Northrim BanCorp, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Unaudited consolidated results; the company reports as one operating segment. Unless noted, amounts are U.S. dollars.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net interest income | $11.0 million | $10.6 million | $32.5 million | $31.4 million |
| Net income attributable to Northrim | $3.5 million | $4.1 million | $9.6 million | $9.8 million |
| Diluted earnings per share | $0.53 | $0.62 | $1.46 | $1.49 |
| Tax-equivalent net interest margin | 4.24% | 4.33% | 4.30% | 4.45% |
Q3 total interest income was $11.5 million and interest expense was $0.5 million. Net income declined 15% in Q3 and 1% year to date, mainly reflecting lower other operating income and a higher loan-loss provision (a smaller benefit), partly offset by higher net interest income and lower income taxes. Other operating income fell 22% in Q3, including lower earnings from mortgage affiliate RML and lower rental income. Operating expenses were broadly flat; personnel costs increased.
Balance sheet, liquidity and capital
- Total assets were $1.179 billion at September 30, up from $1.160 billion at December 31, 2012. Gross loans were $754.4 million, up 7%; net loans were $751.7 million. Available-for-sale securities were $238.5 million.
- Deposits were $968.2 million, slightly below $970.1 million at year-end. Transaction accounts represented 91% of deposits. Of $89.8 million in certificates of deposit, $60.7 million were scheduled to mature within 12 months.
- Cash and deposits in other banks totaled $85.6 million on the balance sheet; reported cash and cash equivalents were $72.1 million, down from $141.3 million at the start of the year. The company also reported $192.7 million of unpledged available-for-sale securities and approximately $126.8 million of additional borrowing capacity.
- Nine-month cash flows: $10.4 million provided by operations, $80.5 million used in investing, and $0.9 million provided by financing. Investing outflows primarily reflected securities purchases and loan growth.
- Borrowings were $6.6 million, repurchase agreements $23.0 million, and junior subordinated debentures $18.6 million. The company had a $2.2 million, 18-year FHLB advance matched to a low-income housing construction loan; its main-office mortgage had a $4.4 million balance and matured April 2014.
- The company reported a 15.31% Tier 1 risk-based capital ratio and 16.57% total risk-based ratio; the bank’s respective ratios were 13.71% and 14.96%. Both exceeded well-capitalized thresholds. Total equity to assets was 12.09%; tangible common equity to tangible assets was 11.49%.
Credit quality and material changes
- Nonperforming assets fell to $6.6 million, or 0.56% of assets, from $9.1 million, or 0.78%, at year-end. Nonaccrual loans declined to $2.9 million from $4.5 million; other real estate owned declined to $3.7 million from $4.5 million.
- The allowance for loan losses was $16.5 million, 2.19% of gross loans, versus $16.4 million and 2.33% at year-end. Allowance coverage of nonperforming loans rose to 569% from 362%. Nine-month net charge-offs were negative $0.8 million, reflecting net recoveries.
- Potential problem loans increased to $7.6 million from $2.7 million at year-end. Management cited new problem indicators in eight loans from six borrowers, including two commercial loans totaling $1.8 million and a $4.9 million commercial real estate loan to one borrower.
- Troubled debt restructurings totaled $8.9 million, down from $12.1 million at year-end; $1.8 million were nonaccrual. Impaired loans totaled $11.0 million, down from $13.1 million.
- Average loans grew 8% year over year in both the quarter and nine-month period. Loan growth was concentrated in commercial lending and real estate. The allowance decreased as a share of loans despite portfolio growth.
Outlook, risks and unusual items
- Management expected the loan portfolio to continue growing during 2013, mainly in commercial and real estate term lending. This is not quantified earnings guidance.
- Management described Alaska’s economy as continuing to grow, citing energy investment and private-sector employment; it noted federal employment could decline. The company identified Alaska economic conditions, net interest margin, asset quality, growth and competition, customer acceptance, and regulation as risks.
- Management expected office space undergoing improvements to remain vacant through 2013, with new tenants anticipated in 2014. Capital commitments for office improvements were $813,000.
- The company recognized a $3.4 million refund of prepaid FDIC premiums in operating cash flow. It recorded $318,000 in securities-sale gains in the first nine months. Goodwill impairment was not indicated at quarter-end, but management cautioned that a future charge remained possible.
- Interest-rate swaps had $20.4 million aggregate notional value and equal $123,000 asset and liability fair values. Counterparty terms could require settlement if specified capital or regulatory conditions were breached.
- Management said ordinary-course debtor-creditor litigation was not expected to have a material effect. Risk factors were reported as not materially changed from the 2012 Form 10-K.
Important facts for investors to verify
- Whether the increase in potential problem loans, particularly the $4.9 million commercial real estate exposure, progresses to delinquency, nonaccrual status, or impairment.
- Whether loan growth can be sustained without weakening underwriting, asset quality, or the allowance’s adequacy.
- Whether declining net interest margin and lower RML and rental income continue to pressure earnings.
- Near-term certificate-of-deposit maturities, the April 2014 office-mortgage maturity, and the availability of stated borrowing capacity and collateral.
- The timing and cost of office improvements and whether the expected 2014 leasing occurs; also verify subsequent developments in Alaska’s economy and energy investment.