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 HighlightsThree Months Ended
(Dollars in thousands, except per share data)September 30,
2018
June 30, 2018March 31, 2018December 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 assets1.40%1.58%1.10%0.06%1.44%
Return on average shareholders' equity10.27%11.79%8.43%0.43%11.25%
NIM4.69%4.50%4.28%4.25%4.28%
NIMTE*4.74%4.56%4.33%4.31%4.34%
Efficiency ratio73.82%71.19%77.22%80.92%61.40%
Total shareholders' equity/total assets13.53%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, 2018March 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 income2,770 2,836 2,518 2,685 7,636 
Compensation expense, net RML acquisition payments   (193)149 
Other operating expense12,204 11,748 12,367 13,113 12,252 
Income before provision for income taxes5,924 6,002 4,187 4,146 7,300 
Provision for income taxes996 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 shares6,990,633 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 income8,124    14,502 
Compensation expense, net RML acquisition payments    323 
Other operating expense36,319    37,158 
Income before provision for income taxes16,113    15,888 
Provision for income taxes2,537    4,745 
Net income13,576    11,143 
Less: net income attributable to the noncontrolling interest    327 
Net income attributable to Northrim BanCorp$13,576    $10,816 
Average diluted shares6,978,679    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, 2018March 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 fundings9%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 revenue4,202 4,084 3,662 3,533 5,195 
Mortgage servicing revenue1,578 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, net1,450 1,136 1,157 1,514 701 
Other mortgage banking revenue251 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 income5,903 5,478 4,944 5,267 6,219 
Other operating expense5,895 4,858 4,428 5,417 5,290 
Income before provision for income taxes469 995 743 153 1,281 
Provision for income taxes133 285 209 (669)528 
Net income attributable to Northrim BanCorp$336 $710 $534 $822 $753 
      
Average diluted shares6,990,633 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 fundings11%   15%
      
Net realized gains on mortgage loans sold$11,666    $13,929 
Change in fair value of mortgage loan commitments, net282    404 
Total production revenue11,948    14,333 
Mortgage servicing revenue4,015    2,988 
Change in fair value of mortgage servicing rights, net1(272)   (62)
Total mortgage servicing revenue, net3,743    2,926 
Other mortgage banking revenue634    761 
Total mortgage banking income$16,325    $18,020 
      
Net interest income$1,063    $927 
Mortgage banking income16,325    18,020 
Other operating expense15,181    15,335 
Income before provision for income taxes2,207    3,612 
Provision for income taxes627    1,491 
Net income attributable to Northrim BanCorp$1,580    $2,121 
      
Average diluted shares6,978,679    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,
 201820182017 20182017
Interest Income:      
Interest and fees on loans$14,992 $14,036 $14,341  $42,291 $41,180 
Interest on portfolio investments1,419 1,400 1,060  4,167 3,466 
Interest on deposits in banks169 159 118  512 230 
Total interest income16,580 15,595 15,519  46,970 44,876 
Interest Expense:      
Interest expense on deposits595 446 429  1,413 1,325 
Interest expense on borrowings166 160 173  486 557 
Total interest expense761 606 602  1,899 1,882 
Net interest income15,819 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 losses15,819 15,289 12,417  45,371 39,794 
       
Other Operating Income:      
Mortgage banking income5,903 5,478 6,219  16,325 18,020 
Purchased receivable income767 867 752  2,474 2,217 
Bankcard fees724 707 664  2,056 1,903 
Service charges on deposit accounts407 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 income872 886 765  2,457 2,168 
Total other operating income8,673 8,314 13,855  24,449 32,522 
       
Other Operating Expense:      
Salaries and other personnel expense11,261 11,362 11,115  33,208 33,750 
Occupancy expense1,687 1,020 1,706  4,407 4,991 
Data processing expense1,503 1,323 1,509  4,374 4,209 
Impairment of equity method investment804    804  
Professional and outside services727 554 674  1,780 1,908 
Marketing expense367 462 332  1,461 1,733 
Insurance expense171 178 475  645 922 
OREO expense, net rental income and gains on sale43 11 (44) 157 216 
Intangible asset amortization expense18 17 26  53 79 
Compensation expense, net RML acquisition payments  149   323 
Other operating expense1,518 1,679 1,749  4,611 4,685 
Total other operating expense18,099 16,606 17,691  51,500 52,816 
       
