Northrim BanCorp, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. Amounts are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise. The company operates Community Banking and Home Mortgage Lending. Its comparisons are affected by the 2014 acquisitions of Alaska Pacific Bancshares and Residential Mortgage (RML), with RML consolidated beginning December 1, 2014.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net interest income | $14.7 | $13.7 | $42.5 | $38.4 |
| Other operating income | $12.4 | $4.9 | $34.5 | $11.8 |
| Income before taxes | $8.2 | $5.9 | $21.2 | $16.9 |
| Net income attributable to Northrim | $5.3 | $3.7 | $13.7 | $10.7 |
| Diluted EPS | $0.77 | $0.53 | $1.97 | $1.57 |
| Net interest margin | 4.32% | 4.38% | 4.35% | 4.33% |
- Q3 total revenue—net interest income plus other operating income—was $27.1 million, up 45% year over year. Net income attributable to Northrim rose 44% for the quarter and 27% year to date.
- Mortgage banking income from RML was $8.1 million in Q3 and $23.2 million year to date; the 2014 comparison did not include RML’s consolidated operating results. Community Banking contributed $3.7 million and Home Mortgage Lending $1.6 million of Q3 net income attributable to Northrim.
- Operating costs increased substantially alongside the acquired businesses: salaries and personnel expense was $11.4 million in Q3 versus $7.1 million, and total operating expense was $18.2 million versus $12.8 million. The RML earn-out fair-value charge was $0.8 million in Q3 and $2.9 million year to date.
- Return on average assets was 1.42% and return on average equity was 12.37%, compared with 1.07% and 9.29%, respectively, in Q3 2014.
Financial position, liquidity and credit
- At September 30, total assets were $1.539 billion, up from $1.449 billion at December 31, 2014. Portfolio loans were $973.7 million, up 5% from year-end; deposits were $1.265 billion, up 7%. Management cited organic commercial, commercial real estate and construction loan growth.
- Cash and cash equivalents were $144.6 million. The company reported $170.3 million of unpledged available-for-sale securities and approximately $222.2 million of additional funding sources, including Federal Reserve and FHLB lines. About $180 million of FHLB borrowing capacity was available based on pledged assets and outstanding advances.
- Debt and funding at period-end included $33.4 million in repurchase agreements, $12.5 million in borrowings, and $18.6 million in junior subordinated debentures. The RML mortgage warehouse line was included in borrowings; RML’s borrowing was $10.3 million, down from $24.1 million at year-end.
- Nine-month cash from operating activities was negative $7.8 million, principally reflecting net originations of mortgage loans held for sale and a decrease in other liabilities. Investing activities provided $3.0 million; financing activities provided $80.8 million, primarily from deposit growth. Cash and cash equivalents increased by $76.0 million.
- The allowance for loan losses was $17.8 million, compared with $16.7 million at year-end; the company recorded a $1.4 million nine-month provision, versus a $1.1 million benefit in 2014. Nonaccrual loans declined to $3.7 million from $4.7 million, and nonperforming assets declined to $7.2 million from $9.3 million.
- Credit indicators warrant attention: impaired loans increased to $35.0 million from $11.3 million at year-end; potential problem loans rose to $29.0 million from $18.0 million, primarily due to one commercial real estate construction project. Troubled debt restructurings declined to $5.1 million from $7.7 million.
- At September 30, Northrim’s Tier 1 risk-based capital ratio was 13.00%, total risk-based capital was 14.25%, and leverage ratio was 10.21%. The Bank’s respective ratios were 11.88%, 13.13%, and 10.00%. The filing states both exceeded applicable “well-capitalized” thresholds.
Changes, outlook and notable items
- Management described Alaska’s economy as stable but uncertain amid low energy prices. It noted Shell’s decision to stop Chukchi Sea exploratory drilling while saying North Slope activity reflected long-term industry commitments.
- No numeric earnings or growth guidance is provided. Management cautioned that interim results are not necessarily indicative of full-year results.
- Key stated risks include changes in the Alaska economy, net interest margin pressures, credit quality, competition, regulation, execution of the business plan, and potential integration costs or difficulties related to RML. Management also highlighted risks from loan-loss estimates, appraisal assumptions, and potential goodwill impairment.
- The company recorded a $2.9 million year-to-date increase in the RML earn-out liability, to $10.3 million at September 30, based on expected RML earnings. Mortgage loan originations were $594.2 million and sales were $571.5 million year to date.
- All capital ratios exceeded regulatory well-capitalized thresholds; management said the holding-company Tier 1 capital ratio declined slightly from year-end, partly due to Basel III requirements. The filing reported no material change in market-risk disclosures, no material change in internal controls, and no litigation expected to have a material effect.
Important facts for investors to verify
- How much of earnings growth is recurring and attributable to organic banking operations versus RML consolidation, mortgage-market activity, and acquisition-related accounting?
- Whether the increase in impaired and potential problem loans—especially the construction project exposure—leads to additional provisions, charge-offs, or collateral losses.
- Whether RML mortgage volume, margins, and earnings sustain the reported contribution, and how the $10.3 million earn-out liability may change.
- How net interest margin and funding costs respond to deposit mix, certificate maturities, interest rates, and mortgage warehouse funding.
- Whether liquidity and regulatory capital remain adequate under adverse credit or economic conditions; review the filing’s capital ratios and available borrowing capacity.