e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
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þ |
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Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended September 30, 2010
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o |
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Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission File Number 000-33501
NORTHRIM BANCORP, INC.
(Exact name of registrant as specified in its charter)
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Alaska
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92-0175752 |
(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification Number) |
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3111 C Street |
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Anchorage, Alaska
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99503 |
(Address of principal executive offices)
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(Zip Code) |
(907) 562-0062
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a small reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act:
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
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(do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
The number of shares of the issuers Common Stock outstanding at November 5, 2010 was
6,409,779.
PART I. FINANCIAL INFORMATION
These consolidated financial statements should be read in conjunction with the financial
statements, accompanying notes and other relevant information included in the Companys Annual
Report on Form 10-K for the year ended December 31, 2009.
ITEM 1. FINANCIAL STATEMENTS
- 3 -
CONSOLIDATED FINANCIAL STATEMENTS
NORTHRIM BANCORP, INC.
Consolidated Balance Sheets
September 30, 2010, December 31, 2009 and September 30, 2009
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September 30, |
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December 31, |
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September 30, |
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2010 |
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2009 |
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2009 |
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(Unaudited) |
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(Unaudited) |
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(In Thousands, Except Share Data) |
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ASSETS |
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Cash and due from banks |
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$ |
22,367 |
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$ |
19,395 |
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$ |
24,979 |
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Overnight investments |
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60,939 |
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47,326 |
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51,120 |
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Investment securities available for sale |
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206,342 |
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178,159 |
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142,373 |
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Investment securities held to maturity |
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6,692 |
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7,285 |
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9,896 |
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Investment in Federal Home Loan Bank stock |
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2,003 |
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2,003 |
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2,003 |
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Total investment securities |
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215,037 |
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187,447 |
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154,272 |
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Loans held for sale |
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20,082 |
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Loans |
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635,475 |
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655,039 |
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674,191 |
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Allowance for loan losses |
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(14,711 |
) |
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(13,108 |
) |
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(13,452 |
) |
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Net loans |
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640,846 |
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641,931 |
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660,739 |
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Purchased receivables, net |
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8,654 |
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7,261 |
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8,202 |
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Accrued interest receivable |
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3,234 |
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3,986 |
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3,472 |
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Premises and equipment, net |
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28,769 |
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28,523 |
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28,889 |
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Goodwill and intangible assets |
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8,767 |
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8,996 |
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9,072 |
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Other real estate owned |
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11,019 |
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17,355 |
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10,118 |
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Other assets |
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38,302 |
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40,809 |
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34,829 |
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Total assets |
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$ |
1,037,934 |
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$ |
1,003,029 |
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$ |
985,692 |
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LIABILITIES |
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Deposits: |
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Demand |
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$ |
281,972 |
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$ |
276,532 |
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$ |
267,291 |
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Interest-bearing demand |
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126,056 |
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134,899 |
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115,337 |
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Savings |
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77,971 |
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66,647 |
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62,761 |
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Alaska CDs |
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111,526 |
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104,840 |
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108,057 |
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Money market |
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132,349 |
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125,339 |
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123,239 |
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Certificates of deposit less than $100,000 |
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56,984 |
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64,652 |
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62,603 |
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Certificates of deposit greater than $100,000 |
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91,870 |
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80,199 |
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97,820 |
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Total deposits |
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878,728 |
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853,108 |
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837,108 |
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Securities sold under repurchase agreements |
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9,996 |
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6,733 |
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5,090 |
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Other borrowings |
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5,506 |
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5,587 |
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5,649 |
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Junior subordinated debentures |
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18,558 |
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18,558 |
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18,558 |
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Other liabilities |
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8,290 |
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8,023 |
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9,356 |
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Total liabilities |
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921,078 |
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892,009 |
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875,761 |
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SHAREHOLDERS EQUITY |
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Preferred Stock, $1 par value, 2,500,000 shares authorized,
none issued or outstanding |
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Common stock, $1 par value, 10,000,000 shares authorized,
6,409,799 6,371,455, and 6,359,650 shares issued and
outstanding at September 30, 2010, December 31, 2009,
and September 30, 2009, respectively |
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6,410 |
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6,371 |
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6,360 |
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Additional paid-in capital |
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52,660 |
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52,139 |
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51,994 |
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Retained earnings |
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56,268 |
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51,121 |
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49,819 |
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Accumulated other comprehensive income |
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1,476 |
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1,341 |
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1,727 |
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Total Northrim BanCorp shareholders equity |
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116,814 |
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110,972 |
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109,900 |
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Noncontrolling interest |
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42 |
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48 |
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31 |
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Total shareholders equity |
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116,856 |
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111,020 |
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109,931 |
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Total liabilities and shareholders equity |
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$ |
1,037,934 |
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$ |
1,003,029 |
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$ |
985,692 |
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See notes to the consolidated financial statements
- 4 -
NORTHRIM BANCORP, INC.
Consolidated Statements of Income
For the Three and Nine Months Ended September 30, 2010 and 2009
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2010 |
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2009 |
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2010 |
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2009 |
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(Unaudited) |
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(Unaudited) |
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(In Thousands, Except Per Share Data) |
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Interest Income |
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Interest and fees on loans |
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$ |
11,249 |
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$ |
12,218 |
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$ |
33,883 |
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$ |
36,672 |
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Interest on investment securities: |
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Securities available for sale |
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895 |
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1,057 |
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3,394 |
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3,057 |
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Securities held to maturity |
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68 |
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98 |
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213 |
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295 |
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Interest on overnight investments |
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54 |
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31 |
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119 |
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64 |
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Interest on domestic certificate of deposit |
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58 |
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Total Interest Income |
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12,266 |
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13,404 |
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37,609 |
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40,146 |
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Interest Expense |
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Interest expense on deposits,
borrowings and junior subordianted debentures |
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1,370 |
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1,662 |
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4,306 |
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5,562 |
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Net Interest Income |
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10,896 |
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11,742 |
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33,303 |
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34,584 |
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Provision for loan losses |
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417 |
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1,374 |
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3,167 |
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4,866 |
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Net Interest Income After Provision for Loan Losses |
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10,479 |
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10,368 |
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|
30,136 |
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29,718 |
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Other Operating Income |
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OREO gain on sale and rental income |
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1,277 |
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|
206 |
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1,930 |
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|
446 |
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Service charges on deposit accounts |
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|
659 |
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|
791 |
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|
2,121 |
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|
2,269 |
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Equity in earnings from RML |
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|
570 |
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|
385 |
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|
679 |
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|
1,997 |
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Purchased receivable income |
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|
485 |
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|
474 |
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1,394 |
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|
1,706 |
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Employee benefit plan income |
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|
466 |
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|
469 |
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|
1,417 |
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|
1,282 |
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Electronic banking income |
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|
449 |
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|
463 |
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|
1,284 |
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|
1,124 |
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Gain on sale of securities |
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58 |
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24 |
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|
471 |
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|
220 |
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Equity in earnings (loss) from Elliott Cove |
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(4 |
) |
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(13 |
) |
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(1 |
) |
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(106 |
) |
Other income |
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517 |
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|
566 |
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|
1,650 |
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|
1,676 |
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Total Other Operating Income |
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4,477 |
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|
3,365 |
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|
|
10,945 |
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|
10,614 |
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Other Operating Expense |
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Salaries and other personnel expense |
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5,394 |
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5,730 |
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16,416 |
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|
16,889 |
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Occupancy |
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|
1,016 |
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|
977 |
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|
2,832 |
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|
2,789 |
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Insurance expense |
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|
502 |
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|
502 |
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|
1,482 |
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|
2,266 |
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Marketing expense |
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|
445 |
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|
317 |
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|
1,323 |
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|
951 |
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Professional and outside services |
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|
338 |
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|
374 |
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|
903 |
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|
1,061 |
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OREO expense net, including impairment |
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|
308 |
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|
309 |
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|
|
1,023 |
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|
|
1,170 |
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Equipment expense |
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|
304 |
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|
286 |
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|
821 |
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|
887 |
|
Intangible asset amortization expense |
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|
76 |
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|
82 |
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|
229 |
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|
247 |
|
Prepayment penalty on long term debt |
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|
718 |
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|
718 |
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Purchased receivable losses (gains) |
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(3 |
) |
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|
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|
404 |
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|
(16 |
) |
Other operating expense |
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|
1,607 |
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|
|
1,577 |
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|
|
4,889 |
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|
|
4,979 |
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Total Other Operating Expense |
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|
9,987 |
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|
|
10,872 |
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|
|
30,322 |
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|
|
31,941 |
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Income Before Provision for Income Taxes |
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|
4,969 |
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|
|
2,861 |
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|
|
10,759 |
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|
|
8,391 |
|
Provision for income taxes |
|
|
1,629 |
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|
|
810 |
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|
|
3,243 |
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|
|
2,318 |
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|
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|
|
|
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|
|
|
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|
|
Net Income |
|
|
3,340 |
|
|
|
2,051 |
|
|
|
7,516 |
|
|
|
6,073 |
|
Less: Net income attributable to the noncontrolling interest |
|
|
162 |
|
|
|
102 |
|
|
|
298 |
|
|
|
292 |
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|
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|
|
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|
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Net Income Attributable to Northrim BanCorp |
|
$ |
3,178 |
|
|
$ |
1,949 |
|
|
$ |
7,218 |
|
|
$ |
5,781 |
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Earnings Per Share, Basic |
|
$ |
0.50 |
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|
$ |
0.31 |
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|
$ |
1.13 |
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|
$ |
0.91 |
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Earnings Per Share, Diluted |
|
$ |
0.49 |
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|
$ |
0.30 |
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|
$ |
1.11 |
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|
$ |
0.90 |
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|
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|
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Weighted Average Shares Outstanding, Basic |
|
|
6,401,069 |
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|
|
6,348,519 |
|
|
|
6,391,252 |
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|
|
6,388,757 |
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Weighted Average Shares Outstanding, Diluted |
|
|
6,479,813 |
|
|
|
6,422,262 |
|
|
|
6,473,915 |
|
|
|
6,406,117 |
|
|
|
|
|
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|
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|
|
|
|
|
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|
|
See notes to the consolidated financial statements
- 5 -
NORTHRIM BANCORP, INC.
Consolidated Statements of Changes in
Shareholders Equity and Comprehensive Income
For the Nine Months Ended September 30, 2010 and 2009
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Accumulated |
|
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|
Common Stock |
|
Additional |
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Other |
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Number |
|
Par |
|
Paid-in |
|
Retained |
|
Comprehensive |
|
Noncontrolling |
|
|
|
|
of Shares |
|
Value |
|
Capital |
|
Earnings |
|
Income |
|
Interest |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
|
|
|
|
|
|
|
|
Nine months ending September 30, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2009 |
|
|
6,331 |
|
|
$ |
6,331 |
|
|
$ |
51,458 |
|
|
$ |
45,958 |
|
|
$ |
901 |
|
|
$ |
36 |
|
|
$ |
104,684 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividend declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,920 |
) |
|
|
|
|
|
|
|
|
|
|
(1,920 |
) |
Stock option expense |
|
|
|
|
|
|
|
|
|
|
445 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
445 |
|
Exercise of stock options |
|
|
29 |
|
|
|
29 |
|
|
|
33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62 |
|
Excess tax benefits from share-based payment arrangements |
|
|
|
|
|
|
|
|
|
|
58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58 |
|
Distributions to noncontrolling interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(297 |
) |
|
|
(297 |
) |
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized holding gain (loss)
on available for sale investment securities,
net of related income tax effect |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
826 |
|
|
|
|
|
|
|
826 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to the noncontrolling interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
292 |
|
|
|
292 |
|
Net income attributable to Northrim BanCorp |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,781 |
|
|
|
|
|
|
|
|
|
|
|
5,781 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,899 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2009 |
|
|
6,360 |
|
|
$ |
6,360 |
|
|
$ |
51,994 |
|
|
$ |
49,819 |
|
|
$ |
1,727 |
|
|
$ |
31 |
|
|
$ |
109,931 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ending September 30, 2010: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2010 |
|
|
6,371 |
|
|
$ |
6,371 |
|
|
$ |
52,139 |
|
|
$ |
51,121 |
|
|
$ |
1,341 |
|
|
$ |
48 |
|
|
$ |
111,020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividend declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,071 |
) |
|
|
|
|
|
|
|
|
|
|
(2,071 |
) |
Stock option expense |
|
|
|
|
|
|
|
|
|
|
387 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
387 |
|
Exercise of stock options |
|
|
39 |
|
|
|
39 |
|
|
|
(43 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4 |
) |
Excess tax benefits from share-based payment arrangements |
|
|
|
|
|
|
|
|
|
|
177 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
177 |
|
Distributions to noncontrolling interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(304 |
) |
|
|
(304 |
) |
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized holding gain (loss)
on available for sale investment securities,
net of related income tax effect |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
135 |
|
|
|
|
|
|
|
135 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to the noncontrolling interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
298 |
|
|
|
298 |
|
Net income attributable to Northrim BanCorp |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,218 |
|
|
|
|
|
|
|
|
|
|
|
7,218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,651 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2010 |
|
|
6,410 |
|
|
$ |
6,410 |
|
|
$ |
52,660 |
|
|
$ |
56,268 |
|
|
$ |
1,476 |
|
|
$ |
42 |
|
|
$ |
116,856 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to the consolidated financial statements
- 6 -
NORTHRIM BANCORP, INC.