Income before provision for income taxes6,393 6,997 8,581  18,320 19,500 
Provision for income taxes1,129 1,167 2,980  3,164 6,236 
Net income5,264 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 shares6,877,194 6,872,371 6,872,273  6,873,843 6,897,577 
Average diluted shares6,990,633 6,976,985 6,959,035  6,978,679 6,983,778 


Balance Sheet   
(Dollars in thousands)   
(Unaudited)September 30,June 30,September 30,
 201820182017
    
Assets:   
Cash and due from banks$37,651 $26,355 $13,960 
Interest bearing deposits in other banks32,528 9,775 73,309 
Investment securities available for sale264,193 264,124 264,550 
Investment securities held to maturity  897 
Marketable equity securities6,035 6,006 5,801 
Investment in Federal Home Loan Bank stock2,103 2,104 2,116 
    
Loans held for sale56,636 54,306 59,420 
    
Portfolio loans982,007 967,702 988,490 
Allowance for loan losses(20,160)(20,108)(21,464)
Net portfolio loans961,847 947,594 967,026 
Purchased receivables, net12,706 20,323 12,930 
Mortgage servicing rights9,695 8,733 6,181 
Other real estate owned, net8,707 8,959 3,505 
Premises and equipment, net38,637 38,113 40,046 
Goodwill and intangible assets16,171 16,189 16,245 
Other assets55,764 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 demand240,974 246,628 240,274 
Savings deposits233,611 237,978 251,266 
Money market deposits208,614 223,189 233,768 
Time deposits99,660 95,801 106,063 
Total deposits1,233,268 1,205,521 1,258,317 
Securities sold under repurchase agreements32,429 27,695 31,084 
Other borrowings7,282 7,312 7,387 
Junior subordinated debentures10,310 10,310 10,310 
Other liabilities16,142 20,146 21,259 
Total liabilities1,299,431 1,270,984 1,328,357 
    
Total shareholders' equity203,242 199,456 194,427 
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 securities151,380 56.0% 169,158 62.7% 179,088 66.0%
Corporate securities40,516 15.0% 37,490 13.9% 35,082 12.9%
Marketable equity securities6,035 2.2% 6,006 2.2% 5,801 2.1%
Collateralized loan obligations6,002 2.2% 6,007 2.2% 3,002 1.1%
Alaska municipality, utility, or state bonds7,307 2.7% 7,348 2.7% 13,502 5.0%
Other municipality, utility, or state bonds4,536 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 loans130,166 13% 127,384 13% 132,589 14% 132,041 14% 134,994 14%
CRE nonowner occupied loans382,313 39% 385,648 40% 395,915 41% 359,725 38% 386,137 38%
Construction loans97,976 10% 89,433 9% 85,257 9% 111,294 12% 111,427 11%
Consumer loans42,775 4% 41,711 4% 41,841 3% 42,535 3% 44,681 5%
Subtotal986,362   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 demand240,974 20% 246,628 20% 244,601 19% 252,009 20% 240,274 19%
Savings deposits233,611 19% 237,978 20% 246,981 20% 247,458 20% 251,266 20%
Money market deposits208,614 17% 223,189 19% 239,242 19% 243,603 19% 233,768 19%
Time deposits99,660 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 accruing152    214  
Total nonperforming loans16,880  16,635  24,531  
Nonperforming loans guaranteed by government(279) (327) (1,846) 
Net nonperforming loans16,601  16,308  22,685  
Other real estate owned8,707  8,959  3,505  
Repossessed assets29      
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 guarantees1.69 %1.69 %2.29 %
Nonperforming assets / total assets, net of government guarantees1.60 %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 guarantees2.02 %2.63 %3.07 %
Nonperforming assets plus performing restructured loans / total assets, net of government guarantees1.82 %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 loans0.26 %0.18 %0.70 %
       
Allowance for loan losses / portfolio loans2.05 %2.08 %2.17 %
Allowance for loan losses / nonperforming loans, net of government guarantees121 %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 annualized0.14 %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 estate1,331 363      1,694 
Construction loans        
Consumer loans70 442 (22)(9)(29)  452 
Non-performing loans guaranteed by government(327) 48     (279)
Total non-performing loans16,308 1,984 (1,653)(9)(29)  16,601 
Other real estate owned8,959      (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, 2018March 31, 2018December 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   
Consumer9 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 investments264,377 2.29% 287,003 2.09% 284,806 1.63%
Loans held for sale54,792 4.64% 48,608 4.32% 57,346 3.74%
Portfolio loans984,914 5.81% 963,724 5.65% 1,003,751 5.49%
Total interest-earning assets1,338,219 4.97% 1,335,181 4.74% 1,383,252 4.51%
Nonearning assets150,808   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%
Borrowings46,663 1.39% 44,897 1.40% 49,223 1.36%
Total interest-bearing liabilities841,919 0.36% 863,489 0.28% 888,966 0.27%
         
