Market Overview

Northrim BanCorp Second Quarter 2018 Net Income Grows 62% to $5.8 Million, or $0.84 per Diluted Share, Reflecting Net Interest Margin Expansion and Lower Tax Rates

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ANCHORAGE, Alaska, July 30, 2018 (GLOBE NEWSWIRE) -- Northrim BanCorp, Inc. (NASDAQ:NRIM) ("Northrim" or the "Company") today reported profits grew 62% to $5.8 million, or $0.84 per diluted share, in the second quarter of 2018 compared to $3.6 million, or $0.51 per diluted share, in the second quarter of 2017, and increased 44% from $4.1 million, or $0.58 per diluted share in the first quarter of 2018.  Rising short-term interest rates contributed to profitability with net interest margin ("NIM") expanding to 4.50% and on a tax equivalent basis* ("NIMTE") expanding to 4.56%, as short-term investments repriced or matured and were reinvested at higher interest rates during the second quarter.  In addition, earnings reflect a benefit from lower tax rates effective for 2018.  Pretax, pre-provision profits increased 22% to $6.7 million in the second quarter of 2018 from $5.5 million in the second quarter a year ago and grew 36% from $4.9 million in the preceding quarter.

Earnings for the first six months of 2018 increased 33% to $9.9 million, or $1.42 per diluted share, compared to $7.4 million, or $1.06 per diluted share, in the first six months of 2017.  Pretax, pre-provision income was level at $11.6 million for both the first six months of 2018 and 2017.  Improving political and economic conditions and improving loan portfolio quality provided for a $300,000 recovery of loan loss provisions in the first half of 2018 compared to a $700,000 charge in the first half a year ago.

"The benefits of rising short-term interest rates on yields of both our investment and loan portfolios contributed to strong second quarter and year-to-date profits.  Significant movements by the Alaskan legislature and positive outcomes from the winter oil drilling season helped the Alaskan economy continue to demonstrate its resilience," said Joe Schierhorn, Chairman, President and CEO.

As discussed in the first quarter earnings release, the Company has a large amount of investments maturing or repricing this year. NIMTE* has increased to 4.56% for the second quarter of 2018 from 4.26% for the second quarter of 2017.  "Rates for new investment opportunities continue to rise and Northrim is seeing the benefit of those new investments.  Going forward, we expect to continue to benefit from rising interest rates as our short-term investment portfolio continues to mature and reprice," said Jed Ballard, Chief Financial Officer.

"Alaska's housing market remains stable with both home values and affordability at healthy levels, while foreclosure and delinquency rates have remained lower than the national average for a decade," noted Schierhorn.  "The Northrim team continues to work with local business owners and consumers to provide a broad range of savings and lending options. While new loan originations were offset by payoffs and maturities in the second quarter, our pipeline of loans remains healthy.  We continue to make investments in technology, recruit and retain business talent, and work to gain market share to generate growth in both loans and deposits in the current environment."

Second Quarter 2018 Highlights:

  • Total revenue, which includes net interest income plus other operating income, was $23.3 million in the second quarter of 2018, compared to $21.7 million in the first quarter of 2018, and $24.0 million in the second quarter a year ago.
    • Community Banking provided 75% of total revenues and 88% of earnings in the second quarter of 2018.
    • Home Mortgage Lending provided 25% of total revenues and 12% of earnings in the second quarter of 2018.
  • Net interest income in the second quarter of 2018 increased 5% to $15.0 million from $14.2 million in the second quarter a year ago, mainly due to the higher yield on the loan and investment portfolios, and was also up 5% compared to $14.3 million in the preceding quarter.
  • Operating net income* increased 44% to $5.8 million from $4.1 million in the preceding quarter and grew 47% from $4.0 million in the year ago quarter.  Operating net income excludes one-time or non-operating items as detailed below.
  • NIMTE* expanded to 4.56% in the second quarter of 2018, a 23-basis-point improvement, compared to the preceding quarter and a 30-basis-point improvement compared to the second quarter a year ago.
  • Total portfolio loans were relatively unchanged in the second quarter of 2018 at $967.7 million compared to $967.6 million in the preceding quarter and contracted from $990.4 million a year ago.  Growth in commercial loans, which account for 34% of the portfolio, and construction loans, which account for 9% of the portfolio, was offset by contraction in commercial real estate loans, of which 13% of the portfolio was owner occupied and 40% was non-owner occupied.
  • Total deposits declined during the second quarter of 2018 and year-over-year with demand deposits comprising 33% of the portfolio, interest bearing transaction accounts totaling 59% of the portfolio and time deposits comprising 8% of total deposits.
  • Northrim paid a quarterly cash dividend of $0.24 per share in June 2018, up from the $0.21 per share dividend paid in June 2017.  The dividend provides an annual yield of approximately 2.40% at current market share prices.
  • Book value per share increased 5% to $29.02 at the end of the second quarter of 2018 from $27.75 a year ago, while tangible book value per share* increased 5% to $26.66 at the end of the second quarter of 2018 from $25.40 a year ago.
  • At quarter end, total non-performing assets, net of government guarantees, decreased to $24.0 million, or 1.63% of assets compared to $26.1 million, or 1.71% of assets, at March 31, 2018, and from $25.8 million, or 1.73% of assets a year ago.  Total adversely classified loans also declined to $33.2 million at quarter end, compared to $34.9 million at March 31, 2018, and increased from $32.4 million a year ago.
  • Following net charge-offs of $41,000 in the second quarter of 2018, the allowance for loan losses to portfolio loans grew to 2.08% at June 30, 2018, compared to 2.03% a year ago.
  • Northrim remains well-capitalized with Tier 1 Capital to Risk Adjusted Assets of 15.10%, total shareholders' equity to total assets of 13.56%, and tangible common equity to tangible assets* of 12.60% at June 30, 2018.
Financial Highlights Three Months Ended
(Dollars in thousands, except per share data) June 30, 2018 March 31, 2018 December 31, 2017 September 30, 2017 June 30, 2017
Total assets $ 1,470,440   $ 1,524,741   $ 1,518,596   $ 1,522,784   $ 1,492,603  
Total portfolio loans $ 967,702   $ 967,575   $ 954,953   $ 988,490   $ 990,380  
Average portfolio loans $ 963,724   $ 955,718   $ 980,351   $ 1,003,751   $ 969,051  
Total deposits $ 1,205,521   $ 1,260,790   $ 1,258,283   $ 1,258,317   $ 1,234,310  
Average deposits $ 1,217,903   $ 1,233,745   $ 1,254,566   $ 1,262,808   $ 1,244,583  
Total shareholders' equity $ 199,456   $ 194,973   $ 192,802   $ 194,427   $ 191,777  
Net income attributable to Northrim BanCorp $ 5,830   $ 4,062   $ 214   $ 5,523   $ 3,589  
Operating net income* $ 5,830   $ 4,062   $ 3,181   $ 3,100   $ 3,962  
Diluted earnings per share $ 0.84   $ 0.58   $ 0.03   $ 0.79   $ 0.51  
Operating diluted earnings per share* $ 0.84   $ 0.58   $ 0.46   $ 0.45   $ 0.57  
Return on average assets   1.58 %   1.10 %   0.06 %   1.44 %   0.96 %
Operating return on average assets*   1.58 %   1.10 %   0.83 %   0.81 %   1.05 %
Return on average shareholders' equity   11.79 %   8.43 %   0.43 %   11.25 %   7.43 %
Operating return on average shareholders' equity*   11.79 %   8.43 %   6.40 %   6.32 %   8.21 %
NIM   4.50 %   4.28 %   4.25 %   4.28 %   4.20 %
NIMTE*   4.56 %   4.33 %   4.31 %   4.34 %   4.26 %
Efficiency ratio   71.19 %   77.22 %   80.92 %   61.40 %   76.99 %
Operating efficiency ratio*   71.19 %   77.22 %   78.74 %   71.26 %   74.36 %
Total shareholders' equity/total assets   13.56 %   12.79 %   12.70 %   12.77 %   12.85 %
Tangible common equity/tangible assets*   12.60 %   11.85 %   11.75 %   11.83 %   11.89 %
Book value per share $ 29.02   $ 28.37   $ 28.06   $ 28.37   $ 27.75  
Tangible book value per share* $ 26.66   $ 26.01   $ 25.70   $ 26.00   $ 25.40  
Dividends per share $ 0.24   $ 0.24   $ 0.22   $ 0.22   $ 0.21  

* References to operating net income, operating diluted earnings per share, operating return on average assets, operating return on average shareholders' equity, NIMTE, operating efficiency ratio, 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 non-GAAP financial measures to GAAP financial measures.