Consolidated Statement of Cash Flows
For the Nine Months Ended September 30, 2010 and 2009
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(Unaudited) |
|
|
|
(In Thousands) |
|
Operating Activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
7,516 |
|
|
$ |
6,073 |
|
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: |
|
|
|
|
|
|
|
|
Security (gains), net |
|
|
(471 |
) |
|
|
(220 |
) |
Depreciation and amortization of premises and equipment |
|
|
1,165 |
|
|
|
1,234 |
|
Amortization of software |
|
|
130 |
|
|
|
121 |
|
Intangible asset amortization |
|
|
229 |
|
|
|
247 |
|
Amortization of investment security premium, net of discount accretion |
|
|
306 |
|
|
|
214 |
|
Deferred tax liability (benefit) |
|
|
2,054 |
|
|
|
(1,221 |
) |
Stock-based compensation |
|
|
387 |
|
|
|
445 |
|
Excess tax benefits from share-based payment arrangements |
|
|
(177 |
) |
|
|
(58 |
) |
Deferral of loan fees and costs, net |
|
|
153 |
|
|
|
(6 |
) |
Provision for loan losses |
|
|
3,167 |
|
|
|
4,866 |
|
Purchased receivable loss (recovery) |
|
|
404 |
|
|
|
(16 |
) |
Purchases of loans held for sale |
|
|
(43,593 |
) |
|
|
(75,096 |
) |
Proceeds from the sale of loans held for sale |
|
|
23,530 |
|
|
|
75,160 |
|
Gain on sale of loans held for sale |
|
|
(19 |
) |
|
|
(64 |
) |
Gain on sale of other real estate owned |
|
|
(1,443 |
) |
|
|
(424 |
) |
Impairment on other real estate owned |
|
|
250 |
|
|
|
516 |
|
Earnings in excess of proceeds from RML |
|
|
(848 |
) |
|
|
522 |
|
Equity in loss from Elliott Cove |
|
|
1 |
|
|
|
106 |
|
Decrease in accrued interest receivable |
|
|
752 |
|
|
|
1,340 |
|
(Increase) decrease in other assets |
|
|
1,260 |
|
|
|
(2,091 |
) |
Decrease (increase) of deferred gain on sales of other real estate owned |
|
|
328 |
|
|
|
(90 |
) |
Decrease (increase) of other liabilities |
|
|
418 |
|
|
|
(372 |
) |
|
|
|
|
|
|
|
|
|
Net Cash (Used) Provided by Operating Activities |
|
|
(4,501 |
) |
|
|
11,186 |
|
|
|
|
|
|
|
|
|
|
Investing Activities: |
|
|
|
|
|
|
|
|
Investment in securities: |
|
|
|
|
|
|
|
|
Purchases of investment securities-available-for-sale |
|
|
(169,199 |
) |
|
|
(87,722 |
) |
Purchases of investment securities-held-to-maturity |
|
|
(517 |
) |
|
|
(1,217 |
) |
Proceeds from sales/maturities of securities-available-for-sale |
|
|
141,416 |
|
|
|
87,769 |
|
Proceeds from calls/maturities of securities-held-to-maturity |
|
|
1,105 |
|
|
|
750 |
|
Proceeds from maturities of domestic certificates of deposit |
|
|
|
|
|
|
14,500 |
|
Purchases of domestic certificates of deposit |
|
|
|
|
|
|
(5,000 |
) |
Investment in (repayment from) purchased receivables |
|
|
(1,797 |
) |
|
|
10,889 |
|
Loan paydowns, net of new advances |
|
|
15,857 |
|
|
|
29,269 |
|
Proceeds from sale of other real estate owned |
|
|
9,225 |
|
|
|
7,466 |
|
Investment in other real estate owned |
|
|
(34 |
) |
|
|
(1,470 |
) |
Loan to Elliott Cove, net of repayments |
|
|
60 |
|
|
|
(106 |
) |
Purchases of premises and equipment |
|
|
(1,411 |
) |
|
|
(390 |
) |
Purchases of software |
|
|
(145 |
) |
|
|
(60 |
) |
|
|
|
|
|
|
|
|
|
Net Cash (Used) Provided by Investing Activities |
|
|
(5,540 |
) |
|
|
54,678 |
|
|
|
|
|
|
|
|
|
|
Financing Activities: |
|
|
|
|
|
|
|
|
(Decrease) increase in deposits |
|
|
25,620 |
|
|
|
(6,144 |
) |
Increase in securities sold under repurchase agreements |
|
|
3,263 |
|
|
|
3,460 |
|
Decrease in borrowings |
|
|
(81 |
) |
|
|
(22,827 |
) |
Distributions to noncontrolling interest |
|
|
(304 |
) |
|
|
(297 |
) |
Proceeds from issuance of common stock |
|
|
(4 |
) |
|
|
62 |
|
Excess tax benefits from share-based payment arrangements |
|
|
177 |
|
|
|
58 |
|
Cash dividends paid |
|
|
(2,045 |
) |
|
|
(1,907 |
) |
|
|
|
|
|
|
|
|
|
Net Cash (Used) Provided by Financing Activities |
|
|
26,626 |
|
|
|
(27,595 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Increase in Cash and Cash Equivalents |
|
|
16,585 |
|
|
|
38,269 |
|
Cash and Cash Equivalents at Beginning of Period |
|
|
66,721 |
|
|
|
37,830 |
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Period |
|
$ |
83,306 |
|
|
$ |
76,099 |
|
|
|
|
|
|
|
|
|
|
Supplemental Information: |
|
|
|
|
|
|
|
|
Income taxes paid |
|
$ |
1,263 |
|
|
$ |
4,720 |
|
Interest paid |
|
$ |
4,310 |
|
|
$ |
6,017 |
|
Transfer of loans to other real estate owned |
|
$ |
1,990 |
|
|
$ |
3,518 |
|
Loans made to facilitate sales of other real estate owned |
|
$ |
5,967 |
|
|
$ |
2,404 |
|
Cash dividends declared but not paid |
|
$ |
26 |
|
|
$ |
18 |
|
See notes to the consolidated financial statements
- 7 -
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2010 and 2009
1. Basis of Presentation
The accompanying unaudited financial statements have been prepared by Northrim BanCorp, Inc.
(the Company) in accordance with accounting principles generally accepted in the United States of
America (GAAP) and with instructions to Form 10-Q under the Securities Exchange Act of 1934, as
amended. Accordingly, they do not include all of the information and footnotes required by GAAP for
complete financial statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been included. Certain
reclassifications have been made to prior year amounts to maintain consistency with the current
year with no impact on net income or total shareholders equity. The Company determined that it
operates as a single operating segment. Operating results for the interim period ended September
30, 2010, are not necessarily indicative of the results anticipated for the year ending December
31, 2010. These financial statements should be read in conjunction with the Companys Annual
Report on Form 10-K for the year ended December 31, 2009.
2. Significant Accounting Policies and Recent Accounting Pronouncements
The Companys significant accounting policies are discussed in Note 1 to the audited
consolidated financial statements included in the Companys Annual Report on Form 10-K for the year
ended December 31, 2009.
In July 2010, the FASB issued ASU 2010-20, an update to ASC 310-30, Receivables Loans and
Debt Securities Acquired with Deteriorated Credit Quality. This update is intended to provide
financial statement users with greater transparency about an entitys allowance for credit losses
and the credit quality of its financing receivables. The update requires expanded disclosures that
will facilitate financial statement users evaluation of the nature of credit risk inherent in the
entitys portfolio of financing receivables, how that risk is analyzed and assessed in arriving at
the allowance for credit losses and the changes and reasons for those changes in the allowance for
credit losses. ASU 2010-20 is effective for the Companys financial statements for annual and
interim periods ending after December 15, 2010 and must be adopted prospectively. The Company does
not expect that adoption will impact its financial position, results of operations, and earnings
per share.
3. Investment Securities
The carrying values and approximate fair values of investment securities at September 30, 2010
and September 30, 2009, respectively, are presented below. The contractual terms of these
investments do not permit the issuer to settle the securities at a price less than the amortized
cost of the investment. There were eight securities with unrealized losses as of September 30,
2010 and no securities with unrealized losses as of September 30, 2009, respectively, that had been
in a loss position for less than twelve months. There were no securities with unrealized losses as
of September 30, 2010 and 2009 that had been in a loss position for more than twelve months.
Because the Company does not intend to sell, nor is it required to sell these investments until a
market price recovery or maturity, these investments are not considered other-than-temporarily
impaired.
- 8 -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
Gross |
|
|
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
|
|
|
Cost |
|
Gains |
|
Losses |
|
Fair Value |
|
|
(In Thousands) |
2010: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury & government sponsored entities |
|
$ |
151,614 |
|
|
$ |
805 |
|
|
$ |
7 |
|
|
$ |
152,411 |
|
Municpal Securities |
|
|
6,169 |
|
|
|
300 |
|
|
|
|
|
|
|
6,469 |
|
U.S. Agency Mortgage-backed Securities |
|
|
76 |
|
|
|
3 |
|
|
|
|
|
|
|
79 |
|
Corporate bonds |
|
|
45,980 |
|
|
|
1,440 |
|
|
|
37 |
|
|
|
47,383 |
|
|
Total securities available for sale |
|
$ |
203,839 |
|
|
$ |
2,548 |
|
|
$ |
44 |
|
|
$ |
206,342 |
|
|
Securities held to maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal securities |
|
$ |
6,692 |
|
|
$ |
304 |
|
|
$ |
|
|
|
$ |
6,996 |
|
|
Total securities held to maturity |
|
$ |
6,692 |
|
|
$ |
304 |
|
|
$ |
|
|
|
$ |
6,996 |
|
|
Federal Home Loan Bank stock |
|
$ |
2,003 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
2,003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury & government sponsored entities |
|
$ |
107,537 |
|
|
$ |
1,174 |
|
|
$ |
|
|
|
$ |
108,711 |
|
Municpal Securities |
|
|
5,041 |
|
|
|
193 |
|
|
|
|
|
|
|
5,234 |
|
U.S. Agency Mortgage-backed Securities |
|
|
91 |
|
|
|
|
|
|
|
|
|
|
|
91 |
|
Corporate bonds |
|
|
26,770 |
|
|
|
1,567 |
|
|
|
|
|
|
|
28,337 |
|
|
Total securities available for sale |
|
$ |
139,439 |
|
|
$ |
2,934 |
|
|
$ |
|
|
|
$ |
142,373 |
|
|
Securities Held to Maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal Securities |
|
$ |
9,896 |
|
|
$ |
311 |
|
|
$ |
|
|
|
$ |
10,207 |
|
|
Total securities held to maturity |
|
$ |
9,896 |
|
|
$ |
311 |
|
|
$ |
|
|
|
$ |
10,207 |
|
|
Federal Home Loan Bank Stock |
|
$ |
2,003 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
2,003 |
|
|
The amortized cost and fair values of debt securities at September 30, 2010, are
distributed by contractual maturity as shown below. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
The proceeds and resulting gains and losses, computed using specific identification, from
sales of investment securities for the nine months ending September 30, 2010 and September 30,
2009, respectively, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
September 30, |
|
Proceeds |
|
|
Gains |
|
|
Losses |
|
|
|
(In Thousands) |
|
|
2010: |
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale securities |
|
$ |
20,261 |
|
|
$ |
471 |
|
|
$ |
|
|
Held to maturity securities |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
2009: |
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale securities |
|
$ |
7,550 |
|
|
$ |
220 |
|
|
$ |
|
|
Held to maturity securities |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
A summary of interest income for the nine months ending September 30, 2010 and 2009 on
available for sale investment securities is as follows:
- 9 -
|
|
|
|
|
|
|
|
|
September 30, |
|
2010 |
|
2009 |
|
|
(In Thousands) |
US Treasury and government sponsored entities |
|
$ |
2,096 |
|
|
$ |
1,860 |
|
U.S. Agency Mortgage-backed Securities |
|
|
3 |
|
|
|
5 |
|
Other |
|
|
1,080 |
|
|
|
1,011 |
|
|
Total taxable interest income |
|
$ |
3,179 |
|
|
$ |
2,876 |
|
|
|
|
|
|
|
|
|
|
|
Municipal Securities |
|
|
215 |
|
|
|
181 |
|
|
Total tax-exempt interest income |
|
|
215 |
|
|
|
181 |
|
|
Total |
|
$ |
3,394 |
|
|
$ |
3,057 |
|
|
For the periods ending September 30, 2010, December 31, 2009 and September 30, 2009, we held
Federal Home Loan Bank of Seattle (FHLB) stock with a book value approximately equal to its
market value in the amounts of $2.0 million for each period. The Company evaluated its investment
in FHLB stock for other-than-temporary impairment as of September 30, 2010, consistent with its
accounting policy. Based on the Companys evaluation of the underlying investment, including the
long-term nature of the investment, the liquidity position of the FHLB of Seattle, the actions
being taken by the FHLB of Seattle to address its regulatory capital situation, and the Companys
intent and ability to hold the investment for a period of time sufficient to recover the par value,
the Company did not recognize an other-than-temporary impairment loss. Even though the Company did
not recognize an other-than-temporary impairment loss during the nine-month period ending September
30, 2010, continued deterioration in the FHLB of Seattles financial position may result in future
impairment losses.
The Company has never had any investment in the common or preferred stock of the Federal
National Mortgage Association or the Federal Home Loan Mortgage Corporation, which are commonly
known as Fannie Mae and Freddie Mac, respectively. Additionally, we held no securities of any
single issuer (other than government sponsored entities) that exceeded 10% of our shareholders
equity at September 30, 2010, December 31, 2009 or September 30, 2009.
4. Lending Activities
At September 30, 2010, 28% of the portfolio was scheduled to mature over the next 12 months,
and 28% was scheduled to mature between October 1, 2011, and September 30, 2015. The following
table sets forth the Companys loan portfolio composition by loan type for the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
December 31, 2009 |
|
September 30, 2009 |
|
|
Dollar |
|
Percent |
|
Dollar |
|
Percent |
|
Dollar |
|
Percent |
|
|
Amount |
|
of Total |
|
Amount |
|
of Total |
|
Amount |
|
of Total |
|
|
(In Thousands) |
Commercial |
|
$ |
237,667 |
|
|
|
37 |
% |
|
$ |
248,195 |
|
|
|
38 |
% |
|
$ |
249,171 |
|
|
|
37 |
% |
Construction/development |
|
|
50,979 |
|
|
|
8 |
% |
|
|
62,573 |
|
|
|
10 |
% |
|
|
82,160 |
|
|
|
12 |
% |
Commercial real estate |
|
|
305,808 |
|
|
|
48 |
% |
|
|
301,816 |
|
|
|
46 |
% |
|
|
298,828 |
|
|
|
44 |
% |
Home equity lines and other consumer |
|
|
43,882 |
|
|
|
7 |
% |
|
|
45,168 |
|
|
|
7 |
% |
|
|
46,047 |
|
|
|
7 |
% |
Loans in process |
|
|
90 |
|
|
|
0 |
% |
|
|
85 |
|
|
|
0 |
% |
|
|
691 |
|
|
|
0 |
% |
Unearned loan fees, net |
|
|
(2,951 |
) |
|
|
0 |
% |
|
|
(2,798 |
) |
|
|
0 |
% |
|
|
(2,706 |
) |
|
|
0 |
% |
|
Sub total |
|
|
635,475 |
|
|
|
100 |
% |
|
|
655,039 |
|
|
|
100 |
% |
|
|
674,191 |
|
|
|
100 |
% |
Loans held for sale |
|
|
20,082 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
$ |
655,557 |
|
|
|
|
|
|
$ |
655,039 |
|
|
|
|
|
|
$ |
674,191 |
|
|
|
|
|
|
- 10 -
Loans held for sale: The Company has purchased residential loans from our mortgage
affiliate, RML Holding Company (RML), from time to time since 1998. The Company then sells these
loans in the secondary market. During 2009, the Company renewed its agreement with RML in
anticipation of higher than normal refinance activity in the Anchorage market. The Company
purchased $43.6 million and sold $23.5 million in loans in the nine-month period ending September
30, 2010. The Company purchased and sold $75.1 million in loans in the nine-month period ending
September 30, 2009.
5. Allowance for Loan Losses, Nonperforming Assets and Loans Measured for Impairment
The Company recorded a provision for loan losses in the amount of $417,000 and $3.2 million
for the three and nine-month periods ending September 30, 2010 based upon its analysis of its loan
portfolio.
The following table details activity in the Allowance for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
|
(In Thousands) |
Balance at beginning of period |
|
$ |
14,427 |
|
|
$ |
13,187 |
|
|
$ |
13,108 |
|
|
$ |
12,900 |
|
Charge-offs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
519 |
|
|
|
987 |
|
|
|
2,153 |
|
|
|
2,135 |
|
Construction/development |
|
|
|
|
|
|
231 |
|
|
|
79 |
|
|
|
1,301 |
|
Commercial real estate |
|
|
222 |
|
|
|
159 |
|
|
|
342 |
|
|
|
1,217 |
|
Home equity lines and
other consumer |
|
|
52 |
|
|
|
145 |
|
|
|
305 |
|
|
|
286 |
|
|
Total charge-offs |
|
|
793 |
|
|
|
1,522 |
|
|
|
2,879 |
|
|
|
4,939 |
|
Recoveries: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
638 |
|
|
|
398 |
|
|
|
1,256 |
|
|
|
565 |
|
Construction/development |
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
|
|
Commercial real estate |
|
|
|
|
|
|
1 |
|
|
|
11 |
|
|
|
10 |
|
Home equity lines and
other consumer |
|
|
23 |
|
|
|
14 |
|
|
|
45 |
|
|
|
50 |
|
|
Total recoveries |
|
|
660 |
|
|
|
413 |
|
|
|
1,315 |
|
|
|
625 |
|
Net, (recoveries) charge-offs |
|
|
133 |
|
|
|
1,109 |
|
|
|
1,564 |
|
|
|
4,314 |
|
Provision for loan losses |
|
|
417 |
|
|
|
1,374 |
|
|
|
3,167 |
|
|
|
4,866 |
|
|
Balance at end of period |
|
$ |
14,711 |
|
|
$ |
13,452 |
|
|
$ |
14,711 |
|
|
$ |
13,452 |
|
|
At September 30, 2010, the Allowance was $14.7 million as compared to $13.5 million, at
September 30, 2009. The increase in the Allowance at September 30, 2010 as compared to September
30, 2009 was the result of a $3.2 million provision and $1.6 million in net charge-offs. The
Companys ratio of nonperforming loans compared to portfolio loans at September 30, 2010 was 2.19%
as compared to 4.28% as of September 30, 2009. The Companys ratio of Allowance compared to
portfolio loans at September 30, 2010 was 2.31% as compared to 2.00% as of September 30, 2009.
