Northrim BanCorp, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited consolidated results. Balance-sheet comparisons are to December 31, 2013. Dollar amounts are in millions unless stated otherwise.
Financial performance and condition
| Metric | Q1 2014 / Mar. 31, 2014 | Comparable period / prior year-end |
|---|---|---|
| Total assets | $1,203.6 | $1,215.0 at Dec. 31, 2013 |
| Total loans | $763.1 | $770.0 at Dec. 31, 2013 |
| Total deposits | $997.8 | $1,003.7 at Dec. 31, 2013 |
| Net interest income | $11.23 | $10.56 in Q1 2013 |
| Net income attributable to Northrim | $2.66; diluted EPS $0.40 | $2.67; diluted EPS $0.41 in Q1 2013 |
| Net interest margin | 4.22%; tax-equivalent margin 4.28% | 4.26%; tax-equivalent margin 4.32% in Q1 2013 |
| Cash and cash equivalents | $95.3 at quarter-end | $85.6 at Dec. 31, 2013 |
| Allowance for loan losses | $16.0; 2.10% of gross loans | $16.3; 2.11% at Dec. 31, 2013 |
Interest income was $11.67 million and interest expense was $0.44 million. The loan-loss provision was zero, versus $0.15 million in Q1 2013. The filing does not present a conventional consolidated revenue measure; other operating income was $2.73 million, down from $3.14 million.
Operating cash flow was negative $6.7 million, investing cash flow was positive $29.2 million, and financing cash flow was negative $12.7 million. Management attributed the operating outflow primarily to increased other assets, including $6.4 million transferred in anticipation of the acquisition closing.
Deposits were the primary funding source. Quarter-end borrowings were $2.2 million, repurchase agreements $19.9 million, and junior subordinated debentures $18.6 million. Management reported $108.8 million of cash and bank deposits, $185.4 million of unpledged available-for-sale securities, and approximately $138.8 million of additional borrowing capacity. The company and bank exceeded regulatory well-capitalized thresholds; company Tier 1 risk-based capital was 15.75% and the bank’s was 14.18%.
Material changes and operating trends
- Net interest income rose 6%, mainly from higher average loan balances and lower funding costs. Tax-equivalent net interest margin declined four basis points year over year.
- Net income attributable to Northrim was nearly flat. Lower other operating income and higher expenses—including acquisition-related legal, advisory, and system-conversion costs—were largely offset by higher net interest income and lower loan-loss and income-tax provisions.
- Other operating income fell 13%, reflecting lower mortgage-affiliate earnings, purchased-receivable income, and securities-sale gains; employee-benefit-plan income increased.
- Nonperforming assets increased to $4.4 million, or 0.37% of assets, from $4.2 million, or 0.35%, at year-end. Nonaccrual loans declined to $1.0 million, while other real estate owned rose to $3.4 million. Potential problem loans were $8.3 million.
- The loan portfolio contracted 1% from year-end; average portfolio loans rose 1% from Q4 2013. Management expected total loans to increase by December 31, 2014 versus year-end 2013.
- Book value per share was $22.32, compared with $22.07 at year-end; tangible book value per share was $21.11, compared with $20.86.
Outlook, acquisition, and risks
- Acquisition: On April 1, 2014, Northrim completed its acquisition of Alaska Pacific Bancshares, expanding its Alaska footprint to 15 branches serving a reported 75% of the state’s population. The filing describes the purchase price as approximately $13.9 million in the subsequent-event note; MD&A describes a transaction value of $14.6 million, including $6.4 million cash, shares, and warrant proceeds. The acquisition produced a reported bargain-purchase gain of approximately $0.3 million and a $0.623 million core-deposit intangible. Alaska Pacific results are included from the acquisition date, after quarter-end.
- Management cited an Alaska construction-spending forecast of $9.2 billion for 2014, up 18% from 2013, and discussed oil-tax policy and the risk of a referendum changing that policy. These are external forecasts and management commentary, not company guidance.
- No formal earnings guidance is provided. Management cautioned that acquisition synergies and cost savings may not materialize on schedule and integration costs or difficulties could exceed expectations. Other stated risks include Alaska economic conditions, net interest margin pressure, asset quality, competition, regulation, and the ability to grow market share.
- At March 31, certificates of deposit totaling $56.0 million were scheduled to mature within 12 months. The company also reported $196.1 million in commitments to extend credit and provide letters of credit; many commitments may expire undrawn. Planned corporate-office improvements involved $1.9 million of capital commitments expected in the second half of 2014.
- The company transferred land valued at $0.904 million from premises and equipment to OREO after deciding it was no longer suitable for a planned branch. Management reported no indication of goodwill impairment but noted that a future charge cannot be ruled out. Ordinary-course legal proceedings were not expected to have a material effect.
Most important facts for investors to verify
- Reconcile the acquisition consideration: the note reports $13.9 million, while MD&A reports $14.6 million including warrant proceeds; assess final purchase accounting, integration costs, and realized benefits.
- Review the loan portfolio, OREO, potential problem loans, and allowance adequacy, including the filing’s differing allowance-to-nonperforming-loan ratios: 1,605% in the highlights versus 1,065% in the provision discussion.
- Track loan growth, deposit trends and CD maturities, net interest margin, and the sustainability of funding costs and fee income.
- Assess liquidity and capital after the acquisition, alongside credit commitments and planned capital expenditures.
- Consider the dependence of outlook on Alaska’s economy, oil-sector activity and policy, and successful integration of Alaska Pacific.