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Northrim BanCorp Earns $20.7 Million, or $3.04 per Diluted Share, in 2019 Year Highlighted by Improving Credit Quality and Loan and Deposit Growth

ANCHORAGE, Alaska, Jan. 27, 2020 (GLOBE NEWSWIRE) -- Northrim BanCorp, Inc. (NRIM) (“Northrim” or the "Company") today reported net income of $20.7 million, or $3.04 per diluted share, for 2019 and $4.6 million, or $0.69 per diluted share, for the fourth quarter of 2019.  Improved asset quality, including net loan recoveries for the year, higher production in the mortgage banking division, and loan and deposit growth in the community banking franchise contributed to record profitability.

“We expanded our market presence in 2019, with investments in new branches and employees, contributing to our success in growing both loans and deposits,” said Joe Schierhorn, President and CEO.  “The decrease in mortgage loan rates in the second half of 2019 helped to increase demand for home purchase and refinance loans in our Alaska markets.”

Net income for the full year 2019 increased 3% to a record $20.7 million, or $3.04 per diluted share, compared to $20.0 million, or $2.86 per diluted share, in the full year 2018.  Improving loan portfolio quality and net recoveries provided for a $1.2 million benefit to the loan loss provisions in 2019 compared to a benefit of $500,000 in 2018.  Operating results include increased operating expenses with total operating expenses for 2019 of $77.1 million for the year, up from $69.8 million in 2018, primarily due to increased salaries and employee benefit costs, higher occupancy expenses and increased costs for data processing.  Northrim continues to make investments in technology, and recruiting and retaining business talent, which we believe supports its ability to generate growth in both loans and deposits.

Fourth Quarter 2019 Highlights:

  • Total revenue, which includes net interest income plus other operating income, increased 9% to $101.8 million in 2019, compared to $93.4 million in 2018.
  • For the fourth quarter of 2019, total revenue increased 10% to $26.1 million, compared to $23.9 million in the fourth quarter a year ago, and decreased slightly compared to $26.8 million in the preceding quarter.
    • Community Banking provided 75% of total revenues and 79% of earnings in the fourth quarter of 2019.
    • Home Mortgage Lending provided 25% of total revenues and 21% of fourth quarter earnings.
  • Net interest income in 2019 increased 5% to $64.4 million, from $61.2 million in 2018.
  • Net interest income in the fourth quarter of 2019 increased to $16.4 million from $16.1 million in the fourth quarter a year ago, reflecting growth in cash balances, portfolio loans and investment securities.
  • Net interest margin on a tax equivalent basis (“NIMTE”)* was 4.70% for the year, a 10-basis point increase compared to 2018.
  • NIMTE* was 4.52% in the fourth quarter of 2019, a 24-basis point contraction compared to the fourth quarter a year ago, and a 13-basis point contraction compared to the preceding quarter.
  • For the year, return on average assets was 1.33% and return on average equity was 9.92%, compared to return on average assets of 1.34% and return on average equity of 9.95% in 2018. 
  • For the fourth quarter of 2019, return on average assets was 1.11% and return on average equity was 8.74%, compared to return on average assets of 1.27% and return on average equity of 9.30% in the fourth quarter of 2018.
  • Total deposits increased 12% to $1.37 billion at year-end, compared to $1.23 billion a year earlier.
  • The fourth quarter 2019 benefit for loan losses was $150,000, compared to a benefit of $2.1 million in the preceding quarter and a benefit of $200,000 in the fourth quarter a year ago. 
   
