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 March 31, 2007
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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 Exchange Act 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 is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer
o Accelerated
filer þ Non-accelerated filer o
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 May 8, 2007 was 6,116,729.
TABLE OF CONTENTS
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Consolidated Financial Statements (unaudited) |
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- March 31, 2007 (unaudited) |
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4 |
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- December 31, 2006 |
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4 |
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- March 31, 2006 (unaudited) |
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4 |
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- Three months ended March 31, 2007 and 2006 |
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5 |
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- Three months ended March 31, 2007 and 2006 |
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6 |
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- Three months ended March 31, 2007 and 2006 |
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7 |
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8 |
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11 |
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26 |
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27 |
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28 |
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28 |
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28 |
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28 |
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28 |
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29 |
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29 |
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30 |
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EXHIBIT 31.1 |
EXHIBIT 31.2 |
EXHIBIT 32.1 |
EXHIBIT 32.2 |
- 2 -
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, 2006.
ITEM 1. FINANCIAL STATEMENTS
- 3 -
NORTHRIM BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
March 31, 2007, December 31, 2006, and March 31, 2006
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For review purposes only. |
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March 31, |
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December 31, |
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March 31, |
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Cur QTR/Dec QTR |
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Cur QTR/last QTR |
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2007 |
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2006 |
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2006 |
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Change |
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Change |
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(unaudited) |
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(unaudited) |
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Dollar |
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Percent |
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Dollar |
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Percent |
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(Dollars in thousands, except per share data) |
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ASSETS |
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Cash and due from banks |
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$ |
20,658 |
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$ |
25,565 |
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$ |
24,792 |
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$ |
(4,907 |
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-19 |
% |
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$ |
(4,134 |
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-17 |
% |
Money market investments |
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21,937 |
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18,717 |
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12,400 |
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3,220 |
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17 |
% |
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9,537 |
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77 |
% |
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Investment securities
held to maturity |
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11,775 |
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11,776 |
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9,830 |
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(1 |
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0 |
% |
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1,945 |
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20 |
% |
Investment securities
available for sale |
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71,167 |
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86,993 |
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52,295 |
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(15,826 |
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-18 |
% |
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18,872 |
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36 |
% |
Investment in Federal Home Loan Bank stock |
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1,556 |
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1,556 |
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1,556 |
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0 |
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0 |
% |
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0 |
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0 |
% |
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Total investment
securities |
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84,498 |
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100,325 |
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63,681 |
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(15,827 |
) |
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-16 |
% |
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20,817 |
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33 |
% |
Loans |
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720,144 |
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717,056 |
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716,086 |
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3,088 |
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0 |
% |
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4,058 |
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1 |
% |
Allowance for loan
losses |
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(11,853 |
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(12,125 |
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(10,870 |
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272 |
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-2 |
% |
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(983 |
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9 |
% |
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Net loans |
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708,291 |
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704,931 |
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705,216 |
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3,360 |
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0 |
% |
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3,075 |
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0 |
% |
Purchased receivables,
net |
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20,365 |
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21,183 |
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16,044 |
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(818 |
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-4 |
% |
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4,321 |
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27 |
% |
Accrued interest
receivable |
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5,480 |
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4,916 |
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4,630 |
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564 |
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11 |
% |
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850 |
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18 |
% |
Premises and equipment,
net |
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12,834 |
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12,874 |
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10,593 |
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(40 |
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0 |
% |
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2,241 |
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21 |
% |
Intangible assets |
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6,783 |
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6,903 |
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7,296 |
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(120 |
) |
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-2 |
% |
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(513 |
) |
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-7 |
% |
Other assets |
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30,319 |
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30,206 |
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21,992 |
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113 |
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0 |
% |
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8,327 |
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38 |
% |
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Total Assets |
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$ |
911,165 |
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$ |
925,620 |
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$ |
866,644 |
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$ |
(14,455 |
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-2 |
% |
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$ |
44,521 |
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5 |
% |
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LIABILITIES |
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Deposits: |
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Demand |
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$ |
184,653 |
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$ |
206,343 |
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$ |
175,319 |
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$ |
(21,690 |
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-11 |
% |
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9,334 |
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5 |
% |
Interest-bearing
demand |
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83,194 |
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89,476 |
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75,723 |
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(6,282 |
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-7 |
% |
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7,471 |
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10 |
% |
Savings |
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47,856 |
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48,330 |
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49,606 |
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(474 |
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-1 |
% |
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(1,750 |
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-4 |
% |
Alaska CDs |
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194,952 |
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207,492 |
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208,414 |
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(12,540 |
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-6 |
% |
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(13,462 |
) |
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-6 |
% |
Money market |
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168,867 |
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157,345 |
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144,781 |
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11,522 |
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7 |
% |
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24,086 |
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17 |
% |
Certificates of
deposit less than $100,000 |
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59,324 |
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57,601 |
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56,364 |
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1,723 |
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3 |
% |
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2,960 |
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5 |
% |
Certificates of deposit greater
than $100,000 |
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36,591 |
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28,317 |
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40,294 |
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8,274 |
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29 |
% |
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(3,703 |
) |
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-9 |
% |
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Total deposits |
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775,437 |
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794,904 |
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750,501 |
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(19,467 |
) |
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-2 |
% |
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24,936 |
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3 |
% |
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Borrowings |
