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 quarter of 2018 from $14.6 million in the third quarter of 2017.

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

   
  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
Net interest income $15,358   $14,614   $14,036   $14,381   $14,565  
(Benefit) provision for loan losses   (300 )     2,500  
Other operating income 2,770   2,836   2,518   2,685   7,636  
Compensation expense, net RML acquisition payments       (193 ) 149  
Other operating expense 12,204   11,748   12,367   13,113   12,252  
Income before provision for income taxes 5,924   6,002   4,187   4,146   7,300  
Provision for income taxes 996   882   659   4,754   2,452  
Net income (loss) 4,928   5,120   3,528   (608 ) 4,848  
Less: net income attributable to the noncontrolling interest         78  
Net income (loss) attributable to Northrim BanCorp $4,928   $5,120   $3,528   ($608 ) $4,770  
Average diluted shares 6,990,633   6,976,985   6,968,082   6,963,125   6,959,035  
Diluted earnings (loss) per share $0.70   $0.74   $0.50   ($0.09 ) $0.69  


  Year-to-date
(Dollars in thousands, except per share data) September
30, 2018
      September
30, 2017
Net interest income $44,008         $42,067  
(Benefit) provision for loan losses (300 )       3,200  
Other operating income 8,124         14,502  
Compensation expense, net RML acquisition payments         323  
Other operating expense 36,319         37,158  
Income before provision for income taxes 16,113         15,888  
Provision for income taxes 2,537         4,745  
Net income 13,576         11,143  
Less: net income attributable to the noncontrolling interest         327  
Net income attributable to Northrim BanCorp $13,576         $10,816  
Average diluted shares 6,978,679         6,983,778  
Diluted earnings per share $1.94         $1.55  
               

Home Mortgage Lending

"With the housing market in Alaska continuing to be stable, demand for mortgage loans is steady. We continue to see normal seasonality in the mortgage market with higher demand in the spring and summer and lower demand in autumn and winter," said Ballard. "Loans funded in the third quarter of 2018 were $156.3 million, of which 91% were for new home purchases. Fluctuation in mortgage activity is expected based on a number of variable factors. We continue to closely monitor operating expenses for this segment of our business to ensure that we are as efficient and profitable, as possible.

"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 September 30, 2018, Northrim serviced 2,053 loans in its $516.0 million home mortgage servicing portfolio, which is a 42% increase from the $363.0 million serviced a year ago. Mortgage servicing revenue contributed $1.5 million to third quarter of 2018 and $701,000 to the third 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.

Lastly, the $804,000 pre-tax write down of the carrying value of the Company's minority ownership interest in another mortgage origination business owned by RML discussed above is recorded in the Home Mortgage Lending segment.

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

   
  Three Months Ended
(Dollars in thousands, except per share data) September
30, 2018
June 30, 2018 March 31,
2018
December
31, 2017
September
30, 2017
Mortgage commitments $69,026   $84,092   $64,819   $43,602   $68,601  
Mortgage loans funded for sale $156,301   $148,183   $109,069   $132,606   $162,470  
Mortgage loan refinances to total fundings 9 % 8 % 18 % 17 % 12 %
Mortgage loans serviced for others $516,008   $472,190   $439,561   $406,291   $362,983  
           
Net realized gains on mortgage loans sold $4,268   $4,052   $3,346   $4,084   $5,218  
Change in fair value of mortgage loan commitments, net (66 ) 32   316   (551 ) (23 )
Total production revenue 4,202   4,084   3,662   3,533   5,195  
Mortgage servicing revenue 1,578   1,254   1,183   1,450   997  
Change in fair value of mortgage servicing rights, net2 (128 ) (118 ) (26 ) 64   (296 )
Total mortgage servicing revenue, net 1,450   1,136   1,157   1,514   701  
Other mortgage banking revenue 251   258   125   220   323  
Total mortgage banking income $5,903   $5,478   $4,944   $5,267   $6,219  
           
