Northrim BanCorp, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Unaudited consolidated results include Community Banking and Home Mortgage Lending. RML, acquired in December 2014, is consolidated in the current-period results; comparisons with 2014 are therefore affected by acquisition timing. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Key financial results
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net interest income | $14.2 | $13.4 | $27.8 | $24.6 |
| Other operating income | $11.6 | $4.1 | $22.1 | $6.8 |
| Net income attributable to Northrim | $4.8 | $4.4 | $8.3 | $7.0 |
| Diluted earnings per share | $0.69 | $0.63 | $1.20 | $1.04 |
| Net interest margin, GAAP | 4.37% | 4.38% | 4.36% | 4.31% |
- Q2 total revenue (net interest income plus other operating income) was $25.8 million, up 47% year over year. Six-month net income attributable to Northrim rose 19%.
- Tax-equivalent net interest margin was 4.44% for Q2 (4.43% a year earlier) and 4.41% for the first half (4.36% a year earlier). The tax-equivalent measure is non-GAAP.
- Q2 return on average assets was 1.33% and return on average equity was 11.46%, compared with 1.30% and 11.21%, respectively, a year earlier.
- Q2 provision for loan losses was $376,000; the comparable 2014 quarter recorded a $1.136 million provision benefit. First-half provision was $702,000 versus a $1.136 million benefit in 2014.
Balance sheet, liquidity and capital
- Total assets were $1.500 billion at June 30, 2015, up from $1.449 billion at December 31, 2014. Portfolio loans were $974.8 million, up 5% from year-end; net loans were $957.4 million. Average portfolio loans grew 5% year over year in Q2.
- Deposits were $1.239 billion, up $59.0 million, or 5%, from year-end; management also cited 10% year-over-year deposit growth. Transaction accounts were 88% of deposits. Cash and cash equivalents totaled $104.1 million.
- Investment securities totaled $228.1 million, down $55.9 million, or 20%, from year-end as securities sales, maturities and calls helped fund loan growth.
- Borrowings were $22.3 million, including $20.2 million on RML’s mortgage-origination line of credit, which matured August 12, 2015. The filing reports approximately $291.2 million of additional funding sources, alongside $168.3 million in unpledged available-for-sale securities. The FHLB line available based on collateral and advances was $194.0 million.
- First-half operating cash flow was negative $26.2 million, primarily reflecting net originations of loans held for sale and a decrease in other liabilities. Investing cash flow was positive $11.3 million; financing cash flow was positive $50.5 million, primarily from deposit growth. Cash and cash equivalents increased to $104.1 million from $68.6 million at the start of the year.
- All Company and Bank regulatory capital ratios exceeded well-capitalized thresholds. Company ratios included 12.67% Tier 1 risk-based capital, 13.92% total risk-based capital and a 10.25% leverage ratio. Tangible common equity to tangible assets was 9.97% (non-GAAP); GAAP equity to assets was 11.40%.
- The Company paid a quarterly dividend of $0.18 per share in June 2015, versus $0.17 a year earlier. No shares were repurchased in the first half.
Changes, credit quality and unusual items
- RML generated $15.1 million of first-half mortgage banking income and $2.7 million of first-half net income before noncontrolling interests. It originated $392.8 million and sold $363.1 million of residential mortgages in the first half. Its contribution and consolidation materially change comparison with 2014.
- Higher mortgage income and loan interest income drove earnings growth, partly offset by acquisition-related operating costs and a $2.1 million first-half expense from remeasurement of RML’s earn-out liability. The liability was $9.5 million at June 30, up from $7.3 million at acquisition.
- Nonperforming assets declined 16% from year-end to $7.8 million. Nonaccrual loans were $5.0 million, up from $4.7 million; other real estate owned was $2.8 million, down from $4.6 million. Potential problem loans were $16.6 million, compared with $18.0 million at year-end.
- Impaired loans increased to $26.3 million from $11.3 million at year-end. Troubled debt restructurings rose to approximately $9.0 million from $7.7 million; $3.2 million of the June total was nonaccrual. The allowance for loan losses was $17.4 million, versus $16.7 million at year-end.
- Management described Alaska’s economy as stable despite lower global energy prices, citing state reserves and ongoing North Slope investment. It noted that state revenues remain exposed to energy conditions.
Outlook, risks and contingencies
- The filing provides no specific earnings, revenue or margin guidance. Management cautions that interim results are not necessarily indicative of full-year results.
- Forward-looking risks include Alaska economic conditions, net interest margin and asset quality, competition, regulatory changes, execution of the business plan, and whether RML’s expected benefits are realized on schedule and without greater-than-expected integration costs.
- Management identifies the allowance for loan losses, goodwill and intangible asset valuation, and OREO valuation as critical estimates. Regulators could require a higher loan-loss allowance, adversely affecting earnings and financial condition.
- RML’s mortgage warehouse borrowing line matured shortly after quarter-end; confirm renewal, repayment or replacement financing. Mortgage origination volumes and interest-rate movements may affect mortgage banking income and liquidity.
- Off-balance-sheet commitments to extend credit and letters of credit totaled $241.5 million; related reserves were $120,000. The company also reported $1.3 million of branch construction commitments and $1.8 million of planned corporate-office improvements, expected in the second half of 2015.
- Management did not expect routine legal proceedings to have a material effect. Risk factors were reported as not materially changed from the 2014 Form 10-K. No material change in market-risk disclosures or internal control over financial reporting was reported.
Investor verification priorities
- Assess the sustainability of mortgage banking income and RML origination/sale volumes, and separate acquired growth from organic performance.
- Confirm the status and terms of the RML warehouse line that matured August 12, 2015, and review available liquidity and funding costs.
- Monitor loan quality, especially the rise in impaired loans and TDRs, potential problem loans, and the adequacy of the $17.4 million allowance.
- Review the assumptions behind the $9.5 million RML earn-out liability and the impact of further fair-value changes on expenses.
- Track deposit growth and mix, net interest margin, and capital ratios under Basel III, including any effects of changing rates or Alaska economic conditions.