Market Overview

Northrim BanCorp Reports Earnings of $3.6 Million, or $0.51 per Diluted Share in 2Q17

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ANCHORAGE, Alaska, July 31, 2017 (GLOBE NEWSWIRE) -- Northrim BanCorp, Inc. (NASDAQ:NRIM) ("Northrim" or the "Company") today reported that net income attributable to the Company was $3.6 million, or $0.51 per diluted share, in the second quarter of 2017, compared to $4.4 million, or $0.63 per diluted share, in the second quarter of 2016, and $3.8 million, or $0.55 per diluted share, in the first quarter of 2017.  The decline in profitability compared to the second quarter of 2016 was in large part due to lower mortgage banking income principally resulting from normal seasonality combined with a  slowing Alaska economy this year as compared to 2016.

For the first six months of 2017, net income attributable to the Company was $7.4 million, or $1.06 per diluted share, compared to $7.7 million, or $1.11 per diluted share, in the first six months of 2016. The Company's conversion to a new core banking system was successfully completed in May of 2017 and added other operating expenses of $633,000, or $0.09 per diluted share in the second quarter of 2017 and $764,000, or $0.11 per diluted share for the first six months of 2017.  These one-time costs reduced both return on average equity and return on average assets by 33 basis points and 4 basis points, respectively, and increased the efficiency ratio by 243 basis points in the second quarter of 2017.  For the first six months of 2017, these costs reduced both return on average equity and return on average assets by 40 basis points and 5 basis points, respectively, and increased the efficiency ratio by 141 basis points.

"We are very pleased to have completed this conversion on schedule and under-budget," said Joe Schierhorn, President and CEO.  "This new core banking system allows us to offer our business customers more sophisticated treasury management tools, and we believe our mobile applications are now more dynamic, easier to read, and will operate on virtually any device or operating system on the market today.  Additionally, we expect that this new system will be more scalable, allowing for future growth without a commensurate increase in operating costs to accommodate that growth."

Financial Highlights Three Months Ended
(Dollars in thousands, except per share data) June 30,
2017
March 31,
2017
December 31,
2016
September 30,
2016
June 30,
2016
Total assets $ 1,493,205   $ 1,512,580   $ 1,526,540   $ 1,540,120   $ 1,518,370  
Total portfolio loans $ 991,209   $ 960,832   $ 975,015   $ 997,076   $ 967,346  
Average portfolio loans $ 969,051   $ 970,493   $ 977,678   $ 979,164   $ 969,450  
Total deposits $ 1,234,310   $ 1,247,073   $ 1,267,653   $ 1,278,366   $ 1,255,688  
Average deposits $ 1,244,583   $ 1,230,947   $ 1,265,214   $ 1,263,750   $ 1,235,142  
Total shareholders' equity $ 191,777   $ 189,452   $ 186,712   $ 185,758   $ 183,965  
Net income attributable to Northrim BanCorp $ 3,589   $ 3,825   $ 3,590   $ 3,095   $ 4,350  
Diluted earnings per share $ 0.51   $ 0.55   $ 0.51   $ 0.44   $ 0.63  
Return on average assets   0.96 %   1.04 %   0.94 %   0.81 %   1.17 %
Return on average shareholders' equity   7.43 %   8.30 %   7.96 %   6.73 %   9.42 %
Net interest margin ("NIM")   4.20 %   4.15 %   4.01 %   4.11 %   4.21 %
Tax equivalent NIM*   4.26 %   4.22 %   4.07 %   4.17 %   4.27 %
Efficiency ratio   76.95 %   72.95 %   75.57 %   80.89 %   74.52 %
Total shareholders' equity/total assets   12.84 %   12.53 %   12.23 %   12.06 %   12.12 %
Tangible common equity/tangible assets*   11.88 %   11.57 %   11.28 %   11.12 %   10.72 %
Book value per share $ 27.75   $ 27.42   $ 27.07   $ 26.99   $ 26.75  
Tangible book value per share* $ 25.40   $ 25.06   $ 24.7   $ 24.61   $ 23.30  
Dividends per share $ 0.21   $ 0.21   $ 0.20   $ 0.20   $ 0.19  
                               

* References to tax equivalent NIM, tangible book value per share, tangible common equity and tangible assets (all of which exclude intangible assets) represent non-GAAP financial measures. Management has presented these non-GAAP measurements in this earnings release, because it believes these measures are useful to investors. See the end of this release for reconciliations of these measures to GAAP financial measures.

  • Net income attributable to Northrim BanCorp declined 6% to $3.6 million in the second quarter of 2017 compared to $3.8 million in the preceding quarter and 17% from $4.4 million in the second quarter a year ago.
  • For the first half of 2017, net income attributable to the Company declined 4% to $7.4 million, or $1.06 per diluted share, from $7.7 million, or $1.11 per diluted share in the like period a year ago.  Costs of $764,000 associated with the core processing system conversion and lower mortgage banking revenues contributed to the decline in profitability during the first half of 2017.
  • Total revenues, which include net interest income plus total other operating income, increased 5% to $24.0 million in the second quarter of 2017, compared to $22.7 million in the first quarter of 2017, and declined 8% compared to $25.9 million in the same period a year ago.  The fluctuations in mortgage banking income were the primary driver for the changes in total revenues for both periods.
     - Community Banking contributed 72% to total revenues and 77% to earnings in the second quarter.
     - Home Mortgage Lending contributed 28% to total revenues and 23% of earnings in the second quarter.
  • Net interest income increased 3% to $14.2 million in the second quarter of 2017 compared to the previous quarter, and grew 1% from the second quarter a year ago, mainly as a result of improved yields on loans and portfolio investments in the current quarter compared to prior quarters.
  • Both net interest margin ("NIM") at 4.20% and net interest margin on a tax equivalent basis ("NIMTE")* at 4.26% increased in the second quarter of 2017 compared to the first quarter of 2017, primarily due to increased interest rates in the current quarter.  The Company's NIMTE remains above peer averages1.
  • Northrim announced in July that the Company intends to redeem its $8 million in trust preferred securities held at Northrim Capital Trust 1 in August 2017. This liability bears interest at a floating rate of 90-day LIBOR plus 3.15%, became callable in 2008 and has a final maturity of May 15, 2033.  In 2016, total interest expense on this debt was $310,000.  For the first six months of 2017, interest expense on this debt was $169,000. This redemption is expected to decrease Tier 1 Capital to Risk Adjusted Assets and Total Capital to Risk Adjusted Assets by approximately 60 basis points each, to 14.38% and 15.63%, respectively.
  • Northrim paid a quarterly cash dividend of $0.21 per share in June 2017, up from the $0.19 per share dividend paid in June 2016.  The dividend provides an annual yield of approximately 2.9% at current market share prices.
  • Book value per share increased 4% to $27.75 at the end of the second quarter of 2017 from $26.75 a year ago, while tangible book value per share increased 9% to $25.40 at the end of the second quarter of 2017 from $23.30 a year ago.
  • The allowance for loan losses to portfolio loans grew to 2.02% at quarter end, compared to 1.90% a year ago, primarily due to the increase in nonperforming loans and the Company's assessment of various economic indicators including increasing vacancy rates for commercial real estate in Anchorage.
  • Northrim remains well-capitalized with Tier 1 Capital to Risk Adjusted Assets of 14.98%, total shareholders' equity to total assets of 12.84%, and tangible common equity to tangible assets* of 11.88% at June 30, 2017.