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8,602 |
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6,502 |
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5,488 |
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2,100 |
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32 |
% |
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3,114 |
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57 |
% |
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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0 |
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0 |
% |
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0 |
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0 |
% |
Other liabilities |
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11,802 |
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10,209 |
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6,209 |
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1,593 |
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16 |
% |
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5,593 |
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90 |
% |
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Total liabilities |
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814,399 |
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830,173 |
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780,756 |
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(15,774 |
) |
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-2 |
% |
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33,643 |
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4 |
% |
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Minority interest in
subsidiaries |
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18 |
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29 |
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23 |
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(11 |
) |
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-38 |
% |
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(5 |
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-22 |
% |
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SHAREHOLDERS EQUITY |
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Common stock, $1 par value, 10,000,000 shares
authorized,
6,116,729; 6,114,247; and 5,793,461 shares
issued and
outstanding at March 31, 2007, December 31,
2006, and
March 31, 2006,
respectively |
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|
6,117 |
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|
|
6,114 |
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|
5,793 |
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3 |
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|
0 |
% |
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|
324 |
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|
6 |
% |
Additional paid-in
capital |
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|
46,552 |
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|
46,379 |
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|
39,054 |
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|
173 |
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|
|
0 |
% |
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|
7,498 |
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|
19 |
% |
Retained earnings |
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|
44,252 |
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|
43,212 |
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|
41,618 |
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|
1,040 |
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2 |
% |
|
|
2,634 |
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6 |
% |
Accumulated other comprehensive income unrealized
gain (loss) on
securities, net |
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(173 |
) |
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(287 |
) |
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(600 |
) |
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|
114 |
|
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|
-40 |
% |
|
|
427 |
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|
-71 |
% |
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|
Total
shareholders
equity |
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|
96,748 |
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|
95,418 |
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|
85,865 |
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|
|
1,330 |
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|
1 |
% |
|
|
10,883 |
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|
13 |
% |
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Total Liabilities and Shareholders Equity |
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$ |
911,165 |
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$ |
925,620 |
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$ |
866,644 |
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|
$ |
(14,455 |
) |
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|
-2 |
% |
|
$ |
44,521 |
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|
5 |
% |
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|
See notes to the consolidated financial statements
- 4 -
NORTHRIM BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
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Three Months Ended |
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For review purposes |
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March 31, |
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Quarter Change |
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2007 |
|
2006 |
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Dollars |
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Percent |
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|
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(unaudited) |
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(Dollar in Thousands, |
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except per share data) |
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Interest Income |
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|
|
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|
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Interest and fees on loans |
|
$ |
16,821 |
|
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$ |
15,276 |
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|
|
1,545 |
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|
|
10 |
% |
Interest on investment securities: |
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|
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|
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Assets available for sale |
|
|
895 |
|
|
|
481 |
|
|
|
414 |
|
|
|
86 |
% |
Assets held to maturity |
|
|
112 |
|
|
|
48 |
|
|
|
64 |
|
|
|
133 |
% |
Interest on money market investments |
|
|
154 |
|
|
|
259 |
|
|
|
(105 |
) |
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|
-41 |
% |
|
|
|
Total Interest Income |
|
|
17,982 |
|
|
|
16,064 |
|
|
|
1,918 |
|
|
|
12 |
% |
|
|
|
|
|
|
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|
|
|
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|
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Interest Expense |
|
|
|
|
|
|
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|
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|
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Interest expense on deposits and borrowings |
|
|
5,879 |
|
|
|
4,765 |
|
|
|
1,114 |
|
|
|
23 |
% |
|
|
|
Net Interest Income |
|
|
12,103 |
|
|
|
11,299 |
|
|
|
804 |
|
|
|
7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses |
|
|
455 |
|
|
|
54 |
|
|
|
401 |
|
|
|
743 |
% |
|
|
|
Net Interest Income After Provision for Loan Losses |
|
|
11,648 |
|
|
|
11,245 |
|
|
|
403 |
|
|
|
4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Operating Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts |
|
|
504 |
|
|
|
484 |
|
|
|
20 |
|
|
|
4 |
% |
Purchased receivable income |
|
|
427 |
|
|
|
313 |
|
|
|
114 |
|
|
|
36 |
% |
Employee benefit plan income |
|
|
257 |
|
|
|
173 |
|
|
|
84 |
|
|
|
49 |
% |
Equity in earnings from mortgage affiliate |
|
|
14 |
|
|
|
7 |
|
|
|
7 |
|
|
|
100 |
% |
Equity in loss from Elliott Cove |
|
|
(33 |
) |
|
|
(77 |
) |
|
|
44 |
|
|
|
-57 |
% |
Other income |
|
|
493 |
|
|
|
528 |
|
|
|
(35 |
) |
|
|
-7 |
% |
|
|
|
Total Other Operating Income |
|
|
1,662 |
|
|
|
1,428 |
|
|
|
234 |
|
|
|
16 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Operating Expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and other personnel expense |
|
|
5,255 |
|
|
|
4,765 |
|
|
|
490 |
|
|
|
10 |
% |
Occupancy, net |
|
|
698 |
|
|
|
641 |
|
|
|
57 |
|
|
|
9 |
% |
Equipment expense |
|
|
342 |
|
|
|
341 |
|
|
|
1 |
|
|
|
0 |
% |
Marketing expense |
|
|
459 |
|
|
|
508 |
|
|
|
(49 |
) |
|
|
-10 |
% |
Intangible asset amortization expense |
|
|
121 |
|
|
|
121 |
|
|
|
0 |
|
|
|
0 |
% |
Other operating expense |
|
|
2,057 |
|
|
|
1,588 |
|
|
|
469 |
|
|
|
30 |
% |
|
|
|
Total Other Operating Expense |
|
|
8,932 |
|
|
|
7,964 |
|
|
|
968 |
|
|
|
12 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Income Taxes and Minority Interest |
|
|
4,378 |
|
|
|
4,709 |
|
|
|
(331 |
) |
|
|
-7 |
% |
Minority interest in subsidiaries |
|
|
50 |
|
|
|
45 |
|
|
|
5 |
|
|
|
12 |
% |
|
|
|
Income Before Income Taxes |
|
|
4,328 |
|
|
|
4,664 |
|
|
|
(336 |
) |
|
|
-7 |
% |
Provision for income taxes |
|
|
1,599 |
|
|
|
1,769 |
|
|
|
(170 |
) |
|
|
-10 |
% |
|
|
|
Net Income |
|
$ |
2,729 |
|
|
$ |
2,895 |
|
|
$ |
(166 |
) |
|
|
-6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Share, Basic |
|
$ |
0.44 |
|
|
$ |
0.47 |
|
|
$ |
(0.03 |
) |
|
|
-6 |
% |
Earnings Per Share, Diluted |
|
$ |
0.44 |
|
|
$ |
0.47 |
|
|
$ |
(0.03 |
) |
|
|
-6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Shares Outstanding, Basic |
|
|
6,144,114 |
|
|
|
6,109,522 |
|
|
|
34,592 |
|
|
|
1 |
% |
Weighted Average Shares Outstanding, Diluted |
|
|
6,244,364 |
|
|
|
6,187,370 |
|
|
|
56,994 |
|
|
|
1 |
% |
See notes to the consolidated financial statements
- 5 -
NORTHRIM BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
|
|
|
|
|
2007 |
|
2006 |
|
|
|
|
|
(unaudited) |
|
|
(Dollars in thousands) |
Net income |
|
$ |
2,729 |
|
|
$ |
2,895 |
|
Other comprehensive income, net of tax: |
|
|
|
|
|
|
|
|
Unrealized holding gains (losses) arising during period |
|
|
114 |
|
|
|
(111 |
) |
Less: reclassification adjustment for gains |
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income |
|
$ |
2,843 |
|
|
$ |
2,784 |
|
|
|
|
See notes to the consolidated financial statements
- 6 -
NORTHRIM BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
|
|
|
|
|
2007 |
|
2006 |
|
|
|
|
|
(unaudited) |
|
|
(Dollars in thousands) |
Operating Activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
2,729 |
|
|
$ |
2,895 |
|
|
|
|
|
|
|
|
|
|
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization of premises and equipment |
|
|
306 |
|
|
|
309 |
|
Amortization of software |
|
|
73 |
|
|
|
133 |
|
Intangible asset amortization |
|
|
121 |
|
|
|
121 |
|
Amortization of investment security premium, net of discount accretion |
|
|
(134 |
) |
|
|
(16 |
) |
Deferred tax (benefit) |
|
|
(224 |
) |
|
|
(395 |
) |
Stock-based compensation |
|
|
138 |
|
|
|
122 |
|
Excess tax benefits from share-based payment arrangements |
|
|
(7 |
) |
|
|
(26 |
) |
Deferral of loan fees and costs, net |
|
|
(434 |
) |
|
|
14 |
|
Provision for loan losses |
|
|
455 |
|
|
|
54 |
|
Purchased receivable loss |
|
|
245 |
|
|
|
|
|
Distributions in excess of earnings from RML |
|
|
194 |
|
|
|
324 |
|
Equity in loss from Elliott Cove |
|
|
33 |
|
|
|
77 |
|
Minority interest in subsidiaries |
|
|
50 |
|
|
|
45 |
|
(Increase) in accrued interest receivable |
|
|
(564 |
) |
|
|
(233 |
) |
(Increase) decrease in other assets |
|
|
(180 |
) |
|
|
216 |
|
Increase of other liabilities |
|
|
675 |
|
|
|
1,399 |
|
|
|
|
Net Cash Provided by Operating Activities |
|
|
3,476 |
|
|
|
5,039 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities: |
|
|
|
|
|
|
|
|
Investment in securities: |
|
|
|
|
|
|
|
|
Purchases of investment securities-available-for-sale |
|
|
(14,856 |
) |
|
|
|
|
Purchases of investment securities-held-to-maturity |
|
|
|
|
|
|
(8,896 |
) |
Proceeds from sales/maturities of securities-available-for-sale |
|
|
31,011 |
|
|
|
16 |
|
Investment in purchased receivables, net of repayments |
|
|
573 |
|
|
|
(3,846 |
) |
Investments in loans: |
|
|
|
|
|
|
|
|
Sales of loans and loan participations |
|
|
3,711 |
|
|
|
5,631 |
|
Loans made, net of repayments |
|
|
(7,092 |
) |
|
|
(16,562 |
) |
Investment in Elliott Cove |
|
|
|
|
|
|
(100 |
) |
Loan to Elliott Cove, net of repayments |
|
|
(89 |
) |
|
|
(25 |
) |
Loan to PWA, net of repayments |
|
|
|
|
|
|
385 |
|
Purchases of premises and equipment |
|
|
(266 |
) |
|
|
(299 |
) |
|
|
|
Net Cash Provided (Used) by Investing Activities |
|
|
12,992 |
|
|
|
(23,696 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities: |
|
|
|
|
|
|
|
|
(Decrease) in deposits |
|
|
(19,467 |
) |
|
|
(29,365 |
) |
Increase (decrease) in borrowings |
|
|
2,100 |
|
|
|
(3,485 |
) |
Distributions to minority interests |
|
|
(62 |
) |
|
|
(45 |
) |
Proceeds from issuance of common stock |
|
|
31 |
|
|
|
77 |
|
Excess tax benefits from share-based payment arrangements |
|
|
7 |
|
|
|
26 |
|
Repurchase of common stock |
|
|
|
|
|
|
(410 |
) |
Cash dividends paid |
|
|
(764 |
) |
|
|
(639 |
) |
|
|
|
Net Cash (Used) by Financing Activities |
|
|
(18,155 |
) |
|
|
(33,841 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net (Decrease) in Cash and Cash Equivalents |
|
|
(1,687 |
) |
|
|
(52,498 |
) |
Cash and cash equivalents at beginning of period |
|
|
44,282 |
|
|
|
89,690 |
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
42,595 |
|
|
$ |
37,192 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Information: |
|
|
|
|
|
|
|
|
Income taxes paid |
|
$ |
50 |
|
|
$ |
|
|
|
|
|
Interest paid |
|
$ |
5,797 |
|
|
$ |
4,806 |
|
|
|
|
Dividends declared but not paid |
|
$ |
924 |
|
|
$ |
637 |
|
|
|
|
See notes to the consolidated financial statements
- 7 -
NORTHRIM BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
March 31, 2007 and 2006
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. Operating results for the interim
period ended March 31, 2007, are not necessarily indicative of the results anticipated for the year
ending December 31, 2007. These financial statements should be read in conjunction with the
Companys Annual Report on Form 10-K for the year ended December 31, 2006.