While the Companys ratio of nonperforming loans compared to portfolio loans has decreased as of
September 30, 2010, the Company believes that a higher reserve is appropriate to address the impact
of the current economic environment on our loan portfolio.
- 11 -
Nonperforming assets consist of nonaccrual loans, accruing loans of 90 days or more past due,
restructured loans, and other real estate owned (OREO). The following table sets forth
information with respect to nonperforming assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
December 31, 2009 |
|
September 30, 2009 |
|
|
(In Thousands) |
Nonaccrual loans |
|
$ |
13,688 |
|
|
$ |
12,738 |
|
|
$ |
22,432 |
|
Accruing loans past due 90 days or more |
|
|
200 |
|
|
|
1,000 |
|
|
|
2,625 |
|
Restructured loans |
|
|
|
|
|
|
3,754 |
|
|
|
3,800 |
|
|
Total nonperforming loans |
|
|
13,888 |
|
|
|
17,492 |
|
|
|
28,857 |
|
Other real estate owned |
|
|
11,019 |
|
|
|
17,355 |
|
|
|
10,118 |
|
Repossessed assets |
|
|
105 |
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets |
|
$ |
25,012 |
|
|
$ |
34,847 |
|
|
$ |
38,975 |
|
|
Allowance for loan losses |
|
$ |
14,711 |
|
|
$ |
13,108 |
|
|
$ |
13,452 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans to gross loans |
|
|
2.19 |
% |
|
|
2.67 |
% |
|
|
4.28 |
% |
Nonperforming assets to total assets |
|
|
2.41 |
% |
|
|
3.47 |
% |
|
|
3.95 |
% |
Allowance to gross loans |
|
|
2.31 |
% |
|
|
2.00 |
% |
|
|
2.00 |
% |
Allowance to nonperforming loans |
|
|
105.93 |
% |
|
|
74.94 |
% |
|
|
46.62 |
% |
|
6. Goodwill and Other Intangibles
The Company performs goodwill impairment testing in accordance with the policy described in
Note 1 of the Companys Annual Report on Form 10-K for the year ended December 31, 2009. There
was no indication of impairment as of September 30, 2010. The Company continues to monitor the
Companys goodwill for potential impairment on an ongoing basis. No assurance can be given that
there will not be an impairment charge to earnings during 2010 for goodwill impairment, if, for
example, our stock price declines and continues to trade at a significant discount to its book
value, although there are many factors that we analyze in determining the impairment of goodwill.
7. Variable Interest Entities
The Company has analyzed all of its affiliate relationships in accordance with GAAP and
determined that Elliott Cove is a variable interest entity (VIE). However, the Company does not
have a controlling interest in Elliott Cove. The Company owns a 48% equity interest in Elliott
Cove, an investment advisory services company, through its whollyowned subsidiary, Northrim
Investment Services Company (NISC). The Company determined that Elliott Cove is a VIE based on
the fact that the Company provides Elliott Cove with a line of credit for which the majority owner
of Elliott Cove provides additional subordinated financial support in the form of a 50% guarantee.
This line of credit has a committed amount of $750,000 and an outstanding balance of $617,000 as of
September 30, 2010. Furthermore, Elliott Cove does not have access to any other financial support
through other institutions, nor is it likely that they would be able to obtain additional lines of
credit based on their operational losses to date and their resulting lack of equity. As such, it
appears that Elliott Cove cannot finance its activities without additional subordinated financial
support and is therefore considered a VIE under GAAP. However, the Company has determined that it
does not have a controlling interest in Elliott Cove based on the following facts and
circumstances:
|
a. |
|
Neither the Company nor any members of the Companys management have
control over the budgeting or operational processes of Elliott Cove. |
|
|
b. |
|
While the President, CEO and Chairman of the Company is a member of
Elliott Coves board, he does not exert influence on decisions beyond Northrim
Investment Services Companys ownership percentage in Elliott Cove. |
|
|
c. |
|
The Company has no veto rights with respect to decisions affecting the
operations of Elliott Cove |
- 12 -
The Company has the obligation to absorb losses of Elliott Cove up to its ownership percentage
of 47.6%. There are no caps or guarantees on returns, and there are no protections to limit any
investors share of losses. Additionally, the Company provides Elliott Cove with a $750,000 line
of credit. This line includes a 50% personal guarantee by the majority owner of Elliott Cove.
Therefore, the Company does have the obligation to absorb losses and the right to receive benefits
that could be significant to Elliott Cove and which, as a result of its exposure to 50% of any losses incurred on the line
of credit that the Company has extended to Elliott Cove, may be greater than the Companys 47.6%
ownership therein.
However, GAAP requires that the Company have both the power to control the activities of
Elliott Cove that most significantly impact its economic performance, and the obligation to absorb
losses or the right to receive benefits from Elliott Cove that could potentially be significant to
Elliott Cove. The Company has determined that the facts and circumstances of its relationship with
Elliott Cove including its overall involvement in the operations, decision-making capabilities and
proportionate share in earnings and losses does not satisfy the criteria for a controlling interest
because it does not have the power to direct the activities of Elliott Cove according to GAAP.
The Company also provides a line of credit to our mortgage affiliate, RML. While the Company
also provides a line of credit to RML, which is also guaranteed by the other owners of RML, RML has
other available lines of credit with unrelated financial institutions which have been in place for
many years. Additionally, RML has a history of profitability and has sufficient capital to support
its operations. RML had $17.9 million in equity, $87.8 million in assets and net income of $9.1
million as of and for the year ended December 31, 2009 (see Note 9 in the Companys Form 10-K for
the year ended December 31, 2009). As such, the total equity investment in the entity, which is
provided by the Company and the other owners, is adequate to finance the activities of RML.
Therefore, the Company has concluded that RML is not a VIE.
8. Deposit Activities
Total deposits at September 30, 2010, December 31, 2009 and September 30, 2009 were $878.7
million, $853.1 million and $837.1 million, respectively. The only deposit category with stated
maturity dates is certificates of deposit. At September 30, 2010, the Company had $148.9 million
in certificates of deposit as compared to certificates of deposit of $144.9 million and $160.4
million, for the periods ending December 31, 2009 and September 30, 2009, respectively. At
September 30, 2010, $105.9 million, or 71%, of the Companys certificates of deposits are scheduled
to mature over the next 12 months as compared to $100.1 million, or 69%, of total certificates of
deposit at December 31, 2009, and $125.7 million, or 78%, of total certificates of deposit at
September 30, 2009.
9. Stock Incentive Plan
The Company set aside 330,750 shares of authorized stock for the 2004 Stock Incentive Plan
(2004 Plan) under which it may grant stock options and restricted stock units. During the second
quarter ended June 30, 2010, the Companys shareholders approved the 2010 Stock Option Plan (2010
Plan) under which it may grant 325,000 shares of stock in the form of stock options and restricted
stock units. The Companys policy is to issue new shares to cover awards. The total number of
stock options and restricted stock units outstanding under the 2004 Plan and previous stock
incentive plans at September 30, 2010 was 359,684. There are 23,232 shares available for future
awards under the 2004 Plan. All 325,000 shares in the 2010 Plan are also available for future
awards. Under both the 2004 and 2010 Plans, certain key employees have been granted the option to
purchase set amounts of common stock at the market price on the day the option was granted.
Optionees, at their own discretion, may cover the cost of exercise through the exchange, at the
fair market value, of already owned shares of the Companys stock. Options are granted for a
10-year period and vest on a pro rata basis over the initial three years from grant. In addition to
stock options, the Company has granted restricted stock units to certain key employees under the
2004 Plan. These restricted stock grants cliff vest at the end of a three-year time period.
- 13 -
The Company recognized expenses of $94,000 and $85,000 on the fair value of restricted stock
units and $35,000 and $61,000 on the fair value of stock options for a total of $129,000 and
$146,000 in stock-based compensation expense for the three-month periods ending September 30, 2010
and 2009, respectively. For the nine-month periods ending September 30, 2010 and 2009, the Company
recognized expense of $283,000 and $263,000, respectively, on the fair value of restricted stock
units and $104,000 and $182,000, respectively, on the fair value of stock options for a total of $387,000 and
$445,000, respectively, in stock-based compensation expense.
Proceeds from the exercise of stock options for the three months ended September 30, 2010
and 2009 were $292,000 and $262,000, respectively. The Company withheld shares valued at $297,000
and $204,000 to pay for stock option exercises or income taxes that resulted from the exercise of
stock options or the vesting of restricted stock units for the three-month period ending September
30, 2010 and 2009, respectively. The Company recognized tax deductions of $75,000 and $51,000
related to the exercise of these stock options during the quarter ended September 30, 2010 and
2009, respectively.
Proceeds from the exercise of stock options for the nine months ended September 30, 2010 and
2009 were $789,000 and $334,000, respectively. The Company withheld shares valued at $794,000 and
$276,000 to pay for stock option exercises or income taxes that resulted from the exercise of stock
options or the vesting of restricted stock units for the nine-month periods ending September 30,
2010 and 2009, respectively. The Company recognized tax deductions of $177,000 and $58,000,
respectively, related to the exercise of stock options during the nine months ended September 30,
2010 and 2009, respectively. The Company recognized tax deductions of $41,000 related to the
vesting of restricted stock units during the nine months ended September 30, 2009. There were no
restricted stock units that vested during the nine months ended September 30, 2010.
10. Fair Value of Assets and Liabilities
The Company groups its assets and liabilities measured at fair value in three levels, based on
the markets in which the assets and liabilities are traded and the reliability of the assumptions
used to determine fair value. These levels are:
Level 1: Valuation is based upon quoted prices for identical instruments traded in
active exchange markets, such as the New York Stock Exchange. Level 1 also includes U.S. Treasury
and federal agency securities, which are traded by dealers or brokers in active markets.
Valuations are obtained from readily available pricing sources for market transactions involving
identical assets or liabilities.
Level 2: Valuation is based upon quoted market prices for similar instruments in
active markets, quoted prices for identical or similar instruments in markets that are not active,
and model-based valuation techniques for which all significant assumptions are observable in the
market.
Level 3: Valuation is generated from model-based techniques that use significant
assumptions not observable in the market. These unobservable assumptions reflect the Companys
estimation of assumptions that market participants would use in pricing the asset or liability.
Valuation techniques include use of option pricing models, discounted cash flow models and similar
techniques.
The following methods and assumptions were used to estimate fair value disclosures. All
financial instruments are held for other than trading purposes.
Cash, Due from Banks and Overnight Investments: Due to the short term nature of these instruments,
the carrying amounts reported in the balance sheet represent their fair values.
Investment Securities: Fair values for investment securities are based on quoted market prices,
where available. If quoted market prices are not available, fair values are based on quoted market
prices of comparable instruments. Investments in Federal Home Loan Bank stock are recorded at
cost, which also represents fair value.
- 14 -
Loans Held for Sale: Due to the short term nature of these instruments, the carrying amounts
reported in the balance sheet represent their fair values.
Loans: Fair value adjustments for loans are mainly related to credit risk, interest rate risk,
required equity return, and liquidity risk. Credit risk is primarily addressed in the financial
statements through the Allowance (see Note 5). Loans are valued using a discounted cash flow methodology and are pooled
based on type of interest rate (fixed or adjustable) and maturity. A discount rate was developed
based on the relative risk of the cash flows, taking into account the maturity of the loans and
liquidity risk. Impaired loans are carried at fair value. Specific valuation allowances are
included in the Allowance. The carrying amount of accrued interest receivable approximates its
fair value.
Purchased Receivables: Fair values for purchased receivables are based on their carrying amounts
due to their short duration and repricing frequency.
Deposit Liabilities: The fair values of demand and savings deposits are equal to the carrying
amount at the reporting date. The carrying amount for variable-rate time deposits approximates
their fair value. Fair values for fixed-rate time deposits are estimated using a discounted cash
flow calculation that applies currently offered interest rates to a schedule of aggregate expected
monthly maturities of time deposits. The carrying amount of accrued interest payable approximates
its fair value.
Securities sold under repurchase agreements: Fair values for securities sold under repurchase
agreements are based on their carrying amounts due to their short duration and repricing frequency.
Borrowings: Due to the short term nature of these instruments, the carrying amount of short-term
borrowings reported in the balance sheet approximate the fair value. Fair values for fixed-rate
long-term borrowings are estimated using a discounted cash flow calculation that applies currently
offered interest rates to a schedule of aggregate expected monthly payments.
Junior Subordinated Debentures: Fair value adjustments for junior subordinated debentures are based
on the current discounted cash flows to maturity. Management utilized a market approach to
determine the appropriate discount rate for junior subordinated debentures.
Assets subject to nonrecurring adjustment to fair value: The Company is also required to measure
certain assets such as equity method investments, goodwill, intangible assets or OREO at fair value
on a nonrecurring basis in accordance with GAAP. Any nonrecurring adjustments to fair value
usually result from the write down of individual assets.
The Company uses either in-house evaluations or external appraisals to estimate the fair value of
OREO and impaired loans as of each reporting date. In-house appraisals are considered Level 3
inputs and external appraisals are considered Level 2 inputs.. The Companys determination of which
method to use is based upon several factors. The Company takes into account compliance with legal
and regulatory guidelines, the amount of the loan, the size of the assets, the location and type of
property to be valued and how critical the timing of completion of the analysis is to the
assessment of value. Those factors are balanced with the level of internal expertise, internal
experience and market information available, versus external expertise available such as qualified
appraisers, brokers, auctioneers and equipment specialists.
The Company uses external sources to estimate fair value for projects that are not fully
constructed as of the date of valuation. These projects are generally valued as if complete, with
an appropriate allowance for cost of completion, including contingencies developed from external
sources such as vendors, engineers and contractors. The Company believes that recording other real
estate owned that is not fully constructed based on as if complete values is more appropriate than
recording other real estate owned that is not fully constructed using as is values. We concluded
that as if complete values are appropriate for these types of projects based on the guidance for
capitalization of project costs and subsequent measurement of the value of real estate contained in
ASC 970-340. ASC 970-340-35-1 specifically states that estimates and cost allocations must be
reviewed at the end of each reporting period and reallocated based on revised estimates. The
Company adjusts the carry value of other real estate owned in
- 15 -
accordance with this guidance for
increases in estimated cost to complete that exceed the fair value of the real estate at the end of
each reporting period.
Commitments to Extend Credit and Standby Letters of Credit: The fair value of commitments is
estimated using the fees currently charged to enter into similar agreements, taking into account
the remaining terms of the agreements and the present creditworthiness of the counterparties. For
fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates
and the committed rates. The fair value of letters of credit is based on fees currently charged
for similar agreements or on the estimated cost to terminate them or otherwise settle the
obligation with the counterparties at the reporting date.