Net interest income $461   $375   $227   $303   $352  
Mortgage banking income 5,903   5,478   4,944   5,267   6,219  
Other operating expense 5,895   4,858   4,428   5,417   5,290  
Income before provision for income taxes 469   995   743   153   1,281  
Provision for income taxes 133   285   209   (669 ) 528  
Net income attributable to Northrim BanCorp $336   $710   $534   $822   $753  
           
Average diluted shares 6,990,633   6,976,985   6,968,082   6,963,125   6,959,035  
Diluted earnings per share $0.05   $0.10   $0.08   $0.12   $0.11  
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) September
30, 2018
      September
30, 2017
Mortgage loans funded for sale $413,552         $421,472  
Mortgage loan refinances to total fundings 11 %       15 %
           
Net realized gains on mortgage loans sold $11,666         $13,929  
Change in fair value of mortgage loan commitments, net 282         404  
Total production revenue 11,948         14,333  
Mortgage servicing revenue 4,015         2,988  
Change in fair value of mortgage servicing rights, net1 (272 )       (62 )
Total mortgage servicing revenue, net 3,743         2,926  
Other mortgage banking revenue 634         761  
Total mortgage banking income $16,325         $18,020  
           
Net interest income $1,063         $927  
Mortgage banking income 16,325         18,020  
Other operating expense 15,181         15,335  
Income before provision for income taxes 2,207         3,612  
Provision for income taxes 627         1,491  
Net income attributable to Northrim BanCorp $1,580         $2,121  
           
Average diluted shares 6,978,679         6,983,778  
Diluted earnings per share $0.23         $0.30  
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.
 

Balance Sheet Review

Northrim's total assets were $1.50 billion at September 30, 2018, up 2% from the preceding quarter and down 1% from a year ago. "A number of factors contributed to the change 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 remains consistent at 80% at September 30, 2018, compared to 80% at June 30, 2018, and 79% at September 30, 2017.

Average interest-earning assets were $1.33 billion in the third quarter of 2018, relatively unchanged from the second quarter of 2018 and down 3% from the third quarter a year ago. The average yield on interest-earning assets was 4.97% in the third quarter of 2018, up from 4.74% in the preceding quarter and 4.51% in the like quarter a year ago. For the first nine months of 2018, average interest-earning assets declined slightly to $1.34 billion from $1.37 billion in the first nine months of 2017. Average yields were 4.73% in the first nine months of 2018, compared to 4.46% in the first nine months of 2017.

Average investment securities totaled $264.4 million, a decrease of 8% from the second quarter of 2018, and down 7% in the third quarter of 2018 compared to the year ago quarter. The investment portfolio generated an average net tax equivalent yield of 2.29% for the third quarter of 2018, up from 2.09% in the preceding quarter and 1.63% a year ago. The average estimated duration of the investment portfolio was 24 months, at September 30, 2018, which is expected to generate improvement in yields as securities reprice in this rising interest rate environment. For the first nine months of 2018, average investment securities declined to $288.3 million with an average yield of 2.07% compared to $311.2 million and an average yield of 1.63% for the first nine months of 2017.

Portfolio loans were $982.0 million at the end of the third quarter of 2018 up 1% from the preceding quarter and down less than 1% from the third quarter a year ago. Average portfolio loans in the third quarter of 2018 were $984.9 million up 2% from the preceding quarter and down 2% from a year ago. Yields on average portfolio loans in the third quarter of 2018 improved to 5.81% from 5.65% in the second quarter of 2018 and 5.49% in the third quarter of 2017. Average portfolio loans in the first nine months of 2018 were down 1% to $968.2 million with a yield of 5.66% compared to $981.2 million and a yield of 5.48% for the first nine months 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 September 30, 2018, represented 92% of total deposits. At September 30, 2018, total deposits were $1.23 billion, up from $1.21 billion at June 30, 2018, and down from $1.26 billion a year ago. Average interest-bearing deposits were down 3% to $795.3 million with an average cost of 0.30% in the third quarter of 2018, compared to $818.6 million and 0.22% in the second quarter of 2018, and down 5% from $839.7 million and 0.20% in the third quarter of 2017. Average interest-bearing deposits were down 2% in the first nine months of 2018 at $814.3 million and with an average cost of 0.23% compared to $830.1 million and 0.21% in the first nine months of 2017. "Our cost of deposits is rising more slowly than our loan yields, reflecting the rational nature of the competition in our market," said Ballard.