Financial Highlights Three Months Ended
(Dollars in thousands, except per share data) December 31,
2019
September 30,
2019
June 30,
2019
March 31,
2019
December 31,
2018
Total assets $1,643,996   $1,616,631   $1,552,770   $1,520,051   $1,502,988  
Total portfolio loans $1,043,371   $1,036,547   $1,015,704   $982,341   $984,346  
Average portfolio loans $1,027,728   $1,020,186   $1,003,019   $988,920   $981,407  
Total deposits $1,372,351   $1,351,029   $1,288,178   $1,228,018   $1,228,088  
Average deposits $1,361,786   $1,307,795   $1,239,354   $1,194,512   $1,233,479  
Total shareholders' equity $207,117   $204,039   $206,338   $208,838   $205,947  
Net income $4,580   $7,538   $4,261   $4,312   $4,848  
Diluted earnings per share $0.69   $1.11   $0.62   $0.62   $0.69  
Return on average assets   1.11 %   1.90 %   1.12 %   1.18 %   1.27 %
Return on average shareholders' equity   8.74 %   14.45 %   8.13 %   8.36 %   9.30 %
NIM   4.48 %   4.60 %   4.71 %   4.83 %   4.71 %
NIMTE*   4.52 %   4.65 %   4.77 %   4.89 %   4.76 %
Efficiency ratio   78.79 %   72.01 %   77.58 %   73.23 %   76.64 %
Total shareholders' equity/total assets   12.60 %   12.62 %   13.29 %   13.74 %   13.70 %
Tangible common equity/tangible assets*   11.73 %   11.74 %   12.38 %   12.81 %   12.76 %
Book value per share $31.58   $31.20   $30.66   $30.36   $29.92  
Tangible book value per share* $29.12   $28.74   $28.27   $28.01   $27.57  
Dividends per share $0.33   $0.33   $0.30   $0.30   $0.27  
                               

* 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

After three consecutive years of a mild recession, the Alaska economy began to show a positive change in the fourth quarter of 2018, with improvements continuing throughout 2019.  The State Department of Labor reported growth of 1,100 jobs in November of 2019 compared to November of 2018.  This is an increase of 0.3% year-over-year.  October of 2018 was the first month of year-over-year increase in employment since September of 2015.  After 37 months of year-over-year declines, Alaska now has 14 consecutive months of year-over-year job increases.

Oil and Gas has led the growth with an increase of 400 jobs compared to November of 2018, an improvement of 4.3%.  The Construction industry has grown by 200 jobs or 1.3% during the same 12 month period.  Tourism helped boost Leisure & Hospitality employment by 300 jobs or 1%.  Health Care added 300 jobs, a growth of 0.8% through November.  Federal Government jobs grew by 100 or 0.7%.

The largest decline was -600 State government jobs, a decrease of 2.5% in response to budget cuts. The other two major sectors to shrink were Retail, down 200 jobs or -0.6% and Information Services down 100 jobs or -1.8%.

Alaska’s seasonally adjusted gross state product ("GSP") was $55.5 billion in the second quarter of 2019, according to the Federal Bureau of Economic Analysis ("FBEA") in a report released on November 7, 2019. Alaska’s GSP increased 1.8% annualized in the first quarter of 2019 and 4.1% in the second quarter primarily due to oil and gas.  Alaska’s real GSP increased by 0.7% in 2018.

Alaska’s personal income grew 2.3% annualized in the third quarter of 2019 according to a report released on December 18, 2019 by the FBEA.  Total income from all sources in Alaska grew from $44.2 billion at the end of the 3rd quarter 2018 to $45.6 billion in the 3rd quarter of 2019.  The 3.4% increase year-over-year was mostly driven by an improvement in wages.  Personal income from wages rose $274 million in the third quarter alone in 2019.

“We have seen gains in personal income in Alaska over the last year,” stated Mark Edwards, EVP Chief Credit Officer and Bank Economist. “Job growth has been led by the oil and gas sector, which has the highest average wages in the state.  These improvements, coupled with billions of dollars in exploration and production activity in new and existing fields, have helped create momentum in the economy and lifted the state out of a mild, but long, recession.”  Mr. Edwards added, “Record years in tourism activity have further stimulated the economy with increasing cruise ship visitors and infrastructure investment.  Visitor industries and the ever-expanding health care system have helped offset the state government job losses stemming from an effort to balance the state budget.”

Alaska North Slope crude oil prices have stabilized in a higher price range between approximately $60 and $80 in 2018 and 2019.  This has helped increase industry investment and employment after a difficult period of prices averaging between approximately $30 and $60 from 2015 to 2017.  The most recent monthly average was $66.98 in December of 2019.

Alaska’s crude oil production averaged 511,800 barrels per day ("bpd") in fiscal year ("FY") 2019.  This was a decrease of 4.2% compared to the previous year end.  Total output declined 1.2% to 534,000 bpd in FY 2018.  The State Department of Revenue forecasts production on the North Slope to decline by 0.6% in FY 2020.