Limitations: Fair value estimates are made at a specific point in time, based on relevant market
information and information about the financial instrument. These estimates do not reflect any
premium or discount that could result from offering for sale at one time the Companys entire
holdings of a particular financial instrument. Because no market exists for a significant portion
of the Companys financial instruments, fair value estimates are based on judgments regarding
future expected loss experience, current economic conditions, risk characteristics of various
financial instruments, and other factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
Estimated fair values as of September 30, 2010 and December 31, 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
December 31, 2009 |
|
|
Carrying |
|
Fair |
|
Carrying |
|
Fair |
|
|
Amount |
|
Value |
|
Amount |
|
Value |
|
|
(In Thousands) |
Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
83,306 |
|
|
$ |
83,306 |
|
|
$ |
66,721 |
|
|
$ |
66,721 |
|
Investment securities |
|
|
212,534 |
|
|
|
215,341 |
|
|
|
187,447 |
|
|
|
187,678 |
|
Loans held for sale |
|
|
20,082 |
|
|
|
20,082 |
|
|
|
|
|
|
|
|
|
Net loans |
|
|
640,846 |
|
|
|
596,689 |
|
|
|
641,931 |
|
|
|
616,476 |
|
Purchased receivables |
|
|
8,654 |
|
|
|
8,654 |
|
|
|
7,261 |
|
|
|
7,261 |
|
Accrued interest receivable |
|
|
3,234 |
|
|
|
3,234 |
|
|
|
3,986 |
|
|
|
3,986 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
$ |
878,728 |
|
|
$ |
877,152 |
|
|
$ |
853,108 |
|
|
$ |
841,629 |
|
Accrued interest payable |
|
|
390 |
|
|
|
390 |
|
|
|
394 |
|
|
|
394 |
|
Securities sold under repurchase |
|
|
9,996 |
|
|
|
9,996 |
|
|
|
6,733 |
|
|
|
6,733 |
|
Other Borrowings |
|
|
5,506 |
|
|
|
4,810 |
|
|
|
5,587 |
|
|
|
4,941 |
|
Junior subordinated debentures |
|
|
18,558 |
|
|
|
9,066 |
|
|
|
18,558 |
|
|
|
10,111 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized financial instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments to extend credit(1) |
|
$ |
188,300 |
|
|
$ |
1,883 |
|
|
$ |
166,704 |
|
|
$ |
1,667 |
|
Standby letters of credit(1) |
|
|
18,231 |
|
|
|
182 |
|
|
|
16,913 |
|
|
|
169 |
|
|
|
|
|
|
(1) |
|
Carrying amounts reflect the notional amount of credit exposure
under these financial instruments. |
- 16 -
The following table sets forth the balances as of September 30, 2010 and 2009 of assets
and liabilities measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in |
|
Signifcant |
|
|
|
|
|
|
|
|
Active Markets |
|
Other |
|
Significant |
|
|
|
|
|
|
for Identical |
|
Observable |
|
Unobservable Inputs |
|
|
Total |
|
Assets (Level 1) |
|
Inputs (Level 2) |
|
(Level 3) |
|
|
(In Thousands) |
2010: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury & government sponsored |
|
$ |
152,411 |
|
|
|
|
|
|
$ |
152,411 |
|
|
|
|
|
Municipal Securities |
|
|
6,469 |
|
|
|
|
|
|
|
6,469 |
|
|
|
|
|
U.S. Agency Mortgage-backed Securities |
|
|
79 |
|
|
|
|
|
|
|
79 |
|
|
|
|
|
Corporate bonds |
|
|
47,383 |
|
|
|
|
|
|
|
47,383 |
|
|
|
|
|
|
Total |
|
$ |
206,342 |
|
|
|
|
|
|
$ |
206,342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury & government sponsored |
|
$ |
108,711 |
|
|
|
|
|
|
$ |
108,711 |
|
|
|
|
|
Municipal Securities |
|
|
5,234 |
|
|
|
|
|
|
|
5,234 |
|
|
|
|
|
U.S. Agency Mortgage-backed Securities |
|
|
91 |
|
|
|
|
|
|
|
91 |
|
|
|
|
|
Corporate bonds |
|
|
28,337 |
|
|
|
|
|
|
|
28,337 |
|
|
|
|
|
|
Total |
|
$ |
142,373 |
|
|
|
|
|
|
$ |
142,373 |
|
|
|
|
|
|
As of and for the nine months ending September 30, 2010 and 2009, no impairment or
valuation adjustment was recognized for assets recognized at fair value on a nonrecurring basis,
except for certain assets as shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in |
|
Signifcant |
|
|
|
|
|
|
|
|
|
|
Active Markets |
|
Other |
|
Significant |
|
Total |
|
|
|
|
|
|
for Identical |
|
Observable |
|
Unobservable Inputs |
|
(gains) |
|
|
Total |
|
Assets (Level 1) |
|
Inputs (Level 2) |
|
(Level 3) |
|
losses |
|
|
(In Thousands) |
2010: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans measured for impairment1 |
|
$ |
5,163 |
|
|
|
|
|
|
$ |
3,928 |
|
|
$ |
1,235 |
|
|
$ |
(793 |
) |
Other real estate owned2 |
|
|
640 |
|
|
|
|
|
|
|
|
|
|
|
640 |
|
|
|
250 |
|
|
Total |
|
$ |
5,803 |
|
|
|
|
|
|
$ |
3,928 |
|
|
$ |
1,875 |
|
|
$ |
(543 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans measured for impairment1 |
|
$ |
17,753 |
|
|
|
|
|
|
$ |
6,143 |
|
|
$ |
11,610 |
|
|
$ |
(416 |
) |
Other real estate owned2 |
|
|
6,171 |
|
|
|
|
|
|
|
|
|
|
|
6,171 |
|
|
|
516 |
|
|
Total |
|
$ |
23,924 |
|
|
|
|
|
|
$ |
6,143 |
|
|
$ |
17,781 |
|
|
$ |
100 |
|
|
|
|
|
1 |
|
Relates to certain impaired collateral dependant loans. The impairment was
measured based on the fair value of collateral, in accordance with GAAP. |
|
2 |
|
Relates to certain impaired other real estate owned. This impairment arose from an adjustment to the
Companys estimate of the fair market value of these properties based on changes in estimated
costs to complete the projects and changes in market conditions. |
For loans measured for impairment, the Company classifies fair value measurements using
observable inputs, such as external appraisals, as level 2 valuations in the fair value hierarchy,
and unobservable inputs, such as in-house evaluations, as level 3 valuations in the fair value
hierarchy.
- 17 -
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion should be read in conjunction with the unaudited financial statements of
Northrim BanCorp, Inc. (the Company) and the notes thereto presented elsewhere in this report and
with the Companys Annual Report on Form 10-K for the year ended December 31, 2009.
Note Regarding Forward Looking-Statements
This quarterly report on Form 10-Q includes forward-looking statements, which are not
historical facts. These forward-looking statements describe managements expectations about future
events and developments such as future operating results, growth in loans and deposits, continued
success of the Companys style of banking, and the strength of the local economy. All statements
other than statements of historical fact, including statements regarding industry prospects and
future results of operations or financial position, made in this report are forward-looking. We use words such as anticipate, believe,
expect, intend and similar expressions in part to help identify forward-looking statements.
Forward-looking statements reflect managements current plans and expectations and are inherently
uncertain. Our actual results may differ significantly from managements expectations, and those
variations may be both material and adverse. 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: the general condition of, and changes in, the Alaska economy; factors that impact our net
interest margin; and our ability to maintain asset quality. Further, actual results may be
affected by competition 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. Many of these
risks, as well as other risks that may have a material adverse impact on our operations and
business, are identified in Item 1A Risk Factors of this report, and 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. In addition, you should note that we do not intend to update any of the
forward-looking statements or the uncertainties that may adversely impact those statements, other
than as required by law.
Critical Accounting Policies
The preparation of the consolidated financial statements requires us to make a number of
estimates and assumptions that affect the reported amounts and disclosures in the consolidated
financial statements. On an ongoing basis, we evaluate our estimates and assumptions based upon
historical experience and various other factors and circumstances. We believe that our estimates
and assumptions are reasonable; however, actual results may differ significantly from these
estimates and assumptions which could have a material impact on the carrying value of assets and
liabilities at the balance sheet dates and on our results of operations for the reporting periods.
The accounting policies that involve significant estimates and assumptions by management,
which have a material impact on the carrying value of certain assets and liabilities, are
considered critical accounting policies. The Companys critical accounting policies include those
that address the accounting for the Allowance, the valuation of goodwill and other intangible
assets, and the valuation of other real estate owned. These critical accounting policies are
further described in Managements Discussion and Analysis and in Note 1, Summary of Significant
Accounting Policies, of the Notes to Consolidated Financial Statements in the Companys Form 10-K
as of December 31, 2009. Management has applied its critical accounting policies and estimation
methods consistently in all periods presented in these financial statements.
See Note 2 of the Notes to the Consolidated Financial Statements in this Form 10-Q for a
summary of the pronouncements that became effective in 2010 and discussion of the impact of their
adoption on the Companys consolidated financial statements.
- 18 -
Economic Conditions
According to the Department of Labor, Alaskas seasonally adjusted unemployment rate for
August was 7.7%, unchanged from July. The comparable national jobless rate for August was 9.6%, up
slightly from 9.5% in July. One year ago, the national unemployment rate was 9.7% compared to 8.2%
for Alaska. August was the 22nd consecutive month that Alaskas unemployment rate was lower than
the nations. The average monthly payroll job count in Alaska has increased 1% (from 322,550 to
325,875) through August of 2010 when compared to the first eight months of 2009..
According to the Bureau of Economic Analysis personal income in Alaska rose 3.5% between the second
quarter of 2009 and 2010. This is compared to 2.2% growth over the same period in the US.
Personal income in Alaska has grown for six consecutive quarters between the first quarter of 2009
and the second quarter of 2010.
The retail sector is currently benefitting from the seasonal boost in consumption generated from
the Permanent Fund Dividend, which paid $1,281 to every Alaska resident early in October.
Highlights and Summary of Performance Third Quarter of 2010
|
§ |
|
Northrim continued to maintain strong capital ratios with Tier 1 Capital/risk adjusted
assets of 14.46% as compared to 14.77% in the immediate prior quarter and 13.96% a year
ago. Because the Company elected not to participate in the Capital Purchase Program
sponsored by the U. S. Treasury in 2008, these ratios do not reflect any government
investment in Northrim. |
|
|
§ |
|
Northrims tangible common equity to tangible assets at quarter end was 10.50%, up from
10.32% a year earlier and consistent with the previous quarter which was 10.53%. 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.
The GAAP measure of equity to assets is total equity divided by total assets. Total equity
to total assets was 11.26% at September 30, 2010 as compared to 11.15% at September 30,
2009. |
|
|
§ |
|
Nonperforming assets declined in the quarter to $25.0 million or 2.41% of total assets,
compared to $39 million or 3.95% at September 30, 2009. |
|
|
§ |
|
Book value was $18.22 per share and tangible book value was $16.86 per share, up from
$17.28 and $15.85 respectively a year earlier. Tangible book value is shareholders
equity, less intangible assets, divided by common stock outstanding. |
|
|
§ |
|
The allowance for loan losses continued to increase, now totaling 2.31% of total
portfolio loans at September 30, 2010, compared to 2.00% at September 30, 2009. The
allowance for loan losses to nonperforming loans also increased to 105.93% from 46.62% a
year ago. |
|
|
§ |
|
Other operating income, which includes revenues from service charges, electronic
banking, and financial services affiliates, contributed 29% of total third quarter revenues
and 25% of year-to-date revenues. |
|
|
§ |
|
The cash dividend paid on September 17, 2010, rose 20% to $0.12 per diluted share from
$0.10 per diluted share paid in the prior quarter. |
The Company reported net income and diluted earnings per share of $3.2 million and $0.49,
respectively, for the quarter ending September 30, 2010 compared to net income and diluted
earnings per share of $1.9 million and $0.30, respectively, for the quarter ending September 30,
2009. The increase in net income from the prior year was primarily attributable to an increase
in other operating income and decreases in other operating expense and the provision for loan
losses. These changes were partially offset by a decrease in net interest income and an increase
in the provision for income taxes.
Northrims total assets grew 5% to $1.04 billion at September 30, 2010 from $986 million at
September 30, 2009, with increases in portfolio investments, loans held for sale, overnight
investments, and cash and due from banks more than offsetting continuing declines in portfolio
loans. The loan portfolio decreased 6% in the third quarter to $635 million from $674 million a
year ago. This decrease
- 19 -
was primarily due to continued decreases in Construction loans and a
lower level of Commercial loans.
The loan portfolio remains diversified with commercial loans accounting for 37% of the
portfolio and commercial real estate accounting for 48% of the portfolio at September 30, 2010.
Construction and land development loans, which account for 8% of the loan portfolio at September
30, 2010 are down 38% to $51 million from $82.2 million a year ago, reflecting the maturing of
projects funded in past years, the reduction in new projects started in the past two years, and
continuing successful collection efforts.
Credit Quality and Nonperforming Assets
Nonperforming assets at September 30, 2010, declined by $14 million year-over-year and $3.4
million from the preceding quarter. The risk profile of the portfolio improved as a result of
the following developments:
|
§ |
|
Loans measured for impairment decreased to $22.2 million at September 30, 2010, compared
to $25.1 million at June 30, 2010, and $52.6 million in the third quarter a year ago. |
|
|
§ |
|
Nonperforming loans totaled $13.9 million, or 2.19% of total portfolio loans at
September 30, 2010, compared to $28.9 million, or 4.28% of total portfolio loans a year
ago. |
|
|
§ |
|
The $4.8 million condominium conversion project in Anchorage that moved into OREO during
the fourth quarter of 2009 continues to generate rental income producing an average yield
of approximately 2%. Of the 68 original units, 35 condos have been sold and 22 are rented,
providing positive year-to-date cash flow for the project. |
|
|
§ |
|
Sales of OREO continued during the third quarter, with 26 properties sold for an
aggregate of $3.3 million, generating a $332,000 net gain over current carrying value in
the third quarter of 2010. The Company also recognized $830,000 in deferred gains on sales
of OREO property that occurred in previous periods and now meet the accounting requirements
for gain recognition. Of the current period gain, $422,000 was related to a deferred gain
for one commercial property that was sold in 2007, and the remainder of the gains
recognized in the current quarter were from the sale of ten condominiums and two lots sold
in late 2009 and throughout the first half of 2010. At September 30, 2010 the Company had
$194,000 in remaining deferred gains on sale of OREO property. |
|
|
§ |
|
Year-to-date OREO sales generated $9.2 million in gross proceeds, including $613,000 in gain on
sale of 62 properties. Year-to-date gain on the sale of OREO totaled $1.4 million
including the recognition of the $830,000 in deferred gains discussed above. |
|
|
§ |
|
Net charge-offs in the third quarter of 2010 totaled $132,000, or 0.02% of average
loans, reflecting the effects of $661,000 in recoveries, compared to net charge-offs of
$1.1 million, or 0.16% of average loans during the third quarter of 2009. Year-to-date net
charge-offs totaled $1.6 million, or 0.32%, annualized, of average loans, down from $4.3
million, 0.83%, annualized, of average loans in the first nine months of 2009. |
|
|
§ |
|
The coverage ratio of the allowance to nonperforming loans increased to 105.93% at
September 30, 2010, compared to 46.62% in the third quarter a year ago. |
At September 30, 2010, management had identified potential problem loans of $11.7 million as
compared to potential problem loans of $17.0 million at December 31, 2009 and $6.5 million at
September 30, 2009. Potential problem loans are loans which are currently performing and are not
included in nonaccrual loans, accruing loans 90 days or more past due, impaired loans or troubled
debt restructurings (TDRs) that have developed negative indications that the borrower may not be
able to comply with present payment terms and which may later be included in nonaccrual, past due,
impaired or TDRs. The $5.3 million decrease in potential problem loans at September 30, 2010 from
December 31, 2009 is primarily due to the transfer of one $3.3 million residential land development
loan and 2 commercial loans to nonaccrual status.
At September 30, 2010, December 31, 2009 and September 30, 2009 the Company held OREO of $11.0
million, $17.4 million and $10.1 million, respectively. As of September 30, 2010, OREO consists of
$6.3 million in condominiums, $3.2 million in residential lots in various stages of development,
$1.2 million
- 20 -
in single family residences and $399,000 in commercial property. During the third
quarter of 2010, additions to OREO included two single family residences valued at $907,000, one
commercial building valued at $99,000, and one condominium valued at $49,000. During the third
quarter of 2010, the Company received approximately $3.3 million in proceeds for the sale of OREO,
which included $2.1 million from the sale of condominiums, $1 million from the sale of residential
lots and $228,000 from the sale of a single family residence. Total net gains on the sale of OREO
properties were $1.2 million and $1.4 million for the three and nine-month periods ending September
30, 2010.
