Northrim BanCorp, Inc. — FY2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; comparison is primarily with FY2012. Northrim is an Alaska-based bank holding company operating mainly through Northrim Bank, with related mortgage, factoring, insurance, and wealth-management businesses. It reported $1.22 billion in assets and $1.00 billion in deposits at year-end.
Key financial metrics
| Metric | FY2013 / Dec. 31, 2013 | FY2012 / Dec. 31, 2012 |
|---|---|---|
| Net income attributable to Northrim | $12.3 million; diluted EPS $1.87 | $12.9 million; diluted EPS $1.97 |
| Net interest income | $44.0 million | $42.2 million |
| Net interest margin | 4.23% | 4.34% |
| Other operating income | $12.9 million | $15.4 million |
| Other operating expense | $39.9 million | $39.6 million |
| Total assets | $1.215 billion | $1.160 billion |
| Portfolio loans | $770.0 million | $704.2 million |
| Deposits | $1.004 billion | $970.1 million |
| Shareholders’ equity | $144.3 million | $136.4 million |
| Allowance for loan losses | $16.3 million; 2.11% of portfolio loans | $16.4 million; 2.33% |
Cash flow: Net cash provided by operating activities was $18.6 million, versus $32.5 million in 2012. Investing activities used $108.0 million, primarily reflecting investment in securities and portfolio loans; financing activities provided $33.6 million, mainly from deposit growth. Cash and cash equivalents ended the year at $85.6 million, down from $141.3 million.
Debt and liquidity: Year-end securities sold under repurchase agreements were $21.1 million, borrowings were $6.5 million, and junior subordinated debentures were $18.6 million. Management reported $311.4 million in current assets and $222.5 million available under borrowing lines, and considered liquidity sufficient for the foreseeable future. The Bank was categorized as well-capitalized; its Tier 1 risk-based capital ratio was 13.75% and total risk-based ratio was 15.00%. The Company’s corresponding ratios were 15.35% and 16.61%.
Material changes and operating performance
- Net income attributable to Northrim declined 5%, as lower affiliate and other operating income and a smaller loan-loss benefit more than offset higher net interest income and lower income taxes.
- Net interest income rose $1.8 million, supported by higher average loan balances, but margin continued to contract amid low rates and pressure on loan and investment yields.
- Other operating income fell 16%, principally because RML mortgage affiliate earnings declined with reduced refinancing activity, rental income decreased during office renovations, and purchased-receivable balances were lower.
- Credit indicators improved: nonperforming assets fell to $4.2 million, or 0.35% of assets, from $9.1 million, or 0.78%; nonperforming loans declined to $1.8 million from $4.5 million. The allowance covered 897% of nonperforming loans, versus 362%.
- Loans grew about 9% year over year; average loans increased 10%. Deposits grew 3%. The efficiency ratio worsened to 69.64% from 68.25%, and return on assets declined to 1.07% from 1.19%.
- Cash dividends totaled $0.64 per share for 2013, up from $0.56 in 2012. The board approved a further $0.17-per-share dividend for March 2014.
Outlook, risks, and unusual items
- Acquisition: Northrim agreed in October 2013 to acquire Alaska Pacific Bancshares in a cash-and-stock transaction. Aggregate consideration is subject to a $12.5 million minimum and $13.9 million maximum, with cash and shares expected to be roughly evenly split. Closing remained subject to regulatory and shareholder approvals and other conditions. Integration costs and benefits were not fully estimable.
- Management outlook: Management intended to grow loans while managing credit quality and projected a Bank Tier 1 risk-based capital ratio above 10% in 2014. It expected RML income to decline further in 2014 as refinancing slowed, residential construction activity to increase slightly, and purchased-receivable balances to rebuild. The filing gives no specific earnings or revenue forecast.
- Concentration risk: Approximately 71% of loans were secured by real estate, and commercial real estate represented about 49% of the loan portfolio. Twenty-two large borrower relationships accounted for 44% of loans. Business is concentrated in Alaska and is sensitive to real estate conditions, oil-related state revenues, and other local economic factors.
- Credit watch items: Potential problem loans increased to $8.2 million from $2.7 million, mainly due to one borrower relationship. The allowance is based on management estimates and could prove insufficient. Year-end OREO was $2.4 million.
- Other risks and contingencies: The filing cites interest-rate and margin risk, competition, regulatory and capital-rule changes, liquidity, cybersecurity, and merger execution risks. The company reported no material expected effect from ordinary-course litigation. It had $187.9 million of unfunded credit commitments and $6.5 million of standby letters of credit; these are not expected to be fully drawn at once.
- Unusual financial-statement item: FY2013 operating cash flow included $3.4 million of proceeds from a refund of prepaid FDIC premiums. The company also recorded $2.2 million of capital commitments for planned office improvements.
Important facts for investors to verify
- Whether Alaska Pacific merger approvals and closing conditions were satisfied, and the eventual consideration, integration costs, and realized benefits.
- Whether the increase in potential problem loans develops into higher delinquencies, nonperforming assets, charge-offs, or allowance requirements.
- Whether loan growth can offset continued net interest margin compression without weakening underwriting or increasing funding costs.
- Whether RML affiliate earnings and office rental income recover as management anticipated, and whether purchased-receivable balances grow.
- How concentrated borrower and Alaska real-estate exposures perform, including the large relationship driving higher potential problem loans.
- The effect of new regulatory capital requirements and dividend restrictions on growth and shareholder distributions.
Audit and controls: Moss Adams LLP issued an unqualified opinion on the consolidated financial statements and concluded that internal control over financial reporting was effective as of December 31, 2013.