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 HighlightsThree Months Ended
(Dollars in thousands, except per share data)June 30, 2019March 31, 2019December 31, 2018September 30, 2018June 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 two new branch locations in Soldotna and East Anchorage, and higher compensation costs for the mortgage banking operations due to increased loan originations.  In the first six months of 2019, operating expenses were $36.9 million, up from $33.4 million in the first six months of 2018, reflecting higher medical expenses, higher compensation costs for the mortgage banking operations and an increase in occupancy expenses, as explained above.  “In addition, we continue to invest in technology, which increased data processing costs, to introduce new products and services and enhance our competitive position in Alaska,” said Schierhorn.

Income Tax Provision

For the second quarter of 2019, Northrim recorded $1.1 million in state and federal income tax expense for an effective tax rate of 21.2% compared to $1.2 million, or 16.7% in the second quarter a year ago. For the first half of 2019, Northrim recorded $2.3 million in state and federal income tax expense, for an effective tax rate of 21.2% compared to $2.0 million and 17.1% for the same period in 2018.

Community Banking

“Our Alaska franchise continues to provide long-term opportunities in the market, and our recent branch expansions are bringing in new customers and expanding relationships with the customers and communities we serve,” said Schierhorn.

Net interest income in the Community Banking segment increased 7% to $15.6 million in the second quarter of 2019 from $14.6 million in the second quarter of 2018.

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

 Three Months Ended
(Dollars in thousands, except per share data)June 30, 2019March 31, 2019December 31, 2018September 30, 2018June 30, 2018
Net interest income$15,633 $15,488 $15,719 $15,358 $14,614 
Provision (benefit) for loan losses 300  750  (200)   (300)
Other operating income 3,619  3,235  3,199  2,770  2,836 
Other operating expense 14,111  12,518  13,637  12,204  11,748 
  Income before provision for income taxes 4,841  5,455  5,481  5,924  6,002 
Provision for income taxes 984  1,155  824  996  882 
  Net income$3,857 $4,300 $4,657 $4,928 $5,120 
Average diluted shares 6,896,687  6,981,951  6,990,319  6,990,633  6,976,985 
Diluted earnings per share$0.56 $0.62 $0.66 $0.70 $0.74 


 Year-to-date
(Dollars in thousands, except per share data)June 30, 2019June 30, 2018
Net interest income$31,121 $28,650 
(Benefit) provision for loan losses 1,050  (300)
Other operating income 6,854  5,354 
Other operating expense 26,629  24,115 
  Income before provision for income taxes 10,296  10,189 
Provision for income taxes 2,139  1,541 
  Net income$8,157 $8,648 
   
Average diluted shares 6,939,338  6,972,744 
Diluted earnings per share$1.18 $1.24 

Home Mortgage Lending

“Warm spring weather, continued stability in middle-market home prices, and improved affordability for mortgages contributed to support growth in our home mortgage lending business.  This year, again, we saw normal seasonality in the mortgage market with higher demand in the spring and summer and lower demand in autumn and winter,” said Ballard.  “Loan fundings increased during the quarter and year-over-year driven by increased refinance activity as a result of lower interest rates. Second quarter of 2019 volume increased to $169.0 million, of which 82% were for new home purchases, compared to $92.4 million and 84% of loans funded in the first quarter of 2019 and $148.2 million of which 92% were for new home purchases in the second quarter of 2018.

“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 noted.  As of June 30, 2019, Northrim serviced 2,397 loans in its $598.4 million home-mortgage-servicing portfolio, which is a 27% increase from the $472.2 million serviced a year ago.  Mortgage servicing revenue contributed $1.1 million to revenues in the second quarter of 2019 compared to $1.3 million in the second quarter of 2018.  Total mortgage servicing income fluctuates based on the amount of mortgage servicing rights originated during the period and changes in the fair value of mortgage servicing rights, which are driven by interest rate volatility and fluctuations in estimated prepayment speeds based on published industry metrics. The change in the fair value of mortgage servicing rights was a decrease of $950,000 for the second quarter of 2019 compared to a decrease of $674,000 for the first quarter of 2019 and a decrease of $118,000 for the second quarter of 2018. In the first six months of 2019 the change in fair value of mortgage servicing rights was a decrease of $1.6 million as compared to a decrease of $144,000 for the first six months of 2018.