2. ACCOUNTING PRONOUNCEMENTS
Between September 2006 and March 31, 2007, the Financial Accounting Standards Board (FASB) issued
Statement No. 157, Fair Value Measurements and Statement No. 159, Fair Value Option for Financial
Assets and Financial Liabilities. The Company believes the adoption of these Statements will have
no impact on its financial statements.
3. LENDING ACTIVITIES
The following table sets forth the Companys loan portfolio composition by loan type for the dates
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2007 |
|
December 31, 2006 |
|
March 31, 2006 |
|
|
|
|
|
Dollar |
|
Percent |
|
Dollar |
|
Percent |
|
Dollar |
|
Percent |
|
|
Amount |
|
of Total |
|
Amount |
|
of Total |
|
Amount |
|
of Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
Commercial |
|
$ |
300,834 |
|
|
|
42 |
% |
|
$ |
287,155 |
|
|
|
40 |
% |
|
$ |
296,384 |
|
|
|
41 |
% |
Construction/development |
|
|
144,024 |
|
|
|
20 |
% |
|
|
153,059 |
|
|
|
21 |
% |
|
|
143,955 |
|
|
|
20 |
% |
Commercial real estate |
|
|
234,769 |
|
|
|
33 |
% |
|
|
237,599 |
|
|
|
33 |
% |
|
|
242,005 |
|
|
|
34 |
% |
Consumer |
|
|
42,772 |
|
|
|
6 |
% |
|
|
42,140 |
|
|
|
6 |
% |
|
|
36,410 |
|
|
|
5 |
% |
Loans in process |
|
|
334 |
|
|
|
0 |
% |
|
|
126 |
|
|
|
0 |
% |
|
|
350 |
|
|
|
0 |
% |
Unearned loan fees |
|
|
(2,589 |
) |
|
|
0 |
% |
|
|
(3,023 |
) |
|
|
0 |
% |
|
|
(3,018 |
) |
|
|
0 |
% |
|
|
|
Total loans |
|
$ |
720,144 |
|
|
|
100 |
% |
|
$ |
717,056 |
|
|
|
100 |
% |
|
$ |
716,086 |
|
|
|
100 |
% |
|
|
|
4. ALLOWANCE FOR LOAN LOSSES, NONPERFORMING ASSETS, AND LOANS MEASURED FOR IMPAIRMENT
The Company maintains an Allowance for Loan Losses (the Allowance) to absorb losses from its loan
portfolio. On a quarterly basis, the Company uses three methods to analyze the Allowance by taking
percentage allocations for criticized and classified assets, in addition to a specific allowance
for impaired loans, making percentage allocations based upon its internal risk classifications and
other specifically identified portions of its loan portfolio, and using ratio analysis and peer
comparisons.
The Allowance for Loan Losses is decreased by loan charge-offs and increased by loan recoveries and
provisions for loan losses. The Company took a provision for loan losses in the amount of $455,000
for the three-month period ending March 31, 2007 to account for increases in non-performing loans
and the
- 8 -
specific allowance for impaired loans. The following table details activity in the
Allowance for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
|
|
|
|
|
2007 |
|
2006 |
|
|
|
|
|
(Dollars in thousands) |
Balance at beginning of period |
|
$ |
12,125 |
|
|
$ |
10,706 |
|
Charge-offs: |
|
|
|
|
|
|
|
|
Commercial |
|
|
1,221 |
|
|
|
|
|
Construction/development |
|
|
|
|
|
|
|
|
Commercial real estate |
|
|
|
|
|
|
|
|
Consumer |
|
|
1 |
|
|
|
4 |
|
|
|
|
Total charge-offs |
|
|
1,222 |
|
|
|
4 |
|
Recoveries: |
|
|
|
|
|
|
|
|
Commercial |
|
|
491 |
|
|
|
110 |
|
Construction/development |
|
|
|
|
|
|
|
|
Commercial real estate |
|
|
|
|
|
|
|
|
Consumer |
|
|
4 |
|
|
|
4 |
|
|
|
|
Total recoveries |
|
|
495 |
|
|
|
114 |
|
Net, (recoveries) charge-offs |
|
|
727 |
|
|
|
(110 |
) |
Provision for loan losses |
|
|
455 |
|
|
|
54 |
|
|
|
|
Balance at end of period |
|
$ |
11,853 |
|
|
$ |
10,870 |
|
|
|
|
Nonperforming assets consist of nonaccrual loans, accruing loans of 90 days or more past due,
restructured loans, and real estate owned. The following table sets forth information with respect
to nonperforming assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2007 |
|
December 31, 2006 |
|
March 31, 2006 |
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
Nonaccrual loans |
|
$ |
6,435 |
|
|
$ |
5,176 |
|
|
$ |
4,980 |
|
Accruing loans past due 90 days or more |
|
|
3,679 |
|
|
|
708 |
|
|
|
1,396 |
|
Restructured loans |
|
|
78 |
|
|
|
748 |
|
|
|
|
|
|
|
|
Total nonperforming loans |
|
|
10,192 |
|
|
|
6,632 |
|
|
|
6,376 |
|
Real estate owned |
|
|
829 |
|
|
|
717 |
|
|
|
|
|
|
|
|
Total nonperforming assets |
|
$ |
11,021 |
|
|
$ |
7,349 |
|
|
$ |
6,376 |
|
|
|
|
Allowance for loan losses |
|
$ |
11,853 |
|
|
$ |
12,125 |
|
|
$ |
10,870 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans to portfolio loans |
|
|
1.42 |
% |
|
|
0.92 |
% |
|
|
0.89 |
% |
Nonperforming assets to total assets |
|
|
1.21 |
% |
|
|
0.79 |
% |
|
|
0.74 |
% |
Allowance to portfolio loans |
|
|
1.65 |
% |
|
|
1.69 |
% |
|
|
1.52 |
% |
Allowance to nonperforming loans |
|
|
116 |
% |
|
|
183 |
% |
|
|
170 |
% |
At March 31, 2007, December 31, 2006, and March 31, 2006, the Company had loans measured for
impairment of $29.1 million, $32 million, and $19.6 million, respectively. A specific allowance of
$4.7 million, $4.3 million, and $2.9 million, respectively, was established for these periods. The
decrease in loans measured for impairment at March 31, 2007, as compared to December 31, 2006,
resulted mainly from the payoff of one commercial real estate project that was included in loans
measured for impairment at December 31, 2006 and March 31, 2006. In addition, the Company charged
off two commercial loans totaling $1.1 million at March 31, 2007 that were included in loans
measured for impairment at December 31, 2006. In contrast, the increase in loans measured for
impairment at December 31, 2006, as compared to March 31, 2006, resulted mainly from the addition
of three commercial loan relationships, two land development relationships, and additional advances
on one commercial real estate project.