"For the first half of 2018, the number and dollar amounts of unusual gains and charges have declined significantly from those booked in 2017," said Ballard.  "The second quarter of 2018 was the second consecutive period in seven quarters where there were no one-time or non-operating items on the income statement."  Those items that impacted prior quarterly comparisons are summarized in the following table for the periods presented.

  Three Months Ended
(Dollars in thousands, except per share data) June 30, 2018 March 31, 2018 December 31, 2017 September 30, 2017 June 30, 2017
Net income attributable to Northrim BanCorp $ 5,830   $ 4,062   $ 214   $ 5,523   $ 3,589  
Impact of one-time and other non-operating items:          
  Gain on sale of Northrim Benefits Group           (2 )   (4,443 )    
   Core conversion costs               179     633  
  Writedown minority interest in equity method investment           686          
  Compensation expense, net RML acquisition payments           (193 )   149      
  Provision for income taxes related to above one-time items           (202 )   1,692     (260 )
  Provision for income taxes, change in DTA valuation           2,678          
      Operating net income* $ 5,830   $ 4,062   $ 3,181   $ 3,100   $ 3,962  
Average diluted shares   6,976,985     6,968,082     6,963,125     6,959,035     6,997,727  
Operating diluted earnings per share* $ 0.84   $ 0.58   $ 0.46   $ 0.45   $ 0.57  


  Year-to-date
(Dollars in thousands, except per share data) June 30, 2018 June 30, 2017 One Year % Change
Net income attributable to Northrim BanCorp $ 9,892   $ 7,414   33 %
Impact of one-time and other non-operating items:      
  Core conversion costs       764   NM
  Compensation expense, net RML acquisition payments       174   NM
  Provision for income taxes related to above items       (385 ) NM
  Operating net income* $ 9,892   $ 7,967   24 %
Average diluted shares   6,972,744     6,996,160   %
Operating diluted earnings per share* $ 1.42   $ 1.14   25 %

Alaska Economic Update
(Note: sources for information included in this section are included on page 13.)

Alaska has generated three consecutive quarters of Gross State Product growth, due in large part to the recent increases in the price of oil. Alaska is still losing ground on wages, but the losses are getting smaller.  In the fourth quarter of 2017, wages contracted by 0.5%.  In addition, the State of Alaska Department of Labor estimates that employment decreased by 0.5% in June of this year compared to June of 2017.

"The rising price of oil and news from successful exploratory wells on the North Slope by ConocoPhillips are bright spots for the Alaska economy, as expanded drilling activity is expected to bring jobs, increase tax revenues and generate opportunities for service providers throughout the state," Schierhorn noted.

A recent article by the Alaska Journal of Commerce noted that ConocoPhillips leaders said July 16 that four more wells drilled into Willow early this year indicate the field could hold between 500 million and 1.1 billion barrels of gross resources that will cost between $4 billion and $6 billion to fully develop, with first oil potentially in the 2024-25 timeframe.  It was also noted that roughly 75 percent of ConocoPhillips' prospective acreage in the area is yet to be drilled.

"We are also encouraged by recent progress on resolving Alaska's budget shortfall," said Schierhorn.  In June, the legislature passed and the governor signed a budget plan that significantly reduces the state budget deficit.  For the first time since the Alaska Permanent Fund was established in 1976, the legislature authorized the state to allocate a portion of the earnings from the $65 billion Fund to cover operating expenses for the state.

"This resolution addresses a critical deficiency in the state's budget and provides certainty for businesses planning to invest in Alaska," Schierhorn noted.

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 2018, Northrim generated a return on average assets ("ROAA") of 1.58% and a return on average equity ("ROAE") of 11.79%, compared to 0.96% and 7.43%, respectively in the second quarter of 2017. These results were above the averages posted by the 148 banks that make up the SNL U.S. Bank Index with assets between $1 billion and $5 billion as of March 31, 20181.

Net Interest Income/Net Interest Margin

Net interest income grew 5% to $15.0 million in the second quarter of 2018 compared to $14.2 million in the second quarter of 2017 and $14.3 million in the first quarter of 2018. For the first six months of 2018, net interest income increased 4% to $29.3 million from $28.1 million in the first six months of 2017.

NIMTE* was 4.56% in the second quarter of 2018 compared to 4.33% in the preceding quarter and 4.26% from the same quarter a year ago.  Higher total interest income, coupled with lower total interest expense, contributed to the increases in net interest income and NIMTE* in the second quarter of 2018 compared to the second quarter of 2017.  Net interest income and NIMTE* increased in the second quarter of 2018, compared to the first quarter of 2018, reflecting the deployment of lower yielding cash and investments into more productive loans.  The yield on interest earning assets improved to 4.74%, up 25 basis points in the second quarter of 2018 and 29 basis points year-over-year. The cost of funds was relatively stable in the second quarter of 2018 at 28 basis points, up 3 basis points from the preceding quarter and down 1 basis point compared to the same quarter last year.  For the first six months of 2018, NIMTE* improved 20 basis points to 4.44%.

  • In August 2017, Northrim 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.  Interest expense on this debt in 2017, through the date of redemption on August 15, 2017, averaged $84,800 per quarter.  This redemption decreased Tier 1 Capital to Risk Adjusted Assets and Total Capital to Risk Adjusted Assets by 62 basis points each.
  • An interest rate swap executed in September 2017 effectively converted the floating rate of interest on the remaining $10.0 million in outstanding junior subordinated debt from 90-day LIBOR plus 1.37%, or 3.71% as of June 30, 2018, to a fixed rate of 3.72% through the junior subordinated debt's final maturity date of March 15, 2036.

"The repayment of one of our higher-cost floating rate liabilities, completed in August of 2017, is benefiting the Company as expected by reducing second quarter interest expense on borrowings by 19% year over year, and provided further benefits to the net interest margin," said Ballard.

"As we discussed during the first quarter, NIM has benefited from our short duration investment portfolio and our variable interest rate loans, and we expect to continue to see those benefits throughout 2018," Ballard continued.


1As of March 31, 2018, the SNL US Bank Index tracked 148 banks with assets between $1 billion and $5 billion with averages for the following ratios: NIMTE* 3.63%, loan loss reserves to gross loans of 0.92%, ROAA 1.13%, and ROAE 10.40%. 

The components of the change in NIMTE* are detailed in the table below:

  2Q18 vs. 1Q18 2Q18 vs. 2Q17
Nonaccrual interest adjustments 0.01 % %
Interest rates and loan fees 0.18 % 0.24 %
Volume and mix of interest-earning assets 0.04 % 0.06 %
Change in NIMTE* 0.23 % 0.30 %


  YTD18 vs. YTD17
Nonaccrual interest adjustments %
Interest rates and loan fees 0.18 %
Volume and mix of interest-earning assets 0.02 %
Change in NIMTE* 0.20 %

Provision for Loan Losses

In the second quarter and first half of 2018, Northrim recorded a recovery of loan loss provision of $300,000, reflecting improvements in qualitative metrics on its loan portfolio.  In addition, non-performing loans declined to $16.3 million at June 30, 2018, from $18.6 million at March 31, 2018, and $21.5 million at June 30, 2017.  The allowance for loan losses was 123% of nonperforming loans, net of government guarantees, at June 30, 2018, up from 110% at the end of the first quarter of 2018 and 93% a year ago.

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.  Other operating income contributed $8.3 million, or 36% of total second quarter revenues, as compared to $7.5 million, or 34% of revenues in the first quarter of 2018, and $9.8 million, or 41% of revenues in the second quarter of 2017.  In the first six months of 2018, other operating income totaled $15.8 million, or 35% of revenues, compared to $18.7 million, or 40% of revenues in 2017.  The primary driver of other operating income is variability in the mortgage market given the elimination of employee benefits plan income following the sale of the Company's interest in Northrim Benefits Group in August of 2017.

Other Operating Expenses

Operating expenses were $16.6 million in the second quarter 2018, compared to $16.8 million in the first quarter of 2018 and $18.5 million in the second quarter of 2017.  In the second quarter of 2017, the Company incurred $633,000 related to core conversion costs, which the Company did not incur in 2018. Occupancy expense in the second quarter of 2018 declined from prior periods, reflecting a one-time technical correction for depreciation of approximately$670,000.  Also impacting the first half of 2018 were enhancements to the profit sharing program and increases to the 401(k) matching program, which improves Northrim's competitive position in the market for skilled banking professionals, and align our benefits to incentivize profitable growth, without materially increasing overhead. In the first six months of 2018, operating expenses declined 5% to $33.4 million from $35.1 million, reflecting lower compensation costs for the mortgage banking operations, no core conversion costs, and lower occupancy expenses as explained above.