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, 2019March 31, 2019December 31, 2018September 30, 2018June 30, 2018
Mortgage commitments$107,330 $66,319 $44,999 $69,026 $84,092 
Mortgage loans funded for sale$168,953 $92,447 $113,963 $156,301 $148,183 
Mortgage loan refinances to total fundings 18% 16% 10% 9% 8%
Mortgage loans serviced for others$598,415 $586,595 $557,583 $516,008 $472,190 
      
Net realized gains on mortgage loans sold$4,903 $2,927 $3,156 $4,268 $4,052 
Change in fair value of mortgage loan commitments, net 655  356  (442) (66) 32 
Total production revenue 5,558  3,283  2,714  4,202  4,084 
Mortgage servicing revenue 1,119  1,668  1,526  1,578  1,254 
Change in fair value of mortgage servicing rights, net1 (950) (674) 145  (128) (118)
Total mortgage servicing revenue, net 169  994  1,671  1,450  1,136 
Other mortgage banking revenue 223  21  134  251  258 
  Total mortgage banking income$5,950 $4,298 $4,519 $5,903 $5,478 
      
Net interest income$324 $281 $418 $461 $375 
Mortgage banking income 5,950  4,298  4,519  5,903  5,478 
Other operating expense 5,708  4,562  4,663  5,895  4,858 
  Income before provision for income taxes 566  17  274  469  995 
Provision for income taxes 162  5  83  133  285 
  Net income$404 $12 $191 $336 $710 
      
Average diluted shares 6,896,687  6,981,951  6,990,319  6,990,633  6,976,985 
Diluted earnings per share$0.06  $— $0.03 $0.05 $0.10 

1Principally reflects changes in discount rates and prepayment speed assumptions, which are primarily affected by changes in interest rates, net of collection/realization of expected cash flows over time.

 Year-to-date
(Dollars in thousands, except per share data)June 30, 2019June 30, 2018
Mortgage loans funded for sale$261,400 $257,252 
Mortgage loan refinances to total fundings 17% 12%
   
Net realized gains on mortgage loans sold$7,830 $7,398 
Change in fair value of mortgage loan commitments, net 1,011  348 
Total production revenue 8,841  7,746 
Mortgage servicing revenue 2,787  2,438 
Change in fair value of mortgage servicing rights, net1 (1,624) (144)
Total mortgage servicing revenue, net 1,163  2,294 
Other mortgage banking revenue 244  382 
  Total mortgage banking income$10,248 $10,422 
   
Net interest income$605 $602 
Mortgage banking income 10,248  10,422 
Other operating expense 10,270  9,286 
  Income before provision for income taxes 583  1,738 
Provision for income taxes 167  494 
  Net income$416 $1,244 
   
Average diluted shares 6,939,338  6,972,744 
Diluted earnings per share$0.06 $0.18 

1Principally reflects changes in discount rates and prepayment speed assumptions, which are primarily affected by changes in interest rates, net of collection/realization of expected cash flows over time.

Balance Sheet Review

Northrim’s total assets were $1.55 billion at June 30, 2019, up 2% from the preceding quarter and up 6% from a year ago.  Northrim’s loan-to-deposit ratio was 79% at June 30, 2019, down from 80% at both March 31, 2019 and June 30, 2018.

Average interest-earning assets were $1.36 billion in the second quarter of 2019, up 3% from $1.32 billion in the first quarter of 2019 and up 2% from $1.34 billion in the second quarter a year ago.  The average yield on interest-earning assets was 5.17% in the second quarter of 2019, down from 5.23% in the preceding quarter and up from 4.74% in the second quarter a year ago.

Average investment securities increased slightly to $281.5 million at June 30, 2019, compared to $280.4 million in the first quarter of 2019 and decreased 2% from $287.0 million in the second quarter a year ago.  The average net tax equivalent yield on the securities portfolio improved to 2.71% for the second quarter of 2019, from 2.65% in the preceding quarter and 2.09% a year ago*.  The average estimated duration of the investment portfolio was 19 months, at June 30, 2019.