- 9 -
6. INVESTMENT SECURITIES
Investment securities, which include Federal Home Loan Bank stock, totaled $84.5 million at March
31, 2007, a decrease of $15.8 million, or 16%, from $100.3 million at December 31, 2006, and an
increase of $20.8 million, or 33%, from $63.7 million at March 31, 2006. Investment securities
designated as available for sale comprised 84% of the investment portfolio at March 31, 2007, 87%
at December 31, 2006, and 82% at March 31, 2006, and are available to meet liquidity requirements.
Both available for sale and held to maturity securities may be pledged as collateral to secure
public deposits. At March 31, 2007, $21 million in securities, or 25%, of the investment portfolio
was pledged, as compared to $16 million, or 16%, at December 31, 2006, and $16.7 million, or 26%,
at March 31, 2006.
7. OTHER OPERATING INCOME
In December of 2005, the Company, through Northrim Capital Investments Co. (NCIC), a wholly-owned
subsidiary of Northrim Bank, purchased an additional 40.1% interest in Northrim Benefits Group, LLC
(NBG), which brought its ownership interest in this company to 50.1%. As a result of this
increase in ownership, the Company now consolidates the balance sheet and income statement of NBG
into its financial statements and notes the minority interest in this subsidiary as a separate line
item on its financial statements. In the three-month periods ending March 31, 2007 and 2006, the
Company included employee benefit plan income from NBG of $257,000 and $173,000, respectively, in
its Other Operating Income.
Residential Mortgage, LLC (RML) was formed in 1998 and has offices throughout Alaska. During the
third quarter of 2004, RML reorganized and became a wholly-owned subsidiary of a newly formed
holding company, Residential Mortgage Holding Company, LLC (RML Holding Company). In this
process, RML Holding Company acquired another mortgage company, Pacific Alaska Mortgage Company.
Prior to the reorganization, the Company, through NCIC, owned a 30% interest in the profits and
losses of RML. Following the reorganization, the Companys interest in RML Holding Company
decreased to 23.5%. In the three-month period ending March 31, 2007, the Companys earnings from
RML Holding Company increased by $7,000 to $14,000 as compared to $7,000 for the three-month period
ending March 31, 2006.
The Company owns a 47% equity interest in Elliott Cove Capital Management LLC (Elliott Cove), an
investment advisory services company, through its whollyowned subsidiary, Northrim Investment
Services Company (NISC). Elliott Cove began active operations in the fourth quarter of 2002 and
has had losses since that time as it continues to build its assets under management. In addition
to its ownership interest, the Company provides Elliot Cove with a line of credit that has a
commitment amount of $750,000 and an outstanding balance of $706,000 as of March 31, 2007.
The Companys share of the loss from Elliott Cove for the first quarter of 2007 was $33,000, as
compared to a loss of $77,000 in the first quarter of 2006. The loss that the Company realized on
its investment in Elliott Cove decreased for the three-month period ending March 31, 2007 as
compared to the same period in 2006 as Elliott Cove continued to increase its assets under
management which caused its income to
increase more than its expenses and resulted in a lower operating loss.
In the first quarter of 2006, through NISC, the Company purchased a 24% interest in Pacific Wealth
Advisors, LLC (PWA). PWA is a holding company that owns Pacific Portfolio Consulting, LLC
(PPC) and Pacific Portfolio Trust Company (PPTC). PPC is an investment advisory company with
an existing client base while PPTC is a start-up operation. During the three-month period ending
March 31, 2007, the Company incurred a loss of $53,000 on its investment in PWA, which reduced
other income during this period. The losses from PWA and Elliott Cove were partially offset by
commissions that the Company receives for its sales of Elliot Cove investment products, which are
accounted for as other operating income. Furthermore, the Company expects to incur losses over the
next several years as PWA builds the customer base of its combined operations.
- 10 -
8. DEPOSIT ACTIVITIES
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 deposit. At March 31, 2007, the Company held no
certificates of deposit for the Alaska Permanent Fund Corporation. In contrast, at March 31, 2006,
the Company held $15 million in certificates of deposit for the Alaska Permanent Fund Corporation.
9. STOCK INCENTIVE PLAN
The Company has set aside 315,000 shares of authorized stock for the 2004 Stock Incentive Plan
(2004 Plan) under which it may grant stock options and restricted stock units. The Companys
policy is to issue new shares to cover awards. The total number of shares under the 2004 Plan and
previous stock incentive plans at March 31, 2007 was 436,402, which includes 141,266 shares granted
under the 2004 Plan leaving 173,734 shares available for future awards. This information has been
adjusted for the 5% stock dividend paid on September 1, 2006. Under the 2004 Plan, 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 then 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.
The Company recognized expense of $55,000 and $29,000 on the fair value of restricted stock units
and $83,000 and $93,000 on the fair value of stock options for a total of $138,000 and $122,000 in
stock-based compensation expense for the three-month periods ending March 31, 2007 and 2006,
respectively.The Company withheld $31,000 and $77,000 to pay for stock option exercises or income taxes that
resulted from the exercise of stock options for the three-month periods ending March 31, 2007 and
2006, respectively. The Company recognized $7,000 and $26,000 in tax deductions related to the
exercise of these stock options during the three-month periods ending March 31, 2007 and 2006,
respectively.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Note Regarding Forward-Looking Statements
This report includes forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended. These forward-looking statements describe Northrims
managements expectations about future
- 11 -
events and developments such as future operating results,
growth in loans and deposits, continued success of Northrims 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 anticipates, believes, expects, intends
and similar expressions in part to help identify forward-looking statements. Forward-looking
statements reflect managements current 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 margins; and
our ability to maintain asset quality. Further, actual results may be affected by our ability to
compete on price and other factors with other financial institutions; customer acceptance of new
products and services; the regulatory environment in which we operate; and general trends in the
local, regional and national banking industry and economy. Many of these risks, as well as other
risks that may have a material adverse impact on our operations and business, are identified in our
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.