Alaska’s home mortgage delinquency and foreclosure levels continue to be better than most of the nation.  According to the Mortgage Bankers Association, Alaska’s foreclosure rate was 0.71% at the end of the third quarter of 2019.  The comparable national average rate was 0.84% for the same time period 2019.  The national rate continues to improve, while the Alaska rate remains relatively lower. The survey also reported that the percentage of delinquent mortgage loans in Alaska was 3.16% for the third quarter of 2019.  The comparable delinquency rate for the entire country was higher at 4.09%.

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 2019, Northrim generated a return on average assets ("ROAA") of 1.11% and a return on average equity ("ROAE") of 8.74%, compared to 1.90% and 14.45%, respectively, in the third quarter of 2019 and 1.27% and 9.30%, respectively, in the fourth quarter a year ago.

Net Interest Income/Net Interest Margin

Net interest income grew 2% to $16.4 million in the fourth quarter of 2019 compared to $16.1 million in the fourth quarter of 2018 and increased modestly compared to $16.3 million in the third quarter of 2019.  For the year, net interest income increased 5% to $64.4 million from $61.2 million in 2018.  Interest income benefited from the growth in the loan portfolio which more than offset the increased cost of interest-bearing deposits and borrowings in both the fourth quarter and full year 2019, compared to the year ago periods.

NIMTE* was 4.52% in the fourth quarter of 2019 compared to 4.65% in the preceding quarter and 4.76% in the fourth quarter a year ago.  While the NIMTE* contracted during the fourth quarter of 2019, it remains above the peer average posted by the SNL Small Cap U.S. Bank Index with total market capitalization between $250 million and $1 billion as of September 30, 20191.

The yield on interest earning assets in the fourth quarter of 2019 was 4.97%, down 11 basis points from both the third quarter of 2019 and the fourth quarter a year ago.  The cost of funds increased in the fourth quarter of 2019 to 70 basis points, up 2 basis points from the preceding quarter and up 20 basis points compared to the fourth quarter a year ago.

“We continue to have a favorable cost of funds, which has helped to sustain our net interest margin during this challenging interest rate environment,” said Jed Ballard, Chief Financial Officer.  “The growth in both interest-bearing and non-interest-bearing demand deposits continues to support our NIM.”

Provision for Loan Losses

Northrim recorded a benefit for loan losses of $150,000 in the fourth quarter of 2019.  This compares to a benefit for loan losses of $2.1 million in the third quarter of 2019 and a benefit for loan losses of $200,000 in the fourth quarter of 2018.  “We recorded a benefit for loan losses in the fourth quarter due to improved credit quality, including net loan recoveries of approximately $100,000,” said Ballard.

Nonperforming loans, net of government guarantees, improved during the quarter to $14.0 million at December 31, 2019, compared to $15.5 million at September 30, 2019, and $14.7 million at December 31, 2018.  The allowance for loan losses was 137% of nonperforming loans, net of government guarantees at December 31, 2019.

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 $9.7 million, or 37% of total fourth quarter 2019 revenues, as compared to $10.5 million, or 39% of revenues in the third quarter of 2019, and $7.7 million, or 32% of revenues in the fourth quarter of 2018.  For the year, other operating income totaled $37.3 million, or 37% of revenues, compared to $32.2 million, or 34% of revenues in 2018.  The primary drivers of changes in other operating income are increases in mortgage banking income as a result of lower interest rates, gains or losses from the fair value changes of marketable equity securities, and income from interest rate swaps.  The fair value mark-to-market of the marketable equity securities portfolio increased other income by $129,000 in the fourth quarter of 2019, compared to a $490,000 decrease in the fourth quarter of 2018 and increased other income by $911,000 for the year, compared to a decrease of $625,000 in 2018.  Additionally, $230,000 in interest rate swap income was earned in the fourth quarter, and $964,000 for the year of 2019 on the execution of interest rate swaps related to the Company's commercial lending operations. These figures compare to interest rate swap income of $14,000 and $84,000 for the fourth quarter and full year in 2018, respectively.

1As of September 30, 2019, the SNL Small Cap US Bank Index tracked 124 banks with total common market capitalization between $250 million and $1 billion with an average for NIMTE* of 3.47%.