“During the second quarter of 2019, loan originations more than offset the rate of repayments that results from the short duration of the loan portfolio.  Commercial loans increased to 38% of total loans, offsetting small reductions in commercial real estate and construction loans in the second quarter of 2019.  Portfolio loans were $1.02 billion at June 30, 2019, up 3% from the preceding quarter and up 5% from a year ago.  Average portfolio loans in the second quarter of 2019 were $1.00 billion, up slightly from the preceding quarter and up 4% from a year ago.  Yields on average portfolio loans in the second quarter of 2019 declined to 5.96% from 6.04% in the first quarter of 2019 and improved compared to 5.65% in the second quarter of 2018.

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, 2019, represented 90% of total deposits.  At June 30, 2019, total deposits were $1.29 billion, up 5% from $1.23 billion at March 31, 2019, and up 7% from $1.21 billion a year ago.  Average interest-bearing deposits were up 2% to $818.1 million with an average cost of 0.58% in the second quarter of 2019, compared to $800.5 million and an average cost of 0.48% in the first quarter of 2019, and down slightly from $818.6 million and an average cost of 0.22% in the second quarter of 2018.

“In the second quarter, we introduced improved commercial sweep accounts with enhanced services for our business customers,” said Schierhorn.  “This expansion of our deposit products and services improves our competitive position in the Alaska market.”

Shareholders’ equity was $206.3 million, or $30.66 per share, at June 30, 2019, compared to $208.8 million, or $30.36 per share, at March 31, 2019 and $199.5 million, or $29.02 per share, a year ago.  Tangible book value per share* was $28.27 at June 30, 2019, up from $26.66 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 15.03% at June 30, 2019.  Investments in share repurchases accounted for the modest decline in shareholder equity in the second quarter of 2019 compared to the preceding quarter.

Asset Quality

Nonperforming assets ("NPAs") net of government guarantees improved to $23.9 million at June 30, 2019, compared to $25.5 million at March 31, 2019, and $24.0 million at June 30, 2018.  Of the NPAs, $13.3 million, or 56% are nonaccrual loans related to six commercial relationships. Two of these relationships, which totaled $6.3 million at the end of the second quarter of 2019, are businesses in the medical industry.

Net adversely classified loans improved to $25.0 million at the end of the second quarter of 2019 as compared to $27.1 million at the end of the first quarter of 2019, and $33.2 million one year ago.  Loan recoveries were greater than loan charge-offs in the second quarter by $9,000, compared to $60,000 in net loan charge-offs in the first quarter of 2019 and $41,000 in net loan charge-offs in the year ago quarter.  Year to date, net loan charge-offs were $51,000, compared to $1.1 million in the first six months of 2018.  Adversely classified loans are loans that Northrim has classified as substandard, doubtful, and loss, net of government guarantees.  As of June 30, 2019, $18.8 million, or 75% of net adversely classified loans are attributable to eight relationships with four loans to commercial businesses, two loans to medical businesses, and two loans to oilfield services commercial businesses.

Performing restructured loans that were not included in nonaccrual loans at the end of the second quarter of 2019 were $1.6 million, down from $3.4 million in the preceding quarter and from $9.1 million a year ago.  The decrease in the second quarter of 2019 compared to the year ago quarter is primarily due to the repayment of one commercial relationship.  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 $64.4 million, or approximately 6% of portfolio loans as of June 30, 2019, had direct exposure to the oil and gas industry in Alaska, and $2.7 million of these loans are adversely classified.  As of June 30, 2019, Northrim has an additional $32.0 million in unfunded commitments to companies with direct exposure to the oil and gas industry in Alaska, and none of these unfunded commitments are considered to be adversely classified loans.

“We continue to 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,” added Ballard.

About Northrim BanCorp

Northrim BanCorp, Inc. is the parent company of Northrim Bank, an Alaska-based community bank with 16 branches in Anchorage, the Matanuska Valley, Soldotna, 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, 2018, 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.alaskanomics.com/alaskas-economy/

http://labor.alaska.gov/trends/jul19.pdf

http://live.laborstats.alaska.gov/qcew/

https://www.bls.gov/eag/eag.ak.htm

https://pubs.iseralaska.org/media/1ef3a5d2-2efe-4f83-9ab5-c719d0202edd/2019_07_08-VetoEconomicImpacts.pdf