Shareholders' equity increased 5% to $203.2 million, or $29.52 per share, at September 30, 2018, compared to $194.4 million, or $28.37 per share, a year ago. Tangible book value per share* was $27.17 at September 30, 2018, compared to $26.00 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 16.58% at September 30, 2018.

Asset Quality

Asset quality in the third quarter of 2018 was stable. Nonperforming assets ("NPAs"), net of government guarantees were $24.1 million at September 30, 2018, relatively unchanged from the end of the preceding quarter, and declined from $26.2 million at September 30, 2017, primarily due to loan payments which exceeded NPA additions. Of the NPAs, $16.0 million or 67% are nonaccrual loans related to five commercial relationships. Two of these relationships, which totaled $8.3 million at the end of the third quarter of 2018, are businesses in the medical industry.

Net adversely classified loans were $29.7 million at the end of the third quarter of 2018 as compared to $33.2 million at the end of the second quarter of 2018 and $33.8 million one year ago. Net loan recoveries in the third quarter of 2018 were $52,000 compared to net charge-offs of $41,000 in the preceding quarter and $1.1 million 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 September 30, 2018, $27.9 million, or 94% of net adversely classified loans are attributable to seven relationships with four loans to commercial businesses, two loans to medical businesses, and one loan to an oilfield services commercial business.

Performing restructured loans that were not included in nonaccrual loans at the end of the third quarter of 2018 were $3.3 million, down from $9.1 million in the preceding quarter and from $7.7 million a year ago. The decrease in the third quarter of 2018 compared to the year ago quarter is primarily due to the repayment 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 $55.7 million, or approximately 6% of portfolio loans as of September 30, 2018, had direct exposure to the oil and gas industry in Alaska, and $1.9 million of these loans are adversely classified. As of September 30, 2018, Northrim has an additional $38.5 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, as amended. 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:

https://www.adn.com/business-economy/2018/10/09/first-crude-flows-from-federal-leases-in-arctic-alaska-petroleum-reserve/

http://www.petroleumnews.com/pntruncate/757137768.shtml

             
Income Statement            
(Dollars in thousands, except per share data) Three Months Ended   Year-to-date
(Unaudited) September 30, June 30, September 30,   September 30, September 30,
  2018 2018 2017   2018 2017
Interest Income:            
Interest and fees on loans $14,992   $14,036   $14,341     $42,291   $41,180  
Interest on portfolio investments 1,419   1,400   1,060     4,167   3,466  
Interest on deposits in banks 169   159   118     512   230  
Total interest income 16,580   15,595   15,519     46,970   44,876  
Interest Expense:            
Interest expense on deposits 595   446   429     1,413   1,325  
Interest expense on borrowings 166   160   173     486   557  
Total interest expense 761   606   602     1,899   1,882  
Net interest income 15,819   14,989   14,917     45,071   42,994  
             
(Benefit) provision for loan losses   (300 ) 2,500     (300 ) 3,200  
Net interest income after provision for loan losses 15,819   15,289   12,417     45,371   39,794  
             
Other Operating Income:            
Mortgage banking income 5,903   5,478   6,219     16,325   18,020  
Purchased receivable income 767   867   752     2,474   2,217  
Bankcard fees 724   707   664     2,056   1,903  
Service charges on deposit accounts 407   376   406     1,137   1,254  
(Loss) gain on sale of securities     (3 )     11  
Gain on sale of Northrim Benefits Group     4,443       4,443  
Employee benefit plan income     609       2,506  
Other income 872   886   765     2,457   2,168  
Total other operating income 8,673   8,314   13,855     24,449   32,522  
             