1As of March 31, 2017, the SNL US Bank Index tracked 151 banks with assets between $1 billion and $5 billion with averages for the following ratios: NIM (tax equivalent) 3.57%, loan loss reserves to gross loans of 0.98%, return on average assets 0.93%, and return on average equity 8.84%

Alaska Economic Update

"The decline in commodity valuations, particularly in the energy sector, continues to impact the economy of Alaska," said Schierhorn. According to the State of Alaska Department of Labor, June 2017 employment was down 1.6 percent, compared to June 2016. This compares to job losses of 2.5 percent in the fall of 2016.

"With lower revenues being generated from our state's natural resources, we are disappointed that the Alaska State Legislature continues to enact only short term solutions that we believe do not address the state's long-term fiscal problems.  Although we believe Alaska has far more financial resources than most states, we believe that the state government cannot continue to fund deficit spending from either the state reserves or the approximate $60 billion Alaska Permanent Fund (see www.apfc.org)."

In June, Alaskans celebrated the official anniversary of the completion of the Trans-Alaska Pipeline System (TAPS). The first oil flowed to Valdez through TAPS 40 years ago, culminating a 3-year, $8 billion project that employed approximately 70,000 people during construction.

In the past 40 years, more than 17 billion barrels of oil have been produced on Alaska's North Slope. Through 2016, the oil industry has invested more than $55 billion in Alaska. In many years, oil has funded 90% of the state's unrestricted general fund and generated more than $180 billion in total state revenue. Today, oil revenues account for approximately 67% of the state's unrestricted general fund revenue.

We believe that despite relatively low oil prices, the oil and gas industry will continue to have a significant impact on the Alaskan economy mainly due to the large amount of proven oil resources in the state. For example, revised estimates of the oil reserves at the oil field at Prudhoe Bay have exceeded initial projections and that oil field is now the third-largest oil field in the U.S. by proved reserves. Additionally, 2016 was the first year in a decade that had increased oil production through TAPS. If as expected, oil production through TAPS again increases in 2017, it would be the first time since 1988 where oil production through TAPS increased two consecutive years.

Regarding the housing market in Anchorage, the Alaska Dispatch News recently reported that the average price of a single-family home in Anchorage has remained stable from last year despite a large drop in housing inventory. Consequently, it appears to the Company that despite limited housing inventory and relatively low interest rates, housing prices are not rising.

According to the most recent report from Alaska Multiple Listing Service (the "AMLS"), the average home price in Anchorage was $365,836 for the first six months of 2017 (essentially unchanged from the same period last year), while the number of homes for sale in June 2017 was 865, down 16% from June 2016. Further, the AMLS reported that the total number of homes listed this year through June was 2,708, a drop of 12% from the first six months of 2016. According to the AMLS, housing inventory was artificially inflated in 2016 mostly as a result of the number of additional homes that became available as a result of the economic effects of Royal Dutch Shell abandoning its offshore oil exploration program in Alaska in 2015.

Overall, the AMLS predicts that selling a home in Anchorage will likely take longer this year compared to last year as the homes sold through June in 2017 spent 53 days on the market, which is up from 48 days for the first half of 2016.

Northrim Bank sponsors the Alaskanomics blog to provide news, analysis, and commentary on Alaska's economy.  Join the conversation at Alaskanomics.com, or for more information on the Alaska economy, visit: www.northrim.com and click on the "Business Banking" link and then click "Learn". Information from our website is not incorporated into, and does not form a part of this press release.

Review of Income Statement

Consolidated Income Statement

In the second quarter of 2017, Northrim generated a return on average assets of 0.96% and a return on average equity of 7.43%, in line with the 0.93% return on average assets and lower than the 8.84% return on average equity posted by the 151 banks that make up the SNL U.S. Bank Index with assets between $1 billion and $5 billion as of March 31, 2017.  NIM and NIMTE* for the second quarter of 2017 were 4.20% and 4.26%, respectively, compared to 3.57% NIMTE* for the index peers1.   For the first six months of 2017, return on average assets was 1.00% and return on average equity was 7.86%, compared to 1.04% and 8.53%, respectively, for the first half of 2016.

Net Interest Income/Net Interest Margin

Net interest income grew 3% to $14.2 million in the second quarter of 2017 compared to $13.8 million in the first quarter 2017 and grew 1% from $14.1 million in the second quarter a year ago. For the first six months of 2017, net interest income declined 1% to $28.1 million from $28.3 million in the first six months of 2016.  Lower interest and fees on loans during the current quarter compared to the same quarter in 2016 were more than offset by higher interest on portfolio investments in the current quarter, while increased interest income on portfolio investments in the first half of 2017 only partially offset reduced interest and fees on loans during that period compared to the same period in 2016.  Stable average portfolio loan balances and yields helped sustain net interest income during the current quarter, while lower average portfolio balances as a percentage of total earning assets contributed to a decline in both NIM and NIMTE for the first half of the year compared to the same period in 2016.  In addition, in the first quarter of 2017, net interest income was reduced by the reversal of $187,000 in interest income on an $8.7 million commercial loan relationship that was moved to nonaccrual status.

NIM increased to 4.20% in the second quarter of 2017 compared to 4.15% in the preceding quarter and decreased 1 basis points from the same quarter a year ago.  For the first six months of 2017 NIM was 4.17%, a decline of 5 basis points from 4.22% in the first six months of 2016.The following table summarizes the components of these changes:

  2Q17 vs. 1Q17    2Q17 vs. 2Q16
Nonaccrual interest adjustments % %
Interest rates and loan fees 0.06 % 0.04 %
Volume and mix of interest-earning assets (0.01 )% (0.05 )%
Change in NIM 0.05 % (0.01 )%


  YTD17 vs.YTD16
Nonaccrual interest adjustments %
Interest rates and loan fees (0.01 )%
Volume and mix of interest-earning assets (0.04 )%
Change in NIM (0.05 )%

 "We anticipate the planned repayment of one of our higher-cost floating rate liabilities will reduce interest expense going forward by at least $300,000 per year, and possibly more if interest rates continue to rise," said Latosha Frye, Chief Financial Officer.  "We believe the elimination of this interest expense will help to sustain NIM in the coming quarters.

"We expect NIM will range from 4.15% to 4.25% and NIMTE* will range from 4.20% and 4.30% in the second half of 2017 as we anticipate that our earning assets will continue to reprice higher and increases in deposit costs will lag these increases. We continue to believe that both our NIM and NIMTE* will benefit in the event interest rates rise or the yield curve steepens, and we would be adversely affected if interest rates fall and the yield curve continues to flatten," Frye continued.

Provision for Loan Losses

The provision for loan losses was $300,000 in the second quarter of 2017 compared to $400,000 in the first quarter of 2017 and $200,000 in the second quarter of 2016.  For the first six months of 2017, the provision for loan losses was $700,000 compared to $903,000 in the first half of 2016.  While adversely classified loans and delinquencies improved slightly, nonperforming loan balances are elevated as compared to the prior quarter and June 30, 2016. The allowance for loan losses to portfolio loans at the end of the second quarter of 2017 was 2.02% compared to 2.07% at March 31, 2017, and 1.90% at June 30, 2016.

Other Operating Income

In addition to home mortgage lending, Northrim has interests in other businesses that complement its core community banking activities.  It provides financial services to businesses and individuals through these interests, including purchased receivables financing, employee benefit plans, and wealth management.  These complementary business activities, including home mortgage lending and other noninterest income, contributed $9.7 million, or 41% of total revenues in the second quarter of 2017, as compared to $8.9 million, or 39% of revenues in the first quarter of 2017 and $11.9 million, or 46% of revenues in the second quarter of 2016.