https://www.bea.gov/data/income-saving/personal-income-by-state

https://www.bea.gov/data/gdp/gdp-state

http://almis.labor.state.ak.us/


Income Statement      
(Dollars in thousands, except per share data)Three Months Ended Year-to-date
(Unaudited)June 30,March 31,June 30, June 30,June 30,
  2019 2019 2018  2019 2018
Interest Income:      
  Interest and fees on loans$15,353 $14,977 $14,036  $30,330 $27,299 
  Interest on portfolio investments 1,818  1,758  1,400   3,576  2,748 
  Interest on deposits in banks 135  143  159   278  343 
  Total interest income 17,306  16,878  15,595   34,184  30,390 
Interest Expense:      
  Interest expense on deposits 1,174  938  446   2,112  818 
  Interest expense on borrowings 175  171  160   346  320 
  Total interest expense 1,349  1,109  606   2,458  1,138 
  Net interest income 15,957  15,769  14,989   31,726  29,252 
       
Provision (benefit) for loan losses 300  750  (300)  1,050  (300)
  Net interest income after provision for loan losses 15,657  15,019  15,289   30,676  29,552 
       
Other Operating Income:      
  Mortgage banking income 5,950  4,298  5,478   10,248  10,422 
  Purchased receivable income 837  809  867   1,646  1,707 
  Bankcard fees 744  650  707   1,394  1,332 
  Interest rate swap income 734       734   
  Service charges on deposit accounts 413  413  376   826  730 
  Gain (loss) on marketable equity securities 118  534  (173)  652  (173)
  Gain on sale of securities   23     23   
  Other income 773  806  1,059   1,579  1,758 
  Total other operating income 9,569  7,533  8,314   17,102  15,776 
       
Other Operating Expense:      
  Salaries and other personnel expense 12,945  11,302  11,362   24,247  21,947 
  Data processing expense 1,796  1,679  1,323   3,475  2,871 
  Occupancy expense 1,642  1,771  1,020   3,413  2,720 
  Marketing expense 833  419  462   1,252  1,094 
  Professional and outside services 684  556  554   1,240  1,053 
  Insurance expense 232  258  178   490  474 
  Intangible asset amortization expense 15  15  17   30  35 
  OREO expense, net rental income and gains on sale 165  (320) 11   (155) 114 
  Other operating expense 1,507  1,400  1,679   2,907  3,093 
  Total other operating expense 19,819  17,080  16,606   36,899  33,401 
       
  Income before provision for income taxes 5,407  5,472  6,997   10,879  11,927 
  Provision for income taxes 1,146  1,160  1,167   2,306  2,035 
  Net income$4,261 $4,312 $5,830  $8,573 $9,892 
       
  Basic EPS$0.62 $0.63 $0.85  $1.25 $1.44 
  Diluted EPS$0.62 $0.62 $0.84  $1.24 $1.42 
  Average basic shares 6,798,352  6,879,619  6,872,371   6,838,986  6,872,167 
  Average diluted shares 6,896,687  6,981,951  6,976,985   6,939,338  6,972,744 


Balance Sheet   
(Dollars in thousands)   
(Unaudited)June 30,March 31,June 30,
 2019 2019 2018
    
Assets:   
  Cash and due from banks$25,377 $30,266 $26,355 
  Interest bearing deposits in other banks 45,454  48,667  9,775 
  Investment securities available for sale 249,986  274,441  264,124 
  Marketable equity securities 7,916  7,798  6,006 
  Investment in Federal Home Loan Bank stock 2,069  2,071  2,104 
  Loans held for sale 61,531  30,211  54,306 
  Portfolio loans 1,015,704  982,341  967,702 
  Allowance for loan losses (20,518) (20,209) (20,108)
  Net portfolio loans 995,186  962,132  947,594 
  Purchased receivables, net 13,114  21,286  20,323 
  Mortgage servicing rights 10,836  11,254  8,733 
  Other real estate owned, net 7,043  7,043  8,959 
  Premises and equipment, net 39,155  38,978  38,113 
  Lease right of use asset 14,924  15,485   
  Goodwill and intangible assets 16,124  16,139  16,189 
  Other assets 64,055  54,280  67,859 
  Total assets$1,552,770$1,520,051$1,470,440
    
