Market Overview

Northrim BanCorp Earns $5.5 million, or $0.79 per Diluted Share, in 3Q17; Gains from Sale of Subsidiary Boost Profits

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ANCHORAGE, Alaska, Oct. 30, 2017 (GLOBE NEWSWIRE) -- Northrim BanCorp, Inc. (NASDAQ:NRIM) ("Northrim" or the "Company") today reported net income attributable to the Company ("net income") was $5.5 million, or $0.79 per diluted share, in the third quarter of 2017, compared to $3.1 million, or $0.44 per diluted share, in the third quarter of 2016, and $3.6 million, or $0.51 per diluted share, in the second quarter of 2017.  For the first nine months of 2017, net income was $12.9 million, or $1.85 per diluted share, compared to $10.8 million, or $1.55 per diluted share, in the first nine months of 2016. The increase in profitability for the quarter and year-to-date compared to prior periods was primarily due to the $4.4 million gain from the sale of the Company's interest in Northrim Benefits Group ("NBG").  This increase was partially offset by a higher provision for loan losses in the third quarter of 2017.  In addition, mortgage banking income for the third quarter and year-to-date in 2017 decreased due to the slowing Alaska economy  as compared to 2016.

Several  items impacted the quarterly and year-to-date comparisons including:

  • The sale of Northrim's interest in NBG contributed $4.4 million pretax and $2.6 million after tax, or $0.38 per diluted share, to third quarter 2017 profits.  This gain represents approximately 7 times 2016 net profits from NBG.  Net income for the third quarter of 2017 also includes 2 months of income from NBG.
  • The third quarter 2017 provision for loan losses was $2.5 million compared to $300,000 in the preceding quarter and $652,000 in the year ago quarter.  The increase in the provision for loan losses in the third quarter of 2017 is the result of an increase in specific impairment of $1.1 million, primarily due to one $2.9 million commercial relationship in the medical industry that was added to nonaccrual loans during the quarter, as well as an increase in the qualitative factors included in the allowance for loan losses.  The allowance for loan losses is $21.5 million at September 30, 2017, which equates to 95% of total nonperforming loans at September 30, 2017.
  • The Company's conversion to a new core banking system was successfully completed in May of 2017.  The conversion added one-time costs of $179,000, or $0.03 per diluted share in the third quarter of 2017 and $943,000, or $0.14 per diluted share year-to-date through September of 2017.
  • The third quarter of 2016 includes a non-cash, one-time accounting correction which resulted in an increase in expenses, net of tax, of $1.4 million, or $0.20 per diluted share due to a change in accounting treatment for the earn-out payments associated with the Company's 2014 acquisition of Residential Mortgage Lending, LLC, ("RML").

Other highlights for the third quarter of 2017 include the following:

  • The Company repurchased 58,341 shares of its common stock at an average price of $27.56, leaving 168,901 shares available under the previously announced repurchase authorization.
  • The Company redeemed $8.0 million in junior subordinated debt held at Northrim Capital Trust 1. This liability bore interest at a floating rate of 90-day LIBOR plus 3.15%, or 4.33% at the time it was redeemed, and had a final maturity of May 15, 2033.  In 2016, total interest expense on this debt was $310,000.  Interest expense on this debt in 2017 through the date of redemption on August 15, 2017 was $212,000. This redemption decreased Tier 1 Capital to Risk Adjusted Assets and Total Capital to Risk Adjusted Assets by 62 basis points each.
  • The Company executed an interest rate swap in September 2017, which effectively converts the floating rate of interest on the Company's remaining $10.0 million in junior subordinated debt from 90-day LIBOR plus 1.37%, or 2.69% as of September 30, 2017, to a fixed rate of 3.72% through the instrument's final maturity date of March 15, 2036.

"We continue to build our infrastructure to position the Company for future growth and to achieve operating efficiencies, and the completion of our core conversion last quarter is part of this overall strategy," said Joe Schierhorn, President and CEO.  "While growth of both loans and deposits is a challenge in the current economic environment in Alaska, we believe that ongoing investments in systems, infrastructure, and people better position us to take advantage of growth opportunities as they arise over time either from improvements in the economy of Alaska or from competitive factors that we act upon to increase our market share organically, or through mergers and acquisitions.  However, in light of our estimates for lower growth in the short term coupled with our current capital position, we executed stock buybacks for the first time in ten years in the third quarter of 2017."

   
Financial Highlights Three Months Ended
(Dollars in thousands, except per share data) September 30,
2017
June 30, 2017 March 31, 2017 December 31, 2016 September 30, 2016
Total assets $ 1,523,341   $ 1,493,205   $ 1,512,580   $ 1,526,540   $ 1,540,120  
Total portfolio loans $ 989,253   $ 991,209   $ 960,832   $ 975,015   $ 997,076  
Average portfolio loans $ 1,003,751   $ 969,051   $ 970,493   $ 977,678   $ 979,164  
Total deposits $ 1,258,317   $ 1,234,310   $ 1,247,073   $ 1,267,653   $ 1,278,366  
Average deposits $ 1,262,808   $ 1,244,583   $ 1,230,947   $ 1,265,214   $ 1,263,750  
Total shareholders' equity $ 194,427   $ 191,777   $ 189,452   $ 186,712   $ 185,758  
Net income attributable to Northrim BanCorp $ 5,523   $ 3,589   $ 3,825   $ 3,590   $ 3,095  
Diluted earnings per share $ 0.79   $ 0.51   $ 0.55   $ 0.51   $ 0.44  
Return on average assets   1.44 %   0.96 %   1.04 %   0.94 %   0.81 %
Return on average shareholders' equity   11.25 %   7.43 %   8.30 %   7.96 %   6.73 %
Net interest margin ("NIM")   4.28 %   4.20 %   4.15 %   4.01 %   4.11 %
Tax equivalent NIM*   4.34 %   4.26 %   4.22 %   4.07 %   4.17 %
Efficiency ratio   61.31 %   76.95 %   72.95 %   75.57 %   80.89 %
Total shareholders' equity/total assets   12.76 %   12.84 %   12.53 %   12.23 %   12.06 %
Tangible common equity/tangible assets*   11.82 %   11.88 %   11.57 %   11.28 %   11.12 %
Book value per share $ 28.37   $ 27.75   $ 27.42   $ 27.07   $ 26.99  
Tangible book value per share* $ 26.00   $ 25.40   $ 25.06   $ 24.70   $ 24.61  
Dividends per share $ 0.22   $ 0.21   $ 0.21   $ 0.20   $ 0.20  

* 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. 