Other Operating Expenses

Operating expenses were $20.6 million in the fourth quarter of 2019, compared to $19.3 million in the third quarter of 2019, and $18.3 million in the fourth quarter of 2018. For the full year 2019, operating expenses were $76.8 million, up from $69.8 million in 2018.  “Higher overhead costs reflect our successful execution of our growth plan, including the addition of two new branch locations, and our ability to recruit and retain experienced, talented bankers in the Alaska markets that we serve,” said Schierhorn.  Factors impacting other operating expenses include costs associated with the new branch location in East Anchorage, which opened in the fourth quarter of 2018, and the new branch in Soldotna on the Kenai Peninsula, which opened in the second quarter of 2019, higher compensation costs for the mortgage banking operations due to increased loan originations, increased data processing and banking technology costs, and higher salaries and personnel expense due to an increased profit sharing expense and higher medical costs.

Other operating expense in the fourth quarter of 2019 includes $468,000 in compensation expense for acquisition payments related to Residential Mortgage Holding Company, LCC, the parent company of Residential Mortgage, LLC (collectively "RML").  The fourth quarter of 2019 marks the end of the five-year period following the acquisition of RML during which Northrim was required to make additional payments to the former owners of RML when profitability hit certain targets.  There was no compensation expense for RML acquisition payments in 2018 due to RML not hitting the profitability targets.  Per the terms of the purchase agreement, no further payments are scheduled, and therefore no additional expense for acquisition payments will be recorded in the future.

Income Tax Provision

For the fourth quarter of 2019, Northrim recorded $1.1 million in state and federal income tax expense for an effective tax rate of 19.4% compared to $907,000, or 15.8% in the fourth quarter a year ago. For the full year of 2019, Northrim recorded $5.4 million in state and federal income tax expense, for an effective tax rate of 20.8% compared to $4.1 million and 16.9%, respectively, in 2018.  The tax rate increased in both periods in 2019 primarily due to less tax-exempt income and fewer estimated tax credits from low income housing project investments as a percentage of pre-tax income in 2019 as compared to 2018.

Community Banking

“The two recent branch additions are already contributing to our community banking operating results, and we will continue to look for other opportunities within our Alaska footprint,” said Schierhorn.  Net interest income in the Community Banking segment increased 2% to $16.1 million in the fourth quarter of 2019 from $15.7 million in the fourth 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) December 31,
2019
September 30,
2019
June 30,
2019
March 31,
2019
December 31,
2018
Net interest income $16,080   $16,000   $15,633   $15,488   $15,719  
Provision (benefit) for loan losses   (150 )   (2,075 )   300     750     (200 )
Other operating income   3,347     2,944     3,619     3,235     3,199  
Compensation expense, net RML acquisition payments   468                  
Other operating expense   14,765     13,126     14,111     12,518     13,637  
  Income before provision for income taxes   4,344     7,893     4,841     5,455     5,481  
Provision for income taxes   719     1,550     984     1,155     824  
  Net income $3,625   $6,343   $3,857   $4,300   $4,657  
Average diluted shares   6,647,510     6,707,523     6,896,687     6,981,951     6,990,319  
Diluted earnings per share $0.55   $0.93   $0.56   $0.62   $0.66  


   
  Year-to-date
(Dollars in thousands, except per share data) December 31,
2019
December 31,
2018
Net interest income $63,201   $59,727  
(Benefit) provision for loan losses   (1,175 )   (500 )
Other operating income   13,145     11,323  
Compensation expense, net RML acquisition payments   468      
Other operating expense   54,520     49,956  
  Income before provision for income taxes   22,533     21,594  
Provision for income taxes   4,408     3,361  
  Net income $18,125   $18,233  
Average diluted shares   6,808,209     6,981,557  
Diluted earnings per share $2.66   $2.60  
             