Other Operating Expense:            
Salaries and other personnel expense 11,261   11,362   11,115     33,208   33,750  
Occupancy expense 1,687   1,020   1,706     4,407   4,991  
Data processing expense 1,503   1,323   1,509     4,374   4,209  
Impairment of equity method investment 804         804    
Professional and outside services 727   554   674     1,780   1,908  
Marketing expense 367   462   332     1,461   1,733  
Insurance expense 171   178   475     645   922  
OREO expense, net rental income and gains on sale 43   11   (44 )   157   216  
Intangible asset amortization expense 18   17   26     53   79  
Compensation expense, net RML acquisition payments     149       323  
Other operating expense 1,518   1,679   1,749     4,611   4,685  
Total other operating expense 18,099   16,606   17,691     51,500   52,816  
             
Income before provision for income taxes 6,393   6,997   8,581     18,320   19,500  
Provision for income taxes 1,129   1,167   2,980     3,164   6,236  
Net income 5,264   5,830   5,601     15,156   13,264  
Less: Net income attributable to the noncontrolling interest     78       327  
Net income attributable to Northrim BanCorp $5,264   $5,830   $5,523     $15,156   $12,937  
             
Basic EPS $0.77   $0.85   $0.80     $2.21   $1.88  
Diluted EPS $0.75   $0.84   $0.79     $2.17   $1.85  
Average basic shares 6,877,194   6,872,371   6,872,273     6,873,843   6,897,577  
Average diluted shares 6,990,633   6,976,985   6,959,035     6,978,679   6,983,778  


Balance Sheet      
(Dollars in thousands)      
(Unaudited) September 30, June 30, September 30,
  2018 2018 2017
       
Assets:      
Cash and due from banks $37,651   $26,355   $13,960  
Interest bearing deposits in other banks 32,528   9,775   73,309  
Investment securities available for sale 264,193   264,124   264,550  
Investment securities held to maturity     897  
Marketable equity securities 6,035   6,006   5,801  
Investment in Federal Home Loan Bank stock 2,103   2,104   2,116  
       
Loans held for sale 56,636   54,306   59,420  
       
Portfolio loans 982,007   967,702   988,490  
Allowance for loan losses (20,160 ) (20,108 ) (21,464 )
Net portfolio loans 961,847   947,594   967,026  
Purchased receivables, net 12,706   20,323   12,930  
Mortgage servicing rights 9,695   8,733   6,181  
Other real estate owned, net 8,707   8,959   3,505  
Premises and equipment, net 38,637   38,113   40,046  
Goodwill and intangible assets 16,171   16,189   16,245  
Other assets 55,764   67,859   56,798  
Total assets $1,502,673   $1,470,440   $1,522,784  
       
Liabilities:      
Demand deposits $450,409   $401,925   $426,946  
Interest-bearing demand 240,974   246,628   240,274  
Savings deposits 233,611   237,978   251,266  
Money market deposits 208,614   223,189   233,768  
Time deposits 99,660   95,801   106,063  
Total deposits 1,233,268   1,205,521   1,258,317  
Securities sold under repurchase agreements 32,429   27,695   31,084  
Other borrowings 7,282   7,312   7,387  
Junior subordinated debentures 10,310   10,310   10,310  
Other liabilities 16,142   20,146   21,259  
Total liabilities 1,299,431   1,270,984   1,328,357  
       
Total shareholders' equity 203,242   199,456   194,427  
Total liabilities and shareholders' equity $1,502,673   $1,470,440   $1,522,784  


Additional Financial Information
(Dollars in thousands)
(Unaudited)
 
Composition of Portfolio Investments              
  September 30, 2018   June 30, 2018   September 30, 2017
  Balance % of
total
  Balance % of
total
  Balance % of
total
U.S. Treasury securities $54,452   20.2 %   $39,534   14.6 %   $30,012   11.1 %
U.S. Agency securities 151,380   56.0 %   169,158   62.7 %   179,088   66.0 %
Corporate securities 40,516   15.0 %   37,490   13.9 %   35,082   12.9 %
Marketable equity securities 6,035   2.2 %   6,006   2.2 %   5,801   2.1 %
Collateralized loan obligations 6,002   2.2 %   6,007   2.2 %   3,002   1.1 %
Alaska municipality, utility, or state bonds 7,307   2.7 %   7,348   2.7 %   13,502   5.0 %
Other municipality, utility, or state bonds 4,536   1.7 %   4,587   1.7 %   4,761   1.8 %
Total portfolio investments $270,228       $270,130       $271,248    


