Market Overview

Northrim BanCorp Earns $5.3 Million, or $0.75 per Diluted Share, in 3Q18; Reflects Solid Contribution from Its Core Community Banking Franchise

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ANCHORAGE, Alaska, Oct. 29, 2018 (GLOBE NEWSWIRE) -- Northrim BanCorp, Inc. (NASDAQ:NRIM) ("Northrim" or the "Company") today reported earnings of $5.3 million, or $0.75 per diluted share, for the third quarter of 2018 and $15.2 million, or $2.17 per diluted share, for the first nine months of 2018. Strong contributions from the community banking franchise, with slightly decreased volumes in its mortgage banking division, contributed to solid third quarter and year-to-date profits.

"We continue to benefit from the rising interest rate environment, lower corporate tax rates and the planned expansion of the Alaska natural resources infrastructure," said Joe Schierhorn, President, CEO and COO. Earlier this month ConocoPhillips announced that "oil is flowing at the Greater Mooses Tooth No. 1 drill site, part of the National Petroleum Reserve-Alaska." According to a recent article in Petroleum News, "the project constitutes one of a chain of developments that ConocoPhillips is undertaking, progressively stepping out west into the northeastern part of the NPR-A from the Colville River delta."

In the third quarter and nine-month period ending September 30, 2017, Northrim recognized a pre-tax gain of $4.4 million on the sale of its interest in Northrim Benefits Group and operating income from that business of $2.5 million, respectively, with no contribution from this divested subsidiary in 2018. These revenues were partially offset in the first nine months of 2017 by a provision for loan losses of $3.2 million.

Third Quarter 2018 Highlights:

  • Total revenue, which includes net interest income plus other operating income, was $24.5 million in the third quarter of 2018, compared to $23.3 million in the second quarter of 2018, and $28.8 million in the third quarter a year ago.
    — Community Banking provided 74% of total revenues and 94% of earnings in the third quarter of 2018.
    — Home Mortgage Lending provided 26% of total revenues and 6% of third quarter earnings.
  • Net interest income in the third quarter of 2018 increased 6% to $15.8 million from $14.9 million in the third quarter a year ago, mainly due to the higher yields on the loan and investment portfolios and was also up 5.5% compared to $15.0 million in the preceding quarter.
  • Net interest margin on a tax equivalent basis ("NIMTE")* expanded to 4.74% in the third quarter of 2018, an 18-basis-point improvement, compared to the preceding quarter and a 40-basis-point improvement compared to the third quarter a year ago.
  • Return on average assets was 1.40% and return on average equity was 10.27% for the third quarter of 2018.
   
Financial Highlights Three Months Ended
(Dollars in thousands, except per share data) September 30,
2018
June 30, 2018 March 31, 2018 December 31,
2017
September 30,
2017
Total assets $1,502,673   $1,470,440   $1,524,741   $1,518,596   $1,522,784  
Total portfolio loans $982,007   $967,702   $967,575   $954,953   $988,490  
Average portfolio loans $984,914   $963,724   $955,718   $980,351   $1,003,751  
Total deposits $1,233,268   $1,205,521   $1,260,790   $1,258,283   $1,258,317  
Average deposits $1,223,997   $1,217,903   $1,233,745   $1,254,566   $1,262,808  
Total shareholders' equity $203,242   $199,456   $194,973   $192,802   $194,427  
Net income attributable to Northrim BanCorp $5,264   $5,830   $4,062   $214   $5,523  
Diluted earnings per share $0.75   $0.84   $0.58   $0.03   $0.79  
Return on average assets 1.40 % 1.58 % 1.10 % 0.06 % 1.44 %
Return on average shareholders' equity 10.27 % 11.79 % 8.43 % 0.43 % 11.25 %
NIM 4.69 % 4.50 % 4.28 % 4.25 % 4.28 %
NIMTE* 4.74 % 4.56 % 4.33 % 4.31 % 4.34 %
Efficiency ratio 73.82 % 71.19 % 77.22 % 80.92 % 61.40 %
Total shareholders' equity/total assets 13.53 % 13.56 % 12.79 % 12.70 % 12.77 %
Tangible common equity/tangible assets* 12.58 % 12.60 % 11.85 % 11.75 % 11.83 %
Book value per share $29.52   $29.02   $28.37   $28.06   $28.37  
Tangible book value per share* $27.17   $26.66   $26.01   $25.70   $26.00  
Dividends per share $0.27   $0.24   $0.24   $0.22   $0.22  
* References to NIMTE, 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.
 

Alaska Economic Update
(Note: sources for information included in this section are included on page 10.)

Alaska's Department of Labor and Workforce Development released employment numbers for August 2018. The employment rate is down 0.6% from August 2017 and the unemployment rate sits at 6.7%, down two-tenths of a point from July 2018. "While rising oil prices are supporting long-term investment in Alaska's natural resources, Alaska's economy is slowly emerging from the recession that began in late 2014," noted Schierhorn.

The price for a single-family home in Alaska has remained stable during the recession. We believe that this is due to a few different factors. Low interest rates, migration patterns, measured selling and buying, and controlled building were likely part of the reasons for the stable prices.

