Northrim BanCorp, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Unaudited consolidated results; comparisons are with the corresponding 2013 periods unless noted. Northrim is an Alaska-based bank holding company and reports one operating segment.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net interest income | $13.4 million | $10.9 million | $24.6 million | $21.5 million |
| Other operating income | $4.1 million | $3.7 million | $6.8 million | $6.8 million |
| Total revenue (net interest income plus other operating income) | $17.5 million | $14.6 million | $31.5 million | $28.3 million |
| Net income attributable to Northrim | $4.4 million | $3.5 million | $7.0 million | $6.2 million |
| Diluted earnings per share | $0.63 | $0.53 | $1.04 | $0.94 |
| Tax-equivalent net interest margin | 4.43% | 4.34% | 4.36% | 4.33% |
Net income growth reflected higher net interest income, Alaska Pacific acquisition contributions, and a $1.1 million loan-loss provision benefit from net recoveries. Expense growth, including acquisition-related and integration costs, partly offset those gains. The company recorded $651,000 of merger-related expense in the first half. Q2 included a $158,000 bargain-purchase gain.
Balance sheet, liquidity and capital
- At June 30, assets were $1.356 billion, up 12% from year-end 2013; portfolio loans were $926.8 million, up 20%, and deposits were $1.130 billion, up 13%. The increases primarily reflect the April 1 acquisition of Alaska Pacific, including $138.4 million in acquired loans and $151.4 million in acquired deposits, as well as organic loan growth.
- Cash and cash equivalents were $84.4 million. Management also reported $157.2 million in unpledged available-for-sale securities and approximately $205 million of additional borrowing sources. Available-for-sale and held-to-maturity securities totaled $210.1 million, down from $250.9 million at December 31, 2013.
- Reported cash flows for the first six months were $451,000 net cash used in operating activities, $32.2 million provided by investing activities, and $33.0 million used in financing activities. Cash and cash equivalents decreased $1.2 million to $84.4 million.
- Interest-bearing deposits, repurchase agreements, borrowings and junior subordinated debentures were $1.171 billion in aggregate; junior subordinated debentures were $18.6 million. The $4.3 million borrowing secured by the main office was repaid in January; the remaining $2.2 million FHLB advance had an 18-year term.
- All reported regulatory capital ratios exceeded well-capitalized thresholds. Northrim’s Tier 1 risk-based capital ratio was 14.26% and its leverage ratio was 12.55%; both were lower than at year-end, primarily following the acquisition. Total equity was $156.9 million, or 11.57% of assets.
Credit quality and material changes
- Allowance for loan losses was $16.0 million, or 1.73% of loans, versus $16.3 million, or 2.11%, at year-end. The allowance was 521% of nonperforming loans, down from 897%.
- Nonaccrual loans rose to $3.1 million from $1.8 million; nonperforming assets increased to $8.2 million from $4.2 million, including $4.9 million of other real estate owned. Potential problem loans were $9.1 million, versus $8.2 million at year-end.
- Troubled debt restructurings totaled $8.7 million, up from $7.9 million; the filing attributes the increase partly to acquired Alaska Pacific loans. One previously restructured loan subsequently defaulted within the trailing 12 months.
- Purchased receivables totaled $17.4 million net. One $243,000 receivable was past due and nonperforming; the company recorded $239,000 of net charge-offs in the first half.
- The company completed its $13.9 million Alaska Pacific acquisition on April 1, issuing 290,212 shares and paying approximately $6.4 million in cash. Alaska Pacific contributed $2.4 million of revenue and $1.1 million of pretax income in Q2. The acquisition expanded the bank to 15 branches.
Outlook, risks and unusual items
The filing provides no quantitative earnings or revenue guidance. Management described Alaska’s economy as stable, with moderate growth across several sectors and moderate reductions in government activity. Forward-looking results remain subject to Alaska economic conditions, net interest margin and asset-quality developments, competition, regulation, and the realization and costs of Alaska Pacific integration benefits. Management noted that actual results may differ materially from expectations.
On August 7, 2014, Northrim announced a definitive agreement for its bank to acquire the remaining 76.5% of Residential Mortgage, LLC (RML) for approximately $29.8 million: $22.4 million at closing and up to approximately $7.4 million over five years depending on RML profitability. This was a subsequent event, not a completed transaction as of June 30. The company also expected to incur $4.2 million of corporate-office improvements in the second half of 2014. Management reported effective disclosure controls; it did not expect routine legal proceedings to have a material effect.
Important facts for investors to verify
- Reconcile the cash-flow discussion: the financial statements report $451,000 of operating cash use and $32.2 million of investing cash inflow, while MD&A describes approximately $1.5 million of operating cash use and $33.3 million of investing inflow.
- Track post-acquisition credit quality, especially nonaccrual loans, OREO, potential problem loans, TDR performance, and purchased-receivable losses; loan growth includes a substantial acquired portfolio.
- Assess the profitability, integration costs and capital/liquidity effects of Alaska Pacific, and the terms, funding and contingent payments for the proposed RML purchase.
- Review certificate-of-deposit maturities: $75.2 million, or 68% of CDs, were scheduled to mature within 12 months.
- Consider that reported earnings benefited from net loan recoveries and a bargain-purchase gain, while expenses increased with acquisition integration and operations.