Northrim BanCorp Earns $4.4 Million, or $0.63 Per Diluted Share, in Q214

“The acquisition of Alaska Pacific Bancshares provided contributions to revenues and earnings this quarter, particularly through net interest margin expansion and the growth in our loan portfolio,” said Marc Langland, Chairman, President and CEO of Northrim Bancorp. “We now have 15 branch locations serving 75% of Alaska’s population throughout Anchorage, the Matanuska Valley, Juneau, Fairbanks, Sitka and Ketchikan. The integration of this franchise into ours is going well, and we are pleased with the strong bonds we are forging with customers and employees in these new markets.”

“All sectors of the Alaska economy remain stable with only moderate reductions in the government sector,” said Joseph Beedle, Northrim Bank’s President. “Fisheries, tourism, transportation, health services, construction, and the ever important resource extraction industries continue to produce moderate growth. However, the recent upswing in the oil industry is considered sustainable only if voters do not repeal the favorable 2013 oil tax legislation, which is scheduled for a statewide referendum vote on August 19, 2014. As relayed in April, we believe the 2013 oil tax legislation is vitally important to the economy of Alaska.”

Total revenues, which include net interest income plus other operating income, were $17.5 million in the second quarter of 2014, up 25.4% from $14.0 million in the first quarter of 2014 and up 19.7% from $14.6 million in the second quarter of 2013. Total revenues increased 11.1% in the first six months of 2014 to $31.5 million from $28.3 million in the first six months of 2013, reflecting the addition of the Alaska Pacific franchise.

“In the second quarter of 2014, net interest income increased 19% to $13.4 million, compared to $11.2 million in the immediate prior quarter and was up 23% from $10.9 million in the second quarter of 2013. The addition of $138.4 million in loans from the Alaska Pacific acquisition, along with organic loan growth, generated an increase in net interest income this quarter,” said Joseph Beedle, Northrim Bank’s President.

“Our net interest margin improved in both the second quarter and first half of 2014 from the year ago periods,” said Joe Schierhorn, Chief Operating Officer.”With the acquisition of Alaska Pacific, our ratio of loans to deposits increased, growing to 82.0% at the end of the second quarter of 2014 from 76.5% in the preceding quarter and 74.9% a year ago.We are also continuing to deploy more of our lower yielding assets into more profitable loans, which is supporting our margin.” In the second quarter of 2014, Northrim’s net interest margin (NIM) was 4.43%, up from 4.28% in the preceding quarter and 4.34% in the second quarter a year ago. For the first six months of 2014, NIM was 4.36% compared to 4.33% for the first six months of 2013.

“Due to the continuing strength in asset quality and large recoveries on previously charged off loans, we recorded a negative provision for loan losses in the second quarter of 2014,” said Latosha Frye, Chief Financial Officer.The negative loan loss provision was $1.1 million in the second quarter of 2014 of this year compared to no provision inthe second quarter of 2013.For the first six months of 2014, the negative loan loss provision totaled $1.1million, compared to a provision of $150,000 in the first six months of 2013.

Northrim has interests in a number of complementary businesses that provide financial services to businesses and individuals, including purchased receivables financing, health insurance plans, mortgage origination and wealth management. In the second quarter of 2014, total other operating income increased 50% to $4.1 million from $2.7 million in the preceding quarter and grew 11% from $3.7 million in the second quarter of 2013. “Contributions from the acquisition of Alaska Pacific and gains on sale of securities contributed to growth in other operating income in the second quarter of 2014 as compared to the second quarter of 2013.These contributions coupled with a seasonal increase in production from our residential mortgage affiliate represent the primary reasons for the increase in other operating income as compared to the first quarter of 2014,” Frye continued.

In the first six months of 2014, other operating income was $6.8 million and equal to the year ago period levels.”For the first half of 2014, growth in employee benefit plan income generated from Enroll Alaska, a division of our affiliate, Northrim Benefits Group, LLC, and higher revenue in several categories as a result of the Alaska Pacific acquisition helped offset lower income from purchased receivables and a reduction in earnings from our mortgage affiliate as compared to the first six months of 2013,” said Frye.

Employee benefit plan income contributed $878,000 to second quarter 2014 revenues, compared to $876,000 in the preceding quarter and $632,000 in the second quarter of 2013, primarily due to revenue contributions from Enroll Alaska.For the first six months of 2014, employee benefit plan income increased 46% to $1.8 million from $1.2 million in the first six months of 2013.Approximately 60% of the increase in employee benefit plan income in the first half of 2014 resulted from an increase in revenues from Enroll Alaska. Northrim expects that Enroll Alaska revenues will increase only moderately through the end of 2014. The next open enrollment period for the Affordable Care Act commences on November 15, 2014.

In the second quarter of this year, service charges were $607,000, up from $476,000 in the preceding quarter and $539,000 in the second quarter a year ago.In the second quarter of 2014, electronic banking income contributed $604,000 to other operating income, an increase of 21% from the first quarter of 2014 and 13% from the second quarter of 2013.For the first six months of 2014, electronic banking income grew 6% to $1.1 million and service charges increased 2% to $1.1 million from the year ago period.

Purchased receivable income was $484,000 in the second quarter of 2014 as compared to $481,000 in the first quarter of 2014, and $768,000 in the second quarter a year ago, reflecting the 35% decline in balances from a year ago due to customers paying down their balances in the first quarter of 2014. For the first six months of 2014, purchased receivable income declined 34% to $965,000 from $1.5 million in the first six months of 2013. “While average purchased receivable balances have been lower in 2014, the balances have been growing since December 31, 2013, and we recognize it will take some time to rebuild this portfolio. In the meantime, we are pleased with the contribution this funding program provides to our income stream,” said Beedle.

Earnings from Residential Mortgage contributed $355,000 to second quarter 2014 revenues compared to a loss of $131,000 in the first quarter of 2014 and income of $538,000 in the second quarter of 2013.Residential Mortgage generated earnings of $224,000 in the first six months of 2014, compared to $780,000 in the first six months of 2013. “Demand for home mortgages is usually seasonal in Alaska, with volumes in the first quarter at the low point for the year.We are starting to see demand return to more normalized levels, but it is still well below the levels that we saw in the last few years as a result of higher refinance activity in the prior years,” said Schierhorn.

Gain on sale of securities contributed $349,000 to revenues in the second quarter of 2014, compared to $97,000 in the first quarter of 2014 and $100,000 in the second quarter a year ago. For the first six months of 2014, gain on sale of securities generated $446,000 in revenues compared to $318,000 in the first six months of 2013.

Other income totaled $829,000 for the second quarter of 2014, compared to $435,000 in the first quarter of 2014 and $589,000 in the second quarter of 2013.For the first six months of 2014, other income was $1.3 million compared to $968,000 in the first six months a year ago.The increase in other income in the second quarter of 2014 was primarily related to the acquisition of Alaska Pacific which added $132,000 in various servicing fee income and $158,000 in a one-time bargain purchase gain.

Overhead costs increased 16% to $12.0 million in the second quarter of 2014, as compared to $10.3 million in the first quarter of 2014, reflecting the acquisition of the Alaska Pacific operations and one-time merger costs.In the second quarter a year ago overhead costs were $9.4 million. For the first six months of 2014, other operating expenses increased 17% to $22.3 million from $19.1 million in the first six months of 2013. Second quarter 2014 compensation costs grew 16% to $6.8 million from $5.9 million in the first quarter of 2014, and increased 22% from the second quarter a year ago. “As we complete the integration of the Alaska Pacific operations into our systems in the third quarter of this year, we anticipate that on-going overhead costs related to the merger and the operation of our new branches in Southeast Alaska will decline. The majority of the one-time expenses associated with the merger are behind us now,” said Beedle.

Northrim’s assets increased 16% to $1.36 billion at June 30, 2014, compared to $1.16 billion a year ago and 13% from $1.20 billion at March 31, 2014, reflecting the $167.2 million in acquired assets from Alaska Pacific.

Investment securities totaled $213.6 million at June 30, 2014, compared to $236.2 million at March 31, 2014 and $227.5 million a year ago.At June 30, 2014, the investment portfolio was comprised of 62% U.S. Agency securities (primarily Federal Home Loan Bank and Federal Farm Credit Bank debt), 20% corporate securities, 8% Alaskan municipality, utility, or state agency securities, 7% U.S. treasury securities, 2% stock in the Federal Home Loan Bank of Seattle, and 1% in mortgage backed securities. At June 30, 2014, the average estimated duration of the investment portfolio was 18 months. The investment portfolio generated an average net tax equivalent yield of 1.39% for the second quarter of 2014.

Portfolio loans grew 21% to $926.9 million at June 30, 2014, as compared to $763.1 million at March 31, 2014 and grew 28%, as compared to $718.2 million at June 30, 2013. On April 1, 2014, Northrim acquired $138.4 million in loans from Alaska Pacific. The following table provides details on the acquired loan portfolio after fair value adjustments as of June 30, 2014:

“We generated organic loan growth during the second quarter of 2014 with additions in commercial loans and construction lending,” Schierhorn noted.Commercial loans increased 15% in the quarter ended June 30, 2014, and 13% year-over-year to $339.0 million and accounted for 37% of portfolio loans at June 30, 2014. Commercial real estate loans totaled $435.2 million and accounted for 47% of portfolio loans at June 30, 2014.Construction and land development loans increased 41% in the quarter and 71% year-over-year to $90.1 million and accounted for 10% of portfolio loans at June 30, 2014. Consumer loans almost doubled to $66.9 million and accounted for 7% of portfolio loans at quarter end.

Loans held for sale were $14.2 million at the end of the second quarter of 2014, compared to $14.3 million at March 31, 2014 and $15.8 million a year ago.The average balance for the quarter for loans held for sale increased to $10.8 million at June 30, 2014, compared to $6.6 million at March 31, 2014 and fell from $16.9 million a year ago, primarily reflecting the volatility in the mortgage refinance market. Northrim purchases these loans from its mortgage affiliate and sells them into the secondary market on pre-arranged commitments.

Northrim’s deposit base continues to be 100% Alaska based, and is primarily made up of low-cost transaction accounts. Balances in transaction accounts at June 30, 2014, represented 90.2% of total deposits compared to 90.5% a year ago. At June 30, 2014, total deposits were $1.13 billion, up 18% from $958.9 million a year ago and 13% compared to $997.8 million at March 31, 2014. On April 1, 2014, Northrim acquired $151.4 million in deposits from Alaska Pacific and recorded a $623,000 core deposit intangible as part of the purchase. The following table provides details on the deposits after fair value adjustments acquired from Alaska Pacific as of June 30, 2014:

At June 30, 2014, noninterest-bearing demand deposits accounted for 34% of total deposits, interest-bearing demand accounts were 15%, savings deposits were 11%, money market balances accounted for 20%, the Alaska CD accounted for 10%, and time certificates were 10% of total deposits.

Shareholders’ equity increased 8% to $156.9 million, or $22.97 per share, at June 30, 2014, compared to $140.1 million, or $21.50 per share, a year ago. At March 31, 2014, shareholders’ equity was $145.9 million, or $22.32 per share. Tangible book value per share was $21.73 at June 30, 2014, compared to $20.26 per share a year ago and $21.11 per share at March 31, 2014. Northrim remains well-capitalized with Tier 1 Capital to Risk Adjusted Assets of 14.26% at June 30, 2014.

Nonaccrual loans increased to $3.1 million and non-performing assets (“NPAs”) increased to $8.2 million primarily as a result of the acquisition of the Alaska Pacific loan portfolio. In accordance with generally accepted accounting principles, the acquired loan portfolio was recorded at its estimated fair value as of April 1, 2014 and the total fair value adjustment was a net discount of $3.0 million. The ratio of NPAs to total assets was 0.61% at June 30, 2014, an increase from 0.37% three months earlier and down from 0.70% a year ago.

Nonperforming loans (“NPLs”) were 0.33% of portfolio loans compared to 0.13% in the preceding quarter and 0.53% a year ago. NPLs were $3.1 million at June 30, 2014, as compared to $1.0 million at March 31, 2014 and $3.8 million a year ago. Other real estate owned (OREO) was $4.9 million at the end of the second quarter of 2014, compared to $3.4 million in the preceding quarter and $4.3 million at the end of the second quarter of 2013.Nonperforming purchased receivables were $243,000 at June 30, 2014 and zero at March 31, 2014 and June 30, 2013.As of June 30, 2014 12% of NPAs, or $968,000 were guaranteed by agencies of the United States government or the State of Alaska.

Loans measured for impairment totaled $12.0 million at June 30, 2014, compared to $6.0 million at March 31, 2014, and $11.2 million in the second quarter a year ago.

There were $1.5 million in restructured loans included in nonaccrual loans at the end of the second quarter of 2014, as compared to none at March 31, 2014, and $2.8 million at June 30, 2013. At June 30, 2014, Northrim held $7.2 million in performing restructured loans that were not included in nonaccrual loans, as compared to $4.8 million at March 31, 2014, and $6.2 million at June 30, 2013. “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,” said Frye. “We present restructured loans that are performing separately from those that are in nonaccrual to provide more information on this category of loans and to differentiate between accruing performing and nonperforming restructured loans.”

The coverage ratio of the allowance for loan losses to nonperforming loans was 521% at June 30, 2014, compared to 1,605% three months earlier, and 431% a year ago.The allowance for loan losses was stable at $16.0 million at June 30, 2014, compared to $16.0 million at the end of the preceding quarter and $16.5 million a year ago.

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 75% of Alaska’s population; and an asset based lending division in Washington. The Bank differentiates itself with its detailed knowledge of Alaska’s economy and its “Customer First Service” philosophy. Affiliated companies include Elliott Cove Insurance Agency, LLC; Elliott Cove Capital Management, LLC; Residential Mortgage, LLC; Northrim Benefits Group, LLC; and Pacific Wealth Advisors, LLC.

This release may contain “forward-looking statements” as that term is defined for purposes of Section 21D of the Securities and Exchange Act.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 may 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; our abilityto implement our marketing and growth strategies; our expected cost savings, synergies, and other financial benefits from the recently completed merger of Northrim with Alaska Pacific might not be realized within the expected time frames and costs or difficulties relating to integration matters might be greater than expected; 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, 2013, and from time to time are disclosed in our other filings with the SEC.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.