 1.53% of assets, versus $21.8 million (2.07%) at year-end and $25.0 million (2.41%) a year earlier. Nonaccrual loans were $7.9 million, down from $11.4 million at year-end. The allowance was $16.1 million, or 2.56% of gross loans, and equaled 154.1% of nonperforming loans.
- Problem credits: Thirteen troubled debt restructurings totaled $4.1 million; $1.5 million were nonaccrual and the rest were performing under modified terms. The filing says none had defaulted since modification. Potential problem loans were $5.6 million, compared with $8.8 million at year-end.
- Liquidity and debt: Cash and cash equivalents totaled $128.6 million; the company also reported $181.5 million of unpledged available-for-sale securities and approximately $105 million of additional borrowing capacity. Liabilities included $17.0 million in repurchase agreements, $4.7 million in building-related borrowings and $18.6 million in junior subordinated debentures. Deposits were the primary funding source.
- Cash flow, nine months: Operating activities provided $17.5 million, investing activities provided $42.7 million, and financing activities provided $2.3 million. Cash and cash equivalents increased $62.5 million to $128.6 million, largely reflecting loan paydowns and balance-sheet cash accumulation.
- Capital: The company and bank exceeded regulatory “well-capitalized” thresholds. Company Tier 1 risk-based capital was 15.39%; the bank’s was 14.17%. Total equity to assets was 11.58%.
Changes, outlook and risks
- Net interest margin contracted as yields on loans and investments fell faster than funding costs; management attributed the decline principally to lower market rates and asset repricing.
- OREO declined to $5.8 million from $10.4 million at year-end. Nine-month sales generated $7.9 million in proceeds, including a $3.8 million condominium-unit sale with a $449,000 gain; additions to OREO partly offset disposals.
- Management described Alaska’s economy as comparatively strong, citing commodity prices, income growth and employment. It provided no quantified earnings, margin or full-year loan-growth guidance.
- Key risks include Alaska economic conditions, net interest margin pressure, asset quality, competition, regulation and broader banking conditions. Management noted estimates for loan-loss reserves, goodwill and OREO could prove inaccurate; regulators could require a higher allowance. The company also warned that deterioration in FHLB of Seattle’s financial position could result in impairment of its FHLB stock investment.
- Goodwill impairment was not indicated at quarter-end, but management gave no assurance against a future charge. The company had $210 million of commitments to extend credit and letters of credit; amounts are not necessarily expected cash outflows. Ordinary-course debtor-creditor litigation was disclosed, with no specific material proceeding identified.
Important facts for investors to verify
- Whether lower asset yields and continued margin compression persist, and how they affect future earnings.
- Whether the improved nonperforming-asset trend continues, and whether the $4.1 million of TDRs and $5.6 million of potential problem loans perform as expected.
- Whether the $16.1 million allowance remains adequate given loan concentrations, collateral valuations and economic conditions.
- Whether management’s expected commercial and real estate term loan growth materializes without weakening credit quality.
- The quality and availability of reported liquidity and borrowing capacity, and the impact of deposit maturities and pledged securities.
- Potential effects of FHLB of Seattle’s financial condition, goodwill valuation, and the company’s disclosed off-balance-sheet commitments.