Home Mortgage Lending

“With the decrease in mortgage rates, demand for mortgage loans picked up substantially in the second half of the year.  While a large part of the mortgage demand is due to an increase in refinancing as a result of lower mortgage rates, purchase activity was also up, increasing 7% year over year,” said Ballard.  During the fourth quarter of 2019, mortgage loan volume totaled $181.1 million, of which 70% was for new home purchases, compared to $241.8 million and 67% of loans funded in the third quarter of 2019 and $114.0 million of which 90% were for new home purchases in the fourth 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, generated continued growth during the quarter,” added Ballard.  As of December 31, 2019, Northrim serviced 2,643 loans in its $659.0 million home-mortgage-servicing portfolio, which is an 18% increase from the $557.6 million serviced a year ago.  Mortgage servicing revenue contributed $1.7 million to revenues in the fourth quarter of 2019 compared to $1.6 million in the third quarter of 2019 and $1.5 million in the fourth 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 those servicing rights, which is 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 $321,000 for the fourth quarter of 2019, compared to a decrease of $662,000 for the third quarter of 2019 and an increase of $145,000 for the fourth quarter of 2018.  For the full year 2019, the change in fair value of mortgage servicing rights was a decrease of $2.6 million as compared to a decrease of $127,000 for 2018.

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

   
  Three Months Ended
(Dollars in thousands, except per share data) December 31,
2019
September 30,
2019
June 30,
2019
March 31,
2019
December 31,
2018
Mortgage commitments $48,796   $86,044   $107,330   $66,319   $44,999  
Mortgage loans funded for sale $181,102   $241,795   $168,953   $92,447   $113,963  
Mortgage loan refinances to total fundings   30 %   33 %   18 %   16 %   10 %
Mortgage loans serviced for others $659,048   $634,059   $598,415   $586,595   $557,583  
           
Net realized gains on mortgage loans sold $5,215   $6,768   $4,903   $2,927   $3,156  
Change in fair value of mortgage loan commitments, net   (455 )   (535 )   655     356     (442 )
Total production revenue   4,760     6,233     5,558     3,283     2,714  
Mortgage servicing revenue   1,679     1,649     1,119     1,668     1,526  
Change in fair value of mortgage servicing rights, net1   (321 )   (662 )   (950 )   (674 )   145  
Total mortgage servicing revenue, net   1,358     987     169     994     1,671  
Other mortgage banking revenue   270     345     223     21     134  
  Total mortgage banking income $6,388   $7,565   $5,950   $4,298   $4,519  
           
Net interest income $330   $306   $324   $281   $418  
Mortgage banking income   6,388     7,565     5,950     4,298     4,519  
Other operating expense   5,382     6,198     5,708     4,562     4,663  
  Income before provision for income taxes   1,336     1,673     566     17     274  
Provision for income taxes   381     478     162     5     83  
  Net income $955   $1,195   $404   $12   $191  
           
Average diluted shares   6,647,510     6,707,523     6,896,687     6,981,951     6,990,319  
Diluted earnings per share $0.14   $0.18   $0.06     $—   $0.03  
                               

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) December 31,
2019
December 31,
2018
Mortgage loans funded for sale $684,297   $527,516  
Mortgage loan refinances to total fundings   26 %   11 %
     
Net realized gains on mortgage loans sold $19,813   $14,822  
Change in fair value of mortgage loan commitments, net   21     (160 )
Total production revenue   19,834     14,662  
Mortgage servicing revenue   6,115     5,541  
Change in fair value of mortgage servicing rights, net1   (2,607 )   (127 )
Total mortgage servicing revenue, net   3,508     5,414  
Other mortgage banking revenue   859     768  
  Total mortgage banking income $24,201   $20,844  
     
Net interest income $1,241   $1,481  
Mortgage banking income   24,201     20,844  
Other operating expense   21,850     19,844  
  Income before provision for income taxes   3,592     2,481  
Provision for income taxes   1,026     710  
  Net income $2,566   $1,771  
     
Average diluted shares   6,808,209     6,981,557  
Diluted earnings per share $0.38   $0.26  
             

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 increased to $1.64 billion at December 31, 2019, up 2% from the preceding quarter and up 9% from a year ago.  Northrim’s loan-to-deposit ratio was 76% at December 31, 2019, down from 77% at September 30, 2019 and 80% at December 31, 2018.

Average interest-earning assets were $1.45 billion in the fourth quarter of 2019, up 3% from $1.41 billion in the third quarter of 2019 and up 7% from $1.36 billion in the fourth quarter a year ago.  The average yield on interest-earning assets was 4.97% in the fourth quarter of 2019, down from 5.08% in both the preceding quarter and in the fourth quarter a year ago.

