Northrim BanCorp, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Northrim is an Alaska-based bank holding company with Community Banking and Home Mortgage Lending segments. Amounts below are in U.S. dollars; financial amounts are rounded to millions unless noted.
Financial performance
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Total revenue (net interest income plus other operating income) | $23.3 million | $24.2 million; down 4% |
| Net interest income | $14.2 million | $13.6 million; up 4% |
| Net interest margin | 4.23% | 4.34%; down 11 basis points |
| Provision for loan losses | $0.703 million | $0.326 million |
| Income before income taxes | $5.2 million | $5.4 million |
| Net income attributable to Northrim | $3.4 million | $3.6 million; down 5% |
| Diluted earnings per share | $0.48 | $0.51 |
| Effective tax rate | 33% | 32% |
Mortgage banking income fell to $5.7 million from $7.3 million, primarily reflecting lower refinance activity. Other operating expense declined 6% to $17.4 million, mainly because the RML earn-out fair-value expense was $0.13 million versus $1.50 million a year earlier. Personnel expense rose $0.70 million. Average portfolio loans increased 4% year over year to $980.1 million, while lower loan yields partly offset volume growth.
Financial position, cash flow and capital
- Assets: $1.500 billion at March 31, essentially unchanged from December 31, 2015. Portfolio loans were $970.5 million, down 1% from year-end; net loans were $952.3 million.
- Deposits and funding: Deposits totaled $1.247 billion, up $6.2 million from year-end. Transaction accounts represented 89% of deposits. Certificates of deposit totaled $136.7 million, with $88.1 million scheduled to mature within 12 months.
- Debt: Borrowings were $7.7 million, including a $5.6 million RML mortgage-origination line maturing August 10, 2016. Repurchase agreements were $25.9 million and junior subordinated debentures were $18.6 million.
- Cash flow: Operating activities provided $8.3 million, investing activities provided $7.3 million, and financing activities provided $5.0 million. Cash and cash equivalents ended the quarter at $79.3 million, up $20.6 million during the quarter.
- Liquidity: Management reported $617 million available under existing borrowing lines and believes liquidity is sufficient for operations and anticipated capital needs for at least 12 months. Unfunded loan and letter-of-credit commitments were $230.4 million.
- Capital: Northrim reported a 13.66% Tier 1 risk-based capital ratio and an 11.87% leverage ratio; all company and bank capital ratios exceeded well-capitalized thresholds. Tangible common equity to tangible assets was 10.61%. The quarterly dividend was $0.19 per share.
Credit quality and material changes
- Nonperforming assets declined 15% from year-end to $4.4 million. Net nonaccrual loans were $1.6 million and other real estate owned was $2.7 million.
- Potential problem loans increased to $37.0 million from $28.9 million, mainly due to one residential land development project and one commercial aviation business. Impaired loans rose to $42.1 million from $34.6 million at year-end.
- Troubled debt restructurings totaled $13.3 million, down from $13.7 million at year-end. The company reported no newly restructured loans during the quarter.
- The allowance for loan losses was $18.2 million. Net charge-offs were $0.673 million, compared with $0.102 million a year earlier. Management attributed the higher provision primarily to loan growth, increased adversely classified loans, and its assessment of current economic conditions.
- Portfolio loans decreased $10.3 million from year-end, primarily from commercial real estate payoffs, partly offset by growth in commercial real estate construction loans. Average loans, however, were higher year over year.
Outlook, risks and unusual items
The filing gives no specific earnings, revenue, or margin guidance. Management described moderate loan and deposit growth, a stable margin, and a profitable mortgage quarter despite reduced refinancing. It expects Alaska economic uncertainty to persist following lower oil prices: state employment was forecast to decline by about 2,500 jobs by year-end 2016, and oil-sector layoffs were reported. Management also cited potential support from military expansion, tourism, and health care, including the planned F-35 deployment at Eielson Air Force Base.
Key risks include Alaska economic conditions, oil-price effects, loan and real-estate credit quality, maintaining market share and net interest margin, competition, regulatory requirements, and execution of growth plans. The phased-in capital conservation buffer may affect the Bank’s ability to pay dividends. Management said market-risk disclosures and risk factors had not materially changed from the 2015 Form 10-K. Ordinary-course legal matters were not expected to have a material effect. No material changes in internal control were reported.
An unusual year-over-year comparison is the RML earn-out fair-value expense: $0.13 million in Q1 2016 versus $1.50 million in Q1 2015, contributing to lower reported operating expenses. The quarter also included a higher loan-loss provision and lower mortgage banking income.
Important facts for investors to verify
- Whether the increase in potential problem and impaired loans leads to further downgrades, charge-offs, or higher allowance needs.
- Whether Alaska’s oil-related economic weakness affects borrowers, collateral values, deposits, or loan demand.
- Whether mortgage banking income and refinance activity stabilize, and how RML’s earn-out valuation changes.
- Deposit retention and renewal rates, including the $88.1 million of certificates of deposit maturing within 12 months.
- Availability and terms of the RML credit line maturing August 10, 2016, and the effect of the capital conservation buffer on dividends.