Other operating income decreased by 18% in the second quarter of 2017 from the same quarter a year ago and increased 9% from the first quarter of 2017.  For the first six months of 2017, other operating income decreased 11% to $18.6 million from $21.0 million in the first six months of 2016. The  decrease in other operating income for both the current quarter and the first six months of 2017 compared to the same periods a year ago, is primarily due to a decline in mortgage banking income in 2017.  Since there is significant seasonality in mortgage banking in Alaska, and the first quarter is typically the lowest time of the year for mortgage activity(barring any significant increases in refinance activity or significant fluctuations in the value of mortgage servicing rights), mortgage banking income was higher in the current quarter compared to the previous quarter, which was the primary reason for the increase in total operating income in the current quarter compared to the previous quarter.

Other Operating Expenses

Operating expenses were $18.5 million in the second quarter 2017 compared to $16.6 million in the first quarter of 2017 and $19.4 million in the second quarter of 2016.  The increase compared to the preceding quarter reflects an increase in variable costs commensurate with higher mortgage volume, the majority of the one-time costs related to the core conversion and the timing of payments for marketing expenses and charitable contributions.  These increases were partially offset by the decrease in compensation expense related to the acquisition of Residential Mortgage, LLC ("RML") due to lower expected earnings from RML through the end of the current earn-out period, which ends on November 30, 2017.  In addition, the Company accrued $170,000 in other operating expense for estimated loan collection costs in the fourth quarter of 2016, but reversed $100,000 of this estimate in the first quarter of 2017 when management determined that actual costs were $70,000.  The Company also recorded a reduction in other operating expense in the first quarter of 2017 upon receipt of a $122,000 refund from the State of Washington for business and occupancy taxes related to 2012 - 2015 taxation years. The decrease in operating expenses in the second quarter of 2017 compared to the same quarter a year ago is primarily due to a decline in compensation payments related to the acquisition of RML mainly due to lower earnings from RML combined with a reduction in losses on the disposition of fixed assets.

Operating expenses for the first half of 2017 decreased 5% to $35.1 million from $36.7 million in the first half of 2016. The decrease from the year-ago period was primarily the result of the decrease in compensation payments related to the acquisition of RML mainly due to lower earnings from RML combined with lower salaries and other personnel expenses incurred in the first half of 2017.

Community Banking

"Our community banking business continues to generate the majority of our revenues and profits," said Schierhorn.  "While the slowdown in the economy has also slowed growth in both our loan and deposit portfolios, we believe the franchise remains positioned to capitalize on future market opportunities." Net income in the community banking segment decreased 16% in the second quarter, compared to the preceding quarter and 3% year-over-year, primarily due to the increase in other operating expenses in the current quarter compared to the previous quarters, mostly as a result of the one-time costs related to the core conversion and the timing of payments for marketing expenses and charitable contributions.

Net income attributable to the Company in the community banking segment increased 8% to $6.0 million in the first six months of 2017 from $5.6 million in the first six months of 2016, primarily due to the lower compensation expense in 2017 related to lower earnings from RML.

The following table provides highlights of the community banking segment of Northrim:

  Three Months Ended
(Dollars in thousands, except per share data) June 30,
2017
March 31,
2017
December 31,
2016
September 30,
2016
June 30,
2016
Net interest income $ 13,952   $ 13,549   $ 13,584   $ 13,901   $ 13,829  
Provision for loan losses   300     400     743     652     200  
Other operating income   3,368     3,446     3,399     3,594     3,354  
Compensation expense, RML acquisition payments       174     708     3,250     687  
Other operating expense   13,240     11,613     12,151     11,649     12,504  
Income before provision for income taxes   3,780     4,808     3,381     1,944     3,792  
Provision for income taxes   871     1,422     727     50     805  
Net income   2,909     3,386     2,654     1,894     2,987  
Less: net income attributable to the noncontrolling interest   152     97     105     188     156  
Net income attributable to Northrim BanCorp $ 2,757   $ 3,289   $ 2,549   $ 1,706   $ 2,831  
Average diluted shares   6,997,727     6,993,726     6,983,771     6,973,354     6,968,891  
Diluted earnings per share $ 0.39   $ 0.47   $ 0.36   $ 0.24   $ 0.41  


  Year-to-date
(Dollars in thousands, except per share data) June 30,
2017
      June 30,
2016
Net interest income $ 27,501         $ 27,762  
Provision for loan losses   700           903  
Other operating income   6,814           6,763  
Compensation expense, RML acquisition payments   174           817  
Other operating expense   24,853           24,810  
Income before provision for income taxes   8,588           7,995  
Provision for income taxes   2,293           2,090  
Net income   6,295           5,905  
Less: net income attributable to the noncontrolling interest   249           286  
Net income attributable to Northrim BanCorp $ 6,046         $ 5,619  
Average diluted shares   6,996,160           6,966,905  
Diluted earnings per share $ 0.86         $ 0.81  

Home Mortgage Lending

Home mortgage lending contributed $6.4 million to revenues and $0.12 to diluted net earnings per share in the second quarter 2017, compared to $5.5 million, or $0.08 per share, in the preceding quarter and $8.5 million, or $0.22 per share in the second quarter a year ago.   For the first half of 2017, mortgage lending contributed $11.8 million, or $0.20 per share, compared to $14.2 million, or $0.30 per share, in the first six months a year ago.  "Improvement from seasonal factors was partially offset by continuing softness in the Alaska economy this quarter," said Frye.  Despite the slowdown in the economy, the Company believes the housing markets in Alaska's population centers remain stable.  According to AMLS, average days on the market have lengthened slightly to 53 days in the first six months of 2017 compared to 48 days in the like period a year ago in the Anchorage market.

In the fourth quarter of 2015, Northrim began servicing the loans it originates for the Alaska Housing Finance Corporation, which accounted for approximately 20% of loans funded.  Northrim now services 1,338 loans in its $332.5 million servicing portfolio, which continues to grow.  Servicing income contributed $790,000 to second quarter mortgage banking income, compared to $1.4 million for the first quarter of 2017 and $510,000 in the second quarter a year ago. Servicing income declined in the second quarter compared to the first quarter primarily due to interest rate volatility and the impact on the change in the fair value for the mortgage servicing rights.

