Northrim BanCorp Earns $20.0 Million, or $2.86 per Diluted Share, in 2018; Reflects Expanding Net Interest Margin, Improving Credit Quality, and Lower Taxes

ANCHORAGE, Alaska, Jan. 28, 2019 (GLOBE NEWSWIRE) — Northrim BanCorp, Inc. (NASDAQ:NRIM) (“Northrim” or the “Company”) today reported earnings of $20.0 million, or $2.86 per diluted share, for 2018 and $4.8 million, or $0.69 per diluted share, for the fourth quarter of 2018.  Northrim continues to benefit from rising interest rates with the short duration of both its loan and investment portfolios repricing into higher yields in both the fourth quarter and full year.

“With the four 25-basis-point rate hikes implemented in 2018, our yields on interest-earning assets expanded faster than our cost of funds.  In addition, lower corporate tax rates and improved credit quality contributed to earnings growth in 2018,” said Joe Schierhorn, President and CEO.

In the fourth quarter and full year periods ending December 31, 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 2017 by a provision for loan losses of $3.2 million, compared to a benefit of $500,000 in 2018 due to improvements in asset quality.

Fourth Quarter and Full Year 2018 Highlights:

• Total revenue, which includes net interest income plus other operating income, decreased 3% to $23.9 million in the fourth quarter of 2018, compared to $24.5 million in the third quarter of 2018, and grew 5% from $22.6 million in the fourth quarter a year ago.
  • Community Banking provided 79% of total revenues and 96% of earnings in the fourth quarter of 2018.
  • Home Mortgage Lending provided 21% of total revenues and 4% of fourth quarter 2018 earnings.
• Net interest income in the fourth quarter of 2018 increased 10% to $16.1 million from $14.7 million in the fourth quarter a year ago, mainly due to the higher yields on the loan and investment portfolios and was also up 2% compared to $15.8 million in the preceding quarter.
• Pre-tax income increased to $5.8 million in the fourth quarter of 2018 compared to $4.3 million in the fourth quarter a year ago, but decreased from $6.4 million in the preceding quarter.
• Net interest margin on a tax equivalent basis (“NIMTE”) * expanded to 4.76% in the fourth quarter of 2018, a 2-basis-point improvement, compared to the preceding quarter and a 45-basis-point improvement compared to the fourth quarter a year ago.
• Return on average assets was 1.27% and return on average equity was 9.30% for the fourth quarter of 2018 and 1.34% and 9.95% for the full year.
• The Company repurchased 15,468 shares of its common stock in the fourth quarter of 2018 at an average price of $31.90, leaving 153,433 shares available under the previously announced repurchase authorization.

^* 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.)

According to the State Department of Labor, average monthly employment in Alaska through November of 2018 was lower by 1,300 jobs, or (-0.4%) compared to November of 2017. Health care continues to be the bright spot, adding 500 jobs up 1.3% (in this sector).  “The construction sector is often a leading indicator of future economic change,” stated Mark Edwards, Senior Vice President Credit Administration and Bank Economist.  November 2018 year-over-year figures show construction added 200 jobs, up +1.4%, ending a two-year decline.  Also significant was a positive increase of 100 jobs, or +1.1%, in the oil and gas sector, reversing a three-year decline.  This sector suffered the most during the recent recession and it consists of the highest paying jobs in the economy.

The Alaska Department of Labor highlighted military, oil & gas activity and tourism as the three primary drivers leading to forecasted job growth of 0.4% in 2019.  This is projected to end a three year period of job losses between 2016 and 2018.  Military job growth is expected to be the most significant driver due to the deployment of F-35 fighter jets at Eielson Air Force Base in Fairbanks.  The troops supporting two full squadrons are expected to arrive between 2020 and 2022, and positive economic impacts are already occurring.  According to Alaska Labor Economist Karinne Wiebold, “Preparations include a half-billion dollars in new construction to accommodate the jets and additional active duty and civilian support staff.”  This should also indirectly help other sectors throughout the state including numerous professional and business services.