Income Tax Provision

For the second quarter of 2018, Northrim recorded $1.2 million in state and federal income tax expense for an effective tax rate of 16.7% compared to an effective tax rate of 28% in the second quarter of 2017, reflecting the new lower federal corporate income tax rate.  For the first half of 2018, Northrim recorded $2.0 million in state and federal income tax expense, for an effective tax rate of 17.0% compared to $3.3 million and 30% for the same period in 2017.

Community Banking

"Our Alaska franchise continues to provide long-term opportunities in the market," said Schierhorn.  "The new loan production office in Soldotna on the Kenai Peninsula is starting to gain traction in this market, and we continue to work to implement future branch enhancements."

Net interest income in the Community Banking segment increased 5% to $14.6 million in the second quarter of 2018 from $14.0 million in the second quarter of 2017.

The following table provides highlights of the Community Banking segment of Northrim, and detail significant one-time and other non-operating items impacting the periods presented:

  Three Months Ended
(Dollars in thousands, except per share data) June 30, 2018 March 31, 2018 December 31, 2017 September 30, 2017 June 30, 2017
Net interest income $ 14,614   $ 14,036   $ 14,381   $ 14,566   $ 13,952  
(Benefit) provision for loan losses   (300 )           2,500     300  
Other operating income   2,836     2,518     2,685     7,635     3,412  
Compensation expense, net RML acquisition payments           (193 )   149      
Other operating expense   11,748     12,367     13,113     12,252     13,284  
  Income before provision for income taxes   6,002     4,187     4,146     7,300     3,780  
Provision for income taxes   882     659     4,754     2,452     871  
  Net income (loss)   5,120     3,528     (608 )   4,848     2,909  
    Less: net income attributable to the noncontrolling interest               78     152  
    Net income (loss) attributable to Northrim BanCorp $ 5,120   $ 3,528   ($ 608 ) $ 4,770   $ 2,757  
Average diluted shares   6,976,985     6,968,082     6,963,125     6,959,035     6,997,727  
Diluted earnings (loss) per share $ 0.74   $ 0.50   ($ 0.09 ) $ 0.69   $ 0.39  


  Three Months Ended
(Dollars in thousands, except per share data) June 30, 2018 March 31, 2018 December 31, 2017 September 30, 2017 June 30, 2017
Net income (loss) attributable to Northrim BanCorp $ 5,120   $ 3,528   ($ 608 ) $ 4,770   $ 2,757  
Impact of one-time and other non-operating items:          
  Gain on sale of Northrim Benefits Group           (2 )   (4,443 )    
   Core conversion costs               179     633  
  Compensation expense, net RML acquisition payments           (193 )   149      
   Provision for income taxes related to above items           80     1,692     (260 )
   Provision for income taxes, change in DTA valuation           3,411          
       Operating net income* $ 5,120   $ 3,528   $ 2,688   $ 2,347   $ 3,130  
Average diluted shares   6,976,985     6,968,082     6,963,125     6,959,035     6,997,727  
Operating diluted earnings per share* $ 0.74   $ 0.50   $ 0.39   $ 0.34   $ 0.45  


  Year-to-date
(Dollars in thousands, except per share data) June 30,
2018
      June 30,
2017
Net interest income $ 28,650         $ 27,501  
(Benefit) provision for loan losses   (300 )         700  
Other operating income   5,354           6,814  
Compensation expense, net RML acquisition payments             174  
Other operating expense   24,115           24,853  
  Income before provision for income taxes   10,189           8,588  
Provision for income taxes   1,541           2,293  
  Net income   8,648           6,295  
    Less: net income attributable to the noncontrolling interest             249  
      Net income attributable to Northrim BanCorp $ 8,648         $ 6,046  
Average diluted shares   6,972,744           6,996,160  
Diluted earnings per share $ 1.24         $ 0.86  


  Year-to-date  
(Dollars in thousands, except per share data) June 30,
2018
      June 30,
2017
One Year % Change
Net income attributable to Northrim BanCorp $ 8,648         $ 6,046   43 %
Impact of one-time and other non-operating items:            
   Core conversion costs             764   NM
  Compensation expense - RML acquisition payments             174   NM
   Provision for income taxes related to above items             (385 ) NM
       Operating net income* $ 8,648         $ 6,599   31 %
Average diluted shares   6,972,744           6,996,160   %
Operating diluted earnings per share* $ 1.24         $ 0.94   32 %
                       

Home Mortgage Lending

"The mortgage market continues to be a profitable segment in our business, and activity picked up in the second quarter reflecting the seasonality of this segment," said Ballard.   "Loans funded in the second quarter of 2018 were $148.2 million, of which 92% were for new home purchases.  Mortgage activity fluctuates from one quarter to another based on seasonal factors, interest rates, housing supply, wage and employment conditions and other economic factors.  We actively and carefully control operating expenses for this segment of our business to be as efficient and profitable as feasible."

"Our mortgage servicing business, which was initiated in the fourth quarter of 2015 to service loans for the Alaska Housing Finance Corporation, continues to grow," Ballard continued.  "As of June 30, 2018, Northrim services 1,891 loans in its $472.2 million home mortgage servicing portfolio, which is a 42% increase from the $332.5 million serviced a year ago." Mortgage servicing revenue contributed $1.3 million to second quarter of 2018 and $838,000 to the second quarter of 2017 revenues.  Total mortgage servicing income fluctuates based on the amount of mortgage servicing rights originated during the period, and also based on changes in the fair value of mortgage servicing rights, which are driven by interest rate volatility and fluctuations in estimated prepayment speeds, which are based on published industry metrics.

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, 2018 March 31, 2018 December 31, 2017 September 30, 2017 June 30, 2017
Mortgage commitments $ 84,092   $ 64,819   $ 43,602   $ 68,601   $ 80,068  
Mortgage loans funded for sale $ 148,183   $ 109,069   $ 132,606   $ 162,470   $ 143,944  
Mortgage loan refinances to total fundings   8 %   18 %   17 %   12 %   12 %
Mortgage loans serviced for others $ 472,190   $ 439,561   $ 406,291   $ 362,983   $ 332,485  
           
Net realized gains on mortgage loans sold $ 4,052   $ 3,346   $ 4,084   $ 5,218   $ 4,990  
Change in fair value of mortgage loan commitments, net   32     316     (551 )   (23 )   299  
Total production revenue   4,084     3,662     3,533     5,195     5,289  
Mortgage servicing revenue   1,254     1,183     1,450     997     838  
Change in fair value of mortgage servicing rights, net2   (118 )   (26 )   64     (296 )   (48 )
Total mortgage servicing revenue, net   1,136     1,157     1,514     701     790  
Other mortgage banking revenue   258     125     220     323     272  
   Total mortgage banking income $ 5,478   $ 4,944   $ 5,267   $ 6,219   $ 6,351  
           
Net interest income $ 375   $ 227   $ 303   $ 352   $ 291  
Provision for loan losses                    
Mortgage banking income   5,478     4,944     5,267     6,219     6,351  
Other operating expense   4,858     4,428     5,417     5,290     5,226  
   Income before provision for income taxes   995     743     153     1,281     1,416  
Provision for income taxes   285     209     (669 )   528     584  
   Net income attributable to Northrim BanCorp $ 710   $ 534   $ 822   $ 753   $ 832  
           
Average diluted shares   6,976,985     6,968,082     6,963,125     6,959,035     6,997,727  
Diluted earnings per share $ 0.10   $ 0.08   $ 0.12   $ 0.11   $ 0.12  

2Principally 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.

