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Northrim BanCorp 10-Q 2015
NRIM.2015-10Q1


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC  20549
FORM 10-Q
(Mark One)
þ    Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2015
o    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from_____to____
Commission File Number 000-33501
NORTHRIM BANCORP, INC.
(Exact name of registrant as specified in its charter)
Alaska
 
92-0175752
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
3111 C Street
Anchorage, Alaska 99503
(Address of principal executive offices)    (Zip Code) 

(907) 562-0062

(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   
ý Yes  ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 
ý Yes  ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:  
Large Accelerated Filer ¨  Accelerated Filer ý    Non-accelerated Filer ¨ Smaller Reporting Company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).      
¨ Yes  ý No
The number of shares of the issuer’s Common Stock, par value $1 per share, outstanding at May 8, 2015 was 6,854,189.





TABLE OF CONTENTS
 
 
 
Part  I
FINANCIAL INFORMATION
 
Item 1.
Financial Statements (unaudited)
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
Part II
OTHER INFORMATION
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.



1



PART I. FINANCIAL INFORMATION
These consolidated financial statements should be read in conjunction with the financial statements, accompanying notes and other relevant information included in Northrim BanCorp, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2014.
ITEM 1. FINANCIAL STATEMENTS

2


CONSOLIDATED FINANCIAL STATEMENTS
NORTHRIM BANCORP, INC.
Consolidated Balance Sheets
(Unaudited)
 
March 31,
2015
 
December 31,
2014
(In Thousands, Except Share Data)
 
ASSETS
 
 
 
Cash and due from banks

$32,957

 

$36,036

Interest bearing deposits in other banks
13,115

 
36,020

 
 
 
 
Investment securities available for sale
254,772

 
281,730

Investment securities held to maturity
2,199

 
2,201

Total portfolio investments
256,971

 
283,931

 
 
 
 
Investment in Federal Home Loan Bank stock
3,367

 
3,404

 
 
 
 
Loans held for sale
61,873

 
43,866

 
 
 
 
Loans
960,564

 
924,504

Allowance for loan losses
(16,947
)
 
(16,723
)
Net loans
943,617

 
907,781

Purchased receivables, net
15,332

 
15,254

Accrued interest receivable
3,784

 
3,373

Other real estate owned, net
4,209

 
4,607

Premises and equipment, net
36,449

 
35,643

Goodwill
22,334

 
22,334

Other intangible assets, net
1,628

 
1,701

Other assets
52,348

 
55,399

Total assets

$1,447,984

 

$1,449,349

LIABILITIES
 
 
 
Deposits:
 
 
 
Demand

$410,464

 

$403,523

Interest-bearing demand
179,124

 
185,114

Savings
127,708

 
122,588

Alaska CDs
99,120

 
99,736

Money market
227,345

 
226,574

Certificates of deposit less than $100,000
57,938

 
58,249

Certificates of deposit greater than $100,000
89,314

 
83,963

Total deposits
1,191,013

 
1,179,747

Securities sold under repurchase agreements
17,820

 
19,843

Borrowings
22,569

 
26,304

Junior subordinated debentures
18,558

 
18,558

Other liabilities
30,640

 
40,456

Total liabilities
1,280,600

 
1,284,908

SHAREHOLDERS' EQUITY
 
 
 
Preferred stock, $1 par value, 2,500,000 shares authorized, none issued or outstanding

 

Common stock, $1 par value, 10,000,000 shares authorized, 6,854,189 and 6,854,189 shares
issued and outstanding at March 31, 2015 and December 31, 2014, respectively
6,854

 
6,854

Additional paid-in capital
61,847

 
61,729

Retained earnings
97,809

 
95,493

Accumulated other comprehensive income
747

 
247

Total Northrim BanCorp shareholders' equity
167,257

 
164,323

Noncontrolling interest
127

 
118

Total shareholders' equity
167,384

 
164,441

Total liabilities and shareholders' equity

$1,447,984

 

$1,449,349

See notes to consolidated financial statements

3



NORTHRIM BANCORP, INC.
Consolidated Statements of Income
(Unaudited)
 
Three Months Ended March 31,
(In Thousands, Except Per Share Data)
2015
 
2014
Interest Income
 
 
 
Interest and fees on loans

$13,467

 

$10,871

Interest on investment securities available for sale
885

 
730

Interest on investment securities held to maturity
23

 
23

Interest on deposits in other banks
11

 
49

Total Interest Income
14,386

 
11,673

Interest Expense
 
 
 
Interest expense on deposits, borrowings and junior subordinated debentures
754

 
440

Net Interest Income
13,632

 
11,233

Provision for loan losses
326

 

Net Interest Income After Provision for Loan Losses
13,306

 
11,233

Other Operating Income
 
 
 
Mortgage banking income
7,283

 

Employee benefit plan income
777

 
876

Electronic banking income
622

 
500

Purchased receivable income
589

 
481

Service charges on deposit accounts
490

 
476

Gain on sale of securities, net
114

 
97

Equity in earnings from RML

 
(131
)
Other income
660

 
435

Total Other Operating Income
10,535

 
2,734

Other Operating Expense
 
 
 