  • Total revenues, which include net interest income plus total other operating income, increased to $28.7 million in the third quarter of 2017, compared to $24.0 million in the second quarter of 2017, and $26.1 million in the same period a year ago.  Excluding the gains from the sale of the Company's interest in NBG, revenues increased 1% in the third quarter and declined 7% year over year.
    • Community Banking contributed 77% to total revenues and 86% to earnings in the third quarter.
    • Home Mortgage Lending contributed 23% to total revenues and 14% of earnings in the third quarter.
  • Net interest income in the third quarter of 2017 increased 5% to $14.9 million as compared to both the preceding quarter and the same quarter a year ago, mainly as a result of improved mix of assets due to higher average portfolio loans in the third quarter of 2017.    
  • Both net interest margin ("NIM") at 4.28% and net interest margin on a tax equivalent basis ("NIMTE")* at 4.34% increased in the third quarter of 2017, compared to the second quarter of 2017, primarily due to an improved mix of assets in the current quarter.  The Company's NIMTE* remains above peer averages1.
  • Northrim paid a quarterly cash dividend of $0.22 per share in September 2017, up from the $0.20 per share dividend paid in September 2016.  The dividend provides an annual yield of approximately 2.5% at current market share prices.
  • Book value per share increased 5% to $28.37 at the end of the third quarter of 2017 from $26.99 a year ago, while tangible book value per share* increased 6% to $26.00 at the end of the third quarter of 2017 from $24.61 a year ago.
  • Asset quality declined in the third quarter of 2017 as compared to prior periods due to a single $2.9 million lending relationship in the medical industry that moved to nonaccrual status.
  • Following net charge-offs of $1.1 million and the $2.5 million provision for loan losses in the third quarter of 2017, the allowance for loan losses to portfolio loans grew to 2.17% at quarter end, compared to 1.95% a year ago.
  • Northrim remains well-capitalized with Tier 1 Capital to Risk Adjusted Assets of 13.50%, total shareholders' equity to total assets of 12.76%, and tangible common equity to tangible assets* of 11.82% at September 30, 2017.

1As of June 30, 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) 3.65%, loan loss reserves to gross loans of 0.95%, return on average assets (ROAA) 0.97%, and return on average equity (ROAE) 8.99%.

Alaska Economic Update
(Note: sources for information included in this section are included on page 12.)

Alaska's total employment was down by an estimated 1.3% in September compared to September 2016, a loss of about 4,600 jobs. Over-the-year job losses have gradually gotten smaller in 2017, however. The largest losses during the current downturn were in the fall of 2016 at a decrease of 2.6%.

Oil and gas employment and construction were both down 6.7%. The only industries to add jobs were health care (1.4%), leisure and hospitality (0.3%), and local government (0.2 %). Federal employment was flat, and other industries showed mostly modest losses.

Seasonally adjusted unemployment in August was 7.2% compared to 4.4% for the United States.  Not seasonally adjusted unemployment in Alaska in August was 6.3% compared to 4.5% for the nation, placing Alaska at 50th in the country for both unemployment and job growth.  However, Alaska did rank 8th on per capita personal income, 9th for average hourly earnings in the private sector and 10th for average hourly earnings in the leisure and hospitality sectors.

While winter brings reduced activity in the tourism and construction industries, it also brings increased activity on the North Slope as the roadways freeze, allowing the movement of heavy equipment and people into the region.

Armstrong Energy has announced proposed plans to continue drilling delineation wells in the Nanushuk project which is located between Conoco Phillips' Alpine and Kuparuk River fields in the Pikka Unit.  Armstrong Energy indicates the Nanushuk project could produce as much as 120,000 barrels of crude oil per day and is estimated to contain up to 1.2 billion barrels of proven recoverable reserves.

ConocoPhillips announced its Willow discovery, a 300 million-barrel recoverable Nanushuk find west of the Alpine field in the National Petroleum Reserve-Alaska.  In addition, ConocoPhillips Alaska is planning its most ambitious exploration program in years, and the effort could provide more details about a newly promising North Slope discovery.  "The plans, if completed, will represent the most exploration wells drilled per year by the company in 15 years," said Joe Marushack, president of ConocoPhillips Alaska.

Hilcorp Energy has proposed its Liberty project, which would produce about 60,000 barrels of oil per day from a manmade island in shallow federal waters just offshore from Prudhoe Bay.

For the first time in many years, throughput on the Alyeska pipeline increased in 2016 by 2% to 185.5 million barrels a year.

"We believe that these planned new projects in the oil and gas industry will help stabilize the state's economy, providing high-paying jobs and new tax revenues for the state and local communities," said Schierhorn.

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 third quarter of 2017, Northrim generated return on average assets ("ROAA") of 1.44% and a return on average equity ("ROAE") of 11.25%.  Excluding the gain on the sale of the Company's interest in NBG, ROAA was 0.76% and ROAE was 5.92% in the third quarter of 2017, which is below the average 0.97% ROAA and the 8.99% ROAE posted by the 151 banks that make up the SNL U.S. Bank Index with assets between $1 billion and $5 billion as of June 30, 2017.  The primary reason for this shortfall compared to peers is the larger provision for loan losses in the third quarter of 2017.  NIM and NIMTE* for the third quarter of 2017 were 4.28% and 4.34%, respectively, compared to 3.65% NIMTE* for the index peers1.

For the first nine months of 2017, ROAA was 1.15% and ROAE was 9.02%, compared to 0.96% and 7.93%, respectively, for the same period in 2016. Excluding the gain on the sale of the Company's interest in NBG in 2017 and the one-time accounting adjustment related to the acquisition of RML in 2016, ROAA was 0.92% and ROAE was 7.19% for the first nine months of 2017 compared to 1.10% and 9.07%, respectively, for the same period in 2016. The decline in ROAA and ROAE excluding the one-time items is primarily due to lower net income from the Home Mortgage Lending segment, the increase in the provision for loan losses, and one-time conversion costs incurred in 2017.

Net Interest Income/Net Interest Margin

Net interest income grew 5% to $14.9 million in the third quarter of 2017 compared to $14.2 million in the both the second quarter of 2017 and the third quarter a year ago. For the first nine months of 2017, net interest income increased 1% to $43.0 million from $42.5 million in the first nine months of 2016.  Higher total interest income, coupled with lower total interest expense, contributed to net interest income expansion for both the quarter and year-to-date periods.  Average portfolio loan balances increased 4% in the third quarter of 2017 compared to the preceding quarter and increased 3% compared to the same quarter last year, which improved the mix of earning assets and positively impacted yields. Increases in interest rates also contributed to the increases in net interest income and NIMTE* in the current quarter and year-to-date while cost of funds also declined in the quarter and year-over-year.