  Three Months Ended
(Dollars in thousands, except per share data) June 30, 2018 March 31, 2018 December 31, 2017 September 30, 2017 June 30, 2017
Net income attributable to Northrim BanCorp $ 710   $ 534   $ 822   $ 753   $ 832  
Impact of one-time and other non-operating items:          
   Writedown minority interest in equity method investment           686          
  Provision for income taxes related to above items           (282 )        
  Provision for income taxes, change in DTA valuation           (733 )        
       Operating net income* $ 710   $ 534   $ 493   $ 753   $ 832  
Average diluted shares   6,976,985     6,968,082     6,963,125     6,959,035     6,997,727  
Operating diluted earnings per share* $ 0.10   $ 0.08   $ 0.07   $ 0.11   $ 0.12  


  Year-to-date
(Dollars in thousands, except per share data) June 30,
2018
      June 30,
2017
Mortgage loans funded for sale $ 257,252         $ 259,002  
Mortgage loan refinances to total fundings   12 %         18 %
           
Net realized gains on mortgage loans sold $ 7,398         $ 8,711  
Change in fair value of mortgage loan commitments, net   348           427  
Total production revenue   7,746           9,138  
Mortgage servicing revenue   2,438           1,991  
Change in fair value of mortgage servicing rights, net1   (144 )         234  
Total mortgage servicing revenue, net   2,294           2,225  
Other mortgage banking revenue   382           438  
   Total mortgage banking income $ 10,422         $ 11,801  
           
Net interest income $ 602         $ 575  
Mortgage banking income   10,422           11,801  
Other operating expense   9,286           10,045  
   Income before provision for income taxes   1,738           2,331  
Provision for income taxes   494           963  
   Net income attributable to Northrim BanCorp $ 1,244         $ 1,368  
           
Average diluted shares   6,972,744           6,996,160  
Diluted earnings per share $ 0.18         $ 0.20  

2Principally 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,
2018
      June 30,
2017
Net income attributable to Northrim BanCorp $ 1,244         $ 1,368  
Impact of one-time and other non-operating items:          
   Writedown minority interest in equity method investment              
  Provision for income taxes related to above items              
  Provision for income taxes, change in DTA valuation              
       Operating net income* $ 1,244         $ 1,368  
Average diluted shares   6,972,744           6,996,160  
Operating diluted earnings per share* $ 0.18         $ 0.20  

Balance Sheet Review

Northrim's total assets were $1.47 billion at June 30, 2018, down 4% from the preceding quarter and 1% from a year ago.  "A number of factors contributed to the contraction in the balance sheet including normal seasonality in the first half of the year, timing of repayments and loan funding and asset/liability balancing," said Schierhorn.  Northrim's loan to deposit ratio was 80.3% at June 30, 2018, compared to 76.7% at March 31, 2018, and 80.2% at June 30, 2017.

Average interest-earning assets were $1.34 billion in the second quarter, down 1.3% from the first quarter of 2018 and 1.9% from the second quarter a year ago. The average yield on interest-earning assets was 4.74% in the second quarter of 2018, up from 4.49% in the preceding quarter and 4.45% in the like quarter a year ago.  For the first six months of 2018, average interest-earning assets declined slightly to $1.34 billion from $1.36 billion in the first half of 2017. Average yields were 4.61% in the first six months of 2018, compared to 4.43% in the first half of 2017.

Average investment securities totaled $287.0 million, a decrease of 12% in the second quarter of 2018 compared to the year ago quarter and down 9% from the first quarter of 2018.  The investment portfolio generated an average net tax equivalent yield of 2.09% for the second quarter of 2018, up from 1.85% in the preceding quarter and 1.65% a year ago.  The average estimated duration of the investment portfolio was 25 months, at June 30, 2018, which is expected to generate improvement in yields as securities reprice in this rising interest rate environment.  For the first six months of 2018, average investment securities declined to $300.5 million with an average yield of 1.96% compared to $324.6 million and an average yield of 1.62% for the first six months of 2017.

Loans held for sale increased 32% to $54.3 million in the second quarter of 2018 compared to the preceding quarter and were flat from a year ago, primarily reflecting the seasonality of the mortgage business and the volatility of demand for home loans in the Alaska marketplace.

Portfolio loans were $967.7 million at the end of the second quarter of 2018 unchanged from the preceding quarter and down 2% from a year ago.  Average portfolio loans in the second quarter of 2018 were $963.7 million virtually unchanged from both the year ago and preceding quarters. Yields on average portfolio loans in the second quarter of 2018 improved to 5.65% from 5.52% in the first quarter of 2018 and 5.51% in the second quarter of 2017.  Average portfolio loans in the first half of 2018 were down 1% to $959.7 million with a yield of 5.59% compared to $969.8 million and a yield of 5.47% for the first half of 2017.

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, 2018, represented 92% of total deposits.  At June 30, 2018, total deposits were $1.21 billion, down from $1.26 billion at March 31, 2018, and $1.23 billion a year ago.  Average interest-bearing deposits were down 1.3% to $818.6 million with an average cost of 0.22% in the second quarter of 2018, compared to $829.5 million and 0.18% in the first quarter of 2018, and down 2.1% from $836.1 million and 0.22% in the second quarter of 2017.  Average interest-bearing deposits were stable in the first six months of 2018 at $824.0 million and 0.20% compared to $825.2 million and 0.22% in the first six months of 2017.

Shareholders' equity increased 4% to $199.5 million, or $29.02 per share, at June 30, 2018, compared to $191.8 million, or $27.75 per share, a year ago.  Tangible book value per share* was $26.66 at June 30, 2018, compared to $25.40 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 15.10% at June 30, 2018.

Asset Quality

Asset quality in the second quarter improved with both net nonperforming assets ("NPAs") and adversely classified loans declining.  NPAs decreased to $24.0 million at June 30, 2018, compared to $26.1 million at the end of the preceding quarter, reflecting $1.9 million in payments, and declined from $25.8 million at June 30, 2017, primarily due to loan payments which exceeded NPA additions.  Of the NPAs, $16.1 million or 97% are nonaccrual loans related to four commercial relationships.  Two of these relationships, which totaled $8.7 million at the end of the second quarter of 2018, are businesses in the medical industry.

Net adversely classified loans were $33.2 million at the end of the second quarter of 2018 as compared to $34.9 million at the end of the first quarter of 2018 and $32.4 million one year ago.  Net loan charge-offs in the second quarter of 2018 were $41,000 compared to $1.0 million in the preceding quarter and $132,000 in the year ago quarter.  Adversely classified loans are loans that Northrim has classified as substandard, doubtful, and loss, net of government guarantees.  As of June 30, 2018, $27.9 million, or 84% of net adversely classified loans are attributable to seven relationships with three loans to commercial businesses, two loans to medical businesses, and two loans to oilfield services commercial businesses.

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

(Dollars in thousands) Three Months Ended
  June 30, 2018 March 31, 2018 December 31, 2017 September 30, 2017 June 30, 2017
Charge-offs:          
Transportation and warehousing $   $   $ 24   $ 339   $  
Other services   78         5     48      
Retail trade                   202  
News media               731      
Health care and social assistance       965              
Consumer   22     139     26     85     5  
   Total charge-offs $ 100   $ 1,104   $ 55   $ 1,203   $ 207  
 

Performing restructured loans that were not included in nonaccrual loans at the end of the second quarter of 2018 were $9.1 million, down slightly from $9.2 million in the preceding quarter and up from $5.7 million a year ago.  The increase in the second quarter of 2018 compared to the year ago quarter is primarily due to the addition of two commercial relationships.  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.

Northrim estimates that $60.6 million, or approximately 6% of portfolio loans as of June 30, 2018, had direct exposure to the oil and gas industry in Alaska, and $6.1 million of these loans are adversely classified.  As of June 30, 2018, Northrim has an additional $38.1 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 Ballard.  "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, 2017, 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.conocophillips.com/news-media/story/conocophillips-announces-successful-results-of-2018-winter-exploration-and-appraisal-program-in-alaska/
http://www.conocophillips.com/news-media/
http://www.alaskanomics.com/housing/
http://labor.alaska.gov/trends/jul18.pdf
http://www.alaskajournal.com/2018-07-18/conocophillips-raises-reserve-totals-slope-discoveries#.W1XbJnkm7cs

           
Income Statement          
(Dollars in thousands, except per share data) Three Months Ended
(Unaudited) June 30, March 31, Three Month June 30, Year-Over-Year
  2018 2018 % Change 2017 % Change
Interest Income:          
   Interest and fees on loans $ 14,036   $ 13,263   6 % $ 13,601   3 %
   Interest on portfolio investments   1,400     1,348   4 %   1,227   14 %
   Interest on deposits in banks   159     184   -14 %   64   148 %
     Total interest income   15,595     14,795   5 %   14,892   5 %
Interest Expense:          
   Interest expense on deposits   446     372   20 %   451   -1 %
   Interest expense on borrowings   160     160   %   197   -19 %
     Total interest expense   606     532   14 %   648   -6 %
     Net interest income   14,989     14,263   5 %   14,244   5 %
           
(Benefit) provision for loan losses   (300 )     -100 %   300   -200 %
     Net interest income after provision for loan losses   15,289     14,263   7 %   13,944   10 %
           
Other Operating Income:          
   Mortgage banking income   5,478     4,944   11 %   6,351   -14 %
   Purchased receivable income   867     840   3 %   776   12 %
   Bankcard fees   707     625   13 %   658   7 %
   Service charges on deposit accounts   376     354   6 %   409   -8 %
   Employee benefit plan income         %   961   -100 %
   Other income   886     699   27 %   607   46 %
     Total other operating income   8,314     7,462   11 %   9,762   -15 %
           