Salaries and other personnel expense
10,550

 
5,920

Occupancy expense
1,604

 
877

Change in fair value, RML earn-out liability
1,502

 

Professional and outside services
751

 
322

Marketing expense
617

 
614

Equipment expense
434

 
298

Insurance expense
324

 
185

Software expense
312

 
260

OREO (income) expense, net rental income and gains on sale
297

 
(238
)
Internet banking expense
220

 
200

Intangible asset amortization expense
73

 
52

Merger and acquisition expense

 
480

Reserve for (recovery from) purchased receivables
(54
)
 
(37
)
Other operating expense
1,831

 
1,034

Total Other Operating Expense
18,461

 
9,967

Income Before Provision for Income Taxes
5,380

 
4,000

Provision for income taxes
1,747

 
1,297

Net Income
3,633

 
2,703

Less: Net income attributable to the noncontrolling interest
72

 
45

Net Income Attributable to Northrim BanCorp

$3,561

 

$2,658

Earnings Per Share, Basic

$0.52

 

$0.41

Earnings Per Share, Diluted

$0.51

 

$0.40

Weighted Average Shares Outstanding, Basic
6,854,189

 
6,537,652

Weighted Average Shares Outstanding, Diluted
6,930,873

 
6,629,330


See notes to consolidated financial statements

4



NORTHRIM BANCORP, INC.
Consolidated Statements of Comprehensive Income
(Unaudited)
2010
 
Three Months Ended March 31,
(In Thousands)
2015
2014
Net income

$3,633


$2,703

Other comprehensive income, net of tax:
 
 
   Securities available for sale:
 
 
         Unrealized gains arising during the period

$888


$95

         Reclassification of net gains included in net income (net tax expense of
 
 
          $47 and $40 for the first three months of 2015 and 2014, respectively)
(67
)
(57
)
         Income tax expense related to unrealized gains
(321
)
(39
)
Other comprehensive income (loss)
500

(1
)
Comprehensive income
4,133

2,702

  Less: comprehensive income attributable to the noncontrolling interest
72

45

      Comprehensive income attributable to Northrim BanCorp

$4,061


$2,657

 
See notes to consolidated financial statements


5



NORTHRIM BANCORP, INC.
Consolidated Statements of Changes in Shareholders’ Equity
(Unaudited)
 
Common Stock
 
Additional Paid-in Capital
 
 Retained Earnings
 
Accumulated Other Comprehensive Income
 
Non-controlling Interest
 
 Total
 
Number of Shares
 
Par Value
 
 
 
 
 
(In Thousands)
 
 
 
 
 
 
Balance as of January 1, 2014
6,538

 

$6,538

 

$54,089

 

$82,855

 

$669

 

$167

 

$144,318

Purchase of Alaska Pacific
290

 
290

 
7,156

 

 

 

 
7,446

Cash dividend declared

 

 

 
(4,770
)
 

 

 
(4,770
)
Stock based compensation expense

 

 
360

 

 

 

 
360

Exercise of stock options
26

 
26

 
28

 

 

 

 
54

Excess tax benefits from stock based payment arrangements

 

 
96

 

 

 

 
96

Distributions to noncontrolling interest

 

 

 

 

 
(508
)
 
(508
)
Other comprehensive loss, net of tax

 

 

 

 
(422
)
 

 
(422
)
Net income attributable to the noncontrolling interest

 

 

 

 

 
459

 
459

Net income attributable to Northrim BanCorp

 

 

 
17,408

 

 

 
17,408

Twelve Months Ended December 31, 2014
6,854

 

$6,854

 

$61,729

 

$95,493

 

$247

 

$118

 

$164,441

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash dividend declared






(1,245
)





(1,245
)
Stock based compensation expense




118








118

Distributions to noncontrolling interest










(63
)

(63
)
Other comprehensive income, net of tax








500




500

Net income attributable to the noncontrolling interest










72


72

Net income attributable to Northrim BanCorp






3,561






3,561

Three Months Ended March 31, 2015
6,854



$6,854



$61,847



$97,809



$747



$127



$167,384

 
See notes to consolidated financial statements

6



NORTHRIM BANCORP, INC.
Consolidated Statements of Cash Flows
(Unaudited)
 
Three Months Ended March 31,
(In Thousands)
2015
 
2014
Operating Activities:
 
 
 
Net income

$3,633

 

$2,703

Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
 

 
 

Gain on sale of securities, net
(114
)
 
(97
)
Depreciation and amortization of premises and equipment
562

 
420

Amortization of software
46

 
45

Intangible asset amortization
73

 
52

Amortization of investment security premium, net of discount accretion
(61
)
 
(50
)
Deferred tax liability
143

 
155

Stock-based compensation
118

 
107

Deferral of loan fees and costs, net
(89
)
 
(210
)
Provision for loan losses
326

 

Reserve for (recovery from) purchased receivables
(54
)
 
(37
)
Purchases of loans held for sale

 
(30,482
)
Proceeds from the sale of loans held for sale
158,365

 
27,455

Origination of loans held for sale
(176,372
)
 

Gain on sale of other real estate owned

 
(294
)
Impairment on other real estate owned
268

 

Equity in undistributed earnings from mortgage affiliate

 
148

Net changes in assets and liabilities:
 