NIMTE* increased to 4.34% in the third quarter of 2017 compared to 4.26% in the preceding quarter and 4.17% from the same quarter a year ago.  For the first nine months of 2017, NIMTE* improve to 4.28% from 4.24% in the first nine months of 2016. The following table summarizes the components of these changes:

  3Q17 vs. 2Q17 3Q17 vs. 3Q16
Nonaccrual interest adjustments (0.02 )% (0.02 )%
Interest rates and loan fees 0.01 % 0.13 %
Volume and mix of interest-earning assets 0.09 % 0.06 %
Change in NIMTE* 0.08 % 0.17 %


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


"The repayment of one of our higher-cost floating rate liabilities, completed in August of this year, is expected to reduce interest expense going forward by at least $300,000 per year, and the impact is higher in the future if interest rates continue to rise," said Latosha Frye, Chief Financial Officer.  "We believe the elimination of this interest expense will help to sustain or improve NIM in the coming quarters."

"We expect NIM will range from 4.20% to 4.30% and NIMTE* will range from 4.25% and 4.35% in the remainder 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 $2.5 million in the third quarter of 2017, compared to $300,000 in the second quarter of 2017, and $652,000 in the third quarter of 2016.  For the first nine months of 2017, the provision for loan losses was $3.2 million compared to $1.6 million in the same period of 2016.  "Total adversely classified loans, net of government guarantees, decreased to $33.8 million at September 30, 2017 from $41.5 million at September 30, 2016. Our assessment of the severity of credit issues for the largest relationships in this subset of our loan portfolio, however, has worsened, which led to higher net charge offs and an increase in the specific reserve in our allowance for loan losses in the third quarter of 2017," said Frye.  "Additionally, we have increased the qualitative factors due to continued softening in the Alaska economy, specifically due to continued job losses." According to the Alaska Department of Labor, Alaska lost 4,600 jobs, or 1.3% in September 2017 compared to September 2016. The allowance for loan losses to portfolio loans at the end of the third quarter of 2017 to 2.17% compared to 2.02% at June 20, 2017, and 1.95% at September 30, 2016.  The allowance to loan losses is 95% of nonperforming loans, net of government guarantees, at September 30, 2017.

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 and wealth management.  In August 2017, Northrim sold its interest in NBG recognizing a gain of $4.4 million, or $2.6 million net of tax, which represents an estimated 7 years of future income from this business segment.  In addition, revenues from two months prior to the sale contributed $609,000 to third quarter revenues. This income stream will not recur in future quarters.  These complementary business activities, including home mortgage lending and other noninterest income, contributed $13.8 million, or 48% of total revenues in the third quarter of 2017, as compared to $9.7 million, or 41% of revenues in the second quarter of 2017 and $11.9 million, or 46% of revenues in the third quarter of 2016.

For the first nine months of 2017, other operating income decreased 2% to $32.4 million from $32.9 million for the first nine months of 2016. The decrease in other operating income for the first nine months of 2017 compared to the same period a year ago, is primarily due to a decline in mortgage banking income in 2017, partially offset by the gain on sale of the Company's interest in NBG.

Other Operating Expenses

Operating expenses were $17.6 million in the third quarter 2017, compared to $18.5 million in the second quarter of 2017 and $21.2 million in the third quarter of 2016.  Items impacting the comparative periods include a decrease in variable costs commensurate with lower mortgage volume, the decrease in compensation expense related to the acquisition of RML due to lower expected earnings from this segment, and the fact that compensation expense related to the acquisition of RML was $2.3 million higher in the third quarter of 2016 due to the one-time noncash accounting adjustment.  In addition, $633,000 of the one-time costs related to the core conversion were recorded in the second quarter of 2017 compared to $179,000 in the third quarter of 2017.

Operating expenses for the first nine months of 2017 decreased 9% to $52.7 million, from $57.9 million for the like period in 2017, primarily due to the accounting adjustment in 2016 related to the acquisition of RML as well as a decrease in salary and benefits costs primarily reflecting lower mortgage origination commissions and lower group medical expenses.  These decreases were only partially offset by the $943,000 in one-time costs incurred in 2017 related to the core conversion.    

Community Banking

"While the slowdown in the economy has impacted growth in both our loan and deposit portfolios, we believe the franchise remains positioned to capitalize on future market opportunities." said Schierhorn.  "With the renewed interest in development of the North Slope oil reserves, we are cautiously optimistic that we can offset the repayment of existing loans with renewals and new customer acquisition for both loans and deposits.  Net interest income in the Community Banking segment increased 5% in the third quarter compared to the preceding quarter and the same quarter in 2016, demonstrating the strength of our core franchise."

Net income attributable to the Company in the Community Banking segment increased to $10.8 million in the first nine months of 2017 from $7.3 million in the first nine months of 2016, primarily due to the gain on the sale of NBG in 2017 and the accounting correction recorded in 2016, net of the increase in the provision for loan losses.   One-time costs associated with the core conversion are included in the Community Banking segment.

The following table provides highlights of the Community Banking segment of Northrim:

   
  Three Months Ended
(Dollars in thousands, except per share data) September
30, 2017
June 30, 2017 March 31,
2017
December
31, 2016
September
30, 2016
Net interest income $ 14,566   $ 13,952   $ 13,549   $ 13,584   $ 13,901  
Provision for loan losses   2,500     300     400     743     652  
Other operating income   7,574     3,368     3,446     3,399     3,594  
Compensation expense, RML acquisition payments   149         174     708     3,250  
Other operating expense   12,191     13,240     11,613     12,151     11,649  
  Income before provision for income taxes   7,300     3,780     4,808     3,381     1,944  
Provision for income taxes   2,452     871     1,422     727     50  
  Net income   4,848     2,909     3,386     2,654     1,894  
  Less: net income attributable to the noncontrolling interest   78     152     97     105     188  
  Net income attributable to Northrim BanCorp $ 4,770   $ 2,757   $ 3,289   $ 2,549   $ 1,706  
Average diluted shares   6,959,035     6,997,727     6,993,726     6,983,771     6,973,354  
Diluted earnings per share $ 0.69   $ 0.39   $ 0.47   $ 0.36   $ 0.24  
                               


  Year-to-date
(Dollars in thousands, except per share data) September
30, 2017
      September
30, 2016
Net interest income $ 42,067         $ 41,663  
Provision for loan losses   3,200           1,555  
Other operating income   14,388           10,357  
Compensation expense, RML acquisition payments   323           4,067  
Other operating expense   37,044           36,459  
  Income before provision for income taxes   15,888           9,939  
Provision for income taxes   4,745           2,140  
  Net income   11,143           7,799  
  Less: net income attributable to the noncontrolling interest   327           474  
  Net income attributable to Northrim BanCorp $ 10,816         $ 7,325  
Average diluted shares   6,983,778           6,968,557  
Diluted earnings per share $ 1.55         $ 1.05  
                   

Home Mortgage Lending

"The decline in revenue and net income in the Home Mortgage Lending segment in 2017 is primarily the result of the general slowing of the Alaska economy, which has led to fewer mortgage originations," said Frye. "Despite this decline, the housing market in Alaska remains healthy due to balanced supply and demand for homes in most price ranges, and we expect the Home Mortgage Lending segment to remain profitable despite the slowdown."