Other Operating Expense:          
   Salaries and other personnel expense   11,362     10,585   7 %   11,793   -4 %
   Data processing expense   1,323     1,548   -15 %   1,453   -9 %
   Occupancy expense   1,020     1,700   -40 %   1,664   -39 %
   Professional and outside services   554     499   11 %   612   -9 %
   Marketing expense   462     632   -27 %   891   -48 %
   Insurance expense   178     296   -40 %   194   -8 %
   Intangible asset amortization expense   17     18   -6 %   27   -37 %
   OREO expense, net rental income and gains on sale   11     103   -89 %   83   -87 %
   Other operating expense   1,679     1,414   19 %   1,793   -6 %
     Total other operating expense   16,606     16,795   -1 %   18,510   -10 %
           
     Income before provision for income taxes   6,997     4,930   42 %   5,196   35 %
   Provision for income taxes   1,167     868   34 %   1,455   -20 %
     Net income   5,830     4,062   44 %   3,741   56 %
        Less: Net income attributable to the noncontrolling interest         %   152   -100 %
           Net income attributable to Northrim BanCorp $ 5,830   $ 4,062   44 % $ 3,589   62 %
           
   Basic EPS $ 0.85   $ 0.59   44 % $ 0.52   63 %
   Diluted EPS $ 0.84   $ 0.58   45 % $ 0.51   65 %
   Average basic shares   6,872,371     6,871,963   0 %   6,910,679   -1 %
   Average diluted shares   6,976,985     6,968,082   0 %   6,997,727   0 %


Income Statement  
(Dollars in thousands, except per share data) Six months ended June 30,
(Unaudited)     Year-Over-Year
  2018 2017 % Change
Interest Income:      
   Interest and fees on loans $ 27,299   $ 26,839   2 %
   Interest on portfolio investments   2,748     2,406   14 %
   Interest on deposits in banks   343     112   206 %
      Total interest income   30,390     29,357   4 %
Interest Expense:      
   Interest expense on deposits   818     896   -9 %
   Interest expense on borrowings   320     384   -17 %
      Total interest expense   1,138     1,280   -11 %
      Net interest income   29,252     28,077   4 %
       
(Benefit) provision for loan losses   (300 )   700   -143 %
   Net interest income after provision for loan losses   29,552     27,377   8 %
       
Other Operating Income:      
   Mortgage banking income   10,422     11,801   -12 %
   Purchased receivable income   1,707     1,465   17 %
   Bankcard fees   1,332     1,239   8 %
   Service charges on deposit accounts   730     848   -14 %
   Gain (loss) on sale of securities       14   -100 %
   Employee benefit plan income       1,897   -100 %
   Other income   1,585     1,403   13 %
      Total other operating income   15,776     18,667   -15 %
       
Other Operating Expense:      
   Salaries and other personnel expense   21,947     22,635   -3 %
   Data processing expense   2,871     2,700   6 %
   Occupancy expense   2,720     3,285   -17 %
   Marketing expense   1,094     1,401   -22 %
   Professional and outside services   1,053     1,234   -15 %
   Insurance expense   474     447   6 %
   OREO expense, net rental income and gains on sale   114     260   -56 %
   Intangible asset amortization expense   35     53   -34 %
   Compensation expense - RML acquisition payments       174   -100 %
   Other operating expense   3,093     2,936   5 %
      Total other operating expense   33,401     35,125   -5 %
       
      Income before provision for income taxes   11,927     10,919   9 %
  Provision for income taxes   2,035     3,256   -38 %
      Net income   9,892     7,663   29 %
         Less: Net income attributable to the noncontrolling interest       249   -100 %
            Net income attributable to Northrim BanCorp $ 9,892   $ 7,414   33 %
       
   Basic EPS $ 1.44   $ 1.07   35 %
   Diluted EPS $ 1.42   $ 1.06   34 %
   Average basic shares   6,872,167     6,910,230   -1 %
   Average diluted shares   6,972,744     6,996,160   0 %


Balance Sheet          
(Dollars in thousands)          
(Unaudited) June 30, March 31, Three Month June 30, One Year
  2018 2018 % Change 2017 % Change
           
Assets:          
   Cash and due from banks $ 26,355   $ 15,170   74 % $ 25,187   5 %
   Interest bearing deposits in other banks   9,775     68,792   -86 %   606   1,513 %
   Investment securities available for sale   264,124     297,573   -11 %   291,579   -9 %
   Investment securities held to maturity         %   898   -100 %
   Marketable securities   6,006     5,527   9 %   5,643   6 %
   Investment in Federal Home Loan Bank stock   2,104     2,105   0 %   1,993   6 %
           
   Loans held for sale   54,306     41,216   32 %   54,090   0 %
           
   Portfolio loans   967,702     967,575   0 %   990,380   -2 %
   Allowance for loan losses   (20,108 )   (20,449 ) -2 %   (20,061 ) 0 %
      Net portfolio loans   947,594     947,126   0 %   970,319   -2 %
   Purchased receivables, net   20,323     19,412   5 %   19,835   2 %
   Mortgage servicing rights   8,733     8,039   9 %   5,828   50 %
   Other real estate owned, net   8,959     8,815   2 %   4,315   108 %
   Premises and equipment, net   38,113     37,331   2 %   39,997   -5 %
   Goodwill and intangible assets   16,189     16,207   0 %   16,271   -1 %
   Other assets   67,859     57,428   18 %   56,042   21 %
      Total assets $ 1,470,440 $ 1,524,741 -4 % $ 1,492,603 -1 %
           
Liabilities:          
   Demand deposits $ 401,925   $ 433,046   -7 % $ 395,310   2 %
   Interest-bearing demand   246,628     244,601   1 %   231,073   7 %
   Savings deposits   237,978     246,981   -4 %   249,275   -5 %
   Money market deposits   223,189     239,242   -7 %   231,780   -4 %
   Time deposits   95,801     96,920   -1 %   126,872   -24 %
      Total deposits   1,205,521     1,260,790   -4 %   1,234,310   -2 %
   Securities sold under repurchase agreements   27,695     31,018   -11 %   24,392   14 %
   Other borrowings   7,312     7,338   0 %   4,314   69 %
   Junior subordinated debentures   10,310     10,310   %   18,558   -44 %
   Other liabilities   20,146     20,312   -1 %   19,252   5 %
      Total liabilities   1,270,984     1,329,768   -4 %   1,300,826   -2 %
           
Shareholders' Equity:          
   Northrim BanCorp shareholders' equity   199,456     194,973   2 %   191,644   4 %
   Noncontrolling interest         %   133   -100 %
      Total shareholders' equity   199,456     194,973   2 %   191,777   4 %
      Total liabilities and shareholders' equity $ 1,470,440   $ 1,524,741   -4 % $ 1,492,603   -1 %
           

Additional Financial Information
(Dollars in thousands)
(Unaudited)

Composition of Portfolio Investments              
  June 30, 2018   March 31, 2018   June 30, 2017
  Balance % of total   Balance % of total   Balance % of total
U.S. Treasury securities $ 39,534   14.6 %   $ 49,603   16.4 %   $ 30,039   10.1 %
U.S. Agency securities   169,158   62.7 %     193,715   63.9 %     206,042   69.1 %
U.S. Agency mortgage-backed securities     0.0 %       0.0 %     1   %
Corporate securities   43,496   16.1 %     39,996   13.2 %     40,698   13.7 %
Collateralized loan obligations   6,007   2.2 %     6,010   2.0 %     3,000   1.0 %
Alaska municipality, utility, or state bonds   7,348   2.7 %     9,160   3.0 %     13,553   4.5 %
Other municipality, utility, or state bonds   4,587   1.7 %     4,616   1.5 %     4,787   1.6 %
   Total portfolio investments $ 270,130       $ 303,100       $ 298,120    
                 


Composition of Portfolio Loans                        
  June 30, 2018   March 31, 2018   December 31, 2017   September 30, 2017   June 30, 2017
  Balance % of total   Balance % of total   Balance % of total   Balance % of total   Balance % of total
Commercial loans $ 327,733   34 %   $ 316,081   33 %   $ 313,514   33 %   $ 315,226   32 %   $ 309,177   31 %
CRE owner occupied loans   127,384   13 %     132,589   14 %     132,041   14 %     134,994   14 %     139,414   14 %
CRE nonowner occupied loans   385,648   40 %     395,915   41 %     359,725   38 %     386,137   38 %     401,493   40 %
Construction loans   89,433   9 %     85,257   9 %     111,294   12 %     111,427   11 %     98,713   10 %
Consumer loans   41,711   4 %     41,841   3 %     42,535   3 %     44,681   5 %     45,727   5 %
   Subtotal   971,909         971,683         959,109         992,465         994,524    
Unearned loan fees, net   (4,207 )       (4,108 )       (4,156 )       (3,975 )       (4,144 )  
   Total portfolio loans $ 967,702       $ 967,575       $ 954,953       $ 988,490       $ 990,380    
                             