Oil prices continued to fluctuate in 2018, but trended higher on average during most of the year.  There are a number of near-term projects that have led the Alaska Department of Revenue Commissioner, Bruce Tangeman, to forecast oil production growth over the next two years.  Commissioner Tangeman stated in the December 2018 Revenue Sources Book, “For FY 2018, North Slope oil production averaged 518,400 barrels per day (bpd), a decline of 1.5% compared to FY 2017.  The Department of Revenue forecasts that new fields will help increase production to 526,800 bpd in FY 2019 and 533,200 bpd in FY 2020.”

According to the Alaska Department of Labor report, the third major economic driver is expected to be tourism and the Alaska Department of Labor projects 2019 will be a record year for visitors.  Economist Wiebold stated, “The projected number of cruise ship passengers is up 16% to 1.36 million.  As long as the U.S. economy remains strong and barring substantial disruptions globally, Alaska will continue to be an attractive tourist destination.”

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 fourth quarter of 2018, Northrim generated a return on average assets (“ROAA”) of 1.27% and a return on average equity (“ROAE”) of 9.30%, compared to 1.40% and 10.27%, respectively in the third quarter of 2018 and 0.06% and 0.43%, respectively, in the fourth quarter a year ago. In the full year of 2018, ROAA was 1.34% and ROAE was 9.95%, compared to 0.87% and 6.81%, respectively, in 2017.  These results were above the averages posted by the 149 banks that make up the SNL Index of U.S. Banks with assets of $1 to $5 Billion as of September 30, 2018¹. Average ROAA was 0.85% and ROAE was 7.92% for the index in 2017.

Net Interest Income/Net Interest Margin

Net interest income, before the provision for loan losses, grew 10% to $16.1 million in the fourth quarter of 2018 compared to $14.7 million in the fourth quarter of 2017 and was up 2% from $15.8 million in the third quarter of 2018.  For the full year in 2018, net interest income increased 6% to $61.2 million from $57.7 million in the full year in 2017.

NIMTE^* was 4.76% in the fourth quarter of 2018 compared to 4.74% in the preceding quarter and 4.31% 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 fourth 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 in the fourth quarter improved to 5.08%, up 11 basis points from the third quarter of 2018 and 62 basis points year-over-year.  The cost of funds increased in the fourth quarter of 2018 to 50 basis points, up 14 basis points from the preceding quarter and 25 basis points compared to the same quarter last year.  For the full year in 2018, NIMTE^* improved 32 basis points to 4.60%.

“We implemented several strategies over the past few years to protect our net interest margin, including deploying capital to reduce high-cost debt, executing an interest rate swap that locked in lower rates for the remaining balance of our floating rate debt, and maintaining short durations for both loans and deposits,” said Jed Ballard, Chief Financial  Officer.

Provision for Loan Losses

In the fourth quarter of 2018, Northrim recorded a benefit for loan losses of $200,000, bringing the full year benefit to $500,000, reflecting continued improvement in credit quality of the loan portfolio.  Non-performing loans, net of government guarantees, declined 11% in the quarter and 31% for the year to $14.7 million at December 31, 2018, compared to $16.6 million at September 30, 2018, and $21.4 million at December 31, 2017.  The allowance for loan losses was 133% of nonperforming loans, net of government guarantees at year end.

¹For the trailing 12 months ended of September 30, 2018, the SNL Index of US Banks with Assets of $1 to $5 Billion tracked 155 banks with averages for the following ratios: NIMTE^* 3.68%, loan loss reserves to gross loans of 0.93%, ROAA 1.03%, and ROAE 9.48%.
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 $7.7 million, or 32% of total fourth quarter revenues, as compared to $8.7 million, or 35% of revenues in the third quarter of 2018, and $8.0 million, or 35% of revenues in the fourth quarter of 2017.  For the full year in 2018, other operating income totaled $32.2 million, or 34% of revenues, compared to $40.5 million, or 41% of revenues in 2017.  The primary drivers of other operating income are variability in the mortgage market, which is highly seasonal, the elimination of employee benefits plan income, and no gain on sale following the sale of the Company’s interest in Northrim Benefits Group in August of 2017.  In the fourth quarter of 2018, the Company recorded for the first time in other operating income the fair value of its commercial loan servicing portfolio of $1.0 million. Going forward only the changes in the fair value of the Company’s commercial loan servicing portfolio will be reflected in other operating income and are not expected to be significant. In addition, the fair value mark-to-market of the securities portfolio reduced other income by $490,000 in the fourth quarter of 2018 and $625,000 for the full year.