The following table provides highlights of the Home Mortgage Lending segment of Northrim:

  Three Months Ended
(Dollars in thousands, except per share data) June 30,
2017
March 31,
2017
December 31,
2016
September 30,
2016
June 30,
2016
Mortgage commitments $ 80,068   $ 67,589   $ 62,421   $ 72,315   $ 98,788  
Mortgage loans funded for sale $ 143,944   $ 115,058   $ 169,235   $ 224,594   $ 208,921  
Mortgage loan refinances to total fundings   12 %   24 %   25 %   24 %   18 %
Mortgage loans serviced for others $ 332,485   $ 307,502   $ 272,442   $ 231,167   $ 193,230  
           
Net realized gains on mortgage loans sold $ 4,990   $ 3,721   $ 5,987   $ 7,502   $ 7,147  
Change in fair value of mortgage loan commitments, net   299     128     (551 )   (331 )   480  
Total production revenue   5,289     3,849     5,436     7,171     7,627  
Mortgage servicing revenue   838     1,153     1,194     948     755  
Change in fair value of mortgage servicing rights, net1   (48 )   282     (3 )   (166 )   (245 )
Total mortgage servicing revenue, net   790     1,435     1,191     782     510  
Other mortgage banking revenue   272     166     333     388     373  
  Total mortgage banking income $ 6,351   $ 5,450   $ 6,960   $ 8,341   $ 8,510  
           
Net interest income $ 291   $ 284   $ 307   $ 312   $ 250  
Provision for loan losses                    
Other operating income   6,351     5,450     6,960     8,341     8,510  
Other operating expense   5,226     4,819     5,495     6,287     6,178  
  Income before provision for income taxes   1,416     915     1,772     2,366     2,582  
Provision for income taxes   584     379     731     977     1,063  
  Net income attributable to Northrim BanCorp $ 832   $ 536   $ 1,041   $ 1,389   $ 1,519  
           
Average diluted shares   6,997,727     6,993,726     6,983,771     6,973,354     6,968,891  
Diluted earnings per share $ 0.12   $ 0.08   $ 0.15   $ 0.20   $ 0.22  

1Principally reflects changes in discount rates and prepayment speed assumptions, which are primarily affected by changes in interest rates, net of collection/realization of expected cash flows over time.

  Year-to-date
(Dollars in thousands, except per share data) June 30,
2017
      June 30,
2016
Mortgage loans funded for sale $ 259,002         $ 341,971  
Mortgage loan refinances to total fundings   18 %         17 %
           
Net realized gains on mortgage loans sold $ 8,711         $ 11,924  
Change in fair value of mortgage loan commitments, net   427           528  
Total production revenue   9,138           12,452  
Mortgage servicing revenue   1,991           1,568  
Change in fair value of mortgage servicing rights, net1   234           (357 )
Total mortgage servicing revenue, net   2,225           1,211  
Other mortgage banking revenue   438           543  
  Total mortgage banking income $ 11,801         $ 14,206  
           
Net interest income $ 575         $ 491  
Other operating income   11,801           14,206  
Other operating expense   10,045           11,113  
  Income before provision for income taxes   2,331           3,584  
Provision for income taxes   963           1,477  
  Net income attributable to Northrim BanCorp $ 1,368         $ 2,107  
           
Average diluted shares   6,996,160           6,966,905  
Diluted earnings per share $ 0.20         $ 0.30  

1Principally reflects changes in discount rates and prepayment speed assumptions, which are primarily affected by changes in interest rates, net of collection/realization of expected cash flows over time.

Balance Sheet Review

Northrim's assets were $1.49 billion at June 30, 2017, down 2% from the second quarter a year ago and down 1% from March 31, 2017.  The mix of average assets at each period end continued to shift from portfolio loans to portfolio investments.

Average investment securities increased 1% from the preceding quarter and 11% from a year ago.  The investment portfolio generated an average net tax equivalent yield of 1.65% for the second quarter of 2017. The average estimated duration of the investment portfolio was 1.6 years, at June 30, 2017.

Average loans held for sale increased 19% to $40.9 million in the second quarter of 2017 compared to the preceding quarter, and decreased 16% from the same quarter a year ago, primarily reflecting the seasonality of the mortgage business and the reduced demand for home loans in the Alaska marketplace.

Portfolio loans increased 3% in the quarter and 2% year-over-year to $991.2 million at June 30, 2017.  Average portfolio loans in the second quarter of 2017 were $969.0 million and relatively unchanged compared to the preceding and year-ago quarters.  Construction and land development loans, which are by nature short-term, increased 5% in the second quarter of 2017 compared to the previous quarter and 3% year-over-year.  Commercial loans grew 15% year-over-year.  This growth includes the addition of one new large commercial relationship in the tourism industry.  Additionally, non-owner occupied commercial real estate loans in the quarter were down 2% from the previous quarter but grew 5% year-over-year.

Alaskans account for substantially all of Northrim's deposit base, which is primarily made up of low-cost transaction accounts.  Balances in transaction accounts at June 30, 2017, represented 90% of total deposits.  At June 30, 2017, total deposits were $1.23 billion, down slightly from $1.25 billion in the immediate prior quarter and $1.26 billion from a year ago.  Year-over-year, second quarter average non-interest-bearing deposits declined 5% and average interest-bearing deposits increased 4%, leaving average total deposits up less than 1% at $1.24 billion in the second quarter of 2017.

Shareholders' equity increased 4% to $191.8 million, or $27.75 per share, at June 30, 2017, compared to $184.0 million, or $26.75 per share, a year ago.  Tangible book value per share* was $25.40 at June 30, 2017, compared to $23.30 per share a year ago.  Northrim continues to maintain capital levels in excess of the requirements to be categorized as "well-capitalized" under the Basel III and Dodd Frank regulatory standards with Tier 1 Capital to Risk Adjusted Assets of 15.07% at June 30, 2017.

Asset Quality

Nonperforming assets, net of government guarantees increased to $25.8 million at June 30, 2017 compared to $12.2 million a year ago mainly as a result of the movement of one $10.2 million commercial relationship from adversely classified to nonperforming status in the second quarter of 2017 and the movement of one  $8.3 million commercial relationship in the medical industry from adversely classified to nonperforming status in the fourth quarter of 2016.  These two relationships represent 72% of total nonperforming assets, net of government guarantees, as of June 30, 2017.  This increase in nonperforming assets was partially offset by pay downs on several loans, including a $2.1 million pay down on one land development loan that was moved to other real estate owned in the fourth quarter of 2016. The ratio of nonperforming assets to total assets, net of government guarantees was 1.73% for the second quarter of 2017, up from 1.22% in the first quarter of 2017 and 0.80% a year ago.

Adversely classified loans, net of government guarantees improved to $33.6 million at the end of the second quarter of 2017 as compared to $34.5 million at the end of the first quarter of 2017 and $41.1 million one year ago.  Net charge-offs in the second quarter of 2017 were $132,000 compared to $204,000 in the previous quarter and a recovery of $2,000 in the second quarter of 2016.  "None of these charge-offs were related directly to the oil sector," said Frye.

The following table details loan charge-offs, by industry:

(Dollars in thousands) Three Months Ended
  June 30,
2017
March 31,
2017
June 30,
2016
Charge-offs:      
Transportation and warehousing $   $ 250   $  
Retail trade   202     12     135  
Consumer   5     17      
  Total charge-offs $ 207   $ 279   $ 135  

Performing restructured loans that were not included in nonaccrual loans at the end of the second quarter 2017 were $5.7 million, down from $6.3 million at the end of the preceding quarter and $11.2 million a year ago.  The decrease in the second quarter of 2017 compared to the first quarter of 2017 is primarily due to pay downs on several loans. The decrease in the second quarter of 2017 compared to a year ago is primarily due to the $8.3 million commercial relationship noted above that moved to nonaccrual status in the fourth quarter of 2016. Borrowers who are in financial difficulty and who have been granted concessions that may include interest rate reductions, term extensions, or payment alterations are categorized as restructured loans. The Company presents restructured loans that are performing separately from those that are classified as nonaccrual to provide more information on this category of loans and to differentiate between accruing performing and nonperforming restructured loans.

Adversely classified loans are loans that Northrim has classified as substandard, doubtful, and loss, net of government guarantees.  As of June 30, 2017, $29.9 million, or 92% of adversely classified loans net of government guarantees are attributable to five relationships in the following sectors; two commercial businesses, one commercial real estate property, one medical business, and one oilfield services commercial business.