Liabilities:   
  Demand deposits$435,425 $417,068 $401,925 
  Interest-bearing demand 285,664  247,630  246,628 
  Savings deposits 232,190  237,510  237,978 
  Money market deposits 204,151  204,567  223,189 
  Time deposits 130,748  121,243  95,801 
  Total deposits 1,288,178  1,228,018  1,205,521 
  Securities sold under repurchase agreements 864  34,621  27,695 
  Other borrowings 7,158  7,200  7,312 
  Junior subordinated debentures 10,310  10,310  10,310 
  Lease liability 14,807  15,358   
  Other liabilities 25,115  15,706  20,146 
  Total liabilities 1,346,432  1,311,213  1,270,984 
    
Shareholders' Equity:   
  Total shareholders' equity 206,338  208,838  199,456 
  Total liabilities and shareholders' equity$1,552,770 $1,520,051 $1,470,440 
    

Additional Financial Information
(Dollars in thousands)
(Unaudited)

Composition of Portfolio Investments       
 June 30, 2019 March 31, 2019 June 30, 2018
 Balance% of total Balance% of total Balance% of total
U.S. Treasury securities$55,349 21.5% $55,037 19.5% $39,534 14.6%
U.S. Agency securities 127,417 49.4%  157,260 55.7%  169,158 62.7%
Corporate securities 40,400 15.7%  40,337 14.3%  37,490 13.9%
Marketable equity securities 7,916 3.1%  7,798 2.8%  6,006 2.2%
Collateralized loan obligations 22,931 8.9%  17,909 6.3%  6,007 2.2%
Alaska municipality, utility, or state bonds 3,739 1.4%  3,748 1.3%  7,348 2.7%
Other municipality, utility, or state bonds 150 0.1%  150 0.1%  4,587 1.7%
  Total portfolio investments$257,902   $282,239   $270,130  
         


Composition of Portfolio Loans            
 June 30, 2019 March 31, 2019 December 31, 2018 September 30, 2018 June 30, 2018
 Balance% of total Balance% of total Balance% of total Balance% of total Balance% of total
Commercial loans$387,257 38% $344,164 35% $342,420 35% $333,132 34% $327,733 34%
CRE owner occupied loans 126,991 12%  130,141 13%  126,414 13%  130,166 13%  127,384 13%
CRE nonowner occupied loans 367,703 36%  360,071 37%  367,759 37%  382,313 39%  385,648 40%
Construction loans 97,837 10%  109,404 11%  109,367 11%  97,976 10%  89,433 9%
Consumer loans 40,234 4%  42,861 4%  42,873 4%  42,775 4%  41,711 4%
  Subtotal 1,020,022    986,641    988,833    986,362    971,909  
Unearned loan fees, net (4,318)   (4,300)   (4,487)   (4,355)   (4,207) 
  Total portfolio loans$1,015,704   $982,341   $984,346   $982,007   $967,702  
               


Composition of Deposits            
 June 30, 2019 March 31, 2019 December 31, 2018 September 30, 2018 June 30, 2018
 Balance% of total Balance% of total Balance% of total Balance% of total Balance% of total
Demand deposits$435,425 34% $417,068 34% $420,988 35% $450,409 36% $401,925 33%
Interest-bearing demand 285,664 22%  247,630 20%  248,056 20%  240,974 20%  246,628 20%
Savings deposits 232,190 18%  237,510 19%  239,054 19%  233,611 19%  237,978 20%
Money market deposits 204,151 16%  204,567 17%  206,717 17%  208,614 17%  223,189 19%
Time deposits 130,748 10%  121,243 10%  113,273 9%  99,660 8%  95,801 8%
  Total deposits$1,288,178   $1,228,018   $1,228,088   $1,233,268   $1,205,521  

Additional Financial Information
(Dollars in thousands)
(Unaudited)

Asset Quality      
 June 30, March 31, June 30, 
  2019  2019  2018 
  Nonaccrual loans$18,080  $19,516  $16,635  
  Loans 90 days past due and accruing         
  Total nonperforming loans 18,080   19,516   16,635  
  Nonperforming loans guaranteed by government (1,139)  (1,038)  (327) 
  Net nonperforming loans 16,941   18,478   16,308  
  Other real estate owned 7,043   7,043   8,959  
  Repossessed assets 1,182   1,242     
  Other real estate owned guaranteed by government (1,279)  (1,279)  (1,280) 
  Net nonperforming assets$23,887  $25,484  $23,987  
  Nonperforming loans / portfolio loans, net of government guarantees 1.67 % 1.88 % 1.69 %
  Nonperforming assets / total assets, net of government guarantees 1.54 % 1.68 % 1.63 %
       