 
 
(Increase) in accrued interest receivable
(411
)
 
(205
)
Decrease (increase) in other assets
2,643

 
(4,899
)
Decrease in other liabilities
(9,882
)
 
(1,501
)
Net Cash (Used) by Operating Activities
(20,806
)
 
(6,690
)
Investing Activities:
 

 
 

Investment in securities:
 

 
 
Purchases of investment securities available for sale
(16,792
)
 
(39,125
)
Proceeds from sales/maturities of securities available for sale
44,701

 
55,742

Proceeds from redemption of FHLB stock
37

 
78

(Increase) decrease in purchased receivables, net
(24
)
 
6,162

(Increase) decrease in loans, net
(36,254
)
 
5,774

Proceeds from sale of other real estate owned
311

 
1,294

Decrease in loan to Elliott Cove, net

 
49

Purchases of premises and equipment
(1,368
)
 
(794
)
Net Cash (Used) Provided by Investing Activities
(9,389
)
 
29,180

Financing Activities:
 

 
 
Increase (decrease) in deposits
11,266

 
(5,966
)
(Decrease) in securities sold under repurchase agreements
(2,023
)
 
(1,257
)
(Decrease) in borrowings
(3,735
)
 
(4,330
)
Distributions to noncontrolling interest
(63
)
 
(75
)
Cash dividends paid
(1,234
)
 
(1,112
)
Net Cash Provided (Used) by Financing Activities
4,211

 
(12,740
)
Net Change in Cash and Cash Equivalents
(25,984
)
 
9,750

Cash and Cash Equivalents at Beginning of Period
68,556

 
85,591

Cash and Cash Equivalents at End of Period

$42,572

 

$95,341

 
 
 
 
 
 
 
 
 
 
 
 

7



Supplemental Information:
 

 
 
Income taxes paid

$786

 

$2

Interest paid

$720

 

$442

Noncash commitments to invest in Low Income Housing Tax Credit Partnerships

$55

 

$—

Transfer of loans to other real estate owned

$181

 

$1,137

Transfer of premises to other real estate owned

$—

 

$904

Cash dividends declared but not paid

$11

 

$10

 
See notes to consolidated financial statements

8



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared by Northrim BanCorp, Inc. (the “Company”) in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and with instructions to Form 10-Q under the Securities Exchange Act of 1934, as amended. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The Company owns a 100% interest in Residential Mortgage Holding Company, LLC ("RML"), the parent company of Residential Mortgage, LLC ("Residential Mortgage") and a 50.1% interest in Northrim Benefits Group, LLC ("NBG") and consolidates their balance sheets and income statements into its financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Certain reclassifications have been made to prior year amounts to maintain consistency with the current year with no impact on net income or total shareholders’ equity. The Company determined that it operates in two primary operating segments: Community Banking and Home Mortgage Lending. Prior to December 2014, the Company operated in a single segment: Community Banking. The Company has evaluated events and transactions through May 8, 2015 for potential recognition or disclosure. Operating results for the interim period ended March 31, 2015, are not necessarily indicative of the results anticipated for the year ending December 31, 2015. These consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

2. Significant Accounting Policies and Recent Accounting Pronouncements

The Company’s significant accounting policies are discussed in Note 1 to the audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2014.
In January 2014, the Financial Accounting Standards Board ("FASB") issued ASU No. 2014-01, Accounting for Investments in Qualified Affordable Housing Projects. ASU 2014-01 permits an entity to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). The amendments are effective for annual and interim reporting periods beginning on or after December 15, 2014 and should be applied prospectively. The Company adopted ASU 2014-01 in its consolidated financial statements as of January 1, 2015. As a result, amortization expense related to the Company's investments in low income housing tax credit partnerships has been included in the line item entitled "Provision for income taxes" in the Consolidated Statements of Income for all periods presented.
In February 2015, the Financial Accounting Standards Board (“FASB”) issued ASU 2015-02, Amendments to the Consolidation Analysis (“ASU 2015-02”). The amendments to the Codification in ASU 2015-02 affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. The amendments in this update affect the following areas: 1) the effect of related parties on the primary beneficiary determination, 2) evaluating fees paid to a decision maker or a service provider as a variable interest, 3) the effect of fee arrangements on the primary beneficiary determination, and 4) certain investment funds. This ASU is effective for the Company’s financial statements for annual and interim periods beginning on or after December 15, 2015, and must be applied prospectively. The Company does not believe that the adoption of this standard will have a material impact on the Company’s consolidated financial position or results of operations.
In April 2015, the Financial Accounting Standards Board (“FASB”) issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). The amendments to the Codification in ASU 2015-03 identify, evaluate, and improve areas of generally accepted accounting principles (GAAP) for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements. To simplify presentation of debt issuance costs, the amendments in this Update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this Update. This ASU is effective for the Company’s financial statements for annual and interim periods beginning on or after December 15, 2015, and must be applied prospectively. The Company does not believe that the adoption of this standard will have a material impact on the Company’s consolidated financial position or results of operations.