Northrim estimates that $60.1 million, or approximately 6% of portfolio loans as of June 30, 2017, had direct exposure to the oil and gas industry in Alaska, and $4.2 million of these loans are adversely classified.  Northrim has an additional $61.2 million in unfunded commitments to companies with direct exposure to the oil and gas industry in Alaska, and none of these unfunded commitments are considered to be adversely classified loans.  We continue to have no loans to oil producers or exploration companies.  We define direct exposure to the oil and gas sector as loans to borrowers that provide oilfield services and other companies that we have identified as significantly reliant upon activity in Alaska related to the oil and gas industry, such as lodging, equipment rental, transportation and other logistics services specific to this industry.

About Northrim BanCorp

Northrim BanCorp, Inc. is the parent company of Northrim Bank, an Alaska-based community bank with 14 branches in Anchorage, the Matanuska Valley, Juneau, Fairbanks, Ketchikan, and Sitka serving 90% of Alaska's population; and an asset based lending division in Washington; and a wholly-owned mortgage brokerage company, Residential Mortgage Holding Company, LLC. The Bank differentiates itself with its detailed knowledge of Alaska's economy and its "Customer First Service" philosophy. Affiliated companies include Northrim Benefits Group, LLC; and Pacific Wealth Advisors, LLC.

www.northrim.com 

Forward-Looking Statement
This release may contain "forward-looking statements" as that term is defined for purposes of Section 21E of the Securities Exchange Act of 1934.  These statements are, in effect, management's attempt to predict future events, and thus are subject to various risks and uncertainties. Readers should not place undue reliance on forward-looking statements, which reflect management's views only as of the date hereof. All statements, other than statements of historical fact, regarding our financial position, business strategy and management's plans and objectives for future operations are forward-looking statements.  When used in this report, the words "anticipate," "believe," "estimate," "expect," and "intend" and words or phrases of similar meaning, as they relate to Northrim and its management are intended to help identify forward-looking statements.  Although we believe that management's expectations as reflected in forward-looking statements are reasonable, we cannot assure readers that those expectations will prove to be correct.  Forward looking statements are subject to various risks and uncertainties that may cause our actual results to differ materially and adversely from our expectations as indicated in the forward-looking statements.  These risks and uncertainties include: our ability to maintain strong asset quality and to maintain or expand our market share or net interest margins; and our ability to execute our business plan.  Further, actual results may be affected by our ability to compete on price and other factors with other financial institutions; customer acceptance of new products and services; the regulatory environment in which we operate; and general trends in the local, regional and national banking industry and economy as those factors relate to our cost of funds and return on assets.  In addition, there are risks inherent in the banking industry relating to collectability of loans and changes in interest rates.  Many of these risks, as well as other risks that may have a material adverse impact on our operations and business, are identified in the "Risk Factors" section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, and from time to time are disclosed in our other filings with the Securities and Exchange Commission.  However, you should be aware that these factors are not an exhaustive list, and you should not assume these are the only factors that may cause our actual results to differ from our expectations.  These forward-looking statements are made only as of the date of this release, and Northrim does not undertake any obligation to release revisions to these forward-looking statements to reflect events or conditions after the date of this release.

References:

http://www.alaskanomics.com/
https://www.adn.com/business-economy/2017/07/11/in-anchorage-fewer-single-family-homes-for-sale-and-prices-are-flat/
http://www.akrdc.org/assets/images/rr.june.17.cover.png 
http://labor.alaska.gov/news/2017/news17-32.pdf 

Income Statement          
(Dollars in thousands, except per share data) Three Months Ended
(Unaudited) June 30, March 31, Three Month June 30, One Year
    2017   2017 % Change   2016 % Change
Interest Income:          
Interest and fees on loans $ 13,601   $ 13,238   3 % $ 13,710   -1 %
Interest on portfolio investments   1,227     1,179   4 %   967   27 %
Interest on deposits in banks   64     48   33 %   41   56 %
Total interest income   14,892     14,465   3 %   14,718   1 %
Interest Expense:                          
Interest expense on deposits   451     445   1 %   479   -6 %
Interest expense on borrowings   197     187   5 %   160   23 %
Total interest expense   648     632   3 %   639   1 %
Net interest income   14,244     13,833   3 %   14,079   1 %
                           
Provision for loan losses   300     400   -25 %   200   50 %
Net interest income after provision for loan losses   13,944     13,433   4 %   13,879   0 %
                           
Other Operating Income:                          
Mortgage banking income   6,351     5,450   17 %   8,510   -25 %
Employee benefit plan income   961     936   3 %   936   3 %
Purchased receivable income   776     689   13 %   531   46 %
Bankcard fees   614     572   7 %   675   -9 %
Service charges on deposit accounts   409     439   -7 %   510   -20 %
Gain on sale of securities       14   NM     12   NM  
Other income   607     796   -24 %   690   -12 %
Total other operating income   9,718     8,896   9 %   11,864   -18 %
                           
Other Operating Expense:                          
Salaries and other personnel expense   11,793     10,842   9 %   12,011   -2 %
Occupancy expense   1,664     1,621   3 %   1,697   -2 %
Data processing expense   1,409     1,238   14 %   1,146   23 %
Professional and outside services   612     622   -2 %   785   -22 %
Marketing expense   891     510   75 %   615   45 %
Insurance expense   194     253   -23 %   263   -26 %
OREO expense, net rental income and gains on sale   83     177   -53 %   127   -35 %
Loss (gain) on disposal of premises and equipment   83     (80 ) -204 %   358   -77 %
Intangible asset amortization expense   27     26   4 %   35   -23 %
Compensation expense, RML acquisition payments       174   -100 %   687   -100 %
Other operating expense   1,710     1,223   40 %   1,645   4 %
Total other operating expense   18,466     16,606   11 %   19,369   -5 %
                           
Income before provision for income taxes   5,196     5,723   -9 %   6,374   -18 %
Provision for income taxes   1,455     1,801   -19 %   1,868   -22 %
Net income   3,741     3,922   -5 %   4,506   -17 %
Less: Net income attributable to the noncontrolling interest   152     97   57 %   156   -3 %
Net income attributable to Northrim BanCorp $ 3,589   $ 3,825   -6 % $ 4,350   -17 %
                           
Basic EPS $ 0.52   $ 0.55   -5 % $ 0.63   -17 %
Diluted EPS $ 0.51   $ 0.55   -7 % $ 0.63   -19 %
Average basic shares   6,910,679     6,909,780   0 %   6,877,140   0 %
Average diluted shares   6,997,727     6,993,726   0 %   6,968,891   0 %


Income Statement  
(Dollars in thousands, except per share data) Six months ended June 30,
(Unaudited)     One Year
    2017   2016 % Change
Interest Income:      
Interest and fees on loans $ 26,839   $ 27,488   -2 %
Interest on portfolio investments   2,406     1,960   23 %
Interest on deposits in banks   112     88   27 %
Total interest income   29,357     29,536   -1 %
Interest Expense:                
Interest expense on deposits   896     950   -6 %
Interest expense on borrowings   384     333   15 %
Total interest expense   1,280     1,283   %
Net interest income   28,077     28,253   -1 %
                 
Provision for loan losses   700     903   -22 %
Net interest income after provision for loan losses   27,377     27,350   %
                 
Other Operating Income:                
Mortgage banking income   11,801     14,206   -17 %
Employee benefit plan income   1,897     1,900   %
Purchased receivable income   1,465     1,065   38 %
Bankcard fees   1,186     1,308   -9 %
Service charges on deposit accounts   848     1,009   -16 %
Gain (loss) on sale of securities   14     (11 ) -227 %
Other income   1,403     1,492   -6 %
Total other operating income   18,614     20,969   -11 %
                 