Northrim intends to continue to build its mortgage servicing business, which was initiated in the fourth quarter of 2015 to service loans for the Alaska Housing Finance Corporation.  Northrim now services 1,462 loans in its $363.0 million home mortgage servicing portfolio, which continues to grow.  Mortgage servicing income contributed $997,000 to third quarter of 2017 mortgage banking income, compared to $838,000 for the second quarter of 2017 and $948,000 in the third quarter a year ago. Total mortgage servicing income was reduced in both the third quarters of 2017 and 2016 by the change in fair value of its mortgage servicing rights which are driven by interest rate volatility and fluctuations in estimated prepayment speeds, which are based on industry averages.

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

   
  Three Months Ended
(Dollars in thousands, except per share data) September
30, 2017
June 30, 2017 March 31,
2017
December
31, 2016
September
30, 2016
Mortgage commitments $ 68,601   $ 80,068   $ 67,589   $ 62,421   $ 72,315  
Mortgage loans funded for sale $ 162,470   $ 143,944   $ 115,058   $ 169,235   $ 224,594  
Mortgage loan refinances to total fundings   12 %   12 %   24 %   25 %   24 %
Mortgage loans serviced for others $ 362,983   $ 332,485   $ 307,502   $ 272,442   $ 231,167  
           
Net realized gains on mortgage loans sold $ 5,218   $ 4,990   $ 3,721   $ 5,987   $ 7,502  
Change in fair value of mortgage loan commitments, net   (23 )   299     128     (551 )   (331 )
Total production revenue   5,195     5,289     3,849     5,436     7,171  
Mortgage servicing revenue   997     838     1,153     1,194     948  
Change in fair value of mortgage servicing rights, net1   (296 )   (48 )   282     (3 )   (166 )
Total mortgage servicing revenue, net   701     790     1,435     1,191     782  
Other mortgage banking revenue   323     272     166     333     388  
  Total mortgage banking income $ 6,219   $ 6,351   $ 5,450   $ 6,960   $ 8,341  
           
Net interest income $ 352   $ 291   $ 284   $ 307   $ 312  
Provision for loan losses                    
Other operating income   6,219     6,351     5,450     6,960     8,341  
Other operating expense   5,290     5,226     4,819     5,495     6,287  
  Income before provision for income taxes   1,281     1,416     915     1,772     2,366  
Provision for income taxes   528     584     379     731     977  
  Net income attributable to Northrim BanCorp $ 753   $ 832   $ 536   $ 1,041   $ 1,389  
           
Average diluted shares   6,959,035     6,997,727     6,993,726     6,983,771     6,973,354  
Diluted earnings per share $ 0.11   $ 0.12   $ 0.08   $ 0.15   $ 0.20  

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) September
30, 2017
      September
30, 2016
Mortgage loans funded for sale $ 421,472         $ 566,565  
Mortgage loan refinances to total fundings   15 %         20 %
           
Net realized gains on mortgage loans sold $ 13,929         $ 19,426  
Change in fair value of mortgage loan commitments, net   404           196  
Total production revenue   14,333           19,622  
Mortgage servicing revenue   2,988           2,517  
Change in fair value of mortgage servicing rights, net1   (62 )         (523 )
Total mortgage servicing revenue, net   2,926           1,994  
Other mortgage banking revenue   761           931  
  Total mortgage banking income $ 18,020         $ 22,547  
           
Net interest income $ 927         $ 803  
Other operating income   18,020           22,547  
Other operating expense   15,335           17,400  
  Income before provision for income taxes   3,612           5,950  
Provision for income taxes   1,491           2,454  
  Net income attributable to Northrim BanCorp $ 2,121         $ 3,496  
           
Average diluted shares   6,983,778           6,968,557  
Diluted earnings per share $ 0.30         $ 0.50  

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 $1.52 billion at September 30, 2017, down 1.1% from the third quarter a year ago and up 2.0% from June 30, 2017.  Average interest earnings assets increased 1.6% in the third quarter of 2017 to $1.38 billion and grew 0.57% from the third quarter a year ago.

Average investment securities decreased 12.5% in the third quarter of 2017 from the preceding quarter and 1.8% from a year ago.  The investment portfolio generated an average net tax equivalent yield of 1.63% for the third quarter of 2017. The average estimated duration of the investment portfolio was 1.5 years, at September 30, 2017.

Average loans held for sale increased 40% to $57.4 million in the third quarter of 2017 compared to the preceding quarter and decreased 14% 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 were down slightly to $989.3 million at the end of the third quarter of 2017 compared to both the preceding and year ago quarters.  Average portfolio loans in the third quarter of 2017 were $1.00 billion, up 3.6% from the preceding quarter and up 2.5% from the third quarter a year ago.  Increases in commercial and construction loans offset a modest decline in commercial real estate loans, both owner-occupied and non-owner-occupied properties.  Construction and land development loans, increased 13% in the third quarter of 2017 compared to the previous quarter and 2% year-over-year.   Commercial loans at September 30, 2017 grew 14% year-over-year. Additionally, non-owner occupied commercial real estate loans in the quarter were down 3.8% from the previous quarter but grew 1.7% 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 September 30, 2017, represented 92% of total deposits.  At September 30, 2017, total deposits were $1.26 billion, up slightly from $1.23 billion in the immediate prior quarter and down slightly from $1.28 billion from a year ago.  Average total deposits were up 1% in the third quarter of 2017 compared to the preceding quarter and were essentially unchanged compared to the same quarter in 2016.

Shareholders' equity increased 5% to $194.4 million, or $28.37 per share, at September 30, 2017, compared to $185.8 million, or $26.99 per share, a year ago.  Tangible book value per share* was $26.00 at September 30, 2017, compared to $24.61 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 13.50% at September 30, 2017.  "The repayment of the $8 million in junior subordinated debt in August brought our capital ratios down, which is expected to improve profitability without reducing liquidity significantly," said Schierhorn.

Asset Quality

Nonperforming assets, net of government guarantees increased to $26.2 million at September 30, 2017, compared to $12.1 million a year ago, due to three relationships: one $9.1 million commercial business, and two commercial relationships for $8.1 million and $2.9 million, respectively, in the medical industry.  These three relationships represent 89% of total nonperforming loans, net of government guarantees, as of September 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 $5.9 million 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 1.72% for the third quarter of 2017, down from 1.73% in the second quarter of 2017 and up from 0.78% a year ago.    