Other Operating Expenses

Other operating expenses remained stable at $18.3 million in the fourth quarter of 2018, compared to $18.1 million in the third quarter of 2018 and $18.3 million in the fourth quarter of 2017.  In the full year in 2018, other operating expenses were $69.8 million compared to $71.2 million in 2017.  In the third quarter of 2018 and fourth quarter of 2017, there was an $804,000 and $686,000 write down, respectively, 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”).

Income Tax Provision

For the fourth quarter of 2018, Northrim recorded $907,000 in state and federal income tax expense for an effective tax rate of 16% compared to $4.1 million in the year-ago quarter.  For the full year in 2018, Northrim recorded $4.1 million in state and federal income tax expense, compared to $10.3 million in 2017. The tax expense in 2017 included an additional $2.7 million tax expense, or $0.39 per diluted share, associated with the tax reforms enacted at the end of 2017.

Community Banking

“As Alaska begins to recover from the recent economic recession, we are seeing growth in the three major drivers of our economy:  natural resources exploration and development, military spending, and tourism.  We are optimistic about opportunities in the Alaska markets that we serve throughout the state,” said Schierhorn.

Net interest income in the Community Banking segment increased 9% to $15.7 million in the fourth quarter of 2018 from $14.4 million in the fourth quarter of 2017.

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

Home Mortgage Lending

“A number of factors impacted the housing market in Alaska this quarter, including normal seasonality, the moderate impacts from the earthquake that shook the greater Anchorage area on November 30, and the effects of the government shut-down on non-military federal workers, which make up approximately 5% of the Alaska workforce,” noted Ballard.  “Fortunately, no lives were lost in the earthquake and property damage was remarkably contained compared to damage from other earthquakes of this magnitude.  In addition, our housing market continues to show price stability throughout the state, although loan fundings have been trending down due to a variety of factors including rising interest rates and low housing inventory levels.”  Loans funded in the fourth quarter of 2018 were $114.0 million, of which 90% were for new home purchases, compared to $132.6 million of which 83% were for new home purchases in the fourth quarter of 2017.

“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 December 31, 2018, Northrim serviced 2,220 loans in its $557.6 million home-mortgage-servicing portfolio, which is a 37% increase from the $406.3 million serviced a year ago. Mortgage servicing revenue was steady at $1.5 million in the fourth quarters of both 2018 and 2017.  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 following table provides highlights of the Home Mortgage Lending segment of Northrim:

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.

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 December 31, 2018, unchanged from the preceding quarter and down 1% from a year ago.  “Although the duration of our loan portfolio remains short, we produced moderate loan growth,” said Schierhorn.  Northrim’s loan-to-deposit ratio remains at 80% at December 31, 2018, unchanged from September 30, 2018, and up from 76% at December 31, 2017.  Schierhorn added that “with the rising interest rate environment the Bank has been working hard to maintain our strong deposit base.”

Average interest-earning assets were $1.36 billion in the fourth quarter of 2018, up 2% from $1.34 billion at the end of the third quarter of 2018 and down less than 1% from the fourth quarter a year ago.  The average yield on interest-earning assets was 5.08% in the fourth quarter of 2018, up from 4.97% in the preceding quarter and 4.46% in the like quarter a year ago.  For the full year in 2018, average interest-earning assets declined 2% to $1.35 billion from $1.37 billion in the full year in 2017.  Average yields were 4.82% in the full year in 2018, compared to 4.46% in the full year in 2017.

Average investment securities totaled $280.8 million at December 31, 2018, an increase of 6% from the third quarter of 2018, and down 2% from the fourth quarter of 2018.  The average net tax equivalent yield on the securities portfolio improved to 2.51% for the fourth quarter of 2018, from 2.29% in the preceding quarter and 1.77% a year ago.  The average estimated duration of the investment portfolio was 27 months, at December 31, 2018, which is expected to generate improvement in yields as securities reprice in this rising interest rate environment.  For the full year in 2018, average investment securities declined to $286.4 million with an average yield of 2.17% compared to $305.2 million and an average yield of 1.66% for the full year in 2017.

