Northrim BanCorp, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited consolidated results. Northrim operates Community Banking and Home Mortgage Lending. The 2014 comparison predates consolidation of RML, acquired in December 2014, and largely predates Alaska Pacific, acquired in April 2014.
Financial performance
- Revenue: Net interest income plus other operating income was $24.2 million, up 73% from $14.0 million a year earlier. Net interest income increased 21% to $13.6 million; other operating income rose to $10.5 million from $2.7 million, principally reflecting $7.3 million of mortgage banking income from RML.
- Profit: Net income attributable to Northrim was $3.56 million, up 34% from $2.66 million. Diluted EPS was $0.51 versus $0.40. The effective tax rate was 33%, compared with 32%.
- Margins: GAAP net interest margin was 4.28%, versus 4.17%. Tax-equivalent net interest margin was 4.39%, versus 4.28%.
- Expenses and credit costs: Other operating expense increased 85% to $18.5 million, including $1.5 million for the RML earn-out revaluation. The loan-loss provision was $326,000, versus none in Q1 2014.
- Balance sheet and liquidity: Total assets were $1.448 billion, broadly flat from year-end 2014. Portfolio loans rose 4% to $960.6 million; deposits increased to $1.191 billion. Cash and cash equivalents were $42.6 million at quarter-end. Management reported $198.5 million of unpledged available-for-sale securities and approximately $378.1 million of additional borrowing capacity.
- Cash flow: Operating cash flow was negative $20.8 million, mainly reflecting net mortgage-loan originations; investing cash flow was negative $9.4 million and financing cash flow was positive $4.2 million. Cash and cash equivalents declined $26.0 million during the quarter.
- Debt and capital: Borrowings were $22.6 million, including RML’s $20.4 million mortgage warehouse line, which matures August 12, 2015; junior subordinated debentures were $18.6 million. Northrim and the Bank exceeded well-capitalized thresholds. Company Tier 1 risk-based capital was 12.71%; the Bank’s was 11.71%.
Material changes and asset quality
- Acquisitions substantially changed the year-over-year comparison: RML contributed $7.4 million of revenue and $2.3 million of pretax income in the quarter; Alaska Pacific contributed an estimated $1.9 million of revenue and $393,000 of pretax income.
- Average portfolio loans increased 23% year over year to $946.1 million, mainly from acquired balances and organic growth. Management reported 9% organic loan growth and 4% deposit growth in core banking operations.
- Nonperforming assets were $9.0 million, down 3% from year-end. Nonaccrual loans were $4.8 million; other real estate owned was $4.2 million. Potential problem loans were $17.4 million. Troubled debt restructurings totaled $9.0 million, up from $7.7 million at year-end.
- The allowance for loan losses was $16.9 million, or 1.76% of loans, versus $16.7 million, or 1.81%, at year-end. Nonperforming loans were 0.50% of portfolio loans; allowance coverage was 352%.
Outlook, risks and unusual items
- No numerical earnings or growth guidance was provided. Management said Alaska’s economy showed resilience despite low oil prices, citing state reserves, generally stable employment, and ongoing North Slope projects. Approximately 8% of portfolio loans had direct Alaska oil-and-gas exposure.
- Management noted that RML activity is historically slower in the first quarter; it attributed increased mortgage originations partly to lower FHA borrower fees and continued low mortgage rates.
- The RML earn-out liability rose by $1.5 million during the quarter to approximately $8.8 million, reflecting RML pretax income above acquisition-date estimates. Changes in its estimated fair value affect operating expense.
- Key stated risks include Alaska economic conditions, interest-rate and net-interest-margin pressures, credit quality, competition, regulatory requirements, and whether acquisition synergies and integration benefits are realized. The company also cited possible future goodwill impairment, though none was indicated at March 31.
- Off-balance-sheet commitments to extend credit and letters of credit totaled $226.0 million. Planned capital commitments included $2.1 million for branch construction and $999,000 for corporate-office improvements. Management did not expect ordinary-course legal matters to have a material effect.
Important facts for investors to verify
- How much of reported earnings growth is sustainable from core banking versus the acquired mortgage business and acquisition-related accounting.
- RML mortgage production, margins, warehouse-line renewal or repayment, and future earn-out liability estimates.
- Trends in Alaska’s economy and oil-and-gas exposure, loan quality, TDRs, and allowance adequacy.
- Deposit funding costs, net interest margin sensitivity, and liquidity after the quarter’s mortgage originations and cash decline.
- Regulatory capital trends under Basel III and execution of the planned capital expenditures.