Adversely classified loans, net of government guarantees, were to $33.8 million at the end of the third quarter of 2017 as compared to $32.4 million at the end of the second quarter of 2017 and $41.5 million one year ago.  Net charge-offs in the third quarter of 2017 were $1.1 million compared to $132,000 in the previous quarter and net recovery of $442,000 in the third 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
  September 30, 2017 June 30, 2017 September 30, 2016
Charge-offs:      
Transportation and warehousing $ 339   $   $  
Other services   48          
Retail trade       202      
News media   731          
Consumer   85     5     22  
  Total charge-offs $ 1,203   $ 207   $ 22  
 

Performing restructured loans that were not included in nonaccrual loans at the end of the third quarter 2017 were $7.7 million, up from $5.7 million at the end of the preceding quarter and down from $14.9 million a year ago.  The increase in the third quarter of 2017 compared to the second quarter of 2017 is primarily due to the addition of one commercial loan. The decrease in the third quarter of 2017 compared to a year ago is primarily due to the $8.1 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 September 30, 2017, $30.8 million, or 91% of adversely classified loans net of government guarantees are attributable to six relationships in the following sectors; two commercial businesses, one commercial real estate property, two medical businesses, and one oilfield services commercial business.

Northrim estimates that $60.1 million, or approximately 6% of portfolio loans as of September 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 $54.0 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," added Frye  "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. Pacific Wealth Advisors, LLC is an affiliated company of Northrim BanCorp.

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://labor.alaska.gov/news/2017/news17-38.pdf
http://www.labor.state.ak.us/trends/oct17.pdf
http://www.alaskajournal.com/2017-10-04/first-look-nanushuk-released#.Wd_vaGhSzD7
http://www.alyeska-pipe.com/TAPS/PipelineOperations/Throughput
https://www.adn.com/business-economy/energy/2017/10/13/conocophillips-plans-largest-exploration-season-in-15-years/

           
           
           
           
Income Statement          
(Dollars in thousands, except per share data) Three Months Ended
(Unaudited) September 30, June 30, Three Month September 30, Year-Over-Year
    2017   2017 % Change   2016 % Change
Interest Income:          
  Interest and fees on loans $ 14,341   $ 13,601   5 % $ 13,866   3 %
  Interest on portfolio investments   1,060     1,227   -14 %   944   12 %
  Interest on deposits in banks   118     64   84 %   50   136 %
       Total interest income   15,519     14,892   4 %   14,860   4 %
Interest Expense:          
  Interest expense on deposits   429     451   -5 %   473   -9 %
  Interest expense on borrowings   173     197   -12 %   174   -1 %
       Total interest expense   602     648   -7 %   647   -7 %
       Net interest income   14,917     14,244   5 %   14,213   5 %
           
Provision for loan losses   2,500     300   733 %   652   283 %
  Net interest income after provision for loan losses   12,417     13,944   -11 %   13,561   -8 %
           
Other Operating Income:          
  Mortgage banking income   6,219     6,351   -2 %   8,341   -25 %
  Gain on sale of Northrim Benefits Group   4,443       NM       NM  
  Employee benefit plan income   609     961   -37 %   999   -39 %
  Purchased receivable income   752     776   -3 %   579   30 %
  Bankcard fees   603     614   -2 %   687   -12 %
  Service charges on deposit accounts   406     409   -1 %   516   -21 %
  Gain on sale of securities   (3 )     NM       NM  
  Other income   765     607   26 %   813   -6 %
       Total other operating income   13,794     9,718   42 %   11,935   16 %
           
Other Operating Expense:          
  Salaries and other personnel expense   11,115     11,793   -6 %   12,158   -9 %
  Occupancy expense   1,706     1,664   3 %   1,567   9 %
  Data processing expense   1,448     1,409   3 %   1,121   29 %
  Professional and outside services   674     612   10 %   761   -11 %
  Marketing expense   332     891   -63 %   500   -34 %
  Insurance expense   475     194   145 %   265   79 %
  OREO expense, net rental income and gains on sale   (44 )   83   -153 %   (32 ) 38 %
  Loss (gain) on disposal of premises and equipment       83   -100 %   6   -100 %
  Intangible asset amortization expense   26     27   -4 %   35   -26 %
  Compensation expense, RML acquisition payments   149       NM     3,250   -95 %
  Other operating expense   1,749     1,710   2 %   1,555   12 %
       Total other operating expense   17,630     18,466   -5 %   21,186   -17 %
           
       Income before provision for income taxes   8,581     5,196   65 %   4,310   99 %
  Provision for income taxes   2,980     1,455   105 %   1,027   190 %
       Net income   5,601     3,741   50 %   3,283   71 %
            Less: Net income attributable to the noncontrolling interest   78     152   -49 %   188   -59 %
                 Net income attributable to Northrim BanCorp $ 5,523   $ 3,589   54 % $ 3,095   78 %
           
  Basic EPS $ 0.80   $ 0.52   54 % $ 0.45   78 %
  Diluted EPS $ 0.79   $ 0.51   55 % $ 0.44   80 %
  Average basic shares   6,872,273     6,910,679   -1 %   6,882,482   0 %
  Average diluted shares   6,959,035     6,997,727   -1 %   6,973,354   0 %
                           


Income Statement  
(Dollars in thousands, except per share data) Nine months ended September 30,
(Unaudited)     Year-Over-Year
    2017   2016 % Change
Interest Income:      
  Interest and fees on loans $ 41,180   $ 41,354   0 %
  Interest on portfolio investments   3,466     2,904   19 %
  Interest on deposits in banks   230     138   67 %
       Total interest income   44,876     44,396   1 %
Interest Expense:      
  Interest expense on deposits   1,325     1,423   -7 %
  Interest expense on borrowings   557     507   10 %
       Total interest expense   1,882     1,930   -2 %
       Net interest income   42,994     42,466   1 %
       
Provision for loan losses   3,200     1,555   106 %
       Net interest income after provision for loan losses   39,794     40,911   -3 %
       
Other Operating Income:      
  Mortgage banking income   18,020     22,547   -20 %
  Gain on sale of Northrim Benefits Group   4,443       NM  
  Employee benefit plan income   2,506     2,899   -14 %
  Purchased receivable income   2,217     1,644   35 %
  Bankcard fees   1,789     1,995   -10 %
  Service charges on deposit accounts   1,254     1,525   -18 %
  Gain (loss) on sale of securities   11     (11 ) -200 %
  Other income   2,168     2,305   -6 %
       Total other operating income   32,408     32,904   -2 %
       