Average investment securities increased 10% to $279.8 million in the fourth quarter of 2019, compared to $253.4 million in the third quarter of 2019 and decreased from $280.8 million in the fourth quarter a year ago.  The average net tax equivalent yield on the securities portfolio was 2.65% for the fourth quarter of 2019, down from 2.73% in the preceding quarter and up from 2.51% a year ago.  The average estimated duration of the investment portfolio at December 31, 2019 was 18 months.

Loan originations more than offset the rate of repayments that results from the short duration of the loan portfolio.  At December 31, 2019, commercial loans remained at 39% of total loans, while commercial real estate decreased slightly to 47% of total loans and construction loans increased slightly to 10% of total loans, compared to three months earlier.  Portfolio loans were $1.04 billion at December 31, 2019, up slightly from the preceding quarter and up 6% from a year ago.  Average portfolio loans in the fourth quarter of 2019 were $1.03 billion, up 1% from the preceding quarter and up 5% from a year ago.  Yields on average portfolio loans in the fourth quarter of 2019 increased to 5.94% from 5.92% in the third quarter of 2019 and decreased compared to 5.98% in the fourth quarter of 2018.

Alaskans continue to 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, 2019, represented 88% of total deposits.  At December 31, 2019, total deposits were $1.37 billion, up 2% from $1.35 billion at September 30, 2019, and up 12% from $1.23 billion a year ago.  Average interest-bearing deposits were up 5% to $910.4 million with an average cost of 0.65% in the fourth quarter of 2019, compared to $870.4 million and an average cost of 0.62% in the third quarter of 2019, and up 14% compared to $796.4 million and an average cost of 0.45% in the fourth quarter of 2018.

“We added several bankers over the past year with strong lending expertise and community and business relationships.  These lenders, retail bankers and commercial cash managers are targeting new deposits and providing customers with complete banking solutions,” said Michael Martin, the Bank's Chief Operating Officer and General Counsel.  “We also continued to improve our deposit product offerings and services for our customers, which is helping to grow our banking relationships.”

Shareholders’ equity was $207.1 million, or $31.58 per share, at December 31, 2019, compared to $204.0 million, or $31.20 per share, at September 30, 2019 and $205.9 million, or $29.92 per share, a year ago.  Tangible book value per share* was $29.12 at December 31, 2019, up from $28.74 at September 30, 2019, and $27.57 per share a year ago.  Northrim continues to maintain capital levels in excess of the requirements to be categorized as “well-capitalized” with Tier 1 Capital to Risk Adjusted Assets of 14.38% at December 31, 2019, compared to 14.57% at September 30, 2019 and 15.47% at December 31, 2018.

Earlier this year, the Company completed its currently authorized share repurchase program, buying 192,193 shares of its common stock in the third quarter of 2019 at an average price of $37.29 per share, 149,373 shares of its common stock in the second quarter of 2019 at an average price of $34.79 per share, and 6,110 shares of its common stock in the first quarter of 2019 at an average price of $33.58 per share. “We continue to look at our share repurchase program, as well as our dividend program, to provide value to our shareholders,” said Ballard.

Asset Quality

“A highlight of the year was the overall improvement in asset quality,” said Ballard.  “Net loan recoveries totaled $101,000 for the fourth quarter of 2019, and all credit quality metrics improved compared to three months earlier.”

Nonperforming assets ("NPAs") net of government guarantees improved to $19.9 million at December 31, 2019, compared to $21.5 million at September 30, 2019, and $22.6 million at December 31, 2018.  Of the NPAs, $11.4 million, or 74% are nonaccrual loans related to six commercial relationships. Two of these relationships, which totaled $5.3 million at the end of the fourth quarter of 2019, are businesses in the medical industry.

Net adversely classified loans improved to $22.3 million at December 31, 2019 as compared to $24.2 million at September 30, 2019, and $27.2 million a year ago.  Loan recoveries were greater than loan charge-offs in the fourth quarter by $101,000, compared to $694,000 in net loan recoveries in the third quarter of 2019, and net loan charge-offs of $441,000 in the fourth quarter a year ago.  For the year, net loan recoveries were $744,000, compared to net loan charge-offs of $1.4 million in 2018.  Adversely classified loans are loans that Northrim has classified as substandard, doubtful, and loss, net of government guarantees.  As of December 31, 2019, $16.7 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 fourth quarter of 2019 were $1.4 million, down from $1.5 million in the preceding quarter and from $3.4 million a year ago.  The decrease in the fourth quarter of 2019 compared to the year ago quarter is primarily due to the repayment of one 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.