9



3. Business Combinations
Alaska Pacific Bancshares, Inc.
On April 1, 2014, the Company completed the acquisition of 100% of the outstanding shares of Alaska Pacific Bancshares, Inc. ("Alaska Pacific") for a total purchase price of $13.9 million, which was comprised of the issuance of 290,212 shares of the Company’s common stock (at a volume weighted average closing price of $25.66 per share) and $6.4 million in cash. The assets acquired and liabilities assumed have been accounted for under the acquisition method of accounting and were recorded at their estimated fair values as of the April 1, 2014 acquisition date. Estimated fair values recorded in the transaction are subject to change for up to one year after the closing date of the acquisition. The primary reason for the acquisition was to expand the Company's geographic footprint in Alaska. 

The application of the acquisition method of accounting resulted in the recognition of a bargain purchase gain of $170,000 and a core deposit intangible of $623,000, or 0.5% of core deposits. The bargain purchase gain represents the excess of the estimated fair value of the net assets acquired in excess of the purchase price and is included in Other Income in the Consolidated Statements of Income in this Form 10-Q. This acquisition resulted in a bargain purchase gain primarily due to the inclusion of certain adjustments to the purchase price for potential risks identified by the Company during the due diligence and price negotiation stages of the acquisition that were concluded in October of 2013. The Company has concluded that the potential risks identified at that time do not represent a liability to the Company and, accordingly, they have not been allocated any value in the application of the acquisition method of accounting.

A summary of the net assets acquired and the estimated fair value adjustments of Alaska Pacific are presented below:  

 
Alaska Pacific
(In Thousands)
 
April 1, 2014
 
 
 
Cost basis net assets
 

$14,733

Cash payment made
 
(6,423
)
Common stock issued
 
(7,446
)
Fair value adjustments:
 

   Net loans
 
(1,137
)
   Premises and equipment
 
547

   Other intangible assets
 
623

   Mortgage servicing rights
 
(119
)
   Deposits
 
(844
)
   Other
 
236

Bargain purchase gain
 

$170



10



A summary of assets acquired and liabilities assumed at their estimated fair values are presented below:  

 
Alaska Pacific
(In Thousands)
 
April 1, 2014
 
 
 
Assets Acquired:
 

   Cash and equivalents
 

$12,956

   Investment securities
 
7,240

   Loans
 
138,432

   Premises and equipment
 
3,436

   Other intangibles
 
623

   Mortgage servicing rights
 
1,170

   Other real estate owned
 
1,709

   Other assets
 
1,645

     Total assets acquired
 

$167,211


 

Liabilities Assumed:
 

   Deposits
 

$151,438

   Other liabilities
 
1,734

     Total liabilities assumed
 

$153,172

Alaska Pacific purchased loans not subject to the requirements of FASB ASC  310-30 Loans and Debt Securities Acquired with Deteriorated Credit Quality ("ASC 310-30") are presented below at acquisition:
(In Thousands)
 
April 1, 2014
 
 
 
Contractually required principal payments
 

$133,921

Purchase adjustment for credit, interest rate, and liquidity
 
612

Fair value of purchased non-credit impaired loans
 

$134,533


Alaska Pacific purchased loans subject to the requirements of FASB ASC  310-30 Loans and Debt Securities Acquired with Deteriorated Credit Quality. The Company identified eighteen purchased credit impaired loans as of April 1, 2014. This group of loans consists primarily of commercial and commercial real estate loans, and unlike a pool of consumer mortgages, it is not practicable for the Company to analyze the accretable yield of these loans. As such, the Company has elected the cost recovery method of income recognition for these loans, and thus no accretable difference has been identified for these loans.
Purchased credit impaired loans at acquisition are presented below:
(In Thousands)
 
April 1, 2014
 
 
 
Contractually required principal payments
 

$7,553

Nonaccretable difference
 
(3,654
)
Fair value of purchased credit impaired loans
 

$3,899

The acquisition of Alaska Pacific is not considered significant to the Company’s financial statements. The operations of Alaska Pacific are included in our operating results from April 1, 2014, and we estimate that these operations added revenue of $1.9 million, non-interest expense of $1.5 million, and net income of $393,000, before taxes, for the quarter ended March 31, 2015. Alaska Pacific’s results of operations prior to the acquisition are not included in our operating results. Additionally, merger-related costs of $480,000 for the quarter ended March 31, 2014 were incurred and expensed in connection with the acquisition of Alaska Pacific and recognized within the merger and acquisition expense on the Consolidated Statements of Income.

11



The following table presents unaudited pro forma results of operations for the three month periods ended March 31, 2014 as if the acquisition of Alaska Pacific had occurred on January 1, 2014. The proforma results have been prepared for comparative purposes only and are not necessarily indicative of the results that would have been obtained had the acquisition actually occurred on January 1, 2014.
(In Thousands, except earnings per share data)

Three Months Ended March 31, 2014




Pro Forma

Pro Forma


Company
Alaska Pacific1
Adjustments

Combined
Net interest and other income


$13,967


$2,095


($10
)
2 

$16,052

Net income attributable to Northrim BanCorp, Inc.