Other Operating Expense:      
  Salaries and other personnel expense   33,750     35,420   -5 %
  Occupancy expense   4,991     4,872   2 %
  Data processing expense   4,095     3,351   22 %
  Marketing expense   1,733     1,853   -6 %
  Professional and outside services   1,908     2,252   -15 %
  Insurance expense   922     844   9 %
  OREO expense, net rental income and gains on sale   216     70   209 %
  Compensation expense - RML acquisition payments   323     4,067   -92 %
  Intangible asset amortization expense   79     106   -25 %
  Loss on disposal of premises and equipment   3     365   -99 %
  Other operating expense   4,682     4,726   -1 %
       Total other operating expense   52,702     57,926   -9 %
       
       Income before provision for income taxes   19,500     15,889   23 %
  Provision for income taxes   6,236     4,594   36 %
       Net income   13,264     11,295   17 %
            Less: Net income attributable to the noncontrolling interest   327     474   -31 %
                 Net income attributable to Northrim BanCorp $ 12,937   $ 10,821   20 %
       
  Basic EPS $ 1.88   $ 1.57   20 %
  Diluted EPS $ 1.85   $ 1.55   19 %
  Average basic shares   6,897,577     6,878,921   0 %
  Average diluted shares   6,983,778     6,968,557   0 %


           
Balance Sheet          
(Dollars in thousands)          
(Unaudited) September 30, June 30, Three Month September 30, One Year
    2017   2017 % Change   2016 % Change
           
Assets:          
  Cash and due from banks $ 13,960   $ 25,187   -45 % $ 37,955   -63 %
  Interest bearing deposits in other banks   73,309     606   11,997 %   7,911   827 %
  Portfolio investments   271,248     298,120   -9 %   301,257   -10 %
  Investment in Federal Home Loan Bank stock   2,116     1,993   6 %   1,965   8 %
           
  Loans held for sale   59,214     53,863   10 %   76,452   -23 %
           
  Portfolio loans   989,253     991,209   %   997,076   -1 %
  Allowance for loan losses   (21,464 )   (20,061 ) 7 %   (19,479 ) 10 %
       Net portfolio loans   967,789     971,148   0 %   977,597   -1 %
  Purchased receivables, net   12,930     19,835   -35 %   15,500   -17 %
  Mortgage servicing rights   6,181     5,828   6 %   3,196   93 %
  Other real estate owned, net   3,505     4,315   -19 %   2,824   24 %
  Premises and equipment, net   40,046     39,997   0 %   39,102   2 %
  Goodwill and intangible assets   16,245     16,271   0 %   16,354   -1 %
  Other assets   56,798     56,042   1 %   60,007   -5 %
       Total assets $ 1,523,341   $ 1,493,205   2 % $ 1,540,120   -1 %
                           
Liabilities:                          
  Demand deposits $ 426,946   $ 395,310   8 % $ 474,971   -10 %
  Interest-bearing demand   240,274     231,073   4 %   194,426   24 %
  Savings deposits   251,266     249,275   1 %   236,821   6 %
  Money market deposits   233,768     231,780   1 %   242,102   -3 %
  Time deposits   106,063     126,872   -16 %   130,046   -18 %
       Total deposits   1,258,317     1,234,310   2 %   1,278,366   -2 %
  Securities sold under repurchase agreements   31,084     24,392   27 %   27,701   12 %
  Other borrowings   7,387     4,314   71 %   4,350   70 %
  Junior subordinated debentures   10,310     18,558   -44 %   18,558   -44 %
  Other liabilities   21,816     19,854   10 %   25,387   -14 %
       Total liabilities   1,328,914     1,301,428   2 %   1,354,362   -2 %
           
Shareholders' Equity:          
  Northrim BanCorp shareholders' equity   194,427     191,644   1 %   185,310   5 %
  Noncontrolling interest       133   -100 %   448   -100 %
       Total shareholders' equity   194,427     191,777   1 %   185,758   5 %
       Total liabilities and shareholders' equity $ 1,523,341   $ 1,493,205   2 % $ 1,540,120   -1 %
           

Additional Financial Information
(Dollars in thousands)
(Unaudited)          

               
Composition of Portfolio Investments              
  September 30, 2017   June 30, 2017   September 30, 2016
  Balance % of
total
  Balance % of
total
  Balance % of
total
U.S. Treasury securities $ 30,012   11.1 %   $ 30,039   10.1 %   $ 30,224   10.0 %
U.S. Agency securities   179,088   65.9 %     206,042   69.1 %     215,282   71.5 %
U.S. Agency mortgage-backed securities     0.0 %     1   0.0 %     4   %
Corporate bonds   40,883   15.1 %     40,698   13.7 %     45,578   15.1 %
Collateralized loan obligations   3,002   1.1 %     3,000   1.0 %       %
Alaska municipality, utility, or state bonds   13,502   5.0 %     13,553   4.5 %     9,583   3.2 %
Other municipality, utility, or state bonds   4,761   1.8 %     4,787   1.6 %     586   0.2 %
  Total portfolio investments $ 271,248       $ 298,120       $ 301,257    
                 


Composition of Portfolio Loans                        
  September 30, 2017   June 30, 2017   March 31, 2017   December 31, 2016   September 30, 2016
  Balance % of
total
  Balance % of
total
  Balance % of
total
  Balance % of
total
  Balance % of
total
Commercial loans $ 315,512   32 %   $ 309,493   31 %   $ 275,809   29 %   $ 278,178   28 %   $ 275,994   28 %
CRE owner occupied loans   135,053   14 %     139,475   14 %     140,102   15 %     152,178   16 %     184,505   18 %
CRE nonowner occupied loans   386,294   39 %     401,662   40 %     408,472   41 %     402,003   41 %     379,913   38 %
Construction loans   111,427   11 %     98,713   10 %     94,004   10 %     98,220   10 %     109,093   11 %
Consumer loans   44,942   4 %     46,010   5 %     46,838   5 %     48,870   5 %     51,979   5 %
  Subtotal   993,228         995,353         965,225         979,449         1,001,484    
Unearned loan fees, net   (3,975 )       (4,144 )       (4,393 )       (4,434 )       (4,408 )  
    Total portfolio loans $ 989,253       $ 991,209       $ 960,832       $ 975,015       $ 997,076    
                             


Composition of Deposits                        
  September 30, 2017   June 30, 2017   March 31, 2017   December 31, 2016   September 30, 2016
  Balance % of
total
  Balance % of
total
  Balance % of
total
  Balance % of
total
  Balance % of
total
Demand deposits $ 426,946   34 %   $ 395,310   32 %   $ 421,867   33 %   $ 449,206   36 %   $ 474,971   37 %
Interest-bearing demand   240,274   19 %     231,073   19 %     194,414   16 %     201,349   16 %     194,426   15 %
Savings deposits   251,266   20 %     249,275   20 %     252,218   20 %     241,088   19 %     236,821   19 %
Money market deposits   233,768   19 %     231,780   19 %     244,881   20 %     244,295   19 %     242,102   19 %
Time deposits   106,063   8 %     126,872   10 %     133,693   11 %     131,715   10 %     130,046   10 %
  Total deposits $ 1,258,317       $ 1,234,310       $ 1,247,073       $ 1,267,653       $ 1,278,366    
 