Composition of Deposits                        
  June 30, 2018   March 31, 2018   December 31, 2017   September 30, 2017   June 30, 2017
  Balance % of total   Balance % of total   Balance % of total   Balance % of total   Balance % of total
Demand deposits $ 401,925   33 %   $ 433,046   34 %   $ 414,686   33 %   $ 426,946   34 %   $ 395,310   32 %
Interest-bearing demand   246,628   20 %     244,601   19 %     252,009   20 %     240,274   19 %     231,073   19 %
Savings deposits   237,978   20 %     246,981   20 %     247,458   20 %     251,266   20 %     249,275   20 %
Money market deposits   223,189   19 %     239,242   19 %     243,603   19 %     233,768   19 %     231,780   19 %
Time deposits   95,801   8 %     96,920   8 %     100,527   8 %     106,063   8 %     126,872   10 %
   Total deposits $ 1,205,521       $ 1,260,790       $ 1,258,283       $ 1,258,317       $ 1,234,310    
 

Additional Financial Information
(Dollars in thousands)
(Unaudited)

Asset Quality            
  June 30,   March 31,   June 30,  
  2018   2018   2017  
  Nonaccrual loans $ 16,635     $ 18,895     $ 22,899    
  Loans 90 days past due and accruing         84       468    
     Total nonperforming loans   16,635       18,979       23,367    
       Nonperforming loans guaranteed by government   (327 )     (412 )     (1,849 )  
         Net nonperforming loans   16,308       18,567       21,518    
  Other real estate owned   8,959       8,815       4,315    
       Other real estate owned guaranteed by government   (1,280 )     (1,280 )        
         Net nonperforming assets $ 23,987     $ 26,102     $ 25,833    
   Nonperforming loans / portfolio loans, net of government guarantees   1.69   %   1.92   %   2.17   %
   Nonperforming assets / total assets, net of government guarantees   1.63   %   1.71   %   1.73   %
             
  Performing restructured loans $ 9,096     $ 9,162     $ 5,678    
  Nonperforming loans plus performing restructured loans, net of government            
  guarantees $ 25,404     $ 27,729     $ 27,196    
  Nonperforming loans plus performing restructured loans / portfolio loans, net of            
  government guarantees   2.63   %   2.87   %   2.75   %
  Nonperforming assets plus performing restructured loans / total assets, net of            
  government guarantees   2.25   %   2.31   %   2.11   %
             
  Adversely classified loans, net of government guarantees $ 33,178     $ 34,934     $ 32,440    
  Loans 30-89 days past due and accruing, net of government guarantees /            
  portfolio loans   0.18   %   0.92   %   0.14   %
             
  Allowance for loan losses / portfolio loans   2.08   %   2.11   %   2.03   %
  Allowance for loan losses / nonperforming loans, net of government guarantees   123   %   110   %   93   %
             
  Gross loan charge-offs for the quarter $ 100     $ 1,104     $ 207    
  Gross loan recoveries for the quarter $ (59 )   $ (92 )   $ (75 )  
  Net loan charge-offs for the quarter $ 41     $ 1,012     $ 132    
  Net loan charge-offs year-to-date $ 1,053     $ 1,012     $ 336    
  Net loan charge-offs for the quarter / average loans, for the quarter   0.00   %   0.11   %   0.01   %
  Net loan charge-offs year-to-date / average loans,            
     year-to-date annualized   0.22   %   0.42   %   0.07   %
                         

Additional Financial Information
(Dollars in thousands)
(Unaudited)

Nonperforming Assets Rollforward              
  Balance at Additions Payments Writedowns Transfers to Transfers to Sales Balance at
  March 31,
2018
this
quarter
this
quarter
/Charge-offs
 this quarter
OREO Performing Status
this quarter
this
quarter
June 30,
2018
Commercial loans $ 17,268   $   $ (1,890 ) $ (77 ) $   $ (67 ) $   $ 15,234  
Commercial real estate   1,331                             1,331  
Construction loans                                
Consumer loans   380     80     (85 )   (22 )   (283 )           70  
Non-performing loans guaranteed by government   (412 )       85                     (327 )
   Total non-performing loans   18,567     80     (1,890 )   (99 )   (283 )   (67 )       16,308  
Other real estate owned   8,815     300                     (156 )   8,959  
Other real estate owned guaranteed                
by government   (1,280 )                           (1,280 )
   Total non-performing assets,                
   net of government guarantees $ 26,102   $ 380   $ (1,890 ) $ (99 ) $ (283 ) $ (67 ) $ (156 ) $ 23,987  
 

Additional Financial Information
(Dollars in thousands)
(Unaudited)

Average Balances, Yields, and Rates                
  Three Months Ended
  June 30, 2018   March 31, 2018   June 30, 2017
    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 $ 35,846   1.75 %   $ 48,177   1.53 %   $ 25,489   1.00 %
Portfolio investments   287,003   2.09 %     314,099   1.85 %     325,515   1.65 %
Loans held for sale   48,608   4.32 %     34,503   3.73 %     40,906   3.88 %
Portfolio loans   963,724   5.65 %     955,718   5.52 %     969,051   5.51 %
  Total interest-earning assets   1,335,181   4.74 %     1,352,497   4.49 %     1,360,961   4.45 %
Nonearning assets   145,520         141,588         145,859    
  Total assets $ 1,480,701       $ 1,494,085       $ 1,506,820    
                 
Liabilities and Shareholders' Equity                
Interest-bearing deposits $ 818,592   0.22 %   $ 829,545   0.18 %   $ 836,117   0.22 %
Borrowings   44,897   1.40 %     46,263   1.38 %     51,976   1.49 %
  Total interest-bearing liabilities   863,489   0.28 %     875,808   0.25 %     888,093   0.29 %
                 
Noninterest-bearing demand deposits   399,311         404,200         408,466    
Other liabilities   19,626         18,581         16,605    
Shareholders' equity   198,275         195,496         193,656    
  Total liabilities and shareholders' equity $ 1,480,701       $ 1,494,085       $ 1,506,820    
  Net spread   4.46 %     4.24 %     4.16 %
  NIM   4.50 %     4.28 %     4.20 %
  NIMTE*   4.56 %     4.33 %     4.26 %
  Average portfolio loans to average                
     interest-earning assets   72.18 %       70.66 %       71.20 %  
  Average portfolio loans to average total deposits   79.13 %       77.46 %       77.86 %  
  Average non-interest deposits to average                
     total deposits   32.79 %       32.76 %       32.82 %  
  Average interest-earning assets to average                
     interest-bearing liabilities   154.63 %       154.43 %       153.25 %  
                             

Additional Financial Information
(Dollars in thousands)
(Unaudited)

Average Balances, Yields, and Rates          
  Year-to-date
  June 30, 2018   June 30, 2017
    Average     Average
  Average Tax Equivalent   Average Tax Equivalent
  Balance Yield/Rate   Balance Yield/Rate
Assets          
Interest bearing deposits in other banks $ 41,977   1.63 %   $ 24,495   0.91 %
Portfolio investments   300,476   1.96 %     324,639   1.62 %
Loans held for sale   41,594   4.07 %     37,688   3.91 %
Portfolio loans   959,743   5.59 %     969,768   5.47 %
  Total interest-earning assets   1,343,790   4.61 %     1,356,590   4.43 %
Nonearning assets   143,565         142,650    
  Total assets $ 1,487,355       $ 1,499,240    
           
Liabilities and Shareholders' Equity          
Interest-bearing deposits $ 824,038   0.20 %   $ 825,235   0.22 %
Borrowings   45,577   1.39 %     52,275   1.45 %
  Total interest-bearing liabilities   869,615   0.26 %     877,510   0.29 %
           
Noninterest-bearing demand deposits   401,742         412,568    
Other liabilities   19,105         18,835    
Shareholders' equity   196,893         190,327    
  Total liabilities and shareholders' equity $ 1,487,355       $ 1,499,240    
  Net spread   4.35 %     4.14 %
  NIM   4.39 %     4.17 %
  NIMTE*   4.44 %     4.24 %
  Average portfolio loans to average interest-earning assets   71.42 %       71.49 %  
  Average portfolio loans to average total deposits   78.30 %       78.35 %  
  Average non-interest deposits to average total deposits   32.77 %       33.33 %  
  Average interest-earning assets to average interest-bearing liabilities   154.53 %       154.60 %  
                   