Other Operating Expense:                
Salaries and other personnel expense   22,635     23,262   -3 %
Occupancy expense   3,285     3,305   -1 %
Data processing expense   2,647     2,230   19 %
Marketing expense   1,401     1,353   4 %
Professional and outside services   1,234     1,492   -17 %
Insurance expense   447     578   -23 %
OREO expense, net rental income and gains on sale   260     101   157 %
Compensation expense - RML acquisition payments   174     817   -79 %
Intangible asset amortization expense   53     70   -24 %
Loss on disposal of premises and equipment   3     358   -99 %
Other operating expense   2,933     3,174   -8 %
Total other operating expense   35,072     36,740   -5 %
                 
Income before provision for income taxes   10,919     11,579   -6 %
Provision for income taxes   3,256     3,567   -9 %
Net income   7,663     8,012   -4 %
Less: Net income attributable to the noncontrolling interest   249     286   -13 %
Net income attributable to Northrim BanCorp $ 7,414   $ 7,726   -4 %
                 
Basic EPS $ 1.07   $ 1.12   -4 %
Diluted EPS $ 1.06   $ 1.11   -5 %
Average basic shares   6,910,230     6,877,140   0 %
Average diluted shares   6,996,160     6,966,905   0 %


Balance Sheet          
(Dollars in thousands)          
(Unaudited) June 30, March 31, Three Month June 30, One Year
    2017   2017 % Change   2016 % Change
           
Assets:          
Cash and due from banks $ 25,187   $ 36,729   -31 % $ 30,095   -16 %
Interest bearing deposits in other banks   606     44,203   -99 %   44,661   -99 %
Portfolio investments   298,120     325,037   -8 %   291,502   2 %
Investment in Federal Home Loan Bank stock   1,993     1,993   0 %   1,966   1 %
                           
Loans held for sale   53,863     28,028   92 %   60,360   -11 %
                           
Portfolio loans   991,209     960,832   3 %   967,346   2 %
Allowance for loan losses   (20,061 )   (19,893 ) 1 %   (18,385 ) 9 %
Net portfolio loans   971,148     940,939   3 %   948,961   2 %
Purchased receivables, net   19,835     14,485   37 %   13,596   46 %
Mortgage servicing rights   5,828     5,325   9 %   2,602   124 %
Other real estate owned, net   4,315     5,802   -26 %   2,558   69 %
Premises and equipment, net   39,997     39,682   1 %   38,671   3 %
Goodwill and intangible assets   16,271     16,298   0 %   23,706   -31 %
Other assets   56,042     54,059   4 %   59,692   -6 %
Total assets $ 1,493,205   $ 1,512,580   -1 % $ 1,518,370   -2 %
                           
Liabilities:                          
Demand deposits $ 395,310   $ 421,867   -6 % $ 461,970   -14 %
Interest-bearing demand   231,073     194,414   19 %   183,885   26 %
Savings deposits   249,275     252,218   -1 %   231,246   8 %
Money market deposits   231,780     244,881   -5 %   241,334   -4 %
Time deposits   126,872     133,693   -5 %   137,253   -8 %
Total deposits   1,234,310     1,247,073   -1 %   1,255,688   -2 %
Securities sold under repurchase agreements   24,392     31,783   -23 %   26,049   -6 %
Other borrowings   4,314     4,326   0 %   4,362   -1 %
Junior subordinated debentures   18,558     18,558   %   18,558   %
Other liabilities   19,854     21,388   -7 %   29,748   -33 %
Total liabilities   1,301,428     1,323,128   -2 %   1,334,405   -2 %
                           
Shareholders' Equity:                          
Northrim BanCorp shareholders' equity   191,644     189,324   1 %   183,654   4 %
Noncontrolling interest   133     128   4 %   311   -57 %
Total shareholders' equity   191,777     189,452   1 %   183,965   4 %
Total liabilities and shareholders' equity $ 1,493,205   $ 1,512,580   -1 % $ 1,518,370   -2 %
                           

Additional Financial Information
(Dollars in thousands)
(Unaudited)

Composition of Portfolio Investments              
  June 30, 2017   March 31, 2017   June 30, 2016
  Balance % of total   Balance % of total   Balance % of total
U.S. Treasury securities $ 30,039   10.1 %   $ 30,082   9.2 %   $ 30,315   10.4 %
U.S. Agency securities   206,042   69.1 %     230,553   70.9 %     205,121   70.4 %
U.S. Agency mortgage-backed securities   1   0.0 %     1   0.0 %     6   %
Corporate bonds   40,698   13.7 %     45,434   14.0 %     45,818   15.7 %
Collateralized loan obligations   3,000   1.0 %       %       %
Alaska municipality, utility, or state bonds   13,553   4.5 %     14,181   4.4 %     9,651   3.3 %
Other municipality, utility, or state bonds   4,787   1.6 %     4,786   1.5 %     591   0.2 %
  Total portfolio investments $ 298,120       $ 325,037       $ 291,502    
                 


Composition of Portfolio Loans                        
  June 30, 2017   March 31, 2017   December 31, 2016   September 30, 2016   June 30, 2016
  Balance % of total   Balance % of total   Balance % of total   Balance % of total   Balance % of total
Commercial loans $ 309,493   31 %   $ 275,809   29 %   $ 278,178   28 %   $ 275,994   28 %   $ 269,905   28 %
CRE owner occupied loans   139,475   14 %     140,102   15 %     152,178   16 %     184,505   18 %     171,269   18 %
CRE nonowner occupied loans   401,662   40 %     408,472   41 %     402,003   41 %     379,913   38 %     380,122   38 %
Construction loans   98,713   10 %     94,004   10 %     98,220   10 %     109,093   11 %     96,236   10 %
Consumer loans   46,010   5 %     46,838   5 %     48,870   5 %     51,979   5 %     54,134   6 %
  Subtotal   995,353         965,225         979,449         1,001,484         971,666    
Unearned loan fees, net   (4,144 )       (4,393 )       (4,434 )       (4,408 )       (4,320 )  
  Total portfolio loans $ 991,209       $ 960,832       $ 975,015       $ 997,076       $ 967,346    
                             


Composition of Deposits                        
  June 30, 2017   March 31, 2017   December 31, 2016   September 30, 2016   June 30, 2016
  Balance % of total   Balance % of total   Balance % of total   Balance % of total   Balance % of total
Demand deposits $ 395,310   32 %   $ 421,867   33 %   $ 449,206   36 %   $ 474,971   37 %   $ 461,970   37 %
Interest-bearing demand   231,073   19 %     194,414   16 %     201,349   16 %     194,426   15 %     183,885   15 %
Savings deposits   249,275   20 %     252,218   20 %     241,088   19 %     236,821   19 %     231,246   18 %
Money market deposits   231,780   19 %     244,881   20 %     244,295   19 %     242,102   19 %     241,334   19 %
Time deposits   126,872   10 %     133,693   11 %     131,715   10 %     130,046   10 %     137,253   11 %
  Total deposits $ 1,234,310       $ 1,247,073       $ 1,267,653       $ 1,278,366       $ 1,255,688    
                                                 

Additional Financial Information
(Dollars in thousands)
(Unaudited)

