Northrim BanCorp, Inc. — FY 2015 Form 10-K
Business context and reporting period. This annual filing covers the fiscal year ended December 31, 2015; it is not a standalone quarterly filing. Northrim is an Alaska-based bank holding company operating community banking and home mortgage lending businesses. At year-end, it reported $1.50 billion in assets, $1.24 billion in deposits, and $980.8 million in portfolio loans. The 2014 acquisitions of Alaska Pacific Bank and the remaining interest in Residential Mortgage Holding Company (RML) materially expanded the business.
Financial performance and condition
| Metric | FY 2015 / year-end | Comparable prior period |
|---|---|---|
| Net income attributable to Northrim | $17.8 million; diluted EPS $2.56 | FY 2014: $17.4 million; $2.54 diluted EPS |
| Net interest income | $56.9 million | FY 2014: $52.3 million |
| Net interest margin | 4.27% | FY 2014: 4.31% |
| Other operating income | $44.6 million | FY 2014: $21.1 million |
| Other operating expense | $72.6 million, including $4.1 million of RML earn-out fair-value expense | FY 2014: $48.0 million |
| Return on average assets / equity | 1.20% / 10.47% | FY 2014: 1.30% / 11.19% |
| Cash flows | Operating +$10.5 million; investing −$63.3 million; financing +$42.9 million | FY 2014: +$20.5 million; −$48.7 million; +$11.1 million |
| Cash and cash equivalents | $58.7 million | Year-end 2014: $68.6 million |
Total reported revenue, defined as net interest income plus other operating income, rose 38% to $101.5 million. Mortgage banking income was $29.6 million, reflecting RML’s full-year consolidation in 2015 versus primarily equity-method accounting and only one month of consolidation in 2014. Management reported adjusted “operating net income” of $19.3 million, up 39%, after specified acquisition and other items; this is a non-GAAP measure and is not the reported GAAP net income.
Year-end portfolio loans increased about 6% to $980.8 million and deposits increased about 5% to $1.24 billion. Shareholders’ equity was $177.2 million, up from $164.4 million; book value per share was $25.77 and tangible book value per share was $22.31. The efficiency ratio increased to 71.31% from 65.02%.
Regulatory capital remained strong: the Company’s common equity Tier 1, total risk-based, Tier 1 risk-based, and leverage ratios were 12.01%, 14.60%, 13.34%, and 11.20%, respectively. The Bank’s corresponding ratios were 12.21%, 13.41%, 12.16%, and 10.18%. Deposits are the primary funding source. Year-end liabilities included $31.4 million in repurchase agreements, $2.1 million in borrowings, and $18.6 million in junior subordinated debentures. Management reported $332.2 million of current assets and $622.1 million of available borrowing capacity, subject to collateral and facility terms.
Material changes and credit quality
- Net income rose only 2% despite the 38% revenue increase, as expenses grew 51%, including RML consolidation costs and the $4.1 million earn-out remeasurement.
- The allowance for loan losses increased to $18.2 million, or 1.85% of portfolio loans, from $16.7 million, or 1.81%. The company recorded a $1.8 million provision, versus a $636,000 provision benefit in 2014; net charge-offs were $324,000, compared with net recoveries of $1.1 million.
- Nonperforming assets, net of government guarantees, declined to $5.2 million (0.35% of assets) from $7.2 million (0.50%). However, adversely classified loans rose to $31.1 million from $6.0 million, and impaired loans increased to $34.6 million from $11.3 million. Troubled debt restructurings rose to $13.7 million from $7.7 million.
- Credit and geographic concentration are significant: approximately 76% of loans were secured by real estate; commercial real estate represented about 49% of the loan portfolio. Twenty-seven large borrowing relationships accounted for 41% of portfolio loans, with $128.5 million in additional unfunded commitments to these borrowers.
- Fourth-quarter net income attributable to Northrim was $4.1 million, or $0.59 diluted EPS, versus $6.7 million, or $0.97, in Q4 2014. The filing’s quarterly results show the prior-year quarter included significant acquisition-related and other income items.
Outlook, risks and unusual items
Management said Alaska’s lower oil prices could reduce growth opportunities in 2016; it expected residential construction activity to decline slightly, while anticipating NFS factoring operations would continue to contribute to net income. Management intended to maintain Bank capital ratios above “well-capitalized” requirements. The board approved a $0.19-per-share dividend for March 2016; future dividends remain subject to regulatory and capital constraints.
The filing highlights exposure to Alaska’s economy and oil-dependent state revenues, commercial real estate and large borrower concentrations, credit deterioration, interest-rate and margin changes, mortgage-market conditions, RML integration and earn-out estimates, and cybersecurity, vendor, regulatory, and liquidity risks. The earn-out liability was $6.6 million at year-end after a $4.1 million fair-value increase and approximately $4.9 million in payments during 2015. Management reported no expected material effect from pending legal matters. The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Key facts for investors to verify
- Whether the increase in adversely classified, impaired, and restructured loans—especially the three large borrowing relationships—leads to additional provisions, charge-offs, or collateral impairment.
- How much of 2015 mortgage banking income and earnings reflects sustainable performance versus acquisition accounting, RML consolidation, and earn-out effects.
- Whether Alaska’s oil-related fiscal and economic pressures affect borrower repayment, real estate values, loan demand, and deposit trends.
- The assumptions behind the allowance, RML earn-out valuation, mortgage servicing rights, and reported fair values.
- Capital, collateral, and liquidity availability under stress, including the effect of the phased-in capital conservation buffer on dividends and growth.