Additional Financial Information
(Dollars in thousands)
(Unaudited)

             
Asset Quality            
  September 30,   June 30,   September 30,  
    2017     2017     2016  
  Nonaccrual loans $ 24,317     $ 22,899     $ 10,885    
  Loans 90 days past due and accruing   214       468          
       Total nonperforming loans   24,531       23,367       10,885    
         Nonperforming loans guaranteed by government   (1,846 )     (1,849 )     (1,624 )  
           Net nonperforming loans   22,685       21,518       9,261    
  Other real estate owned   3,505       4,315       2,824    
         Other real estate owned guaranteed by government                  
           Net nonperforming assets $ 26,190     $ 25,833     $ 12,085    
  Nonperforming loans / portfolio loans, net of government guarantees   2.29   %   2.17   %   0.93   %
  Nonperforming assets / total assets, net of government guarantees   1.72   %   1.73   %   0.78   %
             
  Performing restructured loans $ 7,687     $ 5,678     $ 14,936    
  Nonperforming loans plus performing restructured loans, net of government            
  guarantees $ 30,372     $ 27,196     $ 24,197    
  Nonperforming loans plus performing restructured loans / portfolio loans, net of            
  government guarantees   3.07   %   2.74   %   2.43   %
  Nonperforming assets plus performing restructured loans / total assets, net of            
  government guarantees   2.22   %   2.11   %   1.75   %
             
  Adversely classified loans, net of government guarantees $ 33,789     $ 32,440     $ 41,503    
  Loans 30-89 days past due and accruing, net of government guarantees /            
  portfolio loans   0.70   %   0.14   %   0.10   %
             
  Allowance for loan losses / portfolio loans   2.17   %   2.02   %   1.95   %
  Allowance for loan losses / nonperforming loans, net of government guarantees   95   %   93   %   210   %
             
  Gross loan charge-offs for the quarter $ 1,203     $ 207     $ 22    
  Gross loan recoveries for the quarter ($106 )   ($75 )   ($464 )  
  Net loan charge-offs (recoveries) for the quarter $ 1,097     $ 132     ($442 )  
  Net loan charge-offs year-to-date $ 1,433     $ 336     $ 229    
  Net loan charge-offs for the quarter / average loans, for the quarter   0.11   %   0.01   %   (0.05 ) %
  Net loan charge-offs year-to-date / average loans,            
       year-to-date annualized   0.19   %   0.07   %   0.03   %
                         

Additional Financial Information
(Dollars in thousands) 
(Unaudited)

               
Nonperforming Assets Rollforward              
  Balance at Additions Payments Writedowns Transfers to Transfers to Sales Balance at
  June 30, 2017 this quarter this quarter /Charge-offs
 this quarter
OREO Performing Status
this quarter
this quarter September 30, 2017
Commercial loans $ 22,882   $ 1,837   ($682 ) ($1,118 ) $   ($125 ) $   $ 22,794  
Commercial real estate   95     1,331                     (95 )   1,331  
Construction loans                                
Consumer loans   390     124     (23 )   (85 )               406  
Non-performing loans guaranteed by government   (1,849 )       3                     (1,846 )
  Total non-performing loans   21,518     3,292     (702 )   (1,203 )       (125 )   (95 )   22,685  
Other real estate owned   4,315             (75 )           (735 )   3,505  
Other real estate owned guaranteed                
by government                                
  Total non-performing assets,                
  net of government guarantees $ 25,833   $ 3,292   ($702 ) ($1,278 ) $   ($125 ) ($830 ) $ 26,190  
 

Additional Financial Information
(Dollars in thousands)       
(Unaudited)

                 
Average Balances, Yields, and Rates                
  Three Months Ended
  September 30, 2017   June 30, 2017   September 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 $ 37,349   1.24 %   $ 25,489   1.00 %   $ 39,762   0.49 %
Portfolio investments   284,806   1.63 %     325,515   1.65 %     289,938   1.42 %
Loans held for sale   57,346   3.74 %     40,906   3.88 %     66,606   3.51 %
Portfolio loans   1,003,751   5.49 %     969,051   5.51 %     979,164   5.44 %
  Total interest-earning assets   1,383,252   4.51 %     1,360,961   4.45 %     1,375,470   4.35 %
Nonearning assets   142,226         145,859         149,856    
  Total assets $ 1,525,478       $ 1,506,820       $ 1,525,326    
                 
Liabilities and Shareholders' Equity                
Interest-bearing deposits $ 839,743   0.20 %   $ 836,117   0.22 %   $ 800,441   0.23 %
Borrowings   49,223   1.36 %     51,976   1.49 %     49,627   1.36 %
  Total interest-bearing liabilities   888,966   0.27 %     888,093   0.29 %     850,068   0.30 %
                 
Noninterest-bearing demand deposits   423,065         408,466         463,309    
Other liabilities   18,744         16,605         29,030    
Shareholders' equity   194,703         193,656         182,919    
  Total liabilities and shareholders' equity $ 1,525,478       $ 1,506,820       $ 1,525,326    
  Net spread   4.24 %     4.16 %     4.05 %
  Net interest margin ("NIM")   4.28 %     4.20 %     4.11 %
  Tax equivalent NIM*   4.34 %     4.26 %     4.17 %
  Average portfolio loans to average                
    interest-earning assets   72.56 %       71.20 %       71.19 %  
  Average portfolio loans to average total deposits   79.49 %       77.86 %       77.48 %  
  Average non-interest deposits to average                
    total deposits   33.50 %       32.82 %       36.66 %  
  Average interest-earning assets to average                
    interest-bearing liabilities   155.60 %       153.25 %       161.81 %  
                             

Additional Financial Information
(Dollars in thousands)
(Unaudited)

           
Average Balances, Yields, and Rates          
  Year-to-date
  September 30, 2017   September 30, 2016
    Average     Average
  Average Tax Equivalent   Average Tax Equivalent
  Balance Yield/Rate   Balance Yield/Rate
Assets          
Interest bearing deposits in other banks $ 28,827   1.05 %   $ 36,989   0.49 %
Portfolio investments   311,215   1.63 %     291,747   1.45 %
Loans held for sale   44,313   3.84 %     51,255   3.71 %
Portfolio loans   981,220   5.48 %     976,254   5.51 %
  Total interest-earning assets   1,365,575   4.46 %     1,356,245   4.43 %
Nonearning assets   142,507         145,154    
  Total assets $ 1,508,082       $ 1,501,399    
           