  Performing restructured loans$1,645  $3,368  $9,096  
  Nonperforming loans plus performing restructured loans, net of government      
  guarantees$18,586  $21,846  $25,404  
  Nonperforming loans plus performing restructured loans / portfolio loans, net of      
  government guarantees 1.83 % 2.22 % 2.63 %
  Nonperforming assets plus performing restructured loans / total assets, net of      
  government guarantees 1.64 % 1.90 % 2.25 %
       
  Adversely classified loans, net of government guarantees$25,016  $27,080  $33,178  
  Loans 30-89 days past due and accruing, net of government guarantees /      
  portfolio loans 0.70 % 0.36 % 0.18 %
       
  Allowance for loan losses / portfolio loans 2.02 % 2.06 % 2.08 %
  Allowance for loan losses / nonperforming loans, net of government guarantees 121 % 109 % 123 %
       
  Gross loan charge-offs for the quarter$68  $109  $100  
  Gross loan recoveries for the quarter($77) ($49) ($59) 
  Net loan (recoveries) charge-offs for the quarter($9) $60  $41  
  Net loan charge-offs year-to-date$51  $60  $1,053  
  Net loan (recoveries) charge-offs for the quarter / average loans, for the quarter 0.00 % 0.01 %  %
  Net loan charge-offs year-to-date / average loans,      
  year-to-date annualized 0.01 % 0.02 % 0.22 %

Additional Financial Information
(Dollars in thousands)
(Unaudited)

Nonperforming Assets Rollforward       
 Balance at March 31, 2019Additions this quarterPayments this quarterWritedowns
/Charge-offs
 this quarter
Transfers to
OREO/ REPO
Transfers to Performing Status
this quarter
Sales this quarterBalance at June 30, 2019
Commercial loans$12,457 $405 ($1,591)($64)$— $— $— $11,207 
Commercial real estate 4,230  1,087  (276)         5,041 
Construction loans 2,423    (931)         1,492 
Consumer loans 406  97  (159) (4)       340 
Non-performing loans guaranteed by government (1,038) (101)           (1,139)
  Total non-performing loans 18,478  1,488  (2,957) (68)       16,941 
Other real estate owned 7,043              7,043 
Repossessed assets 1,242            (60) 1,182 
Other real estate owned guaranteed        
by government (1,279)             (1,279)
  Total non-performing assets,        
  net of government guarantees$25,484 $1,488 ($2,957)($68)$— $— ($60)$23,887 

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

Loan Charge-offs by Industry    
 Three Months Ended
 June 30, 2019March 31, 2019December 31, 2018September 30, 2018June 30, 2018
Charge-offs:     
Remediation services$— $89 $— $— $— 
Transportation and warehousing     362     
Other services         78 
Excavation and construction   20  320     
Health care and social assistance 64         
Consumer 4    31  9  22 
  Total charge-offs$68 $109 $713 $9 $100 

Additional Financial Information
(Dollars in thousands)
(Unaudited)

Average Balances, Yields, and Rates        
 Three Months Ended
 June 30, 2019 March 31, 2019 June 30, 2018
  Average  Average  Average
 AverageTax Equivalent AverageTax Equivalent AverageTax Equivalent
 BalanceYield/Rate BalanceYield/Rate BalanceYield/Rate
Assets        
Interest bearing deposits in other banks$22,850 2.34% $24,199 2.36% $35,846 1.75%
Portfolio investments 281,450 2.71%  280,419 2.65%  287,003 2.09%
Loans held for sale 51,280 4.13%  31,203 4.52%  48,608 4.32%
Portfolio loans 1,003,019 5.96%  988,920 6.04%  963,724 5.65%
  Total interest-earning assets 1,358,599 5.17%  1,324,741 5.23%  1,335,181 4.74%
Nonearning assets 167,414    162,241    145,520  
  Total assets$1,526,013   $1,486,982   $1,480,701  
         
Liabilities and Shareholders' Equity        
Interest-bearing deposits$818,122 0.58% $800,488 0.48% $818,592 0.22%
Borrowings 44,938 1.53%  51,515 1.32%  44,897 1.40%
  Total interest-bearing liabilities 863,060 0.63%  852,003 0.53%  863,489 0.28%
         