OVERVIEW
GENERAL
Northrim BanCorp, Inc. (the Company) is a publicly traded bank holding company (Nasdaq: NRIM)
with four wholly-owned subsidiaries: Northrim Bank (the Bank), a state chartered, full-service
commercial bank, Northrim Investment Services Company (NISC), which we formed in November 2002 to
hold the Companys equity interest in Elliott Cove Capital Management LLC (Elliott Cove), an
investment advisory services company; Northrim Capital Trust 1 (NCT1), an entity that we formed
in May 2003 to facilitate a trust preferred securities offering by the Company, and Northrim
Statutory Trust 2 (NST2), an entity that we formed in December 2005 to facilitate a trust
preferred securities offering by the Company. We also hold a 23.5% interest in the profits and
losses of a residential mortgage holding company, Residential Mortgage Holding Company, LLC (RML
Holding Company and mortgage affiliate), through the Banks wholly-owned subsidiary, Northrim
Capital Investments Co. (NCIC). Residential Mortgage LLC (RML), the predecessor of RML Holding
Company, was formed in 1998 and has offices throughout Alaska. We also now operate in the
Washington and Oregon market areas through Northrim Funding Services (NFS), a division of the
Bank that we started in the third quarter of 2004. NFS purchases accounts receivable from its
customers and provides them with working capital. In addition, through NCIC, we hold a 50.1%
interest in Northrim Benefits Group, LLC (NBG), an insurance brokerage company that focuses on
the sale and servicing of employee benefit plans. Finally, in the first quarter of 2006, through
NISC, we purchased a 24% interest in Pacific Wealth Advisors, LLC (PWA), an investment advisory
and wealth management business located in Seattle, Washington.
SUMMARY OF FIRST QUARTER RESULTS
At March 31, 2007, the Company had assets of $911.2 million and gross portfolio loans of $720.1
million, an increase of 5% and 1%, respectively, as compared to the balances for these accounts at
March 31, 2006. In contrast, total assets at March 31, 2007 decreased by 2% and total loans at
March 31, 2007 increased by less than 1%, as compared to the balances for these accounts at
December 31, 2006. The Companys net income and diluted earnings per share at March 31, 2007, were
$2.7 million and $0.44, respectively, a decrease of 6% for each, as compared to the same period in
2006. For the first quarter ended March 31, 2007, the Companys net interest income increased
$804,000, or 7%, its provision for loan losses increased $401,000, or 743%, its other operating
income increased $234,000, or 16%, and its other operating expenses increased $968,000, or 12%, as
compared to the first quarter a year ago.
- 12 -
RESULTS OF OPERATIONS
NET INCOME
Net income for the quarter ended March 31, 2007, was $2.7 million, or $0.44 per diluted share, a
decrease in net income of 6%, and a 6% decrease in diluted earnings per share as compared to net
income of $2.9 million and diluted earnings per share of $0.47, respectively, for the first quarter
of 2006.
The decrease in net income for the three-month period ending March 31, 2007 was partially the
result of a $401,000 increase in the provision for loan losses as compared to the same period in
2006. The increase in the provision was a result of an increase in nonperforming loans.
Additionally, the Company wrote-off $245,000 in purchased receivables during the three-month period
ending March 31, 2007 and included this amount in other operating expense. There were no purchased
receivable write-offs during the same period in 2006. Finally, salaries and benefits increased by
$490,000, or 10%, for the three-month period ending March 31, 2007 as compared to the same period a
year ago, due in large part to salary increases driven by competitive pressures. Due to the tight
labor market in the Companys major markets and ongoing competition for employees, the Company
expects further increases in salaries and benefits. The decrease in earnings per diluted share for
the first quarter of 2007 as compared to the first quarter of 2006 was due in part to the decrease
in net income and also due to an increase in the number of shares of common stock outstanding.
NET INTEREST INCOME
The primary component of income for most financial institutions is net interest income, which
represents the institutions interest income from loans and investment securities minus interest
expense, ordinarily on deposits and other interest bearing liabilities. Net interest income for the
first quarter of 2007 increased $804,000, or 7%, to $12.1 million from $11.3 million in the first
quarter of 2006, as a result of the increase in earning assets and higher growth of interest income
as opposed to interest expense. The following table compares average balances and rates for the
three months ending March 31, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Yields/Costs |
|
|
Average Balances |
|
Change |
|
Tax Equivalent |
|
|
|
|
|
|
|
2007 |
|
2006 |
|
$ |
|
% |
|
2007 |
|
2006 |
|
Change |
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
293,102 |
|
|
$ |
285,355 |
|
|
$ |
7,747 |
|
|
|
3 |
% |
|
|
9.47 |
% |
|
|
8.69 |
% |
|
|
0.78 |
% |
Construction/development |
|
|
149,517 |
|
|
|
140,632 |
|
|
|
8,885 |
|
|
|
6 |
% |
|
|
11.34 |
% |
|
|
10.55 |
% |
|
|
0.79 |
% |
Commercial real estate |
|
|
231,983 |
|
|
|
247,031 |
|
|
|
(15,048 |
) |
|
|
-6 |
% |
|
|
8.74 |
% |
|
|
7.91 |
% |
|
|
0.83 |
% |
Consumer |
|
|
42,152 |
|
|
|
36,431 |
|
|
|
5,721 |
|
|
|
16 |
% |
|
|
7.66 |
% |
|
|
7.64 |
% |
|
|
0.02 |
% |
Other loans |
|
|
(1,337 |
) |
|
|
(794 |
) |
|
|
(543 |
) |
|
|
68 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
|
715,417 |
|
|
|
708,655 |
|
|
|
6,762 |
|
|
|
1 |
% |
|
|
9.54 |
% |
|
|
8.76 |
% |
|
|
0.78 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments |
|
|
11,435 |
|
|
|
24,392 |
|
|
|
(12,957 |
) |
|
|
-53 |
% |
|
|
5.14 |
% |
|
|
4.23 |
% |
|
|
0.91 |
% |
Long-term investments |
|
|
88,712 |
|
|
|
59,964 |
|
|
|
28,748 |
|
|
|
48 |
% |
|
|
4.70 |
% |
|
|
3.65 |
% |
|
|
1.05 |
% |
|
|
|
|
|
Interest-earning assets |
|
|
815,564 |
|
|
|
793,011 |
|
|
|
22,553 |
|
|
|
3 |
% |
|
|
8.96 |
% |
|
|
8.24 |
% |
|
|
0.72 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonearning assets |
|
|
84,993 |
|
|
|
69,204 |
|
|
|
15,789 |
|
|
|
23 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
900,557 |
|
|
$ |
862,215 |
|
|
$ |
38,342 |
|
|
|
4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities |
|
$ |
611,471 |
|
|
$ |
594,047 |
|
|
$ |
17,424 |
|
|
|
3 |
% |
|
|
3.90 |
% |
|
|
3.25 |
% |
|
|
0.65 |
% |
Demand deposits |
|
|
180,054 |
|
|
|
176,453 |
|
|
|
3,601 |
|
|
|
2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
12,520 |
|
|
|
5,976 |
|
|
|
6,544 |
|
|
|
110 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
|
96,512 |
|
|
|
85,739 |
|
|
|
10,773 |
|
|
|
13 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
900,557 |
|
|
$ |
862,215 |
|
|
$ |
38,342 |
|
|
|
4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net tax equivalent margin
on earning assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.04 |
% |
|
|
5.80 |
% |
|
|
0.24 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets averaged $815.6 million for the three-month period ending March 31,
2007, an increase of $22.6 million, or 3%, over the $793 million for the comparable period in 2006.
The tax equivalent yield on interest-earning assets averaged 8.96% in the first quarter of 2007, an
increase of 72 basis points from 8.24% for the same period in 2006.
- 13 -
Loans, the largest category of interest-earning assets, increased by $6.8 million, or 1%, to an
average of $715.4 million in the first quarter of 2007 from $708.7 million in the first quarter of
2006. Commercial, construction, and consumer loans increased by $7.7 million, $8.9 million, and
$5.7 million, respectively, on average between the first quarters of 2007 and 2006. Real estate
term loans decreased by $15 million on average between the first quarters of 2007 and 2006. We
expect the loan portfolio to grow in the future with moderate growth in the commercial and
construction loan areas, further declines in commercial real estate, and further increases in
consumer loans as we sell more consumer loans to the larger consumer account base that we have
developed with the High Performance Checking (HPC) product. The decrease in the commercial real
estate area is expected to continue due to additional refinance activity and competitive pressures.