Composition of Portfolio Loans                        
  September 30, 2018   June 30, 2018   March 31, 2018   December 31, 2017   September 30, 2017
  Balance % of
total
  Balance % of
total
  Balance % of
total
  Balance % of
total
  Balance % of
total
Commercial loans $333,132   34 %   $327,733   34 %   $316,081   33 %   $313,514   33 %   $315,226   32 %
CRE owner occupied loans 130,166   13 %   127,384   13 %   132,589   14 %   132,041   14 %   134,994   14 %
CRE nonowner occupied loans 382,313   39 %   385,648   40 %   395,915   41 %   359,725   38 %   386,137   38 %
Construction loans 97,976   10 %   89,433   9 %   85,257   9 %   111,294   12 %   111,427   11 %
Consumer loans 42,775   4 %   41,711   4 %   41,841   3 %   42,535   3 %   44,681   5 %
Subtotal 986,362       971,909       971,683       959,109       992,465    
Unearned loan fees, net (4,355 )     (4,207 )     (4,108 )     (4,156 )     (3,975 )  
Total portfolio loans $982,007       $967,702       $967,575       $954,953       $988,490    


Composition of Deposits                        
  September 30, 2018   June 30, 2018   March 31, 2018   December 31, 2017   September 30, 2017
  Balance % of
total
  Balance % of
total
  Balance % of
total
  Balance % of
total
  Balance % of
total
Demand deposits $450,409   36 %   $401,925   33 %   $433,046   34 %   $414,686   33 %   $426,946   34 %
Interest-bearing demand 240,974   20 %   246,628   20 %   244,601   19 %   252,009   20 %   240,274   19 %
Savings deposits 233,611   19 %   237,978   20 %   246,981   20 %   247,458   20 %   251,266   20 %
Money market deposits 208,614   17 %   223,189   19 %   239,242   19 %   243,603   19 %   233,768   19 %
Time deposits 99,660   8 %   95,801   8 %   96,920   8 %   100,527   8 %   106,063   8 %
Total deposits $1,233,268       $1,205,521       $1,260,790       $1,258,283       $1,258,317    


Additional Financial Information
(Dollars in thousands)
(Unaudited)
 
Asset Quality            
  September 30,   June 30,   September 30,  
  2018   2018   2017  
Nonaccrual loans $16,728     $16,635     $24,317    
Loans 90 days past due and accruing 152         214    
Total nonperforming loans 16,880     16,635     24,531    
Nonperforming loans guaranteed by government (279 )   (327 )   (1,846 )  
Net nonperforming loans 16,601     16,308     22,685    
Other real estate owned 8,707     8,959     3,505    
Repossessed assets 29            
Other real estate owned guaranteed by government (1,279 )   (1,280 )      
Net nonperforming assets $24,058     $23,987     $26,190    
Nonperforming loans / portfolio loans, net of government guarantees 1.69   % 1.69   % 2.29   %
Nonperforming assets / total assets, net of government guarantees 1.60   % 1.63   % 1.72   %
             
Performing restructured loans $3,252     $9,096     $7,687    
Nonperforming loans plus performing restructured loans, net of government guarantees $19,853     $25,404     $30,372    
Nonperforming loans plus performing restructured loans / portfolio loans, net of government guarantees 2.02   % 2.63   % 3.07   %
Nonperforming assets plus performing restructured loans / total assets, net of government guarantees 1.82   % 2.25   % 2.22   %
             
Adversely classified loans, net of government guarantees $29,730     $33,178     $33,789    
Loans 30-89 days past due and accruing, net of government guarantees / portfolio loans 0.26   % 0.18   % 0.70   %
             