Noninterest-bearing demand deposits 421,232    394,024    399,311  
Other liabilities 31,391    31,710    19,626  
Shareholders' equity 210,330    209,245    198,275  
  Total liabilities and shareholders' equity$1,526,013   $1,486,982   $1,480,701  
  Net spread 4.54%  4.70%  4.46%
  NIM 4.71%  4.83%  4.50%
  NIMTE* 4.77%  4.89%  4.56%
  Average portfolio loans to average        
  interest-earning assets 73.83%   74.65%   72.18% 
  Average portfolio loans to average total deposits 80.93%   82.79%   79.13% 
  Average non-interest deposits to average        
  total deposits 33.99%   32.99%   32.79% 
  Average interest-earning assets to average        
  interest-bearing liabilities 157.42%   155.49%   154.63% 

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

 2Q19 vs. 1Q192Q19 vs. 2Q18
Nonaccrual interest adjustments0.01%(0.01)%
Interest rates and loan fees(0.13)%0.15%
Volume and mix of interest-earning assets and liabilities%0.07%
Change in NIMTE*(0.12)%0.21%

Additional Financial Information
(Dollars in thousands)
(Unaudited)

Average Balances, Yields, and Rates     
 Year-to-date
 June 30, 2019 June 30, 2018
  Average  Average
 AverageTax Equivalent AverageTax Equivalent
 BalanceYield/Rate BalanceYield/Rate
Assets     
Interest bearing deposits in other banks$23,521 2.35% $41,977 1.63%
Portfolio investments 280,937 2.68%  300,476 1.96%
Loans held for sale 41,297 4.28%  41,594 4.07%
Portfolio loans 996,009 6.00%  959,743 5.59%
  Total interest-earning assets 1,341,764 5.20%  1,343,790 4.61%
Nonearning assets 164,841    143,565  
  Total assets$1,506,605   $1,487,355  
      
Liabilities and Shareholders' Equity     
Interest-bearing deposits$809,354 0.53% $824,038 0.20%
Borrowings 48,208 1.42%  45,577 1.39%
  Total interest-bearing liabilities 857,562 0.58%  869,615 0.26%
      
Noninterest-bearing demand deposits 407,703    401,742  
Other liabilities 31,550    19,105  
Shareholders' equity 209,790    196,893  
  Total liabilities and shareholders' equity$1,506,605   $1,487,355  
  Net spread 4.62%  4.35%
  NIM 4.77%  4.39%
  NIMTE* 4.83%  4.44%
  Average portfolio loans to average interest-earning assets 74.23%   71.42% 
  Average portfolio loans to average total deposits 81.84%   78.30% 
  Average non-interest deposits to average total deposits 33.50%   32.77% 
  Average interest-earning assets to average interest-bearing liabilities 156.46%   154.53% 

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

 YTD19 vs.YTD18
Nonaccrual interest adjustments(0.01)%
Interest rates and loan fees0.29%
Volume and mix of interest-earning assets and liabilities0.11%
Change in NIMTE*0.39%

Additional Financial Information
(Dollars in thousands, except per share data)
(Unaudited)

Capital Data (At quarter end)      
 June 30, 2019 March 31, 2019 June 30, 2018 
Book value per share$30.66  $30.36  $29.02  
Tangible book value per share*$28.27  $28.01  $26.66  
Total shareholders' equity/total assets 13.29 % 13.74 % 13.56 %
Tangible Common Equity/Tangible Assets* 12.38 % 12.81 % 12.60 %
Tier 1 Capital / Risk Adjusted Assets 15.03 % 15.60 % 15.10 %
Total Capital / Risk Adjusted Assets 16.28 % 16.86 % 16.35 %
Tier 1 Capital / Average Assets 13.22 % 13.86 % 13.23 %
Shares outstanding 6,729,456   6,878,829   6,872,959  
Unrealized gain (loss) on AFS debt securities, net of income taxes$871  ($59) ($1,506) 
Unrealized gain (loss) on derivatives and hedging activities($374) $214  $805  


Profitability Ratios          
 June 30, 2019 March 31, 2019 December 31, 2018 September 30, 2018 June 30, 2018 
For the quarter:          
  NIM4.71 %4.83 %4.71 %4.69 %4.50 %
  NIMTE*4.77 %4.89 %4.76 %4.74 %4.56 %
  Efficiency ratio77.58 %73.23 %76.64 %73.82 %71.19 %
  Return on average assets1.12 %1.18 %1.27 %1.40 %1.58 %
  Return on average equity8.13 %8.36 %9.30 %10.27 %11.79 %