The following summarizes OREO activity for the three and nine-month periods ending September
30, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
|
(In Thousands) |
Balance, beginning of the period |
|
$ |
12,973 |
|
|
$ |
11,576 |
|
|
$ |
17,355 |
|
|
$ |
12,617 |
|
Transfers from loans, net |
|
|
1,059 |
|
|
|
627 |
|
|
|
1,990 |
|
|
|
3,518 |
|
Investment in other real estate owned |
|
|
7 |
|
|
|
298 |
|
|
|
34 |
|
|
|
1,470 |
|
Proceeds from the sale of other real estate owned |
|
|
(3,337 |
) |
|
|
(2,634 |
) |
|
|
(9,225 |
) |
|
|
(7,466 |
) |
Gain on sale of other real estate owned, net |
|
|
1,162 |
|
|
|
201 |
|
|
|
1,443 |
|
|
|
424 |
|
Deferred gain on sale of other real estate owned |
|
|
(771 |
) |
|
|
71 |
|
|
|
(328 |
) |
|
|
71 |
|
Impairment on other real estate owned |
|
|
(74 |
) |
|
|
(21 |
) |
|
|
(250 |
) |
|
|
(516 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
11,019 |
|
|
$ |
10,118 |
|
|
$ |
11,019 |
|
|
$ |
10,118 |
|
|
RESULTS OF OPERATIONS
Income Statement
Net Income
Net income attributable to Northrim BanCorp for the three and nine-month periods ending
September 30, 2010, increased $1.3 million from $1.9 million to $3.2 million and $1.4 million from
$5.8 million to $7.2 million, respectively, as compared to the same periods in 2009. These
increases were due to increased other operating income, decreased loan loss provisions and other
operating expenses, net of decreased net interest income and increased provisions for income taxes.
Other operating income increased $1.1 million and $331,000 for the three and nine-month periods
ending September 30, 2010 primarily due to increased OREO sale and rental income. This increase
was partially offset in the nine month period ending September 30, 2010 by decreased earnings from
RML. The provision for loan losses decreased $957,000 and $1.7 million for the three and
nine-month periods ending September 30, 2010 primarily due to decreases in the loan portfolio and
lower net charge offs in 2010 as compared to 2009. Other operating expenses decreased $885,000 for
the quarter primarily due to a penalty for prepayment of long term FHLB advances that was incurred
in the same period in 2009. Other operating expense decreased $1.6 million for the nine months
ended as of September 30, 2010 primarily due to the prepayment penalty from 2009 as well as
decreases in FDIC insurance expense and salaries and other personnel expenses. These decreases
were partially offset by increased purchased receivable losses. Net interest income decreased
$846,000 for the quarter and $1.3 million for the nine months ended September 30, 2010, mainly due
to a decrease in interest revenue from lower loan balances and from lower yields on long term
investments.
Net Interest Income / Net Interest Margin
Net interest income for the three and nine-month periods ending September 30, 2010 decreased
$846,000 and $1.3 million, respectively, as compared to the same periods in 2009 because of larger
reductions in interest income, accompanied by a smaller decrease in the costs on the Companys
interest-bearing liabilities. The Companys net interest income as a percentage of average
interest-earning assets on a tax equivalent basis decreased by 61 basis points and 31 basis points,
respectively, to 4.77% and 5.05%, for the three and nine-month periods ending September 30, 2010 as
compared to the same periods in 2009.
- 21 -
Average loans, the largest category of interest-earning assets, decreased by $29.7 million and
$49.6 million in the three and nine-month periods ending September 30, 2010 as compared to the same
periods in 2009. Average commercial, construction, home equity lines and other consumer loans all
decreased in both periods while commercial real estate loans increased during these same periods.
Real estate loans held for sale increased in the three month period ending September 30, 2010 and
decreased in the nine month period ending September 30, 2010. The overall decline in the loan
portfolio resulted from a combination of refinance and loan payoff activity and a decrease in
construction loan originations.
Average investments increased $74.4 million and $68.6 million in the three and nine-month
periods ending September 30, 2010 as compared to the same periods in 2009. This increase arose as
loan totals decreased in both periods and total deposits increased in the third quarter.
Average interest-bearing liabilities increased $19.2 million during the third quarter of 2010
and decreased $9.7 million for the nine-month period ending September 30, 2010 as compared to the
same periods in 2009. The increase for the three-month period was the result of increased average
interest-bearing deposit balances. The decrease for the nine-month periods arose from the payoff of the
Companys long term borrowings from FHLB of $9.9 million in the third quarter of 2009 as well as a
shift in customer deposits from interest-bearing to noninterest-bearing demand deposits. Lastly,
the Company had average public certificates of deposits from the Alaska Permanent Fund Corporation
of $43.9 million in the first nine months of 2009 and had no public deposits in 2010. The Alaska
Permanent Fund Corporation may invest in certificates of deposit at Alaska banks in an aggregate
amount with respect to each bank, not to exceed its capital and at specified rates and terms. The
depository bank must collateralize the deposits either with pledged securities or a letter of
credit.
The average cost of interest-bearing liabilities decreased 21 basis points and 26 basis points
for the three and nine-month periods ending September 30, 2010 compared to the same periods in
2009 due mainly to declining market rates and the payoff of the Companys FHLB borrowings.
Components of Net Interest Margin
- 22 -
The following table compares average balances and rates as well as net tax equivalent
margin on earning assets for the three and nine months ending September 30, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income/ |
|
|
|
|
|
|
|
|
|
|
Average Yields/Costs |
|
|
|
Average Balances |
|
|
Change |
|
|
expense |
|
|
Change |
|
|
Tax Equivalent |
|
|
|
2010 |
|
|
2009 |
|
|
$ |
|
|
% |
|
|
2010 |
|
|
2009 |
|
|
$ |
|
|
% |
|
|
2010 |
|
|
2009 |
|
|
Change |
|
|
|
(In Thousands) |
|
|
|
|
Commercial |
|
$ |
240,235 |
|
|
$ |
252,224 |
|
|
$ |
(11,989 |
) |
|
|
-5 |
% |
|
$ |
4,232 |
|
|
$ |
4,587 |
|
|
$ |
(355 |
) |
|
|
-8 |
% |
|
|
6.99 |
% |
|
|
7.22 |
% |
|
|
-0.23 |
% |
Construction/development |
|
|
51,756 |
|
|
|
83,199 |
|
|
|
(31,443 |
) |
|
|
-38 |
% |
|
|
1,042 |
|
|
|
1,810 |
|
|
|
(768 |
) |
|
|
-42 |
% |
|
|
7.99 |
% |
|
|
8.63 |
% |
|
|
-0.64 |
% |
Commercial real estate |
|
|
296,403 |
|
|
|
293,236 |
|
|
|
3,167 |
|
|
|
1 |
% |
|
|
5,091 |
|
|
|
5,043 |
|
|
|
48 |
|
|
|
1 |
% |
|
|
6.81 |
% |
|
|
6.82 |
% |
|
|
-0.01 |
% |
Home equity lines and
other consumer |
|
|
45,256 |
|
|
|
46,655 |
|
|
|
(1,399 |
) |
|
|
-3 |
% |
|
|
743 |
|
|
|
792 |
|
|
|
(49 |
) |
|
|
-6 |
% |
|
|
6.60 |
% |
|
|
6.73 |
% |
|
|
-0.13 |
% |
Real estate loans for sale |
|
|
12,532 |
|
|
|
411 |
|
|
|
12,121 |
|
|
|
2949 |
% |
|
|
141 |
|
|
|
(14 |
) |
|
|
155 |
|
|
|
-1107 |
% |
|
|
4.45 |
% |
|
|
-13.32 |
% |
|
|
17.77 |
% |
Other loans1 |
|
|
(1,058 |
) |
|
|
(853 |
) |
|
|
205 |
|
|
|
24 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans2, 3 |
|
|
645,124 |
|
|
|
674,872 |
|
|
|
(29,748 |
) |
|
|
-4 |
% |
|
|
11,249 |
|
|
|
12,218 |
|
|
|
(969 |
) |
|
|
-8 |
% |
|
|
6.93 |
% |
|
|
7.19 |
% |
|
|
-0.26 |
% |
|
Short-term investments |
|
|
84,371 |
|
|
|
49,609 |
|
|
|
34,762 |
|
|
|
70 |
% |
|
|
54 |
|
|
|
31 |
|
|
|
23 |
|
|
|
74 |
% |
|
|
0.25 |
% |
|
|
0.24 |
% |
|
|
0.01 |
% |
Long-term investments |
|
|
183,585 |
|
|
|
143,979 |
|
|
|
39,606 |
|
|
|
28 |
% |
|
|
963 |
|
|
|
1,155 |
|
|
|
(192 |
) |
|
|
-17 |
% |
|
|
2.22 |
% |
|
|
3.23 |
% |
|
|
-1.01 |
% |
|
Total investments |
|
|
267,956 |
|
|
|
193,588 |
|
|
|
74,368 |
|
|
|
38 |
% |
|
|
1,017 |
|
|
|
1,186 |
|
|
|
(169 |
) |
|
|
-14 |
% |
|
|
1.59 |
% |
|
|
2.45 |
% |
|
|
-0.86 |
% |
|
Interest-earning assets |
|
|
913,080 |
|
|
|
868,460 |
|
|
|
44,620 |
|
|
|
5 |
% |
|
|
12,266 |
|
|
|
13,404 |
|
|
|
(1,138 |
) |
|
|
-8 |
% |
|
|
5.36 |
% |
|
|
6.13 |
% |
|
|
-0.77 |
% |
Nonearning assets |
|
|
105,788 |
|
|
|
104,378 |
|
|
|
1,410 |
|
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,018,868 |
|
|
$ |
972,838 |
|
|
$ |
46,030 |
|
|
|
5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits |
|
$ |
591,319 |
|
|
$ |
568,755 |
|
|
$ |
22,564 |
|
|
|
4 |
% |
|
$ |
1,161 |
|
|
$ |
1,350 |
|
|
$ |
(189 |
) |
|
|
-14 |
% |
|
|
0.78 |
% |
|
|
0.94 |
% |
|
|
-0.16 |
% |
Borrowings |
|
|
33,983 |
|
|
|
37,396 |
|
|
|
(3,413 |
) |
|
|
-9 |
% |
|
|
209 |
|
|
|
312 |
|
|
|
(103 |
) |
|
|
-33 |
% |
|
|
2.41 |
% |
|
|
3.26 |
% |
|
|
-0.85 |
% |
|
Total interest-bearing liabilities |
|
|
625,302 |
|
|
|
606,151 |
|
|
|
19,151 |
|
|
|
3 |
% |
|
|
1,370 |
|
|
|
1,662 |
|
|
|
(292 |
) |
|
|
-18 |
% |
|
|
0.87 |
% |
|
|
1.08 |
% |
|
|
-0.21 |
% |
Demand deposits and other
noninterest-bearing liabilities |
|
|
277,753 |
|
|
|
256,992 |
|
|
|
20,761 |
|
|
|
8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
|
115,813 |
|
|
|
109,695 |
|
|
|
6,118 |
|
|
|
6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,018,868 |
|
|
$ |
972,838 |
|
|
$ |
46,030 |
|
|
|
5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
10,896 |
|
|
$ |
11,742 |
|
|
$ |
(846 |
) |
|
|
-7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net tax equivalent margin on earning assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.77 |
% |
|
|
5.38 |
% |
|
|
-0.61 |
% |
|
|
|
|
1 |
|
Other loans is made up of deferred loan fees, net of loans in process.