Allowance for loan losses / portfolio loans 2.05   % 2.08   % 2.17   %
Allowance for loan losses / nonperforming loans, net of government guarantees 121   % 123   % 95   %
             
Gross loan charge-offs for the quarter $9     $100     $1,203    
Gross loan recoveries for the quarter ($61 )   ($59 )   ($106 )  
Net loan (recoveries) charge-offs for the quarter ($52 )   $41     $1,097    
Net loan charge-offs year-to-date $1,001     $1,053     $1,433    
Net loan (recoveries) charge-offs for the quarter / average loans, for the quarter (0.01 ) % 0.00   % 0.11   %
Net loan charge-offs year-to-date / average loans, year-to-date annualized 0.14   % 0.22   % 0.19   %

Additional Financial Information
(Dollars in thousands)
(Unaudited)

Nonperforming Assets Rollforward              
  Balance at
June 30,
2018
Additions
this
quarter
Payments
this
quarter
Writedowns
/Charge-
offs
this quarter
Transfers to
OREO/
REPO
Transfers to
Performing
Status
this quarter
Sales
this
quarter
Balance at
September
30, 2018
Commercial loans $15,234   $1,179   ($1,679 ) $—   $—   $—   $—   $14,734  
Commercial real estate 1,331   363             1,694  
Construction loans                
Consumer loans 70   442   (22 ) (9 ) (29 )     452  
Non-performing loans guaranteed by government (327 )   48           (279 )
Total non-performing loans 16,308   1,984   (1,653 ) (9 ) (29 )     16,601  
Other real estate owned 8,959             (252 ) 8,707  
Repossessed assets   29             29  
Other real estate owned guaranteed by government (1,280 )   1           (1,279 )
Total non-performing assets, net of government guarantees $23,987   $2,013   ($1,652 ) ($9 ) ($29 ) $—   ($252 ) $24,058  
                                 

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

         
Loan Charge-offs by Industry        
  Three Months Ended
  September 30,
2018
June 30, 2018 March 31, 2018 December 31,
2017
September 30,
2017
Charge-offs:          
Transportation and warehousing $—   $—   $—   $24   $339  
Other services   78     5   48  
News media         731  
Health care and social assistance     965      
Consumer 9   22   139   26   85  
Total charge-offs $9   $100   $1,104   $55   $1,203  


Additional Financial Information
(Dollars in thousands)
(Unaudited)
 
Average Balances, Yields, and Rates                
  Three Months Ended
  September 30, 2018   June 30, 2018   September 30, 2017
  Average
Balance
Average
Tax
Equivalent
Yield/Rate
  Average
Balance
Average
Tax
Equivalent
Yield/Rate
  Average
Balance
Average
Tax
Equivalent
Yield/Rate
Assets                
Interest bearing deposits in other banks $34,136   1.94 %   $35,846   1.75 %   $37,349   1.24 %
Portfolio investments 264,377   2.29 %   287,003   2.09 %   284,806   1.63 %
Loans held for sale 54,792   4.64 %   48,608   4.32 %   57,346   3.74 %
Portfolio loans 984,914   5.81 %   963,724   5.65 %   1,003,751   5.49 %
Total interest-earning assets 1,338,219   4.97 %   1,335,181   4.74 %   1,383,252   4.51 %
Nonearning assets 150,808       145,520       142,226    
Total assets $1,489,027       $1,480,701       $1,525,478    
                 
Liabilities and Shareholders' Equity                
Interest-bearing deposits $795,256   0.30 %   $818,592   0.22 %   $839,743   0.20 %
Borrowings 46,663   1.39 %   44,897   1.40 %   49,223   1.36 %
Total interest-bearing liabilities 841,919   0.36 %   863,489   0.28 %   888,966   0.27 %
                 