Asset Quality            
  June 30,   March 31,   June 30,  
    2017     2017     2016  
Nonaccrual loans $ 22,899     $ 13,513     $ 11,184    
Loans 90 days past due and accruing   468       588       47    
Total nonperforming loans   23,367       14,101       11,231    
Nonperforming loans guaranteed by government   (1,849 )     (1,478 )     (1,600 )  
Net nonperforming loans   21,518       12,623       9,631    
Other real estate owned   4,315       5,802       2,558    
Other real estate owned guaranteed by government                  
Net nonperforming assets $ 25,833     $ 18,425     $ 12,189    
Nonperforming loans / portfolio loans, net of government guarantees   2.17   %   1.31   %   1.00   %
Nonperforming assets / total assets, net of government guarantees   1.73   %   1.22   %   0.80   %
             
Performing restructured loans $ 5,678     $ 6,290     $ 11,177    
Nonperforming loans plus performing restructured loans, net of government            
guarantees $ 27,196     $ 18,913     $ 20,808    
Nonperforming loans plus performing restructured loans / portfolio loans, net of            
government guarantees   2.74   %   1.97   %   2.15   %
Nonperforming assets plus performing restructured loans / total assets, net of            
government guarantees   2.11   %   1.63   %   1.54   %
             
Adversely classified loans, net of government guarantees $ 32,440     $ 34,489     $ 41,072    
Loans 30-89 days past due and accruing, net of government guarantees /            
portfolio loans   0.14   %   0.21   %   0.12   %
             
Allowance for loan losses / portfolio loans   2.02   %   2.07   %   1.90   %
Allowance for loan losses / nonperforming loans, net of government guarantees   93   %   158   %   191   %
             
Gross loan charge-offs for the quarter $ 207     $ 279     $ 135    
Gross loan recoveries for the quarter $ (75 )   $ (75 )   $ (137 )  
Net loan charge-offs (recoveries) for the quarter $ 132     $ 204     $ (2 )  
Net loan charge-offs year-to-date $ 336     $ 204     $ 671    
Net loan charge-offs for the quarter / average loans, for the quarter   0.01   %   0.02   %     %
Net loan charge-offs year-to-date / average loans,            
year-to-date annualized   0.07   %   0.08   %   0.14   %
                         

Additional Financial Information
(Dollars in thousands)
(Unaudited)

Nonperforming Assets Rollforward              
  Balance at Additions Payments Writedowns Transfers  Transfers to Sales Balance at
  March 31,
2017
this
quarter
this
quarter
/Charge-offs
 this quarter
to
OREO
Performing Status
this quarter
this
quarter
June 30,
2017
Commercial loans $ 13,599   $ 10,681   $ (803 ) $ (202 ) $   $ (393 ) $   $ 22,882  
Commercial real estate   115         (15 )   (5 )               95  
Construction loans                                
Consumer loans   387     364     (52 )       (167 )   (142 )       390  
Non-performing loans guaranteed by government   (1,478 )   (371 )                       (1,849 )
  Total non-performing loans   12,623     10,674     (870 )   (207 )   (167 )   (535 )       21,518  
Other real estate owned   5,802     167         (100 )           (1,554 )   4,315  
Other real estate owned guaranteed                
by government                                
  Total non-performing assets,                
  net of government guarantees $ 18,425   $ 10,841   $ (870 ) $ (307 ) $ (167 ) $ (535 ) $ (1,554 ) $ 25,833  
 

Additional Financial Information
(Dollars in thousands)
(Unaudited)

Average Balances, Yields, and Rates                
  Three Months Ended
  June 30, 2017   March 31, 2017   June 30, 2016
    Average     Average     Average
  Average Tax Equivalent   Average Tax Equivalent   Average Tax Equivalent
  Balance Yield/Rate   Balance Yield/Rate   Balance Yield/Rate
Assets                
Interest bearing deposits in other banks $ 25,489   1.00 %   $ 23,490   0.81 %   $ 33,151   0.49 %
Portfolio investments   325,515   1.65 %     323,753   1.59 %     293,716   1.44 %
Loans held for sale   40,906   3.88 %     34,435   3.95 %     48,826   3.85 %
Portfolio loans   969,051   5.51 %     970,493   5.44 %     969,450   5.54 %
  Total interest-earning assets   1,360,961   4.45 %     1,352,171   4.40 %     1,345,143   4.46 %
Nonearning assets   145,859         139,405         144,274    
  Total assets $ 1,506,820       $ 1,491,576       $ 1,489,417    
                 
Liabilities and Shareholders' Equity                
Interest-bearing deposits $ 836,117   0.22 %   $ 814,232   0.22 %   $ 804,944   0.24 %
Borrowings   51,976   1.49 %     52,579   1.40 %     47,996   1.30 %
  Total interest-bearing liabilities   888,093   0.29 %     866,811   0.29 %     852,940   0.30 %
                 
Noninterest-bearing demand deposits   408,466         416,715         430,198    
Other liabilities   16,605         21,090         20,509    
Shareholders' equity   193,656         186,960         185,770    
  Total liabilities and shareholders' equity $ 1,506,820       $ 1,491,576       $ 1,489,417    
  Net spread   4.16 %     4.11 %     4.16 %
  Net interest margin ("NIM")   4.20 %     4.15 %     4.21 %
  Tax equivalent NIM*   4.26 %     4.22 %     4.27 %
  Average portfolio loans to average                
    interest-earning assets   71.20 %       71.77 %       72.07 %  
  Average portfolio loans to average total deposits   77.86 %       78.84 %       78.49 %  
  Average non-interest deposits to average                                
    total deposits   32.82 %         33.85 %         34.83 %  
  Average interest-earning assets to average                                
    interest-bearing liabilities   153.25 %       155.99 %       157.71 %  
                             

Additional Financial Information
(Dollars in thousands)
(Unaudited)

Average Balances, Yields, and Rates          
  Year-to-date
  June 30, 2017   June 30, 2016
    Average     Average
  Average Tax Equivalent   Average Tax Equivalent
  Balance Yield/Rate   Balance Yield/Rate
Assets          
Interest bearing deposits in other banks $ 24,495   0.91 %   $ 35,587   0.49 %
Portfolio investments   324,639   1.62 %     292,662   1.47 %
Loans held for sale   37,688   3.91 %     43,495   3.86 %
Portfolio loans   969,768   5.47 %     974,783   5.54 %
  Total interest-earning assets   1,356,590   4.43 %     1,346,527   4.47 %
Nonearning assets   142,650         142,777    
  Total assets $ 1,499,240       $ 1,489,304    
           
Liabilities and Shareholders' Equity          
Interest-bearing deposits $ 825,235   0.22 %   $ 805,384   0.24 %
Borrowings   52,275   1.45 %     49,430   1.32 %
  Total interest-bearing liabilities   877,510   0.29 %     854,814   0.30 %
           
Noninterest-bearing demand deposits   412,568         430,465    
Other liabilities   18,835         21,943    
Shareholders' equity   190,327         182,082    
  Total liabilities and shareholders' equity $ 1,499,240       $ 1,489,304    
  Net spread   4.14 %     4.17 %
  NIM   4.17 %     4.22 %
  NIMTE*   4.24 %     4.28 %
  Average portfolio loans to average interest-earning assets   71.49 %       72.39 %  
  Average portfolio loans to average total deposits   78.35 %       78.88 %  
  Average non-interest deposits to average total deposits   33.33 %       34.83 %  
  Average interest-earning assets to average interest-bearing liabilities   154.60 %       157.52 %  