|
|
2 |
|
Loan fees recognized during the period and included in the yield calculation totalled
$676,000 and $677,000 in the third quarter of 2010 and 2009, respectively. |
|
3 |
|
Average nonaccrual loans included in the computation of the average loans were $14.5
million and $18.2 million in the third quarter of 2010 and 2009, respectively. |
- 23 -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income/ |
|
|
|
|
|
|
|
|
|
|
Average Yields/Costs |
|
|
|
Average Balances |
|
|
Change |
|
|
expense |
|
|
Change |
|
|
Tax Equivalent |
|
|
|
2010 |
|
|
2009 |
|
|
$ |
|
|
% |
|
|
2010 |
|
|
2009 |
|
|
$ |
|
|
% |
|
|
2010 |
|
|
2009 |
|
|
Change |
|
|
|
(In Thousands) |
|
|
|
|
Commercial |
|
$ |
242,971 |
|
|
$ |
269,926 |
|
|
$ |
(26,955 |
) |
|
|
-10 |
% |
|
$ |
12,908 |
|
|
$ |
14,152 |
|
|
$ |
(1,244 |
) |
|
|
-9 |
% |
|
|
7.10 |
% |
|
|
7.01 |
% |
|
|
0.09 |
% |
Construction/development |
|
|
55,113 |
|
|
|
87,644 |
|
|
|
(32,531 |
) |
|
|
-37 |
% |
|
|
3,358 |
|
|
|
5,185 |
|
|
|
(1,827 |
) |
|
|
-35 |
% |
|
|
8.15 |
% |
|
|
7.91 |
% |
|
|
0.24 |
% |
Commercial real estate |
|
|
295,133 |
|
|
|
281,828 |
|
|
|
13,305 |
|
|
|
5 |
% |
|
|
15,135 |
|
|
|
14,666 |
|
|
|
469 |
|
|
|
3 |
% |
|
|
6.86 |
% |
|
|
6.96 |
% |
|
|
-0.10 |
% |
Home equity lines and
other consumer |
|
|
47,038 |
|
|
|
48,439 |
|
|
|
(1,401 |
) |
|
|
-3 |
% |
|
|
2,338 |
|
|
|
2,460 |
|
|
|
(122 |
) |
|
|
-5 |
% |
|
|
6.64 |
% |
|
|
6.79 |
% |
|
|
-0.15 |
% |
Real estate loans for sale |
|
|
4,311 |
|
|
|
6,310 |
|
|
|
(1,999 |
) |
|
|
-32 |
% |
|
|
144 |
|
|
|
209 |
|
|
|
(65 |
) |
|
|
-31 |
% |
|
|
4.46 |
% |
|
|
4.43 |
% |
|
|
0.03 |
% |
Other loans1 |
|
|
(1,378 |
) |
|
|
(1,359 |
) |
|
|
(19 |
) |
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans2, 3 |
|
|
643,188 |
|
|
|
692,788 |
|
|
|
(49,600 |
) |
|
|
-7 |
% |
|
|
33,883 |
|
|
|
36,672 |
|
|
|
(2,789 |
) |
|
|
-8 |
% |
|
|
7.05 |
% |
|
|
7.08 |
% |
|
|
-0.03 |
% |
Short-term investments |
|
|
62,923 |
|
|
|
37,192 |
|
|
|
25,731 |
|
|
|
69 |
% |
|
|
119 |
|
|
|
122 |
|
|
|
(3 |
) |
|
|
-2 |
% |
|
|
0.25 |
% |
|
|
0.43 |
% |
|
|
-0.18 |
% |
Long-term investments |
|
|
181,378 |
|
|
|
138,527 |
|
|
|
42,851 |
|
|
|
31 |
% |
|
|
3,607 |
|
|
|
3,352 |
|
|
|
255 |
|
|
|
8 |
% |
|
|
2.77 |
% |
|
|
3.40 |
% |
|
|
-0.63 |
% |
|
Total investments |
|
|
244,301 |
|
|
|
175,719 |
|
|
|
68,582 |
|
|
|
39 |
% |
|
|
3,726 |
|
|
|
3,474 |
|
|
|
252 |
|
|
|
7 |
% |
|
|
2.13 |
% |
|
|
2.78 |
% |
|
|
-0.65 |
% |
|
Interest-earning assets |
|
|
887,489 |
|
|
|
868,507 |
|
|
|
18,982 |
|
|
|
2 |
% |
|
|
37,609 |
|
|
|
40,146 |
|
|
|
(2,537 |
) |
|
|
-6 |
% |
|
|
5.70 |
% |
|
|
6.21 |
% |
|
|
-0.51 |
% |
Nonearning assets |
|
|
107,798 |
|
|
|
107,566 |
|
|
|
232 |
|
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
995,287 |
|
|
$ |
976,073 |
|
|
$ |
19,214 |
|
|
|
2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits |
|
$ |
582,614 |
|
|
$ |
588,105 |
|
|
$ |
(5,491 |
) |
|
|
-1 |
% |
|
$ |
3,701 |
|
|
$ |
4,495 |
|
|
$ |
(794 |
) |
|
|
-18 |
% |
|
|
0.85 |
% |
|
|
1.02 |
% |
|
|
-0.17 |
% |
Borrowings |
|
|
33,327 |
|
|
|
37,556 |
|
|
|
(4,229 |
) |
|
|
-11 |
% |
|
|
605 |
|
|
|
1,067 |
|
|
|
(462 |
) |
|
|
-43 |
% |
|
|
2.39 |
% |
|
|
3.75 |
% |
|
|
-1.36 |
% |
|
Total interest-bearing liabilities |
|
|
615,941 |
|
|
|
625,661 |
|
|
|
(9,720 |
) |
|
|
-2 |
% |
|
|
4,306 |
|
|
|
5,562 |
|
|
|
(1,256 |
) |
|
|
-23 |
% |
|
|
0.93 |
% |
|
|
1.19 |
% |
|
|
-0.26 |
% |
Demand deposits and other
noninterest-bearing liabilities |
|
|
265,152 |
|
|
|
242,255 |
|
|
|
22,897 |
|
|
|
9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
|
114,194 |
|
|
|
108,157 |
|
|
|
6,037 |
|
|
|
6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
995,287 |
|
|
$ |
976,073 |
|
|
$ |
19,214 |
|
|
|
2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
33,303 |
|
|
$ |
34,584 |
|
|
$ |
(1,281 |
) |
|
|
-4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net tax equivalent margin on earning assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.05 |
% |
|
|
5.36 |
% |
|
|
-0.31 |
% |
|
|
|
|
1 |
|
Other loans is made up of deferred loan fees, net of loans in process. |
|
2 |
|
Loan fees recognized during the period and included in the yield
calculation totalled $2.0 million and $2.7 million in the nine months ending
September 30, 2010 and 2009, respectively. |
|
3 |
|
Average nonaccrual loans included in the computation of the average
loans were $13.7 million and $19.0 million in the nine months ending September 30,
2010 and 2009, respectively. |
Analysis of Changes in Interest Income and Expense
The following tables set forth the changes in consolidated net interest income attributable to
changes in volume and to changes in interest rates for the three and nine month periods ending
September 30, 2010 as compared to the same periods in 2009. Changes attributable to the combined
effect of volume and interest rate have been allocated proportionately to the changes due to volume
and the changes due to interest rate.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended September 30, 2010 vs. 2009 |
|
|
|
Increase (decrease) due to |
|
|
|
|
|
|
Volume |
|
|
Rate |
|
|
Total |
|
|
|
|
Interest Income: |
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
$ |
(793 |
) |
|
$ |
(176 |
) |
|
$ |
(969 |
) |
Long-term investments |
|
|
1,374 |
|
|
|
(1,566 |
) |
|
|
(192 |
) |
Short-term investments |
|
|
22 |
|
|
|
1 |
|
|
|
23 |
|
|
Total interest income |
|
$ |
604 |
|
|
$ |
(1,740 |
) |
|
$ |
(1,138 |
) |
|
|
Interest Expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits |
|
$ |
57 |
|
|
$ |
(246 |
) |
|
$ |
(189 |
) |
Borrowings |
|
|
(27 |
) |
|
|
(76 |
) |
|
|
(103 |
) |
|
Total interest expense |
|
$ |
30 |
|
|
$ |
(322 |
) |
|
$ |
(292 |
) |
|
- 24 -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2010 vs. 2009 |
|
|
|
Increase (decrease) due to |
| | |
|
|
|
Volume |
|
|
Rate |
|
|
Total |
|
| |
|
Interest Income: |
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
$ |
(2,867 |
) |
|
$ |
78 |
|
|
$ |
(2,789 |
) |
Long-term investments |
|
|
636 |
|
|
|
(381 |
) |
|
|
255 |
|
Short-term investments |
|
|
(8 |
) |
|
|
5 |
|
|
|
(3 |
) |
|
Total interest income |
|
$ |
(2,240 |
) |
|
$ |
(298 |
) |
|
$ |
(2,537 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits |
|
$ |
(42 |
) |
|
$ |
(752 |
) |
|
$ |
(794 |
) |
Borrowings |
|
|
(110 |
) |
|
|
(352 |
) |
|
|
(462 |
) |
|
Total interest expense |
|
$ |
(152 |
) |
|
$ |
(1,104 |
) |
|
$ |
(1,256 |
) |
|
Provision for Loan Losses
As of and for the period ended September 30, 2010, the Company refined its method of
estimating the Allowance for Loans Losses (Allowance). The Company elected this enhanced method
of estimating the Allowance because we believe that it more accurately allocates expected losses by
loan segment and class. The Company performed a retrospective review of the Allowance as of
December 31, 2009, March 31, 2010 and June 30, 2010 and determined that this refinement does not
have an effect on the Companys financial position, results of operations, or earnings per share
for any period; rather, the refined method of estimating the Allowance changes how the total
Allowance is allocated among the Companys loan types and the unallocated portion of the Allowance.
The following paragraphs describe the refinements in the Companys methodology for estimating
the Allowance.
Specific Allowance
Prior to September 30, 2010, the Company determined the allocated portion of the Allowance by
first calculating a specific allowance for impaired loans in accordance with the accounting
guidance in ASC Topic 310-10-35. This analysis was based upon a specific analysis for each
impaired loan, including appraisals on loans secured by real property, managements assessment of
the current market, recent payment history and an evaluation of other sources of repayment. The
specific allowance for impaired loans is included within each portfolio segment by type in the
allowance allocation table. The calculation of the specific reserves did not change as a result of
the change in the methodology for estimating the Allowance as of September 30, 2010.
General Allowance
Prior to September 30, 2010, the Company identified the following classes of loans not
considered impaired for purposes of establishing the allocated portion of the general reserve of
the Allowance. In managements judgment, these identifiable classes of loans carried higher levels
of risk based upon our operating history and were the only class of loans subject to our formula
based methodology:
|
|
|
Special mention loans: Loans in this category had deteriorated sufficiently that
they would have difficulty in refinancing; similarly, purchasers of the business would
not be eligible for bank financing unless they represent a significantly stronger
credit risk. There was deterioration of financial condition or collateral value, still
reasonably secured by collateral or net worth. Although the Company was presently
protected from loss, potential weaknesses were apparent which, if not corrected, could
cause future problems. |
|
|
|
|
Substandard loans: Loans in this category were those that were no longer adequately
protected due to declining net worth, lack of earning capacity, or insufficient
collateral. The possibility for |
- 25 -
|
|
|
loss of some portion of the loan principal could not
be ruled out. Loans exhibited well-defined weaknesses that brought normal repayment
into jeopardy. |
|
|
|
|
Doubtful loans: Loans in this category exhibited the same weaknesses as those
classified Substandard but the traits were more pronounced. Collection in full was
improbable, however the extent of the loss may have been indeterminable due to pending
factors which may yet occur that could salvage the loan, such as possible pledge of
additional collateral, sale of assets, merger, acquisition or refinancing. |
|
|
|
|
Loans made to retail and general wholesale businesses; |
|
|
|
|
Loans collateralized by accounts receivable, inventory, furniture fixtures and
equipment, |
|
|
|
|
Loans for raw land, land development, and speculative construction loans with
expected sellout of greater than one year, |
Special mention loans, substandard loans and doubtful loans were classes of loans that are
included in the Companys internal risk classifications. These classifications are based in large
part upon regulatory definitions for classified loans. The other loan classes listed above are
separately identifiable classes of loans which management believed were subject to higher levels of
risk based on our operating history.
The loss factors that the Company applied to each class of loans within the various risk
classifications were based primarily on industry standards, input from our regulators, and
managements own judgment. Managements judgment was based on average historical losses incurred
by the Company for various portfolio classes. The formula based reserve for these loans was
included in the allocation table by loan type.
As of September 30, 2010 and going forward, the Company has identified the following segments
and classes of loans not considered impaired for purposes of establishing the allocated portion of
the general reserve of the Allowance. Under the enhanced methodology for estimating the Allowance,
the Company first disaggregates the overall loan portfolio in the following segments: commercial,
construction, real estate term and home equity lines and other consumer loans. Then the Company
further disaggregates each segment into the following classes, which are also known as risk
classifications: excellent, good, satisfactory, watch, special mention, substandard, doubtful and
loss. After the portfolio has been disaggregated into these segments and classes, the Company
calculates a general reserve for each segment and class based on the average three year loss
history for each segment and class. This general reserve is then adjusted for qualitative factors,
by segment and class. Qualitative factors are based on managements assessment of current trends
that may cause losses inherent in the current loan portfolio to differ significantly from
historical losses. Some factors that management considers in determining the qualitative
adjustment to the general reserve include, national and local economic trends, business conditions,
underwriting policies and standards, trends in local real estate markets, effects of various
political activities, peer group data, and internal factors such as underwriting policies and
expertise of the Companys employees.
Unallocated Reserves
Prior to September 30, 2010, the Company designated the remaining balance of the Allowance as
unallocated. The unallocated portion of the Allowance was analyzed based on a review of three year
average loan loss rates for loans which did not have a specific or general allocation as described
above, combined with other qualitative factors. The Company validated the unallocated portion of
the Allowance by back testing it in relation to the average historical loss rates for all loan
classes that were not included in the calculation of the allocated portion of the Allowance as
described above as adjusted by the qualitative factors listed above. The unallocated portion of
the Allowance was analyzed in relation to a range of these adjusted average historical loss rates.
As of September 30, 2010, the Company implemented an expanded analysis of average historical
losses segregated by both major loan segments and classes, as defined above, which includes our
internal risk rating system. Starting with this Form 10-Q and going forward, the Companys
unallocated portion of the Allowance will no longer be reviewed using average historical net loss
rates, adjusted for qualitative factors discussed above, because the reserves calculated using
these rates will be allocated by loan segment and class.
- 26 -
Consequently, the refinement in the
methodology of estimating the Allowance is likely to result in a much smaller unallocated portion
of the Allowance.
As of September 30, 2010 and going forward, the Company assesses the overall adequacy of the
Allowance, which affects the unallocated portion of the Allowance, based on several factors
including the level of the Allowance as compared to total loans and nonperforming loans in light of
current economic conditions. The unallocated portion of the Allowance provides for coverage of
credit losses inherent in the loan portfolio but not captured in the credit loss factors that are
utilized in the risk rating-based component, or in the specific impairment component of the
Allowance, and acknowledges the inherent imprecision of all loss prediction models.
The unallocated portion of the Allowance in the enhanced method of estimating the Allowance is
based upon managements evaluation of various factors that are not directly measured in the
determination of the allocated portions of the Allowance. Such factors include uncertainties in
identifying triggering events that directly correlate to subsequent loss rates, uncertainties in
economic conditions, risk factors that have not yet manifested themselves in loss allocation
factors, and historical loss experience data that may not precisely correspond to the current
portfolio. In addition, the unallocated reserve may be further adjusted based upon the direction
of various risk indicators. Examples of such factors include the risk as to current and prospective
economic conditions, the level and trend of charge offs or recoveries, and the risk of heightened
imprecision or inconsistency of appraisals used in estimating real estate values. Although this
allocation process may not accurately predict credit losses by loan type or in aggregate, the total
Allowance is available to absorb losses that may arise from any loan segment or class. Due to the
subjectivity involved in the determination of the unallocated portion of the Allowance, the
relationship of the unallocated component to the total Allowance may fluctuate from period to
period.