Noninterest-bearing demand deposits 428,741       399,311       423,065    
Other liabilities 15,039       19,626       18,744    
Shareholders' equity 203,328       198,275       194,703    
Total liabilities and shareholders' equity $1,489,027       $1,480,701       $1,525,478    
Net spread   4.61 %     4.46 %     4.24 %
NIM   4.69 %     4.50 %     4.28 %
NIMTE*   4.74 %     4.56 %     4.34 %
Average portfolio loans to average interest-earning assets 73.60 %     72.18 %     72.56 %  
Average portfolio loans to average total deposits 80.47 %     79.13 %     79.49 %  
Average non-interest deposits to average total deposits 35.03 %     32.79 %     33.50 %  
Average interest-earning assets to average interest-bearing liabilities 158.95 %     154.63 %     155.60 %  
                       

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

     
  3Q18 vs. 2Q18 3Q18 vs. 3Q17
Nonaccrual interest adjustments (0.02 ) % %
Interest rates and loan fees 0.15   % 0.39 %
Volume and mix of interest-earning assets 0.05   % 0.01 %
Change in NIMTE* 0.18   % 0.40 %


Additional Financial Information
(Dollars in thousands)
(Unaudited)
 
Average Balances, Yields, and Rates          
  Year-to-date
  September 30, 2018   September 30, 2017
    Average     Average
  Average Tax Equivalent   Average Tax Equivalent
  Balance Yield/Rate   Balance Yield/Rate
Assets          
Interest bearing deposits in other banks $39,335   1.72 %   $28,827   1.05 %
Portfolio investments 288,311   2.07 %   311,215   1.63 %
Loans held for sale 46,042   4.30 %   44,313   3.84 %
Portfolio loans 968,225   5.66 %   981,220   5.48 %
Total interest-earning assets 1,341,913   4.73 %   1,365,575   4.46 %
Nonearning assets 146,006       142,507    
Total assets $1,487,919       $1,508,082    
           
Liabilities and Shareholders' Equity          
Interest-bearing deposits $814,339   0.23 %   $830,128   0.21 %
Borrowings 45,943   1.39 %   51,247   1.42 %
Total interest-bearing liabilities 860,282   0.29 %   881,375   0.28 %
           
Noninterest-bearing demand deposits 410,841       416,105    
Other liabilities 17,734       18,800    
Shareholders' equity 199,062       191,802    
Total liabilities and shareholders' equity $1,487,919       $1,508,082    
Net spread   4.44 %     4.18 %
NIM   4.49 %     4.21 %
NIMTE*   4.54 %     4.28 %
Average portfolio loans to average interest-earning assets 72.15 %     71.85 %  
Average portfolio loans to average total deposits 79.03 %     78.73 %  
Average non-interest deposits to average total deposits 33.53 %     33.39 %  
Average interest-earning assets to average interest-bearing liabilities 155.99 %     154.94 %  
               

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

   
  YTD18 vs.YTD17
Nonaccrual interest adjustments (0.01 ) %
Interest rates and loan fees 0.27   %
Volume and mix of interest-earning assets   %
Change in NIMTE* 0.26   %


Additional Financial Information
(Dollars in thousands)
(Unaudited)
 
Capital Data (At quarter end)            
  September 30, 2018   June 30, 2018   September 30, 2017  
Book value per share $29.52     $29.02     $28.37    
Tangible book value per share* $27.17     $26.66     $26.00    
Total shareholders' equity/total assets 13.53   % 13.56   % 12.77   %
Tangible Common Equity/Tangible Assets* 12.58   % 12.60   % 11.83   %
Tier 1 Capital / Risk Adjusted Assets 15.33   % 15.10   % 13.50   %
Total Capital / Risk Adjusted Assets 16.58   % 16.35   % 14.75   %
Tier 1 Capital / Average Assets 13.41   % 13.23   % 11.54   %
Shares outstanding 6,884,386     6,872,959     6,852,338    
                   
Unrealized loss on AFS debt securities, net of income taxes ($1,680 )   ($1,506 )   $147    
Unrealized gain on derivatives and hedging activities $1,039     $805     $—    


Profitability Ratios                    
  September 30,
2018
  June 30,
2018
  March 31,
2018
  December 31,
2017
  September 30,
2017
 
For the quarter:                    
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   %
Return on average assets 1.40   % 1.58   % 1.10   % 0.06   % 1.44   %
Return on average equity 10.27   % 11.79   % 8.43   % 0.43   % 11.25   %