2,658

(1,282
)
146

3 
1,522

Earnings Per Share, Basic


$0.41





$0.22

Earnings Per Share, Diluted


$0.40





$0.22

Weighted Average Shares Outstanding, Basic

6,537,652




6,827,864

Weighted Average Shares Outstanding, Diluted

6,629,330




6,919,542

1 Alaska Pacific represents results from January 1 to March 31 for 2014.
2 Amount of amortization/ accretion of the fair value adjustments on loans and certificates of deposit.
3 Amount of amortization/accretion of the fair value adjustments on loans and certificates of deposit, bargain purchase gain, amortization of cored deposit intangible, and the change in the provision for income taxes.
Residential Mortgage Holding Company, LLC
On December 1, 2014, the Company completed the acquisition of 76.5% of the equity interest in RML, the parent company of Residential Mortgage, in a cash transaction valued at $29.5 million, resulting in RML becoming an indirect wholly-owned subsidiary of the Company. The primary reason for the acquisition was to expand the Company's presence in the mortgage lending business in Alaska. The fair value of the Company's equity interest in RML immediately prior to the acquisition was $9.0 million. The Company recorded a $3.0 million gain in the fourth quarter of 2014 as a result of remeasuring the Company's equity interest in RML immediately prior to the acquisition, which was included in the Company's Consolidated Statements of Income in the line item entitled "Gain on purchase of mortgage affiliate". The Company utilized a market value approach to value its equity interest in RML which included analysis of current trading values and historical acquisition multiples of comparable mortgage companies. The consideration transferred or transferable to the former owners of RML and the assets acquired and liabilities assumed have been accounted for under the acquisition method of accounting and were recorded at their estimated fair values as of the December 1, 2014 acquisition date. Estimated fair values recorded in the transaction are subject to change for up to one year after the closing date of the acquisition. The application of the acquisition method of accounting resulted in the recognition of goodwill in the amount of $14.8 million and a trade name intangible of $950,000. RML holds a 30% equity interest in Homestate Mortgage LLC.


12



The former owners of RML (the "sellers") will receive additional cash proceeds (the "earn-out" payments) based on the adjusted pretax earnings of RML for each of the twelve months periods ending November 30, 2015, 2016, 2017, 2018 and 2019. The Company recorded a $7.3 million liability as of December 1, 2014 as part of its purchase accounting for future earn-out payments. Per the purchase agreement, the earn-out payments are calculated as follows:
First tier earn-out payment
Adjusted pretax earnings greater than $1,000,000 and less than or equal to $2,000,000
Payment will be calculated as product of amount of adjusted pretax earnings times 40%
Second tier earn-out payment
Adjusted pretax earnings greater than $2,000,000 and less than or equal to $3,000,000
The first tier earn-out payment, plus the product of amount of adjusted pretax earnings greater than $2,000,000 and less than $3,000,000 times 50%
Third tier earn-out payment
Adjusted pretax earnings greater than $3,000,000 and less than or equal to $4,000,000
The first tier plus the second tier earn-out payment, plus the product of amount of adjusted pretax earnings greater than $3,000,000 and less than $4,000,000 times 70%
Fourth tier earn- out payment
Adjusted pretax earnings greater than $4,000,000 and less than or equal to $6,000,000
The first, second and third tier earn-out payment, plus the product of amount of adjusted pretax earnings greater than $4,000,000 and less than $6,000,000 times 85%
Fifth tier earn-out payment
Adjusted pretax earnings greater than $6,000,000
The first, second, third and fourth tier earn-out payment, plus the product of amount of adjusted pretax earnings greater than $6,000,000 times 55%

The purchase agreement provides for these earn-out payments as a portion of the purchase price to be paid to the sellers in future periods, contingent on future events. Therefore we included an estimate of the acquisition-date fair value of the contingent consideration of $7.3 million as part of the cost of the combination. The accounting treatment of the contingent consideration to be paid to those of the sellers who continue employment with the Company was evaluated to determine whether the amounts represent purchase consideration or a separate transaction, such as post-transaction employee compensation. Factors evaluated require significant judgment and include, among other factors; consideration of the terms of continuing employment, levels of post-transaction compensation, ownership interest of the sellers/employees, linkage of the contingent consideration to the transaction date combination valuation, and any other agreements or matters related to the transaction.
Based on an evaluation of the factors surrounding the transaction and the terms of the purchase agreement, the amount due under the earn-out provision was accounted for as acquisition consideration. We concluded that the contingent consideration to be paid to the sellers/employees was a significant component of the transaction date valuation of the acquired business. The calculation of the contingent payment was based upon factors established at the date of the transaction to be paid upon meeting the established earnings criteria of RML. The post transaction employment arrangements of the continuing employees are at market rates, and the formula for determining the contingent consideration is consistent with the business valuation methodologies, based upon a multiplier of earnings recognized from RML for five twelve month periods following the acquisition.

For the three months ended March 31, 2015, the Company recorded an adjustment to increase the contingent liability by $1.5 million. The increase in the contingent liability resulted from the excess of RML's pretax income from December 1, 2014 through the end of the first quarter of 2015 over and above estimates made at the close of the purchase of RML. The adjustment to the contingent liability for estimated future earn-out payments is recorded in the line item titled "Change in fair value, RML earn-out liability" in other operating expense on the Consolidated Statements of Income. The total contingent liability as of March 31, 2015 is $8.8 million.