As of December 31, 2019, Northrim estimates that $79.2 million, or approximately 8% of portfolio loans had direct exposure to the oil and gas industry in Alaska, and $3.1 million of these loans are adversely classified.  As of December 31, 2019, Northrim has an additional $31.1 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.  Northrim defines direct exposure to the oil and gas sector as loans to borrowers that provide oilfield services and other companies that have been 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 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://platform.marketintelligence.spglobal.com

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

https://www.bea.gov/

http://www.tax.alaska.gov/programs/oil/prevailing/ans.aspx

http://www.tax.state.ak.us/

https://www.mba.org/

             
Income Statement            
(Dollars in thousands, except per share data) Three Months Ended   Year-to-date
(Unaudited) December 31, September 30, December 31,   December 31, December 31,
   2019  2019  2018    2019  2018
Interest Income:            
  Interest and fees on loans $15,957   $15,863   $15,251     $62,150   $57,542  
  Interest on portfolio investments   1,774     1,661     1,662       7,011     5,829  
  Interest on deposits in banks   331     313     294       922     806  
  Total interest income   18,062     17,837     17,207       70,083     64,177  
Interest Expense:            
  Interest expense on deposits   1,484     1,365     894       4,961     2,307  
  Interest expense on borrowings   168     166     176       680     662  
  Total interest expense   1,652     1,531     1,070       5,641     2,969  
  Net interest income   16,410     16,306     16,137       64,442     61,208  
             
Provision (benefit) for loan losses   (150 )   (2,075 )   (200 )     (1,175 )   (500 )
  Net interest income after provision (benefit) for            
  loan losses   16,560     18,381     16,337       65,617     61,708  
             
Other Operating Income:            
  Mortgage banking income   6,388     7,565     4,519       24,201     20,844  
  Purchased receivable income   916     709     781       3,271     3,255  
  Bankcard fees   762     820     755       2,976     2,811  
  Service charges on deposit accounts   333     398     371       1,557     1,508  
  Interest rate swap income   230         14       964     84  
  Commercial servicing revenue   316     126     1,134       624     1,422  
  Gain (loss) on marketable equity securities   129     130     (490 )     911     (625 )
  Gain on sale of securities                 23      
  Other income   661     761     634       2,819     2,868  
  Total other operating income   9,735     10,509     7,718       37,346     32,167  
             
Other Operating Expense:            
  Salaries and other personnel expense   13,884     13,186     11,442       51,317     44,650  
  Data processing expense   1,804     1,849     1,661       7,128     6,035  
  Occupancy expense   1,618     1,576     1,729       6,607     6,136  
  Marketing expense   764     357     857       2,373     2,318  
  Professional and outside services   681     610     673       2,531     2,453  
  Compensation expense RML acquisition payments, net   468               468      
  Intangible asset amortization expense   15     15     17       60     70  
  Impairment of equity method investment                     804  
  OREO expense, net rental income and gains on sale   (7 )   (31 )   101       (193 )   258  
  Insurance expense   (35 )   102     217       557     862  
  Other operating expense   1,423     1,660     1,603       5,990     6,214  
  Total other operating expense   20,615     19,324     18,300       76,838     69,800  
             
  Income before provision for income taxes   5,680     9,566     5,755       26,125     24,075  
  Provision for income taxes   1,100     2,028     907       5,434     4,071  
  Net income $4,580   $7,538   $4,848     $20,691   $20,004  
             
  Basic EPS $0.70   $1.13   $0.70     $3.08   $2.91  
  Diluted EPS $0.69   $1.11   $0.69     $3.04   $2.86  
  Average basic shares   6,552,471     6,604,044     6,888,762       6,708,622     6,877,573  
  Average diluted shares   6,647,510     6,707,523     6,990,319       6,808,209     6,981,557  


       
Balance Sheet      
(Dollars in thousands)      
(Unaudited) December 31, September 30, December 31,
   2019  2019  2018
       