"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.

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 earnings release.

Review of Income Statement

Consolidated Income Statement

In the third quarter of 2018, Northrim generated a return on average assets ("ROAA") of 1.40% and a return on average equity ("ROAE") of 10.27%, compared to 1.58% and 11.79%, respectively in the second quarter of 2018. These results were above the averages posted by the 131 banks that make up the SNL Small Cap U.S. Bank Index with total market capitalization between $250 million and $1 billion as of June 30, 20181.

Net Interest Income/Net Interest Margin

Net interest income grew 6% to $15.8 million in the third quarter of 2018 compared to $14.9 million in the third quarter of 2017 and $15.0 million in the second quarter of 2018. For the first nine months of 2018, net interest income increased 5% to $45.1 million from $43.0 million in the first nine months of 2017.

NIMTE* was 4.74% in the third quarter of 2018 compared to 4.56% in the preceding quarter and 4.34% from the same quarter a year ago. Higher total interest income, coupled with lower growth in total interest expense, contributed to the increases in net interest income and NIMTE* in the third quarter of 2018 compared to prior quarters. The deployment of lower-yielding cash and investments into more productive loans and higher-yielding securities also supported the increases in net interest income and NIMTE*. The yield on interest earning assets improved to 4.97%, up 23 basis points from the second quarter of 2018 and 46 basis points year-over-year. The cost of funds increased more slowly in the third quarter of 2018 at 36 basis points, up 8 basis points from the preceding quarter and 9 basis points compared to the same quarter last year. For the first nine months of 2018, NIMTE* improved 26 basis points to 4.54%.

  • 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 3.70% as of September 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 last year, is mitigating the impact of rising interest rates on our cost of funds and provides benefits to the net interest margin," said Jed Ballard, Chief Financial Officer.

"As we discussed in prior periods, NIM continues to benefit from our short duration investment portfolio and our variable interest rate loans," Ballard continued.

 
1As of June 30, 2018, the SNL Small Cap US Bank Index tracked 131 banks with total common market capitalization between $250 million and $1 billion with averages for the following ratios: NIMTE* 3.57%, loan loss reserves to gross loans of 0.95%, ROAA 1.08%, and ROAE 10.07%.
 

Provision for Loan Losses

In the third quarter, Northrim did not record a provision for loan losses and in the first nine months of 2018 recorded a recovery of loan loss provision of $300,000, reflecting stable qualitative metrics on its loan portfolio. Non-performing loans, net of government guarantees, were $16.6 million at September 30, 2018, $16.3 million at June 30, 2018, and $22.7 million at September 30, 2017. The allowance for loan losses was 121% of nonperforming loans, net of government guarantees, at September 30, 2018, in line with 123% at the end of the second quarter of 2018 and higher than the 95% 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 $8.7 million, or 35% of total third quarter 2018 revenues, as compared to $8.3 million, or 36% of revenues in the second quarter of 2018, and $13.9 million, or 48% of revenues in the third quarter of 2017. In the first nine months of 2018, other operating income totaled $24.4 million, or 35% of revenues, compared to $32.5 million, or 43% of revenues in the first nine months of 2017. A significant part of other operating income in the prior year was the sale of the Company's interest in Northrim Benefits Group in August of 2017, which generated a $4.4 million pre-tax gain, or $2.6 million, or $0.38 per diluted share after-tax. The sale also eliminated employee benefits plan income going forward. In addition, the variability in the mortgage market also contributes to uneven results in other operating income, as this is where the Company's mortgage banking income is included. Mortgage banking income contributed $5.9 million to other operating income in the third quarter of 2018, as compared to $5.5 million in the second quarter of 2018 and $6.2 million a year ago.

Other Operating Expenses

Other operating expenses were $18.1 million in the third quarter 2018, compared to $16.6 million in the second quarter of 2018 and $17.7 million in the third quarter of 2017. In the third quarter of 2018, there was an $804,000 write down of the carrying value of the Company's minority interest in another mortgage origination business owned by Residential Mortgage Holding Company, LLC the parent company of Residential Mortgage, LLC (collectively "RML"). In addition, occupancy expense in the second quarter of 2018 declined by $670,000 due to a one-time technical correction of building depreciation. In the first nine months of 2018, other operating expenses were $51.5 million compared to $52.8 million in the like period of 2017.

Income Tax Provision

For the third quarter of 2018, Northrim recorded $1.1 million in state and federal income tax expense for an effective tax rate of 18% compared to $3.0 million with an effective tax rate of 35% in the third quarter of 2017, reflecting the new lower federal corporate income tax rate as a result of the Tax Cuts and Jobs Act of 2017. For the first nine months of 2018, Northrim recorded $3.2 million in state and federal income tax expense, for an effective tax rate of 17% compared to $6.2 million and 32% for the same period in 2017.

Community Banking

"We continue to see solid long-term opportunities in the Alaska markets that we serve," said Schierhorn. "The expansion to Soldotna on the Kenai Peninsula earlier this year opens a new market for our lending products to businesses, consumers and homeowners."

Net interest income in the Community Banking segment increased 5% to $15.4 million in the third qu

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