13



A summary of the net assets acquired and the estimated fair value adjustments of RML are presented below:  
 
 
RML
(In Thousands)
 
December 1, 2014
 
 
 
Cost basis net assets
 

$11,915

Cash payment made
 
(18,240
)
Cash surrender value of life insurance paid
 
(3,896
)
Liability for future earn out payments
 
(7,318
)
 
 
 
Fair value adjustments:
 
 
   Loans
 
(360
)
   Trade name intangible
 
950

   Rate lock derivative asset
 
960

   Investment in Homestate Mortgage, LLC
 
1,490

   Other
 
(311
)
Goodwill
 

($14,810
)
A summary of assets acquired and liabilities assumed at their estimated fair values are presented below:  
 
 
RML
(In Thousands)
 
December 1, 2014
 
 
 
Assets Acquired:
 
 
   Cash and equivalents
 

$10,828

   Net loans
 
41,304

   Premises and equipment
 
255

   Trade name intangible
 
950

   Rate lock derivative asset
 
960

   Investment in Homestate Mortgage LLC
 
3,000

   Other real estate owned
 
270

   Other assets
 
10,291

     Total assets acquired
 

$67,858

 
 
 
Liabilities Assumed:
 
 
   Borrowings
 

$37,541

   Other liabilities
 
6,625

     Total liabilities assumed
 

$44,166

The acquisition of RML is not considered significant to the Company’s financial statements under Regulation S-X; however, the Company has determined that the acquisition results in a new reporting segment, Home Mortgage Lending.
The operations of RML are included in our operating results from December 1, 2014, and added revenue of $7.4 million, non-interest expense of $5.1 million, and net income of $2.3 million, before taxes, for the three month period ended March 31, 2015. RML’s results of operations prior to the December 1, 2014 acquisition are included in our operating results under the equity method. Additionally, merger-related costs of $507,000 for the year ended December 31, 2014 were incurred and expensed in connection with the acquisition of RML and recognized within the merger and acquisition expense on the Consolidated Statements of Income.
    

14



The following table presents unaudited pro forma results of operations for the three month periods ended March 31, 2014 as if the acquisition of RML had occurred on January 1, 2014. The proforma results have been prepared for comparative purposes only and are not necessarily indicative of the results that would have been obtained had the acquisition actually occurred on January 1, 2014.
(In Thousands, except earnings per share data)
 
Three Months Ended March 31, 2014
 
 
 
 
 
Pro Forma
 
Pro Forma
 
 
Company
RML1
 
Adjustments
 
Combined
Net interest and other income
 

$13,967


$4,143

2 

$144

3 

$18,254

Net income attributable to Northrim BanCorp, Inc.
 
2,658

(426
)
 
3,072

4 
5,304

Earnings Per Share, Basic
 

$0.41

 
 
 
 

$0.81

Earnings Per Share, Diluted
 

$0.40

 
 
 
 

$0.80

Weighted Average Shares Outstanding, Basic
 
6,537,652

 
 
 
 
6,537,652

Weighted Average Shares Outstanding, Diluted
 
6,629,330

 
 
 
 
6,629,330

1 RML represents results from January 1 to March 31.
2 2014 amount is comprised of net interest income of $67,000 and $4.1 million of other income.
3 Amount of accretion of the fair value adjustments on loans and income recognized under the equity method prior to the December 2014 acquisition.
4 Amount of accretion of the fair value adjustments on loans, income recognized under the equity method, gain on acquisition, earn out accretion, and the change in the provision for income taxes.
Prior to December 1, 2014, the Company accounted for RML under the equity method of accounting. As of December 1, 2014, the Company owns 100% interest in RML and consolidates RML's activity into the Company's Consolidated Financial Statements.
The following table presents unaudited combined pro forma results of operations for the three month periods ended March 31, 2014 as if the acquisition of Alaska Pacific and RML had occurred on January 1, 2014. The proforma results have been prepared for comparative purposes only and are not necessarily indicative of the results that would have been obtained had the acquisitions actually occurred on January 1, 2014.
(In Thousands, except earnings per share data)
 
Three Months Ended March 31, 2014
 
 
 
Alaska
 
 
Pro Forma
 
Pro Forma
 
 
Company
Pacific1
RML2
 
Adjustments
 
Combined
Net interest and other income
 

$13,967


$2,095


$4,143

3 

$134

4 

$20,339

Net income attributable to Northrim BanCorp, Inc.
 
2,658

(1,282
)
(426
)
 
3,218

5 
4,168

Earnings Per Share, Basic
 

$0.41

 
 
 
 
 

$0.61

Earnings Per Share, Diluted
 

$0.40

 
 
 
 
 

$0.60

Weighted Average Shares Outstanding, Basic
 
6,537,652

 
 
 
 
 
6,827,864

Weighted Average Shares Outstanding, Diluted
 
6,629,330

 
 
 
 
 
6,919,542

1 Alaska Pacific represents results from January 1 to March 31 for 2014.
2 RML represents results from January 1 to March 31.
3 2014 amount is comprised of net interest income of $67,000 and $4.1 million of other income.
4 Amount of amortization/ accretion of the fair value adjustments on loans and certificates of deposit for Alaska Pacific and amount of accretion of the fair value adjustments on loans and income recognized under the equity method prior to the December 2014 acquisition for RML.