Noninterest-bearing demand deposits428,741   399,311   423,065  
Other liabilities15,039   19,626   18,744  
Shareholders' equity203,328   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 assets73.60%  72.18%  72.56% 
Average portfolio loans to average total deposits80.47%  79.13%  79.49% 
Average non-interest deposits to average total deposits35.03%  32.79%  33.50% 
Average interest-earning assets to average interest-bearing liabilities158.95%  154.63%  155.60% 
            

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

   
 3Q18 vs. 2Q183Q18 vs. 3Q17
Nonaccrual interest adjustments(0.02)%%
Interest rates and loan fees0.15 %0.39%
Volume and mix of interest-earning assets0.05 %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
 AverageTax Equivalent AverageTax Equivalent
 BalanceYield/Rate BalanceYield/Rate
Assets     
Interest bearing deposits in other banks$39,335 1.72% $28,827 1.05%
Portfolio investments288,311 2.07% 311,215 1.63%
Loans held for sale46,042 4.30% 44,313 3.84%
Portfolio loans968,225 5.66% 981,220 5.48%
Total interest-earning assets1,341,913 4.73% 1,365,575 4.46%
Nonearning assets146,006   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%
Borrowings45,943 1.39% 51,247 1.42%
Total interest-bearing liabilities860,282 0.29% 881,375 0.28%
      
Noninterest-bearing demand deposits410,841   416,105  
Other liabilities17,734   18,800  
Shareholders' equity199,062   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 assets72.15%  71.85% 
Average portfolio loans to average total deposits79.03%  78.73% 
Average non-interest deposits to average total deposits33.53%  33.39% 
Average interest-earning assets to average interest-bearing liabilities155.99%  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 fees0.27 %
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 assets13.53 %13.56 %12.77 %
Tangible Common Equity/Tangible Assets*12.58 %12.60 %11.83 %
Tier 1 Capital / Risk Adjusted Assets15.33 %15.10 %13.50 %
Total Capital / Risk Adjusted Assets16.58 %16.35 %14.75 %
Tier 1 Capital / Average Assets13.41 %13.23 %11.54 %
Shares outstanding6,884,386  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:          
NIM4.69 %4.50 %4.28 %4.25 %4.28 %
NIMTE*4.74 %4.56 %4.33 %4.31 %4.34 %
Efficiency ratio73.82 %71.19 %77.22 %80.92 %61.40 %
Return on average assets1.40 %1.58 %1.10 %0.06 %1.44 %
Return on average equity10.27 %11.79 %8.43 %0.43 %11.25 %


 September 30,
2018
          September 30,
2017
 
Year-to-date:             
NIM4.49 %         4.21 %
NIMTE*4.54 %         4.28 %
Efficiency ratio74.00 %         69.84 %
Return on average assets1.36 %         1.15 %
Return on average equity10.18 %         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 assets1,338,219  1,335,181  1,352,497  1,372,033  1,383,252 
Net interest margin ("NIM")34.69% 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 income182  175  173  204  220 
 $16,001  $15,164  $14,436  $14,888  $15,137 
Divided by average interest-bearing assets1,338,219  1,335,181  1,352,497  1,372,033  1,383,252 
NIMTE34.74% 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 assets1,341,913       1,365,575 
Net interest margin ("NIM")44.49%      4.21%
         
Net interest income$45,071       $42,994 
Plus: reduction in tax expense related to tax-exempt interest income530       670 
 $45,601       $43,664 
Divided by average interest-bearing assets1,341,913       1,365,575 
NIMTE44.54%      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 outstanding6,884  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 assets16,171  16,189  16,207  16,224  16,245 
 $187,071  $183,267  $178,766  $176,578  $178,182 
Divided by shares outstanding6,884  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 assets1,502,673  1,470,440  1,524,741  1,518,596  1,522,784 
Total shareholders' equity to total assets13.53% 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, net16,171  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, net16,171  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 ratio12.58% 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