Market Overview

Northrim BanCorp Earns $4.3 Million, or $0.62 per Diluted Share, in 2Q19 Fueled by Solid Loan Growth, Improved Asset Quality, and Strong Net Interest Margin

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ANCHORAGE, Alaska, July 29, 2019 (GLOBE NEWSWIRE) -- Northrim BanCorp, Inc. (NASDAQ:NRIM) ("Northrim" or the "Company") today reported net income was $4.3 million, or $0.62 per diluted share, in the second quarter of 2019, in line with first quarter 2019, and down from $5.8 million, or $0.84 per diluted share, in the second quarter of 2018.  The year-over year decline in net income reflects higher second quarter 2019 costs for medical and other employee benefits, and additional expenses related to the new branches opened in Soldotna on the Kenai peninsula and in East Anchorage over the past year, as well as the impact from non-core increases in net income in the second quarter of 2018.

Portfolio loans increased 5% to $1.02 billion at the end of the second quarter compared to $967.7 million a year ago.  Net interest margin ("NIM") improved 21 basis points to 4.71% in the second quarter of 2019 from a year ago and compressed 12 basis points from the first quarter of 2019.  Generally rising interest rates in the last year contributed to the year-over-year margin expansion, while the inversion of the yield curve for 3-to 5- year maturities reduced yields on loans with these durations during the second quarter of 2019.

Net income for the first six months of 2019 were $8.6 million, or $1.24 per diluted share, compared to $9.9 million, or $1.42 per diluted share, in the first six months of 2018.  In the first half of 2019, operating results include increased operating expenses of $36.9 million, up from $33.4 million in the first half of 2018 primarily due to increased salaries and wages and medical costs. The provision for loan losses also increased to $1.1 million, compared to a $300,000 recovery of loan loss provisions in the first half of 2018.

"Our loan pipeline, for both home mortgages and business loans, continues to be robust and supports our ability to build shareholder value," said Joe Schierhorn, President and CEO.

Second Quarter 2019 Highlights:

  • Total revenue, which includes net interest income plus other operating income, increased 10% to $25.5 million in the second quarter of 2019, compared to $23.3 million in the first quarter of 2019 and in the second quarter a year ago.
    • Community Banking provided 75% of total revenues and 91% of earnings in the second quarter of 2019.
    • Home Mortgage Lending began its normal seasonal improvement in demand for new home loans with commitments increasing 62% in the quarter and 28% year-over-year. Loans funded for sale grew 83% in the quarter and 14% year-over-year. Interest rate decreases impacted earnings in the segment with fair value decreases in servicing rights and improvements in refinancing activity.
  • Net interest income in the second quarter of 2019 increased 6% to $16.0 million from $15.0 million in the second quarter a year ago, mainly due to the higher yields on the loan and investment portfolios.
  • Net interest margin on a tax equivalent basis ("NIMTE")* was 4.77% in the second quarter, a 21 basis point improvement compared to the second quarter a year ago, and a 12 basis point contraction compared to the preceding quarter.
  • Other operating income benefited from $734,000 in income from an interest rate swap to fix interest costs for a customer.
  • Return on average assets was 1.12% and return on average equity was 8.13% for the second quarter of 2019.
  • The Company repurchased 149,373 shares of its common stock in the second quarter of 2019 at an average price of $34.79, leaving 192,193 shares available under the previously announced repurchase authorization.
Financial Highlights Three Months Ended
(Dollars in thousands, except per share data) June 30, 2019 March 31, 2019 December 31, 2018 September 30, 2018 June 30, 2018
Total assets $1,552,770   $1,520,051   $1,502,988   $1,502,673   $1,470,440  
Total portfolio loans $1,015,704   $982,341   $984,346   $982,007   $967,702  
Average portfolio loans $1,003,019   $988,920   $981,407   $984,914   $963,724  
Total deposits $1,288,178   $1,228,018   $1,228,088   $1,233,268   $1,205,521  
Average deposits $1,239,354   $1,194,512   $1,233,479   $1,223,997   $1,217,903  
Total shareholders' equity $206,338   $208,838   $205,947   $203,242   $199,456  
Net income $4,261   $4,312   $4,848   $5,264   $5,830  
Diluted earnings per share $0.62   $0.62   $0.69   $0.75   $0.84  
Return on average assets   1.12 %   1.18 %   1.27 %   1.40 %   1.58 %
Return on average shareholders' equity   8.13 %   8.36 %   9.30 %   10.27 %   11.79 %
NIM   4.71 %   4.83 %   4.71 %   4.69 %   4.50 %
NIMTE*   4.77 %   4.89 %   4.76 %   4.74 %   4.56 %
Efficiency ratio   77.58 %   73.23 %   76.64 %   73.82 %   71.19 %
Total shareholders' equity/total assets   13.29 %   13.74 %   13.70 %   13.53 %   13.56 %
Tangible common equity/tangible assets*   12.38 %   12.81 %   12.76 %   12.58 %   12.60 %
Book value per share $30.66   $30.36   $29.92   $29.52   $29.02  
Tangible book value per share* $28.27   $28.01   $27.57   $27.17   $26.66  
Dividends per share $0.30   $0.30   $0.27   $0.27   $0.24  

* 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 economic indicators continue to show signs of improvement. There have been modest job gains, growing personal income and wages, and rising gross state product ("GSP"). According to the State Department of Labor, Alaska has registered year-over-year job gains for eight consecutive months after losing jobs for the prior 36 months. Job growth in 2019 has been led by construction, oil & gas, health care and the leisure & hospitality sectors. Somewhat offsetting this growth has been declines year-over-year in seafood processing, financial activities and the information sectors.  The seasonally adjusted unemployment rate in Alaska was 6.4% in May 2019 after finishing nine consecutive months at 6.5%.  "While job growth is modest, improving employment indicates Alaska began to recover from its three-year long mild recession in October 2018.  In addition, per capita income and GSP figures showed positive improvement in 2018," stated Mark Edwards, Chief Credit Officer and Bank Economist.