15



5 Amount of amortization/accretion of the fair value adjustments on loans and certificates of deposit, bargain purchase gain, amortization of cored deposit intangible, and the change in the provision for income taxes for Alaska Pacific and amount of accretion of the fair value adjustments on loans, income recognized under the equity method, gain on acquisition, earn out accretion, and the change in the provision for income taxes for RML.

4. Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, interest-bearing deposits with other banks, banker’s acceptances, commercial paper, securities purchased under agreement to resell, federal funds sold, and securities with maturities of less than 90 days at acquisition.  As of March 31, 2015, the Company had one certificate of deposit totaling $3.5 million in another bank with original maturity greater than 90 days. Cash and cash equivalent balances placed with the Federal Reserve of San Francisco is the only concentration representing more than 10% of the Company’s equity.

5. Investment Securities
The carrying values and approximate fair values of investment securities at the periods indicated are presented below:
(In Thousands)
Amortized Cost

Gross Unrealized Gains

Gross Unrealized Losses

Fair Value
March 31, 2015
 


 


 


 

Securities available for sale
 


 


 


 

U.S. Treasury and government sponsored entities

$199,754



$548



$47



$200,255

Municipal securities
11,962


252


1


12,213

U.S. Agency mortgage-backed securities
976


5


2


979

Corporate bonds
38,895


412




39,307

Preferred stock
1,992


26




2,018

Total securities available for sale

$253,579



$1,243



$50



$254,772

Securities held to maturity
 


 


 


 

Municipal securities

$2,199



$97



$—



$2,296

Total securities held to maturity

$2,199



$97



$—



$2,296

December 31, 2014
 


 


 


 

Securities available for sale
 


 


 


 

U.S. Treasury and government sponsored entities

$226,624



$105



$539



$226,190

Municipal securities
11,843


285


4


12,124

U.S. Agency mortgage-backed securities
1,024


6


1


1,029

Corporate bonds
38,820


415




39,235

Preferred stock
2,999


153




3,152

Total securities available for sale

$281,310



$964



$544



$281,730

Securities held to maturity
 


 


 


 

Municipal securities

$2,201



$107



$—



$2,308

Total securities held to maturity

$2,201



$107



$—



$2,308



16



Gross unrealized losses on investment securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2015 and December 31, 2014 were as follows:

 
Less Than 12 Months
More Than 12 Months
Total
(In Thousands)
Fair Value
Unrealized Losses
Fair Value
Unrealized Losses
Fair Value
Unrealized Losses
March 31, 2015:
 
 
 
 
 
 
Securities Available for Sale
 
 
 
 
 
 
     U.S. Treasury and government sponsored entities

$42,883


$47


$—


$—


$42,883


$47

     Municipal Securities
208

1



208

1

     Mortgage-backed Securities
172

2



172

2

          Total

$43,263


$50


$—


$—


$43,263


$50

 
 
 
 
 
 
 
December 31, 2014:
 
 
 
 
 
 
Securities Available for Sale
 
 
 
 
 
 
     U.S. Treasury and government sponsored entities

$165,004


$539


$—


$—


$165,004


$539

     Municipal Securities
567

4



567

4

     Mortgage-backed Securities
117

1



117

1

          Total

$165,688


$544


$—


$—


$165,688


$544


There were fourteen and twenty-nine available-for-sale securities with unrealized losses as of March 31, 2015 and December 31, 2014, respectively, that have been in a loss position for less than twelve months. There were no securities as of March 31, 2015 and December 31, 2014 that have been in an unrealized loss position for more than twelve months.  The contractual terms of the investments in a loss position do not permit the issuer to settle the securities at a price less than the amortized cost of the investment. Because the Company does not intend to sell, nor is it required to sell these investments until a market price recovery or maturity, these investments are not considered other-than-temporarily impaired.

At March 31, 2015, $56.3 million in securities, or 22%, of the investment portfolio was pledged for deposits and borrowings, as compared to $54.1 million, or 19%, at December 31, 2014. We held no securities of any single issuer (other than government sponsored entities) that exceeded 10% of our shareholders’ equity at March 31, 2015 and December 31, 2014.


17



The amortized cost and fair values of debt securities at March 31, 2015, are distributed by contractual maturity as shown below.  Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.  Although preferred stock has no stated maturity, it is aggregated in the calculation of weighted average yields presented below in the category of investments that mature in ten years or more.
(In  Thousands)
Amortized Cost

Fair Value

Weighted Average Yield
US Treasury and government sponsored entities
 

 

 
1-5 years

$199,754



$200,255


1.13
%
Total

$199,754



$200,255


1.13
%
U.S. Agency mortgage-backed securities
 

 

 
1-5 years

$50



$50


2.29
%
5-10 years
289


289


3.26
%
Over 10 years
637


640


2.91
%
Total

$976



$979


2.98
%
Corporate bonds
 

 

 
Within 1 year

$736



$738


0.91
%
1-5 years
36,159


36,552


1.45
%
5-10 years
2,000


2,017


1.07
%
Total

$38,895



$39,307


1.42
%
Preferred stock
 

 