Residential construction activity in Anchorage, the Companys largest market, is expected to
decline in 2007 due to a decline in available building lots and sales activity. The Company
believes it has offset this effect in part by acquiring additional residential construction
customers and gaining market share in the Anchorage residential construction market. The Company
also expects the real estate markets in the Matanuska-Susitna Valley and Fairbanks areas to
decrease from the prior year as these areas absorb the current levels of housing inventory. As a
result of the increase in its market share in Anchorage and slower residential markets in the
Matanuska-Susitna Valley and Fairbanks areas, the Companys overall construction and land
development loans are expected to remain flat or increase only at a moderate rate for the remainder
of 2007. The tax equivalent yield on the loan portfolio averaged 9.54% for the first quarter of
2007, an increase of 78 basis points from 8.76% over the same quarter a year ago.
Interest-bearing liabilities averaged $611.5 million for the first quarter of 2007, an increase of
$17.4 million, or 3%, compared to $594 million for the same period in 2006. The average cost of
interest-bearing liabilities increased 65 basis points to 3.90% for the first quarter of 2007
compared to 3.25% for the first quarter of 2006. The average cost of funds has increased in
response to interest rate increases by the Federal Reserve in the first half of 2006. The Federal
Reserve has not increased short-term interest rates since June of 2006, which decreased the
pressure on the Companys net interest margin.
The Companys net interest income as a percentage of average interest-earning assets (net
tax-equivalent margin) was 6.04% for the first quarter of 2007 and 5.80% for the same period in
2006. During the first quarter of 2007, the yield on the Companys loans increased at a faster
rate than its deposit costs due in part to the growth of its construction loans, which are the
Companys highest yielding earning asset. In addition, the amount of non-interest bearing demand
deposits, other liabilities and equity totaled $289.1 million at March 31, 2007, as compared to
$268.2 million at March 31, 2006. These balances had the effect of further dampening the deposit
rate increases, which lowered the overall increase in the Companys cost of funds and contributed
to the increase in its net tax equivalent margin when comparing the first quarter ended March 31,
2007 to the same period in
2006. Finally, the Company had net recoveries of $160,000 in interest on non-accrual loans, which
had the effect of increasing its net tax-equivalent margin by 7 basis points.
- 14 -
OTHER OPERATING INCOME
Other operating income consists of earnings on service charges, fees and other items as well as
gains from the sale of securities. Set forth below is the change in Other Operating Income between
the first quarters ending March 31, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2007 |
|
2006 |
|
$ Chg |
|
% Chg |
|
|
|
|
|
(Dollars in thousands) |
Service charges on deposit accounts |
|
$ |
504 |
|
|
$ |
484 |
|
|
$ |
20 |
|
|
|
4 |
% |
Purchased receivable income |
|
|
427 |
|
|
|
313 |
|
|
|
114 |
|
|
|
36 |
% |
Employee benefit plan income |
|
|
257 |
|
|
|
173 |
|
|
|
84 |
|
|
|
49 |
% |
Electronic banking fees |
|
|
183 |
|
|
|
170 |
|
|
|
13 |
|
|
|
8 |
% |
Loan servicing fees |
|
|
108 |
|
|
|
116 |
|
|
|
(8 |
) |
|
|
-7 |
% |
Merchant credit card transaction fees |
|
|
102 |
|
|
|
102 |
|
|
|
|
|
|
|
0 |
% |
Equity in earnings from mortgage affiliate |
|
|
14 |
|
|
|
7 |
|
|
|
7 |
|
|
|
100 |
% |
Equity in loss from Elliott Cove |
|
|
(33 |
) |
|
|
(77 |
) |
|
|
44 |
|
|
|
-57 |
% |
Other |
|
|
100 |
|
|
|
140 |
|
|
|
(40 |
) |
|
|
-29 |
% |
|
|
|
Total |
|
$ |
1,662 |
|
|
$ |
1,428 |
|
|
$ |
234 |
|
|
|
16 |
% |
|
|
|
Total other operating income for the first quarter of 2007 was $1.7 million, an increase of
$234,000 from $1.4 million in the first quarter of 2006 due primarily to increases in income from
the Companys purchased receivable products and its employee benefit plan income.
Service charges on the Companys deposit accounts increased by $20,000, or 4%, to $504,000 in the
first quarter of 2007 from $484,000 in the same period a year ago. In June of 2005, the Company
launched its HPC product that consisted of several consumer checking accounts tailored to the needs
of specific segments of its market, including a totally free checking product. The HPC product has
been supported with a targeted marketing program and extensive branch sales programs. As a result
of its efforts to sell the HPC product, the Company increased the number of its consumer checking
accounts and also increased the service charges on its deposit accounts with the increase in the
number of accounts and the level of activity within these accounts.
Income from the Companys purchased receivable products increased by $114,000, or 36%, to $427,000
in the first quarter of 2007 from $313,000 in the same period a year ago. The Company uses these
products to purchase accounts receivable from its customers and provide them with working capital
for their businesses. While the customers are responsible for collecting these receivables, the
Company mitigates this risk with extensive monitoring of the customers transactions and control of
the proceeds from the collection process. The Company earns income from the purchased receivable
product by charging finance charges to its customers for the purchase of their accounts receivable
and it recognizes the income and fees over the life of the accounts receivable in accordance with
the provision of FASB Statement No. 91, Accounting for Nonrefundable Fees and Costs Associated with
Originating or Acquiring Loans and Initial Direct Costs of Leases (SFAS 91). The income from this
product has grown as the Company has used it to purchase more receivables from its customers. The
Company expects the income level from this product to show growth on a year-over-year comparative
basis as the Company increases this line of business at NFS, as it continues to increase its market
share.
In December of 2005, the Company, through its wholly-owned subsidiary NCIC, purchased an additional
40.1% interest in NBG, which brought its ownership interest in this company to 50.1%. As a result
of this increase in ownership, the Company now consolidates the balance sheet and income statement
of NBG into its financial statements. During the first quarter of 2007, the Company included
employee benefit plan income from NBG of $257,000 in its other operating income, an increase of
$84,000, or 49%, compared to the same quarter in 2006.
- 15 -
The Companys electronic banking revenue increased by $13,000, or 8%, to $183,000 in the first
quarter of 2007 from $170,000 in the same period a year ago. As the Company increased the number
of its deposit accounts through the marketing of the HPC product, it also sold additional services
to these new accounts, which helped it to increase its electronic banking revenues.
The Companys share of the loss from Elliott Cove decreased to $33,000 for the first quarter of
2007 as compared to a loss of $77,000 for the same period in 2006 as Elliot Cove increased its
assets under management, which provided it with increased revenues.
Other income, as broken out on the table above, decreased by $40,000, or 29%, in the first quarter
of 2007 to $100,000 from $140,000 for the same period in 2006. This decrease is a result of the
fact that in the three-month period ending March 31, 2007, the company incurred losses of $53,000
on its investment in PWA as compared to a loss of $12,000 for the period ending March 31, 2006,
primarily because the Companys share of PWAs loss in the first quarter of 2007 represents three
months of PWAs activity while the loss in the first quarter of 2006 only represents two months of
PWAs activity. The Company includes the income and loss from its affiliates in its financial
statements on a one month lagged basis. Since the Company purchased its interest in PWA in January
of 2006, it only included the PWA activity through the month of February in its financial
statements for the period ending March 31, 2006.
The losses from PWA were partially offset by commissions that the Company receives for its sales of
the Elliott Cove investment products and interest on its loan to Elliott Cove. The Company expects
to incur losses over the next several years as PWA builds the customer base of its combined
operations.
