Northrim BanCorp, Inc. — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; comparisons are primarily with FY 2013. This is an annual report, not a standalone fourth-quarter filing. Northrim is an Alaska-based bank holding company operating community banking and, following its December acquisition, home mortgage lending.
Business context and material changes
- Northrim completed the acquisition of Alaska Pacific Bank on April 1, 2014, adding four Southeast Alaska branches, approximately $138.4 million of loans and $151.4 million of deposits.
- On December 1, Northrim acquired the remaining 76.5% of Residential Mortgage Holding Company (RML), making it a wholly owned subsidiary and creating a Home Mortgage Lending reporting segment. The estimated purchase price was about $29.4 million, including a $7.3 million earn-out liability.
- Total assets increased 19% to $1.449 billion; portfolio loans rose 20% to $924.5 million and deposits rose 18% to $1.180 billion. Acquisitions materially contributed to growth.
Financial performance
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Net interest income | $52.9 million | $44.0 million |
| Other operating income | $20.5 million | $12.9 million |
| Income before taxes | $24.7 million | $17.7 million |
| Net income attributable to Northrim | $17.4 million | $12.3 million |
| Diluted EPS | $2.54 | $1.87 |
| Net interest margin | 4.36% | 4.23% |
| Efficiency ratio | 66.84% | 69.64% |
| Return on assets / equity | 1.30% / 11.19% | 1.07% / 8.75% |
Management reported net income growth of 41%; excluding acquisition-related gains and expenses, it said core earnings increased 23%. Net interest income benefited from higher average earning assets, including acquired assets, while average loan yields eased. The company recorded a $636,000 benefit from provision for loan losses, broadly unchanged from 2013, and $1.1 million in net loan recoveries.
Operating cash flow was $20.5 million, versus $18.6 million in 2013. Investing activities used $48.7 million and financing activities provided $11.1 million. Cash and cash equivalents ended the year at $68.6 million, down from $85.6 million.
Year-end shareholders’ equity was $164.4 million, or 11.35% of assets; tangible common equity to tangible assets was 9.85%, down from 11.30%. Regulatory capital ratios remained above the then-applicable well-capitalized thresholds: Company Tier 1 risk-based 13.06% and total risk-based 14.31%; Bank 12.05% and 13.30%, respectively.
Credit, funding and liquidity
- Nonperforming assets increased to $9.3 million, or 0.64% of assets, from $4.2 million, or 0.35%, largely reflecting assets acquired from Alaska Pacific. Nonperforming loans were $4.7 million versus $1.8 million.
- The allowance for loan losses was $16.7 million, 1.81% of portfolio loans, compared with 2.11% a year earlier. Potential problem loans increased to $18.0 million from $8.2 million; management attributed most of the increase to one borrower relationship.
- Loans are concentrated in real estate: approximately 74% of the Bank’s portfolio was secured by real estate, including commercial real estate equal to about 47% of the portfolio. Twenty-five large borrowing relationships represented 38% of loans.
- Deposits were the primary funding source. Borrowings totaled $26.3 million, plus $19.8 million in repurchase agreements; this included a $24.1 million RML warehouse line maturing August 2015. Junior subordinated debentures were $18.6 million.
- Management cited $309.8 million of current assets and $242.5 million available under borrowing lines, and considered liquidity sufficient for the foreseeable future. Unfunded loan and letter-of-credit commitments totaled $225.4 million.
Outlook, commentary and risks
- Management expected the acquisitions to contribute to earnings in 2015 and beyond, and expected NFS factoring activity to continue contributing. It anticipated residential construction activity to remain stable in 2015. The filing provides no specific consolidated earnings or revenue guidance.
- Management warned that persistently low oil prices could weaken Alaska state revenues and longer-term economic growth; it did not expect a significant employment impact in 2015 but anticipated higher unemployment in 2016 if low prices persisted.
- Key risks include Alaska economic and oil-price exposure, real estate values and credit concentrations, loan-loss allowance estimation, interest-rate and margin changes, mortgage-market/refinancing activity, acquisition integration, competition, cybersecurity, and regulatory costs and capital requirements.
- New Basel III capital rules took effect in 2015, with the conservation buffer phased in beginning in 2016. Management said current capital levels complied with the new standards and intended to keep the Bank above well-capitalized requirements; dividend capacity may be constrained by regulation.
- Unusual items included a $3.0 million gain from remeasurement of Northrim’s existing RML interest, a $1.1 million gain on a branch sale, and Alaska Pacific bargain-purchase and loan-disposition gains. FY 2014 also included $2.0 million of merger and acquisition expense. These items affect comparability.
- The independent auditor gave an unqualified opinion on the financial statements and internal control. Management’s control assessment excluded RML, acquired in December; RML represented $57.5 million of year-end assets.
Investor verification priorities
- Reconcile reported earnings growth with acquisition contributions and one-time gains, expenses, and purchase-accounting effects.
- Track post-acquisition asset quality, especially nonperforming and potential problem loans, OREO, large borrower exposures, and allowance coverage.
- Assess the effect of Alaska oil prices and local economic conditions on borrowers, collateral values, deposits, and loan demand.
- Review RML integration, mortgage origination and refinancing trends, the $24.1 million warehouse line maturity, and earn-out payments tied to future earnings.
- Monitor Basel III capital-buffer implementation, regulatory limits on bank dividends, and the sustainability of the $0.18 quarterly dividend.