Additional Financial Information
(Dollars in thousands)
(Unaudited)

Capital Data (At quarter end)            
  June 30, 2018   March 31, 2018   June 30, 2017  
Book value per share $ 29.02     $ 28.37     $ 27.75    
Tangible book value per share* $ 26.66     $ 26.01     $ 25.40    
Total shareholders' equity/total assets   13.56   %   12.79   %   12.85   %
Tangible Common Equity/Tangible Assets*   12.60   %   11.85   %   11.89   %
Tier 1 Capital / Risk Adjusted Assets   15.10   %   14.88   %   14.98   %
Total Capital / Risk Adjusted Assets   16.35   %   16.14   %   16.23   %
Tier 1 Capital / Average Assets   13.23   %   12.82   %   12.97   %
Shares outstanding   6,872,959     6,871,963     6,910,679  
Unrealized loss on AFS debt securities, net of income taxes $ (1,506 )   $ (1,530 )   $ 28    
Unrealized gain on derivatives and hedging activities $ 805     $ 651     $    


Profitability Ratios                    
  June 30, 2018   March 31, 2018   December 31, 2017   September 30, 2017   June 30, 2017  
For the quarter:                    
   NIM 4.50   % 4.28   % 4.25   % 4.28   % 4.20   %
   NIMTE* 4.56   % 4.33   % 4.31   % 4.34   % 4.26   %
   Efficiency ratio 71.19   % 77.22   % 80.92   % 61.40   % 76.99   %
   Return on average assets 1.58   % 1.10   % 0.06   % 1.44   % 0.96   %
   Return on average equity 11.79   % 8.43   % 0.43   % 11.25   % 7.43   %


  June 30, 2018               June 30, 2017  
Year-to-date:                    
   NIM 4.39   %             4.17   %
   NIMTE* 4.44   %             4.24   %
   Efficiency ratio 74.10   %             75.03   %
   Return on average assets 1.34   %             1.00   %
   Return on average equity 10.13   %             7.86   %
                         

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

NIMTE

NIMTE 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 28.43% in 2018 and 41.11% in 2017. The most comparable GAAP measure is net interest margin and the following table sets forth the reconciliation of NIMTE to net interest margin.

  Three Months Ended
  June 30, 2018   March 31, 2018   December 31, 2017   September 30, 2017   June 30, 2017
Net interest income $ 14,989     $ 14,263     $ 14,684     $ 14,917     $ 14,244  
Divided by average interest-bearing assets   1,335,181       1,352,497       1,372,033       1,383,252       1,360,961  
Net interest margin ("NIM")3   4.50 %     4.28 %     4.25 %     4.28 %     4.20 %
                   
Net interest income $ 14,989     $ 14,263     $ 14,684     $ 14,917     $ 14,244  
Plus: reduction in tax expense related to                  
  tax-exempt interest income   175       173       204       220       224  
  $ 15,164     $ 14,436     $ 14,888     $ 15,137     $ 14,468  
Divided by average interest-bearing assets   1,335,181       1,352,497       1,372,033       1,383,252       1,360,961  
NIMTE3   4.56 %     4.33 %     4.31 %     4.34 %     4.26 %


  Year-to-date
  June 30, 2018               June 30, 2017
Net interest income $ 29,252                 $ 28,077  
Divided by average interest-bearing assets   1,343,790                   1,356,590  
Net interest margin ("NIM")4   4.39 %                 4.17 %
                   
Net interest income $ 29,252                 $ 28,077  
Plus: reduction in tax expense related to                  
   tax-exempt interest income   348                   442  
  $ 29,600                 $ 28,519  
Divided by average interest-bearing assets   1,343,790                   1,356,590  
NIMTE4   4.44 %                 4.24 %

3Calculated using actual days in the quarter divided by 365 for quarters ended in 2018 and 2017.

4Calculated using actual days in the year divided by 365 for year-to-date periods in 2018 and 2017.

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

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, 2018   March 31, 2018   December 31, 2017   September 30, 2017   June 30, 2017
                   
Total shareholders' equity $ 199,456     $ 194,973     $ 192,802     $ 194,427     $ 191,777  
Divided by shares outstanding   6,873       6,872       6,872       6,852       6,911  
Book value per share $ 29.02     $ 28.37     $ 28.06     $ 28.37     $ 27.75 


  June 30, 2018   March 31, 2018   December 31, 2017   September 30, 2017   June 30, 2017
                   
Total shareholders' equity $ 199,456     $ 194,973     $ 192,802     $ 194,427     $ 191,777  
Less: goodwill and intangible assets   16,189       16,207       16,224       16,245       16,271  
  $ 183,267     $ 178,766     $ 176,578     $ 178,182     $ 175,506  
Divided by shares outstanding   6,873       6,872       6,872       6,852       6,911  
Tangible book value per share $ 26.66     $ 26.01     $ 25.70     $ 26.00     $ 25.40 
 

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.

Northrim BanCorp, Inc.

 
June 30, 2018   March 31, 2018   December 31, 2017   September 30, 2017   June 30, 2017
                   
Total shareholders' equity $ 199,456     $ 194,973     $ 192,802     $ 194,427     $ 191,777  
Total assets   1,470,440       1,524,741       1,518,596       1,522,784       1,492,603  
Total shareholders' equity to total assets   13.56 %     12.79 %     12.70 %     12.77 %     12.85 %


Northrim BanCorp, Inc.

 
June 30, 2018   March 31, 2018   December 31, 2017   September 30, 2017   June 30, 2017
Total shareholders' equity $ 199,456     $ 194,973     $ 192,802     $ 194,427     $ 191,777  
Less: goodwill and other intangible assets, net   16,189       16,207       16,224       16,245       16,271  
Tangible common shareholders' equity $ 183,267     $ 178,766     $ 176,578     $ 178,182     $ 175,506  
                   
Total assets $ 1,470,440     $ 1,524,741     $ 1,518,596     $ 1,522,784     $ 1,492,603  
Less: goodwill and other intangible assets, net   16,189       16,207       16,224       16,245       16,271  
Tangible assets $ 1,454,251     $ 1,508,534     $ 1,502,372     $ 1,506,539     $ 1,476,332  
Tangible common equity ratio   12.60 %     11.85 %     11.75 %     11.83 %     11.89 %
 

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

Operating diluted earnings per share

Operating diluted earnings per share is a non-GAAP ratio that represents operating net income divided by average diluted shares. The most comparable GAAP measure is diluted earnings per share. The following table provides a reconciliation of operating diluted earnings per share with diluted earnings per share (See page 3 of this earnings release for a reconciliation between net income and operating net income):

Northrim BanCorp, Inc. Three Months Ended
  June 30, 2018   March 31, 2018   December 31, 2017   September 30, 2017   June 30, 2017
Net income $ 5,830     $ 4,062     $ 214     $ 5,523     $ 3,589  
Divided by weighted-average diluted shares outstanding   6,976,985       6,968,082       6,963,125       6,959,035       6,997,727  
Diluted earnings per share $ 0.84    $ 0.58    $ 0.03    $ 0.79    $ 0.51 


Northrim BanCorp, Inc. Three Months Ended
  June 30, 2018   March 31, 2018   December 31, 2017   September 30, 2017   June 30, 2017
Operating net income $ 5,830     $ 4,062     $ 3,181     $ 3,100     $ 3,962  
Divided by weighted-average diluted shares outstanding   6,976,985       6,968,082       6,963,125       6,959,035       6,997,727  
Operating diluted earnings per share $ 0.84    $ 0.58    $ 0.46    $ 0.45    $ 0.57 


Northrim BanCorp, Inc. Year-to-date
  June 30, 2018               June 30, 2017
Net income $ 9,892                 $ 7,414  
Divided by weighted-average diluted shares outstanding   6,972,744                   6,996,160  
Diluted earnings per share $ 1.42                $ 1.06 


Northrim BanCorp, Inc. Year-to-date
  June 30, 2018               June 30, 2017
Operating net income $ 9,892                 $ 7,967  
Divided by weighted-average diluted shares outstanding   6,972,744                   6,996,160  
Operating diluted earnings per share $ 1.42                $ 1.14 


Community Banking Three Months Ended
  June 30, 2018   March 31, 2018   December 31, 2017   September 30, 2017   June 30, 2017
Net income $ 5,120     $ 3,528     $ (608 )   $ 4,770     $ 2,757  
Divided by weighted-average diluted shares outstanding   6,976,985       6,968,082       6,963,125       6,959,035       6,997,727  
Diluted earnings per share $ 0.74    $ 0.50    -$ 0.09    $ 0.69    $ 0.39 