Liabilities and Shareholders' Equity          
Interest-bearing deposits $ 830,128   0.21 %   $ 803,724   0.24 %
Borrowings   51,247   1.42 %     49,496   1.34 %
  Total interest-bearing liabilities   881,375   0.28 %     853,220   0.30 %
           
Noninterest-bearing demand deposits   416,105         441,493    
Other liabilities   18,800         24,323    
Shareholders' equity   191,802         182,363    
  Total liabilities and shareholders' equity $ 1,508,082       $ 1,501,399    
  Net spread   4.18 %     4.13 %
  NIM   4.21 %     4.18 %
  NIMTE*   4.28 %     4.24 %
  Average portfolio loans to average interest-earning assets   71.85 %       71.98 %  
  Average portfolio loans to average total deposits   78.73 %       78.40 %  
  Average non-interest deposits to average total deposits   33.39 %       35.46 %  
  Average interest-earning assets to average interest-bearing liabilities   154.94 %       158.96 %  
                   


Capital Data (At quarter end)            
  September 30, 2017   June 30, 2017   September 30, 2016  
Book value per share $ 28.37     $ 27.75     $ 26.99    
Tangible book value per share* $ 26.00     $ 25.40     $ 24.61    
Total shareholders' equity/total assets   12.76   %   12.84   %   12.06   %
Tangible Common Equity/Tangible Assets*   11.82   %   11.88   %   11.12   %
Tier 1 Capital / Risk Adjusted Assets   13.50   %   14.98   %   14.24   %
Total Capital / Risk Adjusted Assets   14.75   %   16.23   %   15.50   %
Tier 1 Capital / Average Assets   11.54   %   12.97   %   12.36   %
Shares outstanding   6,852,338
      6,910,679
      6,882,482
   
Unrealized gain (loss) on AFS securities, net of income taxes $ 147     $ 28     $ 637    
                         

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

                     
Profitability Ratios                    
  September 30,
2017
  June 30,
2017
  March 31,
2017
  December 31,
2016
  September 30,
2016
 
For the quarter:                    
  Net interest margin ("NIM") 4.28   % 4.20   % 4.15   % 4.01   % 4.11   %
  Tax equivalent NIM* 4.34   % 4.26   % 4.22   % 4.07   % 4.17   %
  Efficiency ratio 61.31   % 76.95   % 72.95   % 75.57   % 80.89   %
  Return on average assets 1.44   % 0.96   % 1.04   % 0.94   % 0.81   %
  Return on average equity 11.25   % 7.43   % 8.30   % 7.96   % 6.73   %


 
  September 30, 2017               September 30, 2016  
Year-to-date:                    
  NIM 4.21   %             4.18   %
  NIMTE* 4.28   %             4.24   %
  Efficiency ratio 69.79   %             76.71   %
  Return on average assets 1.15   %             0.96   %
  Return on average equity 9.02   %             7.93   %
                         

*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
  September 30,
2017
  June 30, 2017   March 31,
2017
  December 31,
2016
  September 30,
2016
Net interest income $ 14,917     $ 14,244     $ 13,833     $ 13,891     $ 14,213  
Divided by average interest-bearing assets   1,383,252       1,360,961       1,352,171       1,378,791       1,375,470  
Net interest margin ("NIM")2   4.28 %     4.20 %     4.15 %     4.01 %     4.11 %
                   
Net interest income $ 14,917     $ 14,244     $ 13,833     $ 13,891     $ 14,213  
Plus: reduction in tax expense related to                  
  tax-exempt interest income   228       220       222       209       196  
  $ 15,145     $ 14,464     $ 14,055     $ 14,100     $ 14,409  
Divided by average interest-bearing assets   1,383,252       1,360,961       1,352,171       1,378,791       1,375,470  
Tax equivalent NIM2   4.34 %     4.26 %     4.22 %     4.07 %     4.17 %
 

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

   
  Year-to-date
  September 30,
2017
              September 30,
2016
Net interest income $ 42,994                 $ 42,466  
Divided by average interest-bearing assets   1,365,575                   1,356,245  
Net interest margin ("NIM")3   4.21 %                 4.18 %
                   
Net interest income $ 42,994                 $ 42,466  
Plus: reduction in tax expense related to                  
  tax-exempt interest income   670                   599  
  $ 43,664                 $ 43,065  
Divided by average interest-bearing assets   1,365,575                   1,356,245  
Tax equivalent NIM3   4.28 %                 4.24 %
 

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.

 
  September 30,
2017
  June 30, 2017   March 31,
2017
  December 31,
2016
  September 30,
2016
                   
Total shareholders' equity $ 194,427     $ 191,777     $ 189,452     $ 186,712     $ 185,758  
Divided by shares outstanding   6,852       6,911       6,910       6,898       6,882  
Book value per share $ 28.37     $ 27.75     $ 27.42     $ 27.07     $ 26.99
 


 
  September 30,
2017
  June 30, 2017   March 31,
2017
  December 31,
2016
  September 30,
2016
                   
Total shareholders' equity $ 194,427     $ 191,777     $ 189,452     $ 186,712     $ 185,758  
Less: goodwill and intangible assets   16,245       16,271       16,298       16,324       16,354  
  $ 178,182     $ 175,506     $ 173,154     $ 170,388     $ 169,404  
Divided by shares outstanding   6,852       6,911       6,910       6,898       6,882  
Tangible book value per share $ 26.00     $ 25.40     $ 25.06     $ 24.70     $ 24.61
 
 

(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.

 
  September 30,
2017
  June 30, 2017   March 31,
2017
  December 31,
2016
  September 30,
2016
                   
Total shareholders' equity $ 194,427     $ 191,777     $ 189,452     $ 186,712     $ 185,758  
Total assets   1,523,341       1,493,205       1,512,580       1,526,540       1,540,120  
Total shareholders' equity to total assets   12.76 %     12.84 %     12.53 %     12.23 %     12.06 %


 
  September 30,
2017
  June 30, 2017   March 31,
2017
  December 31,
2016
  September 30,
2016
Total shareholders' equity $ 194,427     $ 191,777     $ 189,452     $ 186,712     $ 185,758  
Less: goodwill and other intangible assets, net   16,245       16,271       16,298       16,324       16,354  
Tangible common shareholders' equity $ 178,182     $ 175,506     $ 173,154     $ 170,388     $ 169,404  
                   
Total assets $ 1,523,341     $ 1,493,205     $ 1,512,580     $ 1,526,540     $ 1,540,120  
Less: goodwill and other intangible assets, net   16,245       16,271       16,298       16,324       16,354  
Tangible assets $ 1,507,096     $ 1,476,934     $ 1,496,282     $ 1,510,216     $ 1,523,766  
Tangible common equity ratio   11.82 %     11.88 %     11.57 %     11.28 %     11.12 %
 
 

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

 

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