- 16 -
EXPENSES
Other Operating Expense
The following table breaks out the components of and changes in Other Operating Expense between the
three-month periods ending March 31, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2007 |
|
2006 |
|
$ Chg |
|
% Chg |
|
|
|
|
|
(Dollars in thousands) |
Salaries and other personnel expense |
|
$ |
5,255 |
|
|
$ |
4,765 |
|
|
$ |
490 |
|
|
|
10 |
% |
Occupancy, net |
|
|
698 |
|
|
|
641 |
|
|
|
57 |
|
|
|
9 |
% |
Marketing |
|
|
459 |
|
|
|
508 |
|
|
|
(49 |
) |
|
|
-10 |
% |
Equipment, net |
|
|
342 |
|
|
|
341 |
|
|
|
1 |
|
|
|
0 |
% |
Purchase receivable losses |
|
|
245 |
|
|
|
|
|
|
|
245 |
|
|
|
N/A |
|
Intangible asset amortization |
|
|
121 |
|
|
|
121 |
|
|
|
|
|
|
|
0 |
% |
Other expense |
|
|
1,812 |
|
|
|
1,588 |
|
|
|
224 |
|
|
|
14 |
% |
|
|
|
Total |
|
$ |
8,932 |
|
|
$ |
7,964 |
|
|
$ |
968 |
|
|
|
12 |
% |
|
|
|
Total other operating expense for the first quarter of 2007 was $8.9 million, an increase of
$968,000, or 12%, from $8 million for the same period in 2006.
Salaries and benefits increased by $490,000, or 10%, for the three-month period ending March 31,
2007 as compared to the same period a year ago, due in large part to salary increases driven by
competitive pressures. Due to the tight labor market in the Companys major markets and ongoing
competition for employees, the Company expects further increases in salaries and benefits.
Occupancy expense increased by $57,000, or 9%, for the three-month period ending March 31, 2007 as
compared to the same periods a year ago, due in large part to increased rental costs at the
Companys headquarters facility and additional square footage at one leased branch location.
Marketing expenses decreased by $49,000, or 10%, during the first quarter of 2007 as compared to
the first quarter of 2006, as the Company incurred lower marketing costs in the first quarter of
2007 as compared to the first quarter of 2006. The Company has continued to market its HPC consumer
products as it has since the second quarter of 2005 and expects to incur similar marketing costs
for this product in the second quarter of 2007. Moreover, the Company began marketing its HPC for
business products in the first quarter of 2007 and expects to incur increased marketing costs for
this new product in 2007. The Company also expects that the Bank will increase its deposit
accounts and balances as it continues to implement the HPC Program over the next year.
Furthermore, the Company expects that the additional deposit accounts will continue to generate
increased fee income that will offset a majority of the increased marketing costs associated with
the HPC Program.
The Company experienced a $245,000 loss in one of its purchased receivable accounts during the
first quarter of 2007. There were no losses in purchased receivables during the same quarter of
2006.
Other expense increased by $224,000, or 14%, for the first quarter of 2007 as compared to the first
quarter of 2006 largely due to an increase in the amortization expense for the Companys low income
housing partnership, an increase in professional and outside services, and an increase in internet
banking expense due to a system conversion. Each of these items caused other expenses for the
period ending March 31, 2007 to increase by
$86,000, $94,000, and $80,000, respectively, as compared to other expenses for the period ending
March 31, 2006.
- 17 -
Income Taxes
The provision for income taxes decreased by $170,000, or 10%, to $1.6 million in the first quarter
of 2007 compared to $1.8 million in the same period in 2006. The effective tax rate for the first
quarters of 2007 and 2006 was 37% and 38%, respectively. The decrease in the tax rate is due in
part to an increase in available tax credits arising from the Companys investments in low income
housing partnerships. The Company expects that its tax rate for the rest of 2007 will be
approximately similar to the tax rate of the first quarter of this year.
CHANGES IN FINANCIAL CONDITION
ASSETS
Loans and Lending Activities
General: 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.
These types of lending have provided us with market opportunities and higher net interest margins
than other types of lending. However, they also involve 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. Average loans were $6.8 million, or
1%, greater in the first quarter of 2007 than in the same period of 2006. Loans comprised 88% of
total average earning assets for the quarter ending March 31, 2007, compared to 89% of total
average earning assets for the quarter ending March 31, 2006. The yield on loans averaged 9.54%
for the quarter ended March 31, 2007, compared to 8.76% during the same period in 2006.
The loan portfolio increased by $4.1 million, or 1% from $716.1 million at March 31, 2006 to $720.1
million at March 31, 2007. Loans increased by $3.1 million, or less than 1%, from $717.1 million at
December 31, 2006, to $720.1 million at March 31, 2007. Commercial loans increased $4.4 million, or
1%, commercial real estate loans decreased $7.2 million, or 3%, construction loans increased
$69,000, or less than 1%, and consumer loans increased $6.4 million, or 17%, from March 31, 2006 to
March 31, 2007. In addition, commercial loans increased $13.6 million, or 5%, commercial real
estate loans decreased $2.8 million, or 1%, construction loans decreased $9 million, or 6%, and
consumer loans increased $632,000, or 1%, from December 31, 2006 to March 31, 2007. We expect the
loan portfolio to continue to grow in the future with moderate growth in the commercial and
construction loan areas, further declines in commercial real estate due to additional refinance
activity and competitive pressures, and further increases in consumer loans as we sell more
consumer loans to the larger consumer account base that we have developed with the HPC product.
Residential construction activity in Anchorage, the Companys largest market, is expected to
decline in 2007 due to a decline in available building lots and sales activity. The Company
believes it has offset this effect in part by gaining market share in the Anchorage residential
construction market. The Company also expects the real estate markets in the Matanuska-Susitna
Valley and Fairbanks to decrease from the prior year as these areas absorb the current levels of
housing inventory. As a result of the increase in its market share in Anchorage and slower
residential markets in the Matanuska-Susitna Valley and Fairbanks areas, the Company expects its
overall construction and land development loans to remain flat or increase only at a moderate rate
for the remainder of 2007.
Loan Portfolio Composition: Loans increased to $720.1 million at March 31, 2007, from $717.1
million at December 31, 2006 and $716.1 million at March 31, 2006. At March 31, 2007, 51% of the
portfolio was scheduled to mature over the next 12 months, and 25% was scheduled to mature between
April 1, 2008, and March 31, 2012. Future growth in loans is generally dependent on new loan demand
and deposit growth, and is constrained by the Companys policy of being well-capitalized. In
addition, the fact that
51% of the loan portfolio is scheduled to mature in the next 12 months poses an added risk to the
Companys efforts to increase its loan totals as it attempts to renew or replace these maturing
loans.