 June 30, 2019 June 30, 2018 
Year-to-date:    
  NIM4.77 %  4.39 %  
  NIMTE*4.83 %  4.44 %  
  Efficiency ratio75.51 %  74.10 %  
  Return on average assets1.15 %  1.34 %  
  Return on average equity8.24 %  10.13 %  

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

Net interest margin on a tax equivalent basis

Net interest margin on a tax equivalent basis ("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 2019 and 2018, respectively. 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, 2019 March 31, 2019 December 31, 2018 September 30, 2018 June 30, 2018
Net interest income$15,957  $15,769  $16,137  $15,819  $14,989 
Divided by average interest-bearing assets 1,358,599   1,324,741   1,359,909   1,338,219   1,335,181 
Net interest margin ("NIM")2 4.71%  4.83%  4.71%  4.69%  4.50%
          
Net interest income$15,957  $15,769  $16,137  $15,819  $14,989 
Plus: reduction in tax expense related to         
  tax-exempt interest income 191   188   196   182   175 
 $16,148  $15,957  $16,333  $16,001  $15,164 
Divided by average interest-bearing assets 1,358,599   1,324,741   1,359,909   1,338,219   1,335,181 
NIMTE2 4.77%  4.89%  4.76%  4.74%  4.56%


 Year-to-date
 June 30, 2019 June 30, 2018
Net interest income$31,726  $29,252 
Divided by average interest-bearing assets 1,341,764   1,343,790 
Net interest margin ("NIM")3 4.77%  4.39%
    
Net interest income$31,726  $29,252 
Plus: reduction in tax expense related to   
  tax-exempt interest income 379   348 
 $32,105  $29,600 
Divided by average interest-bearing assets 1,341,764   1,343,790 
NIMTE3 4.83%  4.44%

2Calculated using actual days in the quarter divided by 365 for quarters ended in 2019 and 2018.

3Calculated using actual days in the year divided by 365 for year-to-date periods in 2019 and 2018.

*Non-GAAP Financial Measures
(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, 2019 March 31, 2019 December 31, 2018 September 30, 2018 June 30, 2018
          
Total shareholders' equity$206,338  $208,838  $205,947  $203,242  $199,456 
Divided by shares outstanding 6,729   6,879   6,883   6,884   6,873 
Book value per share$30.66  $30.36  $29.92  $29.52  $29.02 


 June 30, 2019 March 31, 2019 December 31, 2018 September 30, 2018 June 30, 2018
          
Total shareholders' equity$206,338  $208,838  $205,947  $203,242  $199,456 
Less: goodwill and intangible assets 16,124   16,139   16,154   16,171   16,189 
 $190,214  $192,699  $189,793  $187,071  $183,267 
Divided by shares outstanding 6,729   6,879   6,883   6,884   6,873 
Tangible book value per share$28.27  $28.01  $27.57  $27.17  $26.66 

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, 2019 March 31, 2019 December 31, 2018 September 30, 2018 June 30, 2018
          
Total shareholders' equity$206,338  $208,838  $205,947  $203,242  $199,456 
Total assets 1,552,770   1,520,051   1,502,988   1,502,673   1,470,440 
Total shareholders' equity to total assets 13.29%  13.74%  13.70%  13.53%  13.56%


Northrim BanCorp, Inc.

 
June 30, 2019 March 31, 2019 December 31, 2018 September 30, 2018 June 30, 2018
Total shareholders' equity$206,338  $208,838  $205,947  $203,242  $199,456 
Less: goodwill and other intangible assets, net 16,124   16,139   16,154   16,171   16,189 
Tangible common shareholders' equity$190,214  $192,699  $189,793  $187,071  $183,267 
          
Total assets$1,552,770  $1,520,051  $1,502,988  $1,502,673  $1,470,440 
Less: goodwill and other intangible assets, net 16,124   16,139   16,154   16,171   16,189 
Tangible assets$1,536,646  $1,503,912  $1,486,834  $1,486,502  $1,454,251 
Tangible common equity ratio 12.38%  12.81%  12.76%  12.58%  12.60%


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

 

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