  September 30,
2018
                    September 30,
2017
 
Year-to-date:                          
NIM 4.49   %                   4.21   %
NIMTE* 4.54   %                   4.28   %
Efficiency ratio 74.00   %                   69.84   %
Return on average assets 1.36   %                   1.15   %
Return on average equity 10.18   %                   9.02   %
                               

*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
  September 30,
2018
  June 30, 2018   March 31,
2018
  December 31,
2017
  September 30,
2017
Net interest income $15,819     $14,989     $14,263     $14,684     $14,917  
Divided by average interest-bearing assets 1,338,219     1,335,181     1,352,497     1,372,033     1,383,252  
Net interest margin ("NIM")3 4.69 %   4.50 %   4.28 %   4.25 %   4.28 %
                   
Net interest income $15,819     $14,989     $14,263     $14,684     $14,917  
Plus: reduction in tax expense related to tax-exempt interest income 182     175     173     204     220  
  $16,001     $15,164     $14,436     $14,888     $15,137  
Divided by average interest-bearing assets 1,338,219     1,335,181     1,352,497     1,372,033     1,383,252  
NIMTE3 4.74 %   4.56 %   4.33 %   4.31 %   4.34 %


  Year-to-date
  September 30,
2018
            September 30,
2017
Net interest income $45,071               $42,994  
Divided by average interest-bearing assets 1,341,913               1,365,575  
Net interest margin ("NIM")4 4.49 %             4.21 %
                 
Net interest income $45,071               $42,994  
Plus: reduction in tax expense related to tax-exempt interest income 530               670  
  $45,601               $43,664  
Divided by average interest-bearing assets 1,341,913               1,365,575  
NIMTE4 4.54 %             4.28 %
 
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.

                   
  September 30,
2018
  June 30, 2018   March 31,
2018
  December 31,
2017
  September 30,
2017
                   
Total shareholders' equity $203,242     $199,456     $194,973     $192,802     $194,427  
Divided by shares outstanding 6,884     6,873     6,872     6,872     6,852  
Book value per share $29.52     $29.02     $28.37     $28.06     $28.37  


  September 30,
2018
  June 30, 2018   March 31,
2018
  December 31,
2017
  September 30,
2017
                   
Total shareholders' equity $203,242     $199,456     $194,973     $192,802     $194,427  
Less: goodwill and intangible assets 16,171     16,189     16,207     16,224     16,245  
  $187,071     $183,267     $178,766     $176,578     $178,182  
Divided by shares outstanding 6,884     6,873     6,872     6,872     6,852  
Tangible book value per share $27.17     $26.66     $26.01     $25.70     $26.00  
                             

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. September 30,
2018
  June 30, 2018   March 31,
2018
  December 31,
2017
  September 30,
2017
                   
Total shareholders' equity $203,242     $199,456     $194,973     $192,802     $194,427  
Total assets 1,502,673     1,470,440     1,524,741     1,518,596     1,522,784  
Total shareholders' equity to total assets 13.53 %   13.56 %   12.79 %   12.70 %   12.77 %


Northrim BanCorp, Inc. September 30,
2018
  June 30, 2018   March 31,
2018
  December 31,
2017
  September 30,
2017
Total shareholders' equity $203,242     $199,456     $194,973     $192,802     $194,427  
Less: goodwill and other intangible assets, net 16,171     16,189     16,207     16,224     16,245  
Tangible common shareholders' equity $187,071     $183,267     $178,766     $176,578     $178,182  
                   
Total assets $1,502,673     $1,470,440     $1,524,741     $1,518,596     $1,522,784  
Less: goodwill and other intangible assets, net 16,171     16,189     16,207     16,224     16,245  
Tangible assets $1,486,502     $1,454,251     $1,508,534     $1,502,372     $1,506,539  
Tangible common equity ratio 12.58 %   12.60 %   11.85 %   11.75 %   11.83 %


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

Northrim BanCorp, Inc. new logo

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