Alaska's seasonally adjusted GSP in real terms was $54.9 billion in the fourth quarter of 2018, according to the U.S. Bureau of Economic Analysis ("BEA") in a report released on May 1, 2019.  Alaska's real GSP declined by 5.7% annualized in the first quarter of 2018, but then grew by 1.7%, 2.9% and 4.9% in the second, third and fourth quarters, respectively.

The BEA also reported that Alaska's per capita income in 2018 was $59,687.  That is a 4.4% increase from $57,163 in 2017.  Alaska ranked 10th highest in per capita income in the country in both years.  Total income in 2018 in Alaska was $44 billion, up from $42.3 billion in 2017, despite a small population loss.  The improvement in total income consisted of $801 million from wage earnings, $264 million from investments and rents, and $649 million from increased government transfer payments.

"An important risk factor that is impacting the current economic recovery is the uncertainty surrounding the State's budget and the long term fiscal plan for the State," said Schierhorn.

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

Review of Income Statement

Consolidated Income Statement

In the second quarter of 2019, Northrim generated a return on average assets ("ROAA") of 1.12% and a return on average equity ("ROAE") of 8.13%, compared to 1.18% and 8.36%, respectively in the first quarter of 2019 and 1.58% and 11.79%, respectively, in the second quarter a year ago.

Net Interest Income/Net Interest Margin

Net interest income grew 6% to $16.0 million in the second quarter of 2019 compared to $15.0 million in the second quarter of 2018 and increased modestly compared to $15.8 million in the first quarter of 2019. For the first six months of 2019, net interest income increased 8% to $31.7 million from $29.2 million in the first six months of 2018.

NIMTE* was 4.77% in the second quarter of 2019 compared to 4.89% in the preceding quarter and 4.56% in the second quarter a year ago.  The growth in the loan portfolio more than offset increased cost of interest-bearing deposits and borrowings in both the second quarter and first half of 2019 compared to the year ago periods.  The yield on interest earning assets in the second quarter was 5.17%, down 6 basis points from the first quarter of 2019 and up 43 basis points year-over-year.  The cost of funds increased in the second quarter of 2019 to 63 basis points, up 10 basis points from the preceding quarter and up 35 basis points compared to the second quarter a year ago.

"We continue to believe maintaining a relatively short duration for our loan and investment portfolios is a prudent capital management strategy," said Jed Ballard, Chief Financial Officer. "The current differential in yields between short- and long-term investments does not warrant the added interest rate risks inherent in extending maturities for our investments or duration of our loan portfolio."

Provision for Loan Losses

Northrim recorded a $300,000 provision for loan losses in the second quarter of 2019, compared to a $750,000 provision in the first quarter of 2019.  In the second quarter a year ago, Northrim recorded a benefit for loan losses of $300,000.  Nonperforming loans, net of government guarantees, decreased during the quarter to $16.9 million at June 30, 2019, compared to $18.5 million at March 31, 2019, and increased slightly from $16.3 million at June 30, 2018.  The allowance for loan losses was 121% of nonperforming loans, net of government guarantees at June 30, 2019.  "While asset quality improved in the quarter, growth in the loan portfolio prompted the increases in reserves," said Ballard.

Other Operating Income

In addition to home mortgage lending, Northrim has interests in other businesses that complement its core community banking activities, including purchased receivables financing and wealth management.  Other operating income contributed $9.6 million, or 37% of total second quarter 2019 revenues, as compared to $7.5 million, or 32% of revenues in the first quarter of 2019, and $8.3 million, or 36% of revenues in the second quarter of 2018.  In the first six months of 2019, other operating income totaled $17.1 million, or 35% of revenues, compared to $15.8 million, or 35% of revenues in 2018.  The primary drivers of changes in other operating income are variability in the mortgage market, which is seasonal and cyclical, and gains or losses from the fair value changes of marketable equity securities.  The fair value mark-to-market of the marketable equity securities portfolio increased other income by $118,000 in the second quarter of 2019, compared to a $534,000 increase in the first quarter of 2019. Additionally, $734,000 in interest rate swap income was earned in 2019 on the execution of three new interest rate swaps related to the  Company's commercial lending operations.

Other Operating Expenses

Operating expenses were $19.8 million in the second quarter of 2019, compared to $17.1 million in the first quarter of 2019 and $16.6 million in the second quarter of 2018.  Impacting salaries and other personnel expenses during the second quarter was a significant increase in medical costs associated with Northrim's self-insured medical plan, costs associated with the

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