 
Over 10 years

$1,992



$2,018


4.71
%
Total

$1,992



$2,018


4.71
%
Municipal securities
 

 

 
Within 1 year

$2,091



$2,096


0.64
%
1-5 years
7,142


7,321


2.67
%
5-10 years
4,928


5,092


4.54
%
Total

$14,161



$14,509


3.02
%

The proceeds and resulting gains and losses, computed using specific identification, from sales of investment securities for the three months ending March 31, 2015 and 2014 respectively, are as follows: 
(In Thousands)
Proceeds

Gross Gains

Gross Losses
2015
 

 

 
Available for sale securities

$1,621



$114



$—

2014
 

 

 
Available for sale securities

$2,098



$97



$—

    
A summary of interest income for the three months ending March 31, 2015 and 2014 on available for sale investment securities is as follows:
(In Thousands)
2015

2014
US Treasury and government sponsored entities

$618



$335

U.S. Agency mortgage-backed securities
7



Other
175


258

Total taxable interest income

$800



$593

Municipal securities

$85



$137

Total tax-exempt interest income

$85



$137

Total

$885



$730


18




6. Loans Held for Sale
The Company acquired the remaining 76.5% of RML on December 1, 2014. RML originates 1-4 family residential mortgages and sells them to the secondary market. These loans are shown as loans held for sale on the Company's Consolidated Balance Sheet. RML originated $176.4 million and sold $158.4 million in loans during the three-month period ending March 31, 2015. Prior to December 1, 2014, the Company had a 23.5% ownership interest in RML and purchased residential loans from them.  The Company then sold these loans in the secondary market.  The Company purchased $30.5 million and sold $27.5 million in loans from RML during the three-month period ending March 31, 2014.
7.  Loans
The following table presents total portfolio loans by portfolio segment and class of financing receivable, based on our risk classification criteria:
(In Thousands)
Commercial

Real estate construction one-to-four family

Real estate construction other

Real estate term owner occupied

Real estate term non-owner occupied

Real estate term other

Consumer secured by 1st deeds of trust

Consumer other

Total
March 31, 2015
 

 

 

 

 

 

 

 

 
AQR Pass

$307,514



$41,272



$92,382



$103,593



$291,821



$39,716



$29,833



$30,242



$936,373

AQR Special Mention
11,601






5,780


2,094




398


43


19,916

AQR Substandard
5,318






594


1,668


433


643


81


8,737

AQR Doubtful

















AQR Loss

















Subtotal

$324,433



$41,272



$92,382



$109,967



$295,583



$40,149



$30,874



$30,366



$965,026

Less: Unearned origination fees, net of origination costs

 

 

(4,462
)
        Total loans
 

 

 

 

 

 

 

 


$960,564

December 31, 2014
 

 

 

 

 

 

 

 

 
AQR Pass

$291,020



$34,651



$91,195



$103,049



$282,774



$36,705



$31,118



$31,399



$901,911

AQR Special Mention
11,618






5,817


2,095


39


396


47


20,012

AQR Substandard
3,905


191




606


1,747


150


486


47


7,132

AQR Doubtful

















AQR Loss

















Subtotal

$306,543



$34,842



$91,195



$109,472



$286,616



$36,894



$32,000



$31,493



$929,055

Less: Unearned origination fees, net of origination costs

 

 

(4,551
)
        Total loans
 

 

 

 

 

 

 

 


$924,504

Loans are carried at their principal amount outstanding, net of charge-offs, unamortized fees and direct loan origination costs.  Loan balances are charged-off to the allowance for loan losses ("Allowance") when management believes that collection of principal is unlikely.  Interest income on loans is accrued and recognized on the principal amount outstanding except for loans in a nonaccrual status.  All classes of loans are placed on nonaccrual and considered impaired when management believes doubt exists as to the collectability of the interest or principal.  Cash payments received on nonaccrual loans are directly applied to the principal balance.  Generally, a loan may be returned to accrual status when the delinquent principal and interest is brought current in accordance with the terms of the loan agreement.  Additionally, certain ongoing performance criteria, which generally includes a performance period of six months, must be met in order for a loan to be returned to accrual status.  Loans are reported as past due when installment payments, interest payments, or maturity payments are past due based on contractual terms.

19



Nonaccrual loans totaled $4.8 million and  $4.7 million at March 31, 2015 and December 31, 2014, respectively. Nonaccrual loans at the periods indicated, by segment, are presented below:
(In  Thousands)
March 31, 2015

December 31, 2014
Commercial

$2,538



$2,031

Real estate construction one-to-four family


191

Real estate construction other



Real estate term owner occupied
127


135

Real estate term non-owner occupied
1,668


1,746

Real estate term other


39

Consumer secured by 1st deeds of trust
477


485

Consumer other


47

Total

$4,810



$4,674


Past due loans and nonaccrual loans at the periods indicated are presented below by loan class:
(In Thousands)
30-59 Days
Past Due
Still
Accruing

60-89 Days
Past Due
Still
Accruing

Greater Than
90 Days
Still
Accruing

Nonaccrual

Total Past
Due

Current

Total
March 31, 2015