Community Banking Three Months Ended
  June 30, 2018   March 31, 2018   December 31, 2017   September 30, 2017   June 30, 2017
Operating net income $ 5,120     $ 3,528     $ 2,688     $ 2,347     $ 3,130  
Divided by weighted-average diluted shares outstanding   6,976,985       6,968,082       6,963,125       6,959,035       6,997,727  
Operating diluted earnings per share $ 0.74    $ 0.50    $ 0.39    $ 0.34    $ 0.45 
 

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

Community Banking Year-to-date
  June 30, 2018               June 30, 2017
Net income $ 8,648                 $ 6,046  
Divided by weighted-average diluted shares outstanding   6,972,744                   6,996,160  
Diluted earnings per share $ 1.24                $ 0.86 


Community Banking Year-to-date
  June 30, 2018               June 30, 2017
Operating net income $ 8,648                 $ 6,599  
Divided by weighted-average diluted shares outstanding   6,972,744                   6,996,160  
Operating diluted earnings per share $ 1.24                $ 0.94 


Home Mortgage Lending Three Months Ended
  June 30, 2018   March 31, 2018   December 31, 2017   September 30, 2017   June 30, 2017
Net income $ 710     $ 534     $ 822     $ 753     $ 832  
Divided by weighted-average diluted shares outstanding   6,976,985       6,968,082       6,963,125       6,959,035       6,997,727  
Diluted earnings per share $ 0.10    $ 0.08    $ 0.12    $ 0.11    $ 0.12 


Home Mortgage Lending Three Months Ended
  June 30, 2018   March 31, 2018   December 31, 2017   September 30, 2017   June 30, 2017
Operating net income $ 710     $ 534     $ 493     $ 753     $ 832  
Divided by weighted-average diluted shares outstanding   6,976,985       6,968,082       6,963,125       6,959,035       6,997,727  
Operating diluted earnings per share $ 0.10    $ 0.08    $ 0.07    $ 0.11    $ 0.12 


Home Mortgage Lending Year-to-date
  June 30, 2018               June 30, 2017
Net income $ 1,244                 $ 1,368  
Divided by weighted-average diluted shares outstanding   6,972,744                   6,996,160  
Diluted earnings per share $ 0.18                $ 0.20 


Home Mortgage Lending Year-to-date
  June 30, 2018               June 30, 2017
Operating net income $ 1,244                 $ 1,368  
Divided by weighted-average diluted shares outstanding   6,972,744                   6,996,160  
Operating diluted earnings per share $ 0.18                $ 0.20 
 

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

Operating efficiency ratio

The operating efficiency ratio is a non-GAAP ratio that is calculated by dividing operating other operating expense (which exclude certain non-operating expense items), exclusive of intangible asset amortization, by the sum of net interest income and operating other operating income (which exclude certain non-operating income items). The following tables set forth the calculation of the operating efficiency ratio:

Northrim BanCorp, Inc.

 
Three Months Ended
  June 30, 2018   March 31, 2018   December 31, 2017   September 30, 2017   June 30, 2017
Total other operating expense $ 16,606     $ 16,795     $ 18,337     $ 17,691     $ 18,510  
Less: intangible asset amortization   17       18       21       26       27  
  $ 16,589     $ 16,777     $ 18,316     $ 17,665     $ 18,483  
Other operating income $ 8,314     $ 7,462     $ 7,952     $ 13,855     $ 9,762  
Plus: net interest income   14,989       14,263       14,684       14,917       14,244  
  $ 23,303     $ 21,725     $ 22,636     $ 28,772     $ 24,006  
  Efficiency ratio   71.19 %     77.22 %     80.92 %     61.40 %     76.99 %


Northrim BanCorp, Inc.

 
Three Months Ended
  June 30, 2018   March 31, 2018   December 31, 2017   September 30, 2017   June 30, 2017
Total other operating expense $ 16,606     $ 16,795     $ 18,337     $ 17,691     $ 18,510  
Less: core conversion costs                     179       633  
Less: writedown minority interest in equity method investment               686              
Less: compensation expense, net RML acquisition payments               (193 )     149        
Operating other operating expense $ 16,606     $ 16,795     $ 17,844     $ 17,363     $ 17,877  
Less: intangible asset amortization   17       18       21       26       27  
  $ 16,589     $ 16,777     $ 17,823     $ 17,337     $ 17,850  
Other operating income $ 8,314     $ 7,462     $ 7,952     $ 13,855     $ 9,762  
Less: gain on sale of Northrim Benefits Group               2       4,443        
Operating other operating income $ 8,314     $ 7,462     $ 7,950     $ 9,412     $ 9,762  
Plus: net interest income   14,989       14,263       14,684       14,917       14,244  
  $ 23,303     $ 21,725     $ 22,634     $ 24,329     $ 24,006  
  Operating efficiency ratio   71.19 %     77.22 %     78.74 %     71.26 %     74.36 %

Operating return on average assets ratio

The operating return on average assets ratio is a non-GAAP ratio that is calculated by dividing operating net income (which exclude certain non-operating income and expense items) by average assets. The following tables set forth the calculation of the operating return on average assets ratio:

Northrim BanCorp, Inc.

 
Three Months Ended
  June 30, 2018   March 31, 2018   December 31, 2017   September 30, 2017   June 30, 2017
Net income $ 5,830     $ 4,062     $ 214     $ 5,523     $ 3,589  
Divided by average assets   1,480,701       1,494,085       1,519,865       1,525,478       1,506,820  
Return on average assets ratio   1.58 %     1.10 %     0.06 %     1.44 %     0.96 %

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

Northrim BanCorp, Inc.

 
Three Months Ended
  June 30, 2018   March 31, 2018   December 31, 2017   September 30, 2017   June 30, 2017
Operating net income $ 5,830     $ 4,062     $ 3,181     $ 3,100     $ 3,962  
Divided by average assets   1,480,701       1,494,085       1,519,865       1,525,478       1,506,820  
Operating return on average assets ratio   1.58 %     1.10 %     0.83 %     0.81 %     1.05 %


Northrim BanCorp, Inc.

 
Year-to-date
  June 30, 2018               June 30, 2017
Net income $ 9,892                 $ 7,414  
Divided by average assets   1,487,355                   1,499,240  
Return on average assets ratio   1.34 %                 1.00 %


Northrim BanCorp, Inc.

 
Year-to-date
  June 30, 2018               June 30, 2017
Operating net income $ 9,892                 $ 7,967  
Divided by average assets   1,487,355                   1,499,240  
Operating return on average assets ratio   1.34 %                 1.07 %
 

Operating return on average shareholders' equity ratio

The operating return on average shareholders' equity ratio is a non-GAAP ratio that is calculated by dividing operating net income (which exclude certain non-operating income and expense items) by average shareholders' equity. The following tables set forth the calculation of the operating return on average equity ratio:

Northrim BanCorp, Inc. Three Months Ended
  June 30, 2018   March 31, 2018   December 31, 2017   September 30, 2017   June 30, 2017
Net income $ 5,830     $ 4,062     $ 214     $ 5,523     $ 3,589  
Divided by average shareholders' equity   198,275       195,496       197,066       194,703       193,656  
Return on average shareholders' equity ratio   11.79 %     8.43 %     0.43 %     11.25 %     7.43 %


Northrim BanCorp, Inc. Three Months Ended
  June 30, 2018   March 31, 2018   December 31, 2017   September 30, 2017   June 30, 2017
Operating net income $ 5,830     $ 4,062     $ 3,181     $ 3,100     $ 3,962  
Divided by average shareholders' equity   198,275       195,496       197,066       194,703       193,656  
Operating return on average shareholders' equity ratio   11.79 %     8.43 %     6.40 %     6.32 %     8.21 %


Northrim BanCorp, Inc. Year-to-date
  June 30, 2018               June 30, 2017
Net income $ 9,892                 $ 7,414  
Divided by average shareholders' equity   196,893                   190,327  
Return on average equity ratio   10.13 %                 7.86 %
 

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

Northrim BanCorp, Inc. Year-to-date
  June 30, 2018               June 30, 2017
Operating net income $ 9,892                 $ 7,967  
Divided by average shareholders' equity   196,893                   190,327  
Operating return on average equity ratio   10.13 %                 8.44 %


   
Contact: Joe Schierhorn,  President, CEO, and COO
  (907) 261-3308
  Jed Ballard, Chief Financial Officer
  (907) 261-3539

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