Capital Data (At quarter end)            
  June 30, 2017   March 31, 2017   June 30, 2016  
Book value per share $ 27.75     $ 27.42     $ 26.75    
Tangible book value per share* $ 25.40     $ 25.06     $ 23.30    
Total shareholders' equity/total assets   12.84   %   12.53   %   12.12   %
Tangible Common Equity/Tangible Assets*   11.88   %   11.57   %   10.72   %
Tier 1 Capital / Risk Adjusted Assets   14.98   %   15.19   %   13.85   %
Total Capital / Risk Adjusted Assets   16.23   %   16.44   %   15.11   %
Tier 1 Capital / Average Assets   12.97   %   12.95   %   12.10   %
Shares outstanding   6,910,679       6,909,865       6,877,140    
Unrealized gain (loss) on AFS securities, net of income taxes $ 28     $ (31 )   $ 742    
                         

Additional Financial Information
(Dollars and shares in thousands)
(Unaudited)

Profitability Ratios                    
  June 30,
2017
  March 31,
2017
  December 31,
2016
  September 30,
2016
  June 30,
2016
 
For the quarter:                    
  Net interest margin ("NIM") 4.20   % 4.15   % 4.01   % 4.11   % 4.21   %
  Tax equivalent NIM* 4.26   % 4.22   % 4.07   % 4.17   % 4.27   %
  Efficiency ratio 76.95   % 72.95   % 75.57   % 80.89   % 74.52   %
  Return on average assets 0.96   % 1.04   % 0.94   % 0.81   % 1.17   %
  Return on average equity 7.43   % 8.30   % 7.96   % 6.73   % 9.42   %


  June 30,
2017
              June 30,
2016
 
Year-to-date:                    
  NIM 4.17   %             4.22   %
  NIMTE* 4.24   %             4.28   %
  Efficiency ratio 75.00   %             74.50   %
  Return on average assets 1.00   %             1.04   %
  Return on average equity 7.86   %             8.53   %
                         

*Non-GAAP Financial Measures
(Dollars and shares in thousands, except per share data)
(Unaudited)

Tax equivalent NIM

Tax equivalent NIM is a non-GAAP performance measurement in which interest income on non-taxable investments and loans is presented on a tax equivalent basis using a combined federal and state statutory rate of  41.11% in both 2017 and 2016. The most comparable GAAP measure is net interest margin and the following table sets forth the reconciliation of tax equivalent NIM to net interest margin.

  Three Months Ended
  June 30,
2017
  March 31,
2017
  December 31,
2016
  September 30,
2016
  June 30,
2016
Net interest income $ 14,244     $ 13,833     $ 13,891     $ 14,213     $ 14,079  
Divided by average interest-bearing assets   1,360,961       1,352,171       1,378,791       1,375,470       1,345,143  
Net interest margin ("NIM")2   4.20 %     4.15 %     4.01 %     4.11 %     4.21 %
                   
Net interest income $ 14,244     $ 13,833     $ 13,891     $ 14,213     $ 14,079  
Plus: reduction in tax expense related to                  
  tax-exempt interest income   220       222       209       196       197  
  $ 14,464     $ 14,055     $ 14,100     $ 14,409     $ 14,276  
Divided by average interest-bearing assets   1,360,961       1,352,171       1,378,791       1,375,470       1,345,143  
Tax equivalent NIM2   4.26 %     4.22 %     4.07 %     4.17 %     4.27 %
 

(Dollars and shares in thousands, except per share data)
(Unaudited)

  Year-to-date
  June 30, 2017               June 30, 2016
Net interest income $ 28,077                 $ 28,253  
Divided by average interest-bearing assets   1,356,590                   1,346,527  
Net interest margin ("NIM")3   4.17 %                 4.22 %
                   
Net interest income $ 28,077                 $ 28,253  
Plus: reduction in tax expense related to                  
  tax-exempt interest income   442                   403  
  $ 28,519                 $ 28,656  
Divided by average interest-bearing assets   1,356,590                   1,346,527  
Tax equivalent NIM3   4.24 %                 4.28 %
                           

2Calculated using actual days in the quarter divided by 365 for quarters ended in 2017 and actual days in the quarter divided by 366 for quarters ended in 2016.

3Calculated using actual days in the year divided by 365 for year-to-date period ended in 2017 and actual days in the year divided by 366 for year-to-date period ended in 2016.

Tangible Book Value

Tangible book value is a non-GAAP measure defined as shareholders' equity, less intangible assets, divided by shares outstanding.  The following table sets forth the reconciliation of tangible book value per share and book value per share.

  June 30,
2017
  March 31,
2017
  December 31,
2016
  September 30,
2016
  June 30,
2016
                   
Total shareholders' equity $ 191,777     $ 189,452     $ 186,712     $ 185,758     $ 183,965  
Divided by shares outstanding   6,911       6,910       6,898       6,882       6,877  
Book value per share $ 27.75     $ 27.42     $ 27.07     $ 26.99     $ 26.75


  June 30,
2017
  March 31,
2017
  December 31,
2016
  September 30,
2016
  June 30,
2016
                   
Total shareholders' equity $ 191,777     $ 189,452     $ 186,712     $ 185,758     $ 183,965  
Less: goodwill and intangible assets   16,271       16,298       16,324       16,354       23,706  
  $ 175,506     $ 173,154     $ 170,388     $ 169,404     $ 160,259  
Divided by shares outstanding   6,911       6,910       6,898       6,882       6,877  
Tangible book value per share $ 25.40     $ 25.06     $ 24.70     $ 24.61     $ 23.30
                                     

(Dollars and shares in thousands, except per share data)
(Unaudited)

Tangible Common Equity to Tangible Assets

Tangible common equity to tangible assets is a non-GAAP ratio that represents total equity less goodwill and intangible assets divided by total assets less goodwill and intangible assets. This ratio has received more attention over the past several years from stock analysts and regulators.  The most comparable GAAP measure of shareholders' equity to total assets is calculated by dividing total shareholders' equity by total assets.

  June 30,
2017
  March 31,
2017
  December 31,
2016
  September 30,
2016
  June 30,
2016
                   
Total shareholders' equity $ 191,777     $ 189,452     $ 186,712     $ 185,758     $ 183,965  
Total assets   1,493,205       1,512,580       1,526,540       1,540,120       1,518,370  
Total shareholders' equity to total assets   12.84 %     12.53 %     12.23 %     12.06 %     12.12 %


  June 30,
2017
  March 31,
2017
  December 31,
2016
  September 30,
2016
  June 30,
2016
Total shareholders' equity $ 191,777     $ 189,452     $ 186,712     $ 185,758     $ 183,965  
Less: goodwill and other intangible assets, net   16,271       16,298       16,324       16,354       23,706  
Tangible common shareholders' equity $ 175,506     $ 173,154     $ 170,388     $ 169,404     $ 160,259  
                   
Total assets $ 1,493,205     $ 1,512,580     $ 1,526,540     $ 1,540,120     $ 1,518,370  
Less: goodwill and other intangible assets, net   16,271       16,298       16,324       16,354       23,706  
Tangible assets $ 1,476,934     $ 1,496,282     $ 1,510,216     $ 1,523,766     $ 1,494,664  
Tangible common equity ratio   11.88 %     11.57 %     11.28 %     11.12 %     10.72 %


 

Contact:
Joe Schierhorn,  President, CEO, and COO
(907) 261-3308
Latosha Frye, Chief Financial Officer
(907) 261-8763

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