“In 2018, loan originations more than offset the relatively rapid repayments that result from the short duration of the loan portfolio.  In addition, a majority of the loan portfolio is adjustable rate, which has benefited yields as interest rates rise,” said Schierhorn.  Portfolio loans were $984.3 million at the end of the fourth quarter of 2018 up slightly from the preceding quarter and up 3% from the fourth quarter a year ago.  Average portfolio loans in the fourth quarter of 2018 were $981.4 million down slightly from the preceding quarter and relatively unchanged from a year ago.  Yields on average portfolio loans in the fourth quarter of 2018 improved to 5.98% from 5.81% in the third quarter of 2018 and 5.45% in the fourth quarter of 2017.  Average portfolio loans in the full year in 2018 were down 1% to $971.5 million with a yield of 5.74%, compared to $981.0 million and a yield of 5.47% for the full year in 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 December 31, 2018, represented 91% of total deposits.  At December 31, 2018, total deposits were $1.23 billion, level with balances at September 30, 2018, and down from $1.26 billion a year ago.  Average interest-bearing deposits were up slightly to $796.4 million with an average cost of 0.45% in the fourth quarter of 2018, compared to $795.3 million and an average cost of 0.30% in the third quarter of 2018, and down 4% from $829.3 million and an average cost of 0.18% in the fourth quarter of 2017.  Average interest-bearing deposits were down 2% in the full year in 2018 at $809.8 million with an average cost of 0.28%, compared to $829.9 million and an average cost of 0.21% in the full year in 2017.

Shareholders’ equity increased 7% to $205.9 million, or $29.92 per share, at December 31, 2018, compared to $192.8 million, or $28.06 per share, a year ago.  Tangible book value per share^* was $27.57 at December 31, 2018, up from $25.70 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 15.47% at December 31, 2018.

Asset Quality

Asset quality in the fourth quarter of 2018 improved with nonperforming assets (“NPAs”) net of government guarantees declining to $22.6 million at December 31, 2018, compared to $24.1 million at the end of the preceding quarter, and $28.7 million at December 31, 2017, primarily due to loan payments which exceeded NPA additions.  Of the NPAs, $13.6 million or 60% are nonaccrual loans related to five commercial relationships.  Two of these relationships, which totaled $7.0 million at the end of the fourth quarter of 2018, are businesses in the medical industry.

Net adversely classified loans were $27.2 million at the end of the fourth quarter of 2018 as compared to $29.7 million at the end of the third quarter of 2018 and $33.8 million one year ago.  Net loan charge-offs in the fourth quarter of 2018 were $441,000 compared to net recoveries of $52,000 in the preceding quarter and $2,000 in charge-offs 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 December 31, 2018, $20.1 million, or 74% 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 fourth quarter of 2018 were $3.4 million, up slightly from $3.3 million in the preceding quarter and down from $7.7 million a year ago.  The decrease in the fourth 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 $62.3 million, or approximately 6% of portfolio loans as of December 31, 2018, had direct exposure to the oil and gas industry in Alaska, and $1.7 million of these loans are adversely classified.  As of December 31, 2018, Northrim has an additional $32.5 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 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 15 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:

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

http://labor.alaska.gov/news/2018/news18-47.htm

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

https://www.adn.com/politics/2018/12/22/alaska-holiday-flights-mail-and-cabin-stays-should-continue-through-government-shutdown/

https://www.nytimes.com/2018/12/01/us/anchorage-alaska-earthquake.html

Additional Financial Information
(Dollars in thousands)
(Unaudited)

Additional Financial Information
(Dollars in thousands)
(Unaudited)

Additional Financial Information
(Dollars in thousands)
(Unaudited)

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

Additional Financial Information
(Dollars in thousands)
(Unaudited)

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

Additional Financial Information
(Dollars in thousands)
(Unaudited)

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

Additional Financial Information
(Dollars in thousands)
(Unaudited)

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

NIMTE

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 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.

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.

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.