Assets:      
  Cash and due from banks $20,518   $45,381   $26,771  
  Interest bearing deposits in other banks   74,906     46,807     50,767  
  Investment securities available for sale   276,138     257,270     271,610  
  Marketable equity securities   7,945     8,045     7,265  
  Investment in Federal Home Loan Bank stock   2,138     2,140     2,101  
  Loans held for sale   67,834     81,942     34,710  
  Portfolio loans   1,043,371     1,036,547     984,346  
  Allowance for loan losses   (19,088 )   (19,137 )   (19,519 )
  Net portfolio loans   1,024,283     1,017,410     964,827  
  Purchased receivables, net   24,373     13,673     14,406  
  Mortgage servicing rights   11,920     11,206     10,821  
  Other real estate owned, net   7,043     7,043     7,962  
  Premises and equipment, net   38,422     38,556     39,090  
  Lease right of use asset   14,306     14,307      
  Goodwill and intangible assets   16,094     16,109     16,154  
  Other assets   58,076     56,742     56,504  
  Total assets $1,643,996   $1,616,631   $1,502,988  
       
Liabilities:      
  Demand deposits $451,896   $460,327   $420,988  
  Interest-bearing demand   320,264     292,198     248,056  
  Savings deposits   229,918     228,739     239,054  
  Money market deposits   205,801     214,352     206,717  
  Time deposits   164,472     155,413     113,273  
  Total deposits   1,372,351     1,351,029     1,228,088  
  Securities sold under repurchase agreements           34,278  
  Other borrowings   8,891     8,933     7,241  
  Junior subordinated debentures   10,310     10,310     10,310  
  Lease liability   14,229     14,224      
  Other liabilities   31,098     28,096     17,124  
  Total liabilities   1,436,879     1,412,592     1,297,041  
       
Shareholders' Equity:      
  Total shareholders' equity   207,117     204,039     205,947  
  Total liabilities and shareholders' equity $1,643,996   $1,616,631   $1,502,988  
       

Additional Financial Information
(Dollars in thousands)
(Unaudited)

Composition of Portfolio Investments              
  December 31, 2019   September 30, 2019   December 31, 2018
  Balance % of
total
  Balance % of
total
  Balance % of
total
U.S. Treasury securities $57,480   20.2 %   $65,303   24.6 %   $54,863   19.7 %
U.S. Agency securities   154,372   54.4 %     123,197   46.5 %     153,997   55.1 %
Corporate securities   35,066   12.3 %     42,460   16.0 %     39,780   14.3 %
Marketable equity securities   7,945   2.8 %     8,045   3.0 %     7,265   2.6 %
Collateralized loan obligations   25,923   9.1 %     22,930   8.6 %     13,886   5.0 %
Alaska municipality, utility, or state bonds   3,297   1.2 %     3,230   1.2 %     4,710   1.7 %
Other municipality, utility, or state bonds     %     150   0.1 %     4,374   1.6 %
  Total portfolio investments $284,083       $265,315       $278,875    
                 


Composition of Portfolio Loans                        
  December 31, 2019   September 30, 2019   June 30, 2019   March 31, 2019   December 31, 2018
  Balance % of
total
  Balance % of
total
  Balance % of
total
  Balance % of
total
  Balance % of
total
Commercial loans $412,690   39 %   $398,231   39 %   $387,257   38 %   $344,164   35 %   $342,420   35 %
CRE owner occupied loans   138,891   13 %     127,045   12 %     126,991   12 %     130,141   13 %     126,414   13 %
CRE nonowner occupied loans   355,466   34 %     377,311   36 %     367,703   36 %     360,071   37 %     367,759   37 %
Construction loans   100,626   10 %     98,716   9 %     97,837   10 %     109,404   11 %     109,367   11 %
Consumer loans   40,783   4 %     39,868   4 %     40,234   4 %     42,861   4 %     42,873   4 %
  Subtotal   1,048,456         1,041,171         1,020,022         986,641         988,833    
Unearned loan fees, net   (5,085 )       (4,624 )       (4,318 )       (4,300 )       (4,487 )  
  Total portfolio loans $1,043,371       $1,036,547       $1,015,704       $982,341       $984,346    
                             


...
Composition of Deposits                        
  December 31, 2019   September 30, 2019   June 30, 2019   March 31, 2019   December 31, 2018
  Balance % of
total
  Balance % of
total
  Balance % of
total
  Balance % of
total
  Balance % of
total