- 18 -
The following table sets forth the Companys loan portfolio composition by loan type for the dates
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2007 |
|
December 31, 2006 |
|
March 31, 2006 |
|
|
|
|
|
Dollar |
|
Percent |
|
Dollar |
|
Percent |
|
Dollar |
|
Percent |
|
|
Amount |
|
of Total |
|
Amount |
|
of Total |
|
Amount |
|
of Total |
|
|
|
|
|
(Dollars in thousands) |
Commercial |
|
$ |
300,804 |
|
|
|
42 |
% |
|
$ |
287,155 |
|
|
|
40 |
% |
|
$ |
296,384 |
|
|
|
41 |
% |
Construction/development |
|
|
144,024 |
|
|
|
20 |
% |
|
|
153,059 |
|
|
|
21 |
% |
|
|
143,955 |
|
|
|
20 |
% |
Commercial real estate |
|
|
234,769 |
|
|
|
33 |
% |
|
|
237,599 |
|
|
|
33 |
% |
|
|
242,005 |
|
|
|
34 |
% |
Consumer |
|
|
42,772 |
|
|
|
6 |
% |
|
|
42,140 |
|
|
|
6 |
% |
|
|
36,410 |
|
|
|
5 |
% |
Loans in process |
|
|
364 |
|
|
|
0 |
% |
|
|
126 |
|
|
|
0 |
% |
|
|
350 |
|
|
|
0 |
% |
Unearned loan fees |
|
|
(2,589 |
) |
|
|
0 |
% |
|
|
(3,023 |
) |
|
|
0 |
% |
|
|
(3,018 |
) |
|
|
0 |
% |
|
|
|
Total loans |
|
$ |
720,144 |
|
|
|
100 |
% |
|
$ |
717,056 |
|
|
|
100 |
% |
|
$ |
716,086 |
|
|
|
100 |
% |
|
|
|
Nonperforming Loans; Real Estate Owned: Nonperforming assets consist of nonaccrual loans, accruing
loans that are 90 days or more past due, restructured loans, and real estate owned. The following
table sets forth information with respect to nonperforming assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2007 |
|
December 31, 2006 |
|
March 31, 2006 |
|
|
(Dollars in thousands) |
Nonaccrual loans |
|
$ |
6,435 |
|
|
$ |
5,176 |
|
|
$ |
4,980 |
|
Accruing loans past due 90 days or more |
|
|
3,679 |
|
|
|
708 |
|
|
|
1,396 |
|
Restructured loans |
|
|
78 |
|
|
|
748 |
|
|
|
|
|
|
|
|
Total nonperforming loans |
|
|
10,192 |
|
|
|
6,632 |
|
|
|
6,376 |
|
Real estate owned |
|
|
829 |
|
|
|
717 |
|
|
|
|
|
|
|
|
Total nonperforming assets |
|
$ |
11,021 |
|
|
$ |
7,349 |
|
|
$ |
6,376 |
|
|
|
|
Allowance for loan losses |
|
$ |
11,853 |
|
|
$ |
12,125 |
|
|
$ |
10,870 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans to portfolio loans |
|
|
1.42 |
% |
|
|
0.92 |
% |
|
|
0.89 |
% |
Nonperforming assets to total assets |
|
|
1.21 |
% |
|
|
0.79 |
% |
|
|
0.74 |
% |
Allowance to portfolio loans |
|
|
1.65 |
% |
|
|
1.69 |
% |
|
|
1.52 |
% |
Allowance to nonperforming loans |
|
|
116 |
% |
|
|
183 |
% |
|
|
170 |
% |
Nonaccrual, Accruing Loans 90 Days or More Past Due and Restructured Loans: The Companys
financial statements are prepared based on the accrual basis of accounting, including recognition
of interest income on the Companys loan portfolio, unless a loan is placed on a nonaccrual basis.
For financial reporting purposes, amounts received on nonaccrual loans generally will be applied
first to principal and then to interest only after all principal has been collected.
Restructured loans are those for which concessions, including the reduction of interest rates below
a rate otherwise available to that borrower, have been granted due to the borrowers weakened
financial condition. Interest on restructured loans will be accrued at the restructured rates when
it is anticipated that no loss of original principal will occur and the interest can be collected.
Total nonperforming loans at March 31, 2007, were $10.2 million, or 1.42%, of total portfolio
loans, an increase of $3.6 million from $6.6 million at December 31, 2006, and an increase of $3.8
million from $6.4 million at March 31, 2006. The increase in the non-performing loans in the first
quarter of 2007 from the end of 2006 was due in large part to a $3 million increase in accruing
loans that were 90 days or more past due. The Company plans to continue to devote resources to
resolve its non-performing loans, and it
continues to write down assets to their estimated fair market value when they are in a
non-performing status, which is accounted for through the calculation of the Allowance for Loan
Losses.
- 19 -
At March 31, 2007, December 31, 2006, and March 31, 2006, the Company had loans measured for
impairment of $29.1 million, $32 million, and $19.6 million, respectively. A specific allowance of
$4.7 million, $4.3 million, and $2.9 million, respectively, was established for these periods. The
decrease in loans measured for impairment at March 31, 2007, as compared to December 31, 2006,
resulted mainly from the payoff of one commercial real estate project that was included in loans
measured for impairment at December 31, 2006 and March 31, 2006. In addition, the Company charged
off two commercial loans totaling $1.1 million at March 31, 2007 that were included in loans
measured for impairment at December 31, 2006. In contrast, the increase in loans measured for
impairment at December 31, 2006, as compared to March 31, 2006, resulted mainly from the addition
of three commercial loan relationships, two land development relationships, and additional advances
on one commercial real estate project.
Potential Problem Loans: At March 31, 2007 the Company had $7.1 million in potential problem loans,
as compared to $6.2 million at March 31, 2006 as a result of adding five loans to the listing of
potential problem loans and deleting one loan from this list. The five loans that were added
totaled $2.8 million while the one loan that was deleted totaled $2.1 million. All of these loans
were included in loans measured for impairment at March 31, 2007. At December 31, 2006, the
Company had potential problem loans of $6.4 million. Potential problem loans are loans which are
currently performing and are not included in nonaccrual, accruing loans 90 days or more past due,
or restructured loans at the end of the applicable period, about which the Company has developed
doubts as to the borrowers ability to comply with present repayment terms and which may later be
included in nonaccrual, past due, or restructured loans.
Analysis of Allowance for Loan Losses and Loan Loss Provision: The Company maintains an Allowance
for Loan Losses to recognize inherent and probable losses from its loan portfolio. On a quarterly
basis, the Company uses three methods to analyze the Allowance by taking percentage allocations for
criticized and classified assets in addition to a specific allowance for impaired loans, making
percentage allocations based upon its internal risk classifications and other specifically
identified portions of its loan portfolio, and using ratio analysis and peer comparisons.
The Allowance for Loan Losses was $11.9 million, or 1.65% of total portfolio loans outstanding, at
March 31, 2007, compared to $10.9 million, or 1.52%, of total portfolio loans at March 31, 2006 and
$12.1 million, or 1.69% of portfolio loans, at December 31, 2006. The Allowance for Loan Losses
represented 116% of non-performing loans at March 31, 2007, as compared to 170% of non-performing
loans at March 31, 2006 and 183% of non performing loans at December 31, 2006.
- 20 -
The Allowance for Loan Losses is decreased for loan charge-offs and increased for loan recoveries
and provisions for loan losses. The Company took a provision for loan losses in the amount of
$455,000 for the three-month period ending March 31, 2007 to account for increases in
non-performing loans and the specific allowance for impaired loans. The following table details
activity in the Allowance for Loan Losses for the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
|
|
2007 |
|
2006 |
|
|
|
|
|
(Dollars in thousands) |
Balance at beginning of period |
|
$ |
12,125 |
|
|
$ |
10,706 |
|
Charge-offs: |
|
|
|
|
|
|
|
|
Commercial |
|
|
1,221 |
|
|
|
|
|
Construction/development |
|
|
|
|
|
|
|
|
Commercial real estate |
|
|
|
|
|
|
|
|
Consumer |
|
|
1 |
|
|
|
4 |
|
|
|
|
Total charge-offs |
|
|
1,222 |
|
|
|
4 |
|
Recoveries: |
|
|
|
|
|
|
|
|
Commercial |
|
|
491 |
|
|
|
110 |
|
Construction/development |
|
|
|
|
|
|
|
|
Commercial real estate |
|
|
|
|
|
|
|
|
Consumer |
|
|
4 |
|
|
|
4 |
|
|
|
|
Total recoveries |
|
|
495 |
|
|
|
114 |
|
Net, (recoveries) charge-offs |
|
|
727 |
|
|
|
(110 |
) |
Provision for loan losses |
|
|
455 |
|
|
|
54 |
|
|
|
|
Balance at end of period |
|
$ |
11,853 |
|
|
$ |
10,870 |
|
|
|
|
The provision for loan losses for the three-month period ending March 31, 2007 was $455,000 as
compared to a provision for loan losses of $54,000 for the three-month period ending March 31,
2006. During the three-month period ending March 31, 2007, there was $727,000 in net loan
charge-offs as compared to $110,000 of net loan recoveries for the same period in 2006. The
increase in loan recoveries, from $114,000 for the three-month period ending March 31, 2006 to
$495,000 for the three-month period ending March 31, 2007 was primarily due to a $421,000 recovery
on one commercial loan relationship. Loan charge-offs increased during this same time period from
