Northrim BanCorp, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Figures are unaudited; dollar amounts are in millions unless stated otherwise.
Business context and reporting period
Northrim is an Alaska-based bank holding company. The April 1, 2014 acquisition of Alaska Pacific expanded its geographic footprint; its results are included from that date. Management described Alaska’s economy as stable, while noting that lower oil prices could weigh on future oil development and state revenues. The company reports one operating segment.
Financial and operating highlights
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue (net interest income plus other operating income) | $18.7 | $14.3 | $50.1 | $42.6 |
| Net interest income | $13.7 | $11.0 | $38.4 | $32.5 |
| Net income attributable to Northrim | $3.7 | $3.5 | $10.7 | $9.6 |
| Diluted earnings per share | $0.53 | $0.53 | $1.57 | $1.46 |
| GAAP net interest margin | 4.38% | 4.18% | 4.33% | 4.24% |
- Net interest income increased mainly from higher average loan balances, including Alaska Pacific loans, partly offset by lower loan yields. Tax-equivalent net interest margin was 4.43% for Q3 and 4.38% year to date.
- Other operating income was $4.9 million in Q3 and $11.8 million year to date. Q3 included a $1.1 million gain on sale of a branch property; higher employee benefit plan income also contributed. Other operating expense rose to $13.1 million in Q3 and $35.4 million year to date, including $1.0 million and $1.7 million, respectively, in merger and acquisition costs.
- At September 30, total assets were $1.421 billion, up 17% from year-end 2013. Portfolio loans were $936.7 million, up 22%; net loans were $930.7 million. Deposits were $1.192 billion, up $188.6 million, including $151.4 million acquired from Alaska Pacific.
- Cash and cash equivalents ended the nine-month period at $125.8 million, versus $72.1 million a year earlier. Operating, investing and financing cash flows were $8.4 million, $4.0 million and $27.9 million, respectively.
- Borrowings were $2.2 million, repurchase agreements $19.9 million, and junior subordinated debentures $18.6 million. Cash and deposits at banks were $129.3 million; unpledged available-for-sale securities were $184.2 million, with approximately $198.3 million of additional borrowing sources available.
- The allowance for loan losses was $16.2 million, or 1.73% of loans, versus 2.11% at year-end. The nine-month loan-loss provision was a benefit of $1.1 million, primarily reflecting net recoveries. Tier 1 risk-based capital was 14.33% at the holding company and 13.39% at the bank; both entities exceeded well-capitalized thresholds.
Material changes versus comparable periods
- Q3 net income attributable to Northrim rose 7% year over year; nine-month net income rose about $1.1 million. Diluted EPS was flat in Q3 and increased from $1.46 to $1.57 year to date.
- Loan growth and higher net interest income primarily reflect the Alaska Pacific acquisition, alongside organic growth in commercial and real estate construction lending. The acquisition added $138.4 million in loans and $151.4 million in deposits at closing.
- Nonperforming assets rose to $7.8 million from $4.2 million at December 31, 2013. Nonaccrual loans increased to $2.8 million from $1.8 million, and other real estate owned rose to $4.7 million from $2.4 million. Potential problem loans increased to $19.9 million from $8.2 million.
- The allowance-to-nonperforming-loans coverage ratio declined to 588% from 897%. Troubled debt restructurings totaled $8.3 million, versus $7.9 million at year-end.
Outlook, risks and unusual items
- The filing provides no numerical earnings or growth guidance. Management’s forward-looking statements identify Alaska economic conditions, interest-rate and net-interest-margin factors, asset quality, competition, regulation, and the ability to grow market share as risks.
- Management cautioned that lower oil prices may adversely affect future Alaska oil development and state revenues. It also warned that expected Alaska Pacific merger synergies and cost savings may not be realized on schedule or may require greater integration costs than expected.
- Northrim had a pending acquisition of the remaining 76.5% of Residential Mortgage Holding Company, LLC, subject to regulatory approval. Related acquisition expenses were included in 2014 results; the filing noted uncertainty around approvals, integration and anticipated benefits.
- The $1.1 million branch-property sale gain was unusual; the property was sold to the State of Alaska for a road project, and the company planned to relocate the branch in Q2 2015. Alaska Pacific’s Q3 contribution was reported as $4.4 million of revenue, $2.7 million of noninterest expense and $1.8 million of pretax income.
- Certificates of deposit totaled $108.6 million, of which $86.5 million were scheduled to mature within 12 months. Off-balance-sheet commitments to extend credit and letters of credit totaled $242.8 million; the filing notes that many commitments may expire undrawn.
- Management reported no material change in market-risk disclosures, effective disclosure controls, and no material change in risk factors from the 2013 Form 10-K. Ordinary-course legal matters were not expected to have a material effect.
Important facts for investors to verify
- How much of loan, deposit and earnings growth is sustainable organic performance versus the Alaska Pacific acquisition, and how integration costs and synergies develop.
- Whether rising potential problem loans, nonperforming assets and purchased-receivable losses lead to higher charge-offs or additional allowance needs.
- The acquired loan portfolio’s credit marks and performance, particularly commercial and real estate exposures, and the outlook for Alaska’s oil-dependent economy.
- Progress, regulatory approval and integration costs for the pending Residential Mortgage Holding Company acquisition.
- Liquidity and funding conditions as certificates of deposit mature, and capital ratios following acquisition-related balance-sheet growth.