Retrospective Review of the Allowance using the Enhanced Methodology for Estimating the
Allowance
The Company performed a retrospective review of the Allowance at December 31, 2009, March 31,
2010 and June 30, 2010 using the enhanced methodology described above. The following table
summarizes what the Allowance would have looked like at these period ending dates if the Company
had used the enhanced methodology to calculate the Allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
June 30, 2010 |
|
March 31, 2010 |
|
December 31, 2009 |
|
|
|
|
|
|
Impaired |
|
Formula-
based |
|
|
|
|
|
|
|
|
|
Impaired |
|
Formula-
based |
|
|
|
|
|
|
|
|
|
Impaired |
|
Formula-
based |
|
|
|
|
|
|
|
|
|
Impaired |
|
Formula-
based |
|
|
Allownace applicable to: |
|
Total |
|
Loans |
|
Amounts |
|
Other |
|
Total |
|
Loans |
|
Amounts |
|
Other |
|
Total |
|
Loans |
|
Amounts |
|
Other |
|
Total |
|
Loans |
|
Amounts |
|
Other |
|
Commercial |
|
$ |
5,808 |
|
|
$ |
280 |
|
|
$ |
5,528 |
|
|
|
|
|
|
$ |
6,164 |
|
|
$ |
167 |
|
|
$ |
5,997 |
|
|
|
|
|
|
$ |
5,530 |
|
|
$ |
1,190 |
|
|
$ |
4,340 |
|
|
|
|
|
|
$ |
4,964 |
|
|
$ |
850 |
|
|
$ |
4,114 |
|
|
|
|
|
Construction |
|
|
1,602 |
|
|
|
542 |
|
|
|
1,060 |
|
|
|
|
|
|
|
1,619 |
|
|
|
531 |
|
|
|
1,088 |
|
|
|
|
|
|
|
1,708 |
|
|
|
633 |
|
|
|
1,075 |
|
|
|
|
|
|
|
2,156 |
|
|
|
869 |
|
|
|
1,287 |
|
|
|
|
|
Real estate term |
|
|
4,778 |
|
|
|
51 |
|
|
|
4,727 |
|
|
|
|
|
|
|
4,641 |
|
|
|
121 |
|
|
|
4,520 |
|
|
|
|
|
|
|
3,375 |
|
|
|
118 |
|
|
|
3,257 |
|
|
|
|
|
|
|
2,680 |
|
|
|
143 |
|
|
|
2,537 |
|
|
|
|
|
Home equity
lines and other consumer |
|
|
506 |
|
|
|
|
|
|
|
506 |
|
|
|
|
|
|
|
625 |
|
|
|
1 |
|
|
|
624 |
|
|
|
|
|
|
|
520 |
|
|
|
1 |
|
|
|
519 |
|
|
|
|
|
|
|
501 |
|
|
|
1 |
|
|
|
500 |
|
|
|
|
|
Unallocated |
|
|
2,017 |
|
|
|
|
|
|
|
|
|
|
|
2,017 |
|
|
|
1,378 |
|
|
|
|
|
|
|
|
|
|
|
1,378 |
|
|
|
2,913 |
|
|
|
|
|
|
|
|
|
|
|
2,913 |
|
|
|
2,807 |
|
|
|
|
|
|
|
|
|
|
|
2,807 |
|
|
|
|
|
|
|
|
Total |
|
$ |
14,711 |
|
|
$ |
873 |
|
|
$ |
11,821 |
|
|
$ |
2,017 |
|
|
$ |
14,427 |
|
|
$ |
820 |
|
|
$ |
12,229 |
|
|
$ |
1,378 |
|
|
$ |
14,046 |
|
|
$ |
1,942 |
|
|
$ |
9,191 |
|
|
$ |
2,913 |
|
|
$ |
13,108 |
|
|
$ |
1,863 |
|
|
$ |
8,438 |
|
|
$ |
2,807 |
|
|
The following table shows the reported allocation of the Allowance based on the legacy
methodology:
- 27 -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
|
March 31, 2010 |
|
|
|
|
June 30, 2010 |
|
|
|
|
|
|
|
|
Impaired |
|
Formula- based |
|
|
|
|
|
|
|
|
|
Impaired |
|
Formula-
based |
|
|
|
|
|
|
|
|
|
Impaired |
|
Formula-
based |
|
|
Allowance applicable to: |
|
Total |
|
Loans |
|
Amounts |
|
Other |
|
Total |
|
Loans |
|
Amounts |
|
Other |
|
Total |
|
Loans |
|
Amounts |
|
Other |
|
Commercial |
|
$ |
3,962 |
|
|
$ |
850 |
|
|
$ |
3,112 |
|
|
|
|
|
|
$ |
4,838 |
|
|
$ |
1,190 |
|
|
$ |
3,648 |
|
|
|
|
|
|
$ |
4,834 |
|
|
$ |
167 |
|
|
$ |
4,667 |
|
|
|
|
|
Construction |
|
|
1,365 |
|
|
|
869 |
|
|
|
496 |
|
|
|
|
|
|
|
1,197 |
|
|
|
633 |
|
|
|
564 |
|
|
|
|
|
|
|
1,281 |
|
|
|
531 |
|
|
|
750 |
|
|
|
|
|
Real estate term |
|
|
565 |
|
|
|
143 |
|
|
|
422 |
|
|
|
|
|
|
|
714 |
|
|
|
118 |
|
|
|
596 |
|
|
|
|
|
|
|
1,692 |
|
|
|
121 |
|
|
|
1,571 |
|
|
|
|
|
Home equity
lines and other consumer |
|
|
50 |
|
|
|
1 |
|
|
|
49 |
|
|
|
|
|
|
|
72 |
|
|
|
1 |
|
|
|
71 |
|
|
|
|
|
|
|
75 |
|
|
|
1 |
|
|
|
74 |
|
|
|
|
|
Unallocated |
|
|
7,166 |
|
|
|
|
|
|
|
|
|
|
|
7,166 |
|
|
|
7,225 |
|
|
|
|
|
|
|
|
|
|
|
7,225 |
|
|
|
6,545 |
|
|
|
|
|
|
|
|
|
|
|
6,545 |
|
|
Total |
|
$ |
13,108 |
|
|
$ |
1,863 |
|
|
$ |
4,079 |
|
|
$ |
7,166 |
|
|
$ |
14,046 |
|
|
$ |
1,942 |
|
|
$ |
4,879 |
|
|
$ |
7,225 |
|
|
$ |
14,427 |
|
|
$ |
820 |
|
|
$ |
7,062 |
|
|
$ |
6,545 |
|
|
The Company reviewed the Allowance for the year ending December 31, 2009 and the quarters
ending March 31, 2010 and June 30, 2010 both in total and by loan category using both the legacy
methodology applied through June 30, 2010 and the enhanced methodology that will be applied
starting with the quarter ending September 30, 2010. The most significant change in the Allowance
using the enhanced methodology for each of these periods is a larger allocation to the real estate
sector of the Companys loan portfolio. Additionally, the formula based allocations for the
commercial, construction and home equity lines and other consumer mortgages also increase under the
revised methodology. The reason for these changes arises from the fact that the Company did not
calculate a specific allocation by loan segment for loans risk rated as watch or better under the
legacy methodology. Rather, these loans were grouped into the unallocated segment of the Allowance
calculation. The calculation of the unallocated portion of the Allowance under the legacy
methodology was based on three year average historical loss rates as adjusted for qualitative
factors. The enhanced methodology results in a different allocation of the segments of the
Allowance but does not indicate that the overall Allowance was misstated. This is due to the fact
that both methodologies utilize three year average historical loss rates, as adjusted for
qualitative factors, to analyze the overall Allowance. The enhanced methodology simply refines the
calculation to allocate the Allowance to the individual loan categories.
The provision for loan losses was $417,000 and $1.4 million for the three-month periods ending
September 30, 2010 and 2009, respectively. Net charge offs were $132,000 and $1.1 million,
respectively, for the quarters ending September 30, 2010 and 2009. The provision for loan losses
was $3.2 million and $4.9 million for the nine-month periods ending September 30, 2010 and 2009,
respectively. Net charge offs were $1.6 million and $4.3 million, respectively, year to date as of
September 30, 2010 and 2009. At September 30, 2010, the Allowance was $14.7 million, or 2.31% of
total loans as compared to $13.5 million, or 2.00% of total loans a year ago. The Company
believes that a higher reserve is appropriate at September 30, 2010 to address the impact of the
current economic environment on our loan portfolio. See analysis of Allowance in the Balance Sheet
Overview section.
Other Operating Income
Other operating income for the third quarter of 2010 increased $1.1 million as compared to
the third quarter of 2009. The increase is primarily due to a $1.1 million increase in OREO
sales and rental income. As discussed in the Credit Quality and Nonperforming Assets section
above, the Company recognized $332,000 in gains on the sale of OREO properties sold in the third
quarter of 2010 and also recognized $830,000 in gains that had been previously deferred related
to sales of OREO property that occurred in previous periods and that now meet the requirements
for gain recognition. These gains had been deferred because the Company provided loans to
facilitate the sales of these properties. $422,000 of the current period gain related to one
commercial property that was sold in 2007, and the remainder of the gains recognized in the
current quarter were from the sale of ten condominiums and two lots sold in late 2009 and
throughout the first half of 2010. The Company recognized $201,000 in gains on the sale of OREO
in the third quarter of 2009. Additionally, the Company earned rental income of $116,000 on OREO
properties in the third quarter of 2010 as compared to $5,000 in 2009. This increase is due to
the transfer of a large condominium development into OREO in December 2009.
Other operating income for the nine months ending September 30, 2010 increased $331,000 as
compared to the same period in 2009. This increase is primarily due to a $1.5 million increase in
OREO sales and rental income. Gains on the sale of OREO properties for the nine-month periods
ending September 30, 2010 and 2009 are $1.4 million, and $424,0000, respectively, including the
gains recognized in 2010 that had
- 28 -
been previously deferred that were discussed above. Rental
income on OREO properties for the nine-month periods ending September 30, 2010 and 2009 were
$487,000 and $22,000, respectively. This increase is also the result of the transfer of the large
condominium development into OREO in December 2009. The increase in OREO sales and rental income
for the nine months ended September 30, 2010 was offset by a decrease in earnings from RML of $1.3
million as compared to the same period in 2009. This decrease resulted from decreased refinance
activity in the first nine months of 2010 as compared to the same period in 2009. Additionally,
purchased receivable income decreased by $312,000 for the nine months ended September 30, 2010 due
to decreased average balances. This decrease was partially offset by a $251,000 increase in gains
on the sale of available-for-sale securities.
Other Operating Expense
Other operating expense for the third quarter of 2010 decreased $885,000 as compared to the
third quarter of 2009. This decrease was primarily due to decreases of $718,000 and $336,000,
respectively, in penalties related to the prepayment of long term FHLB borrowings and salaries and
other personnel expense. Salaries and other personnel expense decreased due to a $159,000 decrease
in deferred compensation expense as the Companys liability under this plan decreased due to market
losses on plan assets and a $130,000 decrease in salary costs due to a decrease in the Companys
workforce.
Other operating expense for the nine months ending September 30, 2010 decreased $1.6 million
from the same period in 2009. This decrease was primarily due to decreases of $784,000 and
$718,000, respectively, in insurance expense and penalties related to the prepayment of long term FHLB
borrowings. Insurance expense decreased due to a $757,000 decrease in FDIC insurance premiums that
was primarily the result of the one time special assessment that the Company incurred in the second
quarter of 2009 as well as a decrease in the rate assessed on the Company in 2010. Additionally,
there was a $33,000 decrease in Keyman insurance expense resulting from increases in the cash
surrender value of assets held under the Companys Keyman insurance policies. Additionally,
salaries and other personnel expenses decreased $473,000 in the first nine months of 2010 as
compared to 2009 as a result of a $346,000 decrease in salaries due to a decrease in the Companys
workforce and a $143,000 decrease in incentive compensation expense. These decreases were partially
offset set by a $420,000 increase in purchased receivable losses. The Company experienced losses on
two customer accounts year-to-date as of September 30, 2010 and did not experience losses during
the same period in 2009.
Income Taxes
The provision for income taxes increased by $819,000 and $925,000 in the three and nine-month
periods ending September 30, 2010 as compared to the same periods in 2009, primarily due to
increased pre-tax income. The tax rates for the three and nine-month periods ending September 30,
2010 were 33% and 30%, respectively, compared to 28% for the same periods in 2009. For the third
quarter of 2010 as
compared to the third quarter of 2009, decreased tax exempt interest income on investments and
decreased tax exempt market gains on the Companys Keyman insurance relative to the level of
taxable income for the period resulted in a 5% increase in the tax rate for the third quarter of
2010. For the nine-month period ending September 30, 2010 as compared to the same period in 2009,
decreased tax exempt interest income on investments and tax exempt market gains on the Companys
Keyman insurance policies for the period as compared to modest nondeductible market losses in the
same period in 2009 resulted in a 2% increase in the tax rate for the period. This increase in the
tax rate for the third quarter exceeds the increase for the nine-month period ending September 30,
2010 as compared to the same periods in 2009 because of the significant increase in pre-tax income
in the third quarter.
FINANCIAL CONDITION
Balance Sheet Overview
- 29 -
Investment Securities
Investment securities at September 30, 2010 increased $27.6 million, or 15%, from December 31,
2009, and increased $60.8 million, or 39%, from September 30, 2009. The increase in investments
from December 31, 2009 to September 30, 2010 was primarily due to the investment of the proceeds
from the increase in deposits from the same period. The increase in investments as of September
30, 2010 from September 30, 2009 arose as loan balances decreased and proceeds from increasing
deposits balances were placed into investments.
Loans and Lending Activities
Our loan products include short and medium-term commercial loans, commercial credit lines,
construction and real estate loans, and consumer loans. From our inception, we have emphasized
commercial, land development and home construction, and commercial real estate lending. This type
of lending has provided us with market opportunities and higher net interest margins than other
types of lending. However, it also involves greater risks, including greater exposure to changes
in local economic conditions, than certain other types of lending.
Loans are the highest yielding component of our earning assets. Loans comprised 71% and 72% of
total average earning assets for the three and nine-month periods ending September 30, 2010,
compared to 78% and 80% of total average earning assets for the three and nine-month periods ending
September 30, 2009. The yield on loans averaged 6.93% and 7.05% for the three and nine-month
periods ending September 30, 2010, compared to 7.19% and 7.08% during the same periods in 2009.
See the Net Interest Income section for further discussion of average balances and yields for the
three and nine-month periods ending September 30, 2010 and 2009.
The loan portfolio decreased by $38.7 million, or 6%, to $635.5 million at September 30, 2010
from $674.2 million at September 30, 2009 due to continued maturities in the construction portfolio
and a lower level of commercial loans. The following table details the changes in loan balances by
loan type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
|
December 31, 2009 |
|
|
September 30, 2009 |
|
|
|
Dollar |
|
|
Percent |
|
|
Dollar |
|
|
Percent |
|
|
Dollar |
|
|
Percent |
|
|
|
Amount |
|
|
of Total |
|
|
Amount |
|
|
of Total |
|
|
Amount |
|
|
of Total |
|
|
|
(In Thousands) |
|
|
|
|
Commercial |
|
$ |
237,667 |
|
|
|
37 |
% |
|
$ |
248,195 |
|
|
|
38 |
% |
|
$ |
249,171 |
|
|
|
37 |
% |
Construction/development |
|
|
50,979 |
|
|
|
8 |
% |
|
|
62,573 |
|
|
|
10 |
% |
|
|
82,160 |
|
|
|
12 |
% |
Commercial real estate |
|
|
305,808 |
|
|
|
48 |
% |
|
|
301,816 |
|
|
|
46 |
% |
|
|
298,828 |
|
|
|
44 |
% |
Home equity lines and other consumer |
|
|
43,882 |
|
|
|
7 |
% |
|
|
45,168 |
|
|
|
7 |
% |
|
|
46,047 |
|
|
|
7 |
% |
Loans in process |
|
|
90 |
|
|
|
0 |
% |
|
|
85 |
|
|
|
0 |
% |
|
|
691 |
|
|
|
0 |
% |
Unearned loan fees, net |
|
|
(2,951 |
) |
|
|
0 |
% |
|
|
(2,798 |
) |
|
|
0 |
% |
|
|
(2,706 |
) |
|
|
0 |
% |
|
Sub total |
|
|
635,475 |
|
|
|
100 |
% |
|
|
655,039 |
|
|
|
100 |
% |
|
|
674,191 |
|
|
|
100 |
% |
Loans held for sale |
|
|
20,082 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
$ |
655,557 |
|
|
|
|
|
|
$ |
655,039 |
|
|
|
|
|
|
$ |
674,191 |
|
|
|
|
|
|
Due to its efforts to capitalize on market opportunities, the Company expects its loan
portfolio to increase in the last quarter of 2010 mainly in the commercial and commercial real
estate areas.
- 30 -
Analysis of Allowance for Loan Losses
The Company maintains an Allowance to reflect estimated inherent losses from its loan
portfolio as of the balance sheet date. The Allowance is decreased by loan charge-offs and
increased by loan recoveries and provisions for loan losses. At September 30, 2010, the Allowance
was $14.7 million, or 2.31% of loans as compared to $13.5 million, or 2.00% of loans a year ago.
As of and for the period ended September 30, 2010 the Company refined its method of estimating the
Allowance.
In determining its total Allowance, the Company first estimates a specific allowance for
impaired loans. Management determines the fair value of the majority of these loans based on the
underlying collateral values. This analysis is based upon a specific analysis for each impaired
loan, including appraisals on loans secured by real property, managements assessment of the
current market, recent payment history and an evaluation of other sources of repayment. In-house
evaluations of fair value are used in the impairment analysis in some situations. Inputs to the
in-house evaluation process include information about sales of comparable properties in the
appropriate markets and changes in tax assessed values. With regard to our appraisal process, the
Company obtains appraisals on real and personal property that secure its loans during the loan
origination process in accordance with regulatory guidance and its loan policy. The Company
obtains updated appraisals on loans secured by real or personal property based upon its assessment
of changes in the current market or particular projects or properties, information from other
current appraisals, and other sources of information. Appraisals may be adjusted downward by the
Company based on our evaluation of the facts and circumstances on a case by case basis. Appraisals
may be discounted when management believes that the absorption period used in the appraisal is
unrealistic, when expected liquidation costs exceed those included in the appraisal, or when
managements evaluation of deteriorating market conditions warrants an adjustment. Additionally,
the Company may also adjust appraisals in the above circumstances between appraisal dates at its
discretion. For collateral dependant loans, the Company uses the information provided in these
updated appraisals along with its evaluation of all other information available on a particular
property as it assesses the collateral coverage on its performing and nonperforming loans and the
impact that may have on the adequacy of its Allowance. The specific allowance for impaired loans,
as well as the overall Allowance, may increase or decrease based on the Companys assessment of
updated appraisals as well as changes in the borrowers financial condition.
When the Company determines that a loss has occurred on an impaired loan, a charge-off equal
to the difference between carrying value and fair value is recorded. If a specific allowance is
deemed necessary for a loan, and that loan is partially charged off, the loan remains classified as
a nonperforming loan after the charge-off is recorded. Loans measured for impairment based on the
underlying collateral value and all other loans measured for impairment are accounted for in the
same way. The ratio of nonperforming loans for which there has been charge offs compared to total
nonperforming loans as of September 30, 2010 was 14% compared to 18% at December 31, 2009 and 12%
as of September 30, 2009.
The specific allowance on impaired loans at September 30, 2010, was $874,000, or 4% of total
loans that are specifically measured for impairment compared to $1.9 million, or 12%, and $2.2
million, or 4%, of total loans that were specifically measured for impairment at December 31, 2009
and September 30, 2009, respectively.
After the Company determines the specific allowance for impaired loans, the Company then
estimates a general allocated allowance for all other loans that were not impaired as of the
balance sheet date using a formula-based approach that includes average historical loss factors
that are adjusted for
qualitative factors. First, the Company disaggregates the unimpaired loan portfolio into
segments and classes. As of September 30, 2010, the Company has identified the following loan
segments: commercial loans, real estate term loans, construction loans, and consumer loans. Then,
the Company disaggregates loan segments into classes. As of September 30, 2010, the Company has
identified the internal risk codes as the only classes of loans. These classes include loans
classified as excellent, good, satisfactory, watch, special mention, substandard, doubtful and
loss.
A loan class is created in the Allowance calculation when that group of loans components
constitute a significant concentration as a percentage of the Companys capital, when current
market or economic conditions point to increased scrutiny, or when historical or recent experience
suggests that additional
- 31 -
attention is warranted in the analysis process. The Company has $51
million in construction loans at September 30, 2010, and $18.1 million of those loans have interest
reserves as of September 30, 2010. Management does not consider construction loans with interest
reserves to be a material class within the loan portfolio for purposes of the Allowance
calculation.
The Company calculates an average historical loss rate for each segment and class of loans as
of each reporting period. As of September 30, 2010, the Company has determined that a three year
look-back period is appropriate given the current economic environment. Lastly, the Company
determines a qualitative adjustment for each historical loss factor based on managements
assessment of current internal and external factors that affect the overall expected losses
inherent in each segment and class of the portfolio.
Finally, the Company assesses the overall adequacy of the Allowance based on several factors
including the level of the Allowance as compared to total loans and nonperforming loans in light of
current economic conditions. This portion of the Allowance is deemed unallocated because it is
not allocated to any segment or class of the loan portfolio. This portion of the Allowance
provides for coverage of credit losses inherent in the loan portfolio but not captured in the
credit loss factors that are utilized in the risk rating-based component, or in the specific
impairment component of the Allowance, and acknowledges the inherent imprecision of all loss
prediction models.
The unallocated portion of the Allowance is based upon managements evaluation of various
factors that are not directly measured in the determination of the allocated portions of the
Allowance. Such factors include uncertainties in identifying triggering events that directly
correlate to subsequent loss rates, uncertainties in economic conditions, risk factors that have
not yet manifested themselves in loss allocation factors, and historical loss experience data that
may not precisely correspond to the current portfolio. In addition, the unallocated reserve may be
further adjusted based upon the direction of various risk indicators. Examples of such factors
include the risk as to current and prospective economic conditions, the level and trend of charge
offs or recoveries, and the risk of heightened imprecision or inconsistency of appraisals used in
estimating real estate values. Although this allocation process may not accurately predict credit
losses by loan type or in the aggregate, the total allowance for credit losses is available to
absorb losses that may arise from any loan type or category. Due to the subjectivity involved in
the determination of the unallocated portion of the Allowance, the relationship of the unallocated
component to the total Allowance may fluctuate from period to period.
At September 30, 2010, the unallocated allowance as a percentage of the total Allowance was
14%. The Company performed a retrospective review of the Allowance using the new methodology for
the periods ending December 31, 2009, March 31, 2010 and June 30, 2010 and determined that the
unallocated allowance as a percentage of the total Allowance was 21%, 21% and 10%, respectively.
The unallocated allowance as a percentage of the total Allowance using the legacy methodology was
45%, 55%, 51% and 45% for the periods ending September 30, 2009, December 31, 2009, March 31, 2010
and June 30, 2010.
Deposits
Deposits are the Companys primary source of funds. Total deposits increased $25.6 million at
September 30, 2010, from December 31, 2009, and increased $41.6 million from September 30, 2009.
The Companys deposits generally are expected to fluctuate according to the level of the Companys
market share, economic conditions, and normal seasonal trends. The Company continues to market its
High Performance Checking products and expects increases in the number of deposit accounts and the
balances associated with them in 2010. There were no depositors with deposits representing 10% or
more of total deposits at September 30, 2010, December 31, 2009, or September 30, 2009.
To provide customer assurances, the Company is participating in the FDICs Transaction Account
Guarantee Program (TAGP) that provides 100% guarantee of noninterest-bearing checking accounts,
including NOW accounts paying less than 0.25%. The TAGP has recently been extended to January 1,
2013. Additionally, under recent changes from the FDIC, all interest-bearing deposit accounts are
insured up to $250,000. The increase in basic FDIC insurance coverage from $100,000 to $250,000
- 32 -
was previously in effect through December 31, 2013, but in July 2010 the coverage limit was
permanently increased.
Borrowings
At September 30, 2010, the Companys maximum borrowing line from the FHLB was $112.7 million,
approximately 11% of the Companys assets. FHLB advances are dependent on the availability of
acceptable collateral such as marketable securities or real estate loans, although all FHLB
advances are secured by a blanket pledge of the Companys assets. At September 30, 2010, December
31, 2009 and September 30, 2009, the Company had no outstanding balances on the borrowing line.
The decrease in the outstanding balance of the line at September 30, 2010, December 31, 2009 and
September 30, 2009 as compared to June 30, 2009 was the result of the early pay off of $9.9 million
in advances in September 2009. The advances had an average remaining life of over 8 years. A
resulting $718,000 prepayment penalty reduced earnings per diluted share for the third quarter of
2009 by $0.07 and is expected to save as much as $0.05 per diluted share in 2010 and additional
amounts in future years.
The Company purchased its main office facility for $12.9 million on July 1, 2008. In this
transaction, the Company, through Northrim Building LLC, assumed an existing loan secured by the
building in an amount of $5.1 million. At September 30, 2010, December 31, 2009 and September 30,
2009, the outstanding balance on this loan was $4.8 million, $4.9 million and $4.9 million,
respectively. This loan has a maturity date of April 1, 2014 and a fixed interest rate of 5.95%.
In addition to the borrowings for the building, the Company had $707,000 in other borrowings
outstanding at September 30, 2010, as compared to $690,000 and $720,000, respectively, in other
borrowings outstanding at December 31, 2009 and September 30, 2009. Other borrowings during each
of these periods consisted of short-term borrowings from the Federal Reserve Bank for Treasury tax
deposits.
At September 30, 2010, December 31, 2009 and September 30, 2009, the Company had no short-term
(original maturity of one year or less) borrowings that exceeded 30% of shareholders equity.
Liquidity and Capital Resources
The Company manages its liquidity through its Asset and Liability Committee. In addition to
the $83.3 million of cash and cash equivalents and $185.6 million in unpledged available for sale
securities held at September 30, 2010, the Company had additional funding sources which include fed
fund borrowing lines and advances available at the Federal Home Loan Bank of Seattle and the
Federal Reserve Bank of approximately $93.5 million as of September 30, 2010.
At September 30, 2010, $19.7 million in securities, or 9%, of the investment portfolio was
pledged, as compared to $17.7 million, or 9%, at December 31, 2009, and $52.1 million, or 34%, at
September 30, 2009. The changes in pledged securities are due to the fact that as of September 30,
2010 and December 31, 2009, the Company did not have any securities pledged to collateralize Alaska
Permanent Fund certificates of deposit. At September 30, 2009, the Company had pledged $36.6
million to collateralize Alaska Permanent Fund certificates of deposit.
As shown in the Consolidated Statements of Cash Flows, net cash used by operating activities
was $4.5 million for the nine months ended September 30, 2010. The use of cash by operating
activities was primarily for purchases of $43.6 million in loans held for sale, net of loans sold
of $23.5 million during the period for a net cash outflow of $20.1 million. This outflow of cash
was partially offset by positive net income, after excluding non-cash charges such as the provision
for loan losses of $3.2 million. Net cash of $5.5 million was used in investing activities. This
net outflow consisted primarily of $27.2 million in net purchases of investment securities and was
partially offset by $15.9 million in loan paydowns, net of advances and $9.2 million in proceeds
from the sale of OREO properties. The $26.6 million of cash provided by financing activities
primarily consisted of the $25.6 million increase in deposits during the nine-month period ended
September 30, 2010.
- 33 -
The Company issued 22,874 shares through the exercise of stock options in the third quarter of
2010 and did not repurchase any shares of its common stock under the Companys publicly announced
repurchase program. At September 30, 2010, the Company had approximately 6.4 million shares of its
common stock outstanding.
Capital Requirements and Ratios
The Company and the Bank are subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum regulatory capital requirements can result
in certain mandatory, and possibly additional discretionary, actions by regulators that, if
undertaken, could have a direct material adverse effect on the Companys financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the
Company and Northrim Bank (the Bank) must meet specific capital guidelines that involve
quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices. The capital amounts and classifications are also subject to
qualitative judgments by regulators about the components of regulatory capital, risk weightings,
and other factors. The regulatory agencies may establish higher minimum requirements if, for
example, a bank or bank holding company has previously received special attention or has a high
susceptibility to interest rate risk.
The requirements address both risk-based capital and leverage capital. At September 30, 2010,
the Company and the Bank met all applicable regulatory capital adequacy requirements for a
well-capitalized institution.
The FDIC has in place qualifications for banks to be classified as well-capitalized. As of
September 15, 2010, the most recent notification from the FDIC categorized the Bank as
well-capitalized. There have been no conditions or events known to us since the FDIC notification
that have changed the Banks classification.
The following table illustrates the actual capital ratios for the Company and the Bank as
calculated under regulatory guidelines, compared to the regulatory minimum capital ratios and the
regulatory minimum capital ratios needed to qualify as a well-capitalized institution as of
September 30, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adequately- |
|
|
Well- |
|
|
Actual Ratio |
|
|
Actual Ratio |
|
|
|
Capitalized |
|
|
Capitalized |
|
|
BHC |
|
|
Bank |
|
|
|
|
Tier 1 risk-based capital |
|
|
4.00 |
% |
|
|
6.00 |
% |
|
|
14.46 |
% |
|
|
13.47 |
% |
Total risk-based capital |
|
|
8.00 |
% |
|
|
10.00 |
% |
|
|
15.72 |
% |
|
|
14.72 |
% |
Leverage ratio |
|
|
4.00 |
% |
|
|
5.00 |
% |
|
|
12.48 |
% |
|
|
11.63 |
% |
|
|
|
|
The regulatory capital ratios for the Company exceed those for the Bank primarily because
the $18.6 million junior subordinated debenture offerings that the Company completed in the third
quarter of 2003 and the fourth quarter of 2005 are included in the Companys capital for regulatory
purposes although such securities are accounted for as a long-term debt in its financial
statements. The junior subordinated
debentures are not accounted for on the Banks financial statements nor are they included in its
capital. As a result, the Company has $18.6 million more in regulatory capital than the Bank,
which explains the significant difference in the capital ratios for the two entities.
Off-Balance Sheet Items
The Company is a party to financial instruments with off-balance sheet risk. Among the
off-balance sheet items entered into in the ordinary course of business are commitments to extend
credit and the issuance of letters of credit. These instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amounts recognized on the balance sheet.
Certain commitments are collateralized. As of September 30, 2010, December 31, 2009 and September
30, 2009, the Companys commitments to extend credit and to provide letters of credit amounted to
$206.5 million, $183.6 million,
- 34 -
and $188.4, respectively. Since many of the commitments are
expected to expire without being drawn upon, these total commitment amounts do not necessarily
represent future cash requirements.
Capital Expenditures and Commitments
The Company has no capital commitments as of September 30, 2010.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rate and credit risks are the most significant market risks which affect the
Companys performance. The Company relies on loan review, prudent loan underwriting standards, and
an adequate allowance for credit losses to mitigate credit risk.
The Company utilizes a simulation model to monitor and manage interest rate risk within
parameters established by its internal policy. The model projects the impact of a 100 basis point
increase and a 100 basis point decrease, from prevailing interest rates, on the balance sheet for a
period of 12 months.
The Company is liability sensitive, meaning that interest-bearing liabilities mature or
reprice more quickly than interest-earning assets. Therefore, an increase in
market rates of interest could negatively impact net interest income. Conversely, a declining
interest rate environment may positively impact net interest income.
Generalized assumptions are made on how investment securities, classes of loans, and various
deposit products might respond to interest rate changes. These assumptions are inherently
uncertain, and as a result, the model cannot precisely estimate net interest income nor precisely
predict the impact of higher or lower interest rates on net interest income. Actual results may
differ materially from simulated results due to factors such as timing, magnitude, and frequency of
rate changes, customer reaction to rate changes, competitive response, changes in market
conditions, the absolute level of interest rates, and management strategies, among other factors.
The results of the simulation model at September 30, 2010, indicate that, if interest rates
immediately increased by 100 basis points, the Company would experience a decrease in net interest
income of approximately $453,000 over the next 12 months. Similarly, the simulation model indicates
that, if interest rates immediately decreased by 100 basis points, the Company would experience an
increase in net interest income of approximately $610,000 over the next 12 months. While we believe that these results are reasonable for a liability sensitive company, we also believe that they are magnified due to current loan
pricing with floors on interest rates that limit the negative effect of a decrease in interest
rates. These floors also decrease the positive impact of an increase in interest rates as many
loans are priced above their floors.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, we evaluated the effectiveness of the
design and operation of our disclosure controls and procedures. Our principal executive and
financial officers supervised and participated in this evaluation. Based on this evaluation, our
principal executive and financial officers each concluded that as of September 30, 2010, the
disclosure controls and procedures are effective in timely alerting them to material information
required to be included in the periodic reports to the Securities and Exchange Commission. The
design of any system of controls is based in part upon various assumptions about the likelihood of
future events, and there can be no assurance that any of our plans, products, services or
procedures will succeed in achieving their intended goals under future conditions.
- 35 -
Changes in Internal Control over Disclosure and Reporting
There was no change in our internal control over financial reporting that occurred during the
quarterly period ended September 30, 2010 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During the normal course of its business, the Company is a party to various debtor-creditor
legal actions, which individually or in the aggregate, could be material to the Companys business,
operations, or financial condition. These include cases filed as a plaintiff in collection and
foreclosure cases, and the enforcement of creditors rights in bankruptcy proceedings.
ITEM 1A. RISK FACTORS
For information regarding risk factors, please refer to Item 1A in the Companys Annual Report
on Form 10-K for the year ended December 31, 2009. These risk factors have not materially changed
as of September 30, 2010.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a)-(b) Not applicable
(c) There were no stock repurchases by the Company during the third quarter of 2010.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. REMOVED AND RESERVED
ITEM 5. OTHER INFORMATION
|
(a) |
|
Not applicable |
|
|
(b) |
|
There have been no material changes to the procedures by which shareholders may
nominate directors to the Companys board. |
ITEM 6. EXHIBITS
|
31.1 |
|
Certification of Chief Executive Officer required by Rule 13a-14(a) or Rule
15d-14(a) |
|
|
31.2 |
|
Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule
15d-14(a) |
|
|
32.1 |
|
Certification of Chief Executive Officer required by Rule 13a-14(b) or Rule
15d-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 |
|
|
32.2 |
|
Certification of Chief Financial Officer required by Rule 13a-14(b) or Rule
15d-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 |
- 36 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
NORTHRIM BANCORP, INC.
|
|
November 8, 2010 |
By |
/s/ R. Marc Langland
|
|
|
|
R. Marc Langland |
|
|
|
Chairman, President, and CEO
(Principal Executive Officer) |
|
|
|
|
|
November 8, 2010 |
By |
/s/ Joseph M Schierhorn
|
|
|
|
Joseph M. Schierhorn |
|
|
|
Executive Vice President,
Chief Financial Officer
(Principal Financial and Accounting Officer) |
|
|
- 37 -