Executive Summary

Q4 2013 was solid on core banking fundamentals but softer on bottom-line as mortgage banking slowed and merger/start-up costs lifted expenses; diluted EPS was $0.40 vs $0.53 in Q3 and $0.48 in Q4 2012 on flat sequential total revenues of $14.3M and a higher efficiency ratio of 74.35% .
Net interest income rose sequentially (+5% q/q to $11.5M) with NIM stable at 4.24% as portfolio loans grew 2% q/q and 9% y/y; asset quality improved materially (NPAs/Assets 0.35% vs 0.56% in Q3) .
Management expects near-term expense headwinds from Alaska Pacific merger costs and the end of the mortgage refi boom, but views the Alaska Pacific acquisition as strategically accretive in 2015 and expanding into Juneau, Ketchikan, Sitka .
Dividend increased 13% y/y to $0.17 in December; tangible book value per share rose to $20.83 (up ~6% y/y), and capital remains strong (Tier 1 15.35%)—supportive for medium-term returns though Q1–Q2 2014 opex could weigh on near-term results .

What Went Well and What Went Wrong

What Went Well
- Core spread income strength: Net interest income increased to $11.5M (+5% q/q, +7% y/y) with NIM steady at 4.24% despite industry pressure; average portfolio loans up 4% q/q and 11% y/y .
- Credit quality and coverage: NPAs/Assets fell to 0.35% (from 0.56% in Q3; 0.78% a year ago); NPLs/Loans down to 0.24% with ALLL/NPLs coverage at 897% .
- Strategic positioning: Announced Alaska Pacific acquisition to enter Juneau, Ketchikan, Sitka; expected EPS accretion in 2015. “Once completed, this acquisition…is expected to be accretive to our earnings in 2015” — Marc Langland, CEO .
What Went Wrong
- Mortgage and fee income softness: Total other operating income fell 14% q/q and 35% y/y to $2.8M on lower mortgage originations and reduced rental income; equity in earnings from Residential Mortgage declined sharply y/y .
- Expense pressure: Other operating expense rose 6% q/q to $10.7M on higher compensation, merger costs, and reserve for purchased receivables; efficiency ratio deteriorated to 74.35% (from 70.23% in Q3) .
- EPS down sequentially and y/y: Diluted EPS was $0.40 vs $0.53 in Q3 and $0.48 in Q4 2012; Q3 benefited from a negative loan loss provision of $785k versus no provision in Q4 .

Financial Results

Metric	Q4 2012	Q3 2013	Q4 2013
Total Revenues ($USD Millions)	$15.1	$14.3	$14.3
Net Interest Income ($USD Millions)	$10.780	$11.022	$11.521
Total Other Operating Income ($USD Millions)	$4.343	$3.243	$2.802
Provision for Loan Losses ($USD Millions)	$(0.300)	$(0.785)	$0.000
Total Other Operating Expense ($USD Millions)	$10.555	$10.076	$10.702
Net Income Attributable to NRIM ($USD Millions)	$3.162	$3.474	$2.681
Diluted EPS ($)	$0.48	$0.53	$0.40
Net Interest Margin (TE, %)	4.25%	4.24%	4.24%
Efficiency Ratio (%)	69.40%	70.23%	74.35%
ROAA (%)	1.11%	1.18%	0.89%
ROAE (%)	9.25%	9.74%	7.36%

Q4 2013 vs S&P Global consensus (if available):

Metric	Consensus	Actual
Diluted EPS ($)	— (Unavailable)	$0.40
Total Revenues ($USD Millions)	— (Unavailable)	$14.3

Note: S&P Global consensus estimates were unavailable at time of analysis (tool access limit).

Segment/Business Mix (Loans) – End of Period Balances

Portfolio Loans ($USD Millions)	12/31/2012	09/30/2013	12/31/2013
Commercial	$273.432	$304.531	$300.338
Commercial Real Estate	$344.559	$358.207	$376.398
Construction	$53.634	$60.446	$62.760
Consumer	$36.019	$34.979	$34.541
Total Portfolio Loans	$704.213	$754.355	$770.016
Mix (disclosed)	—	—	Commercial 39%, CRE 49%, Construction 8%

Key Banking KPIs

KPI	12/31/2012	09/30/2013	12/31/2013
Total Assets ($USD Millions)	$1,160.107	$1,179.137	$1,215.006
Total Deposits ($USD Millions)	$970.129	$968.229	$1,003.723
NPAs / Total Assets (%)	0.78%	0.56%	0.35%
NPLs / Portfolio Loans (%)	0.64%	0.38%	0.24%
ALLL / Loans (%)	2.33%	2.19%	2.11%
Coverage (ALLL/NPLs, %)	362%	569%	897%
Tier 1 / RWA (%)	15.34%	15.31%	15.35%
Tangible BVPS ($)	$19.67	$20.66	$20.83
Quarterly Dividend ($/sh)	$0.15 (Dec’12)	—	$0.17 (Dec’13)

Guidance Changes

Metric	Period	Previous Guidance	Current Guidance	Change
Operating expenses	1H 2014	—	Expect higher professional and conversion costs to complete Alaska Pacific merger	Increase expected
Mortgage banking contribution	2014	—	“Boom in mortgage refinancing…has ended”; mortgage affiliate contributions “moderated substantially”	Lower run-rate
HQ rental income	2H 2014	—	Intend to begin re-leasing HQ space in 2H14 (renovations near completion)	Increase starting 2H14
Strategic M&A (AK Pacific)	2015	—	Acquisition “expected to be accretive to earnings in 2015”	Positive EPS impact (2015)
Dividend	Ongoing	$0.15 (Dec’12)	$0.17 (Dec’13)	Raised

Note: No quantitative ranges provided.

Earnings Call Themes & Trends

Note: No Q4 2013 earnings call transcript was located in the corpus; table reflects available document disclosures and prior-period references.

Topic	Q2 2013 (Q-2)	Q3 2013 (Q-1)	Q4 2013 (Current)	Trend
Net interest margin and yields	— (document unavailable)	NIM 4.24%	NIM 4.24%; yield pressure from refis; >90% low-cost transaction deposits underpin NIM	Stable NIM; ongoing yield pressure
Credit quality	—	Negative provision (benefit) of $785k in Q3	No provision; NPAs/Assets 0.35%, NPLs/Loans 0.24%	Improving
Mortgage banking	—	—	Other op income down on mortgage volume declines; RML equity earnings down sharply y/y	Weaker vs 2012
Expenses/efficiency	—	Efficiency ratio 70.23%	Efficiency 74.35% on higher comp/merger costs/reserve	Deteriorated q/q
M&A and integration	—	—	Alaska Pacific deal announced; accretive 2015; expansion into 3 new markets	Positive strategic setup

Management Commentary

Strategic direction and M&A: “A highlight for the year was the signing of the agreement to acquire Alaska Pacific Bancshares…this acquisition will expand our franchise into Juneau, Ketchikan and Sitka…expected to be accretive to our earnings in 2015.” — Marc Langland, Chairman, President & CEO .
New initiatives: “We also launched Enroll Alaska…working to bring insurance coverage under the Affordable Health Care Act…we were able to enroll over 800 people…while further establishing Northrim Benefits Group as a leading employee benefits agency…” — Marc Langland .
Outlook on expenses and revenue mix: “These investments had a greater impact on costs than on revenue in 2013; however, we expect to begin to see contributions to revenue once the merger with Alaska Pacific is completed. We expect professional expenses and conversion costs…to continue to impact operating expenses in the first half of 2014.” — Joe Beedle, President & CEO of Northrim Bank .
Mortgage banking normalization: “We believe the boom in mortgage refinancing activity has ended…contributions to earnings and profits from our mortgage affiliate have moderated substantially.” — Joe Beedle .
Core margin drivers: “Our net interest margin remained strong…supported by loan growth and a deposit base that is more than 90% in low-cost transaction based accounts…we continue to see pressure on loan yields.” — Joe Schierhorn, CFO & COO .

Q&A Highlights

No earnings call transcript was available; therefore, Q&A themes and any guidance clarifications could not be reviewed. We searched for an “earnings-call-transcript” and “other-transcript” for Q4 2013 and found none in the corpus; web search did not surface an NRIM Q4 2013 call transcript either [Search results: none via ListDocuments; https://www.gurufocus.com/stock/NRIM/transcripts].

Estimates Context

Wall Street consensus (S&P Global) for Q4 2013 EPS and revenue was unavailable due to access limits at time of analysis. Actuals were diluted EPS of $0.40 and total revenues of $14.3M .
Given expense headwinds (merger/professional fees) and weaker mortgage banking, sell-side models may need lower near-term noninterest income and higher opex assumptions, with potential 2H 2014 lift from re-leasing HQ space and 2015 accretion from Alaska Pacific .

Key Takeaways for Investors

Core spread business is resilient: sequential NII growth (+5% q/q) and stable 4.24% NIM despite industry compression; monitor loan growth vs. yield pressure into 1H 2014 .
Asset quality is a strength: NPAs/Assets at 0.35% and coverage at 897% provide loss absorption capacity; risk costs remain benign (no provision in Q4) .
Near-term EPS pressure: expenses tied to merger integration and Enroll Alaska, plus weaker mortgage-related revenues, lifted the efficiency ratio to 74.35% and weighed on EPS ($0.40) .
Strategic expansion: Alaska Pacific adds three Southeast Alaska markets; management targets EPS accretion in 2015—track regulatory/shareholder approvals and integration milestones .
Capital and shareholder returns: Tier 1 at 15.35% and higher quarterly dividend ($0.17) support flexibility; tangible BVPS up to $20.83 .
Watch list for 1H 2014: opex cadence (professional/conversion costs), mortgage affiliate earnings trajectory, re-leasing progress for HQ (2H14), and deposit mix sustaining low-cost funding .
Macro sensitivity: Management notes Alaska job growth moderation and public sector constraints; nonetheless, construction and resource-related lending supported loan growth—monitor regional economic prints for demand trends .

Additional context and data sources:

Q4 2013 earnings press release and detailed financial tables (Form 8-K, Item 2.02) .
Executive employment agreements filed Jan 22, 2014 (corporate updates; not earnings drivers) .

Search notes:

We searched for Q4 2013 earnings call transcript and other Q4 2013 press releases; none were found in the document corpus or via web sources referenced (no NRIM Q4 2013 transcript located) [ListDocuments results; https://www.gurufocus.com/stock/NRIM/transcripts].
Prior two quarters’ standalone earnings 8-K/press releases were not present in the corpus; however, Q4 materials include comparative Q3 2013 and Q4 2012 figures used above .

NORTHRIM BANCORP INC (NRIM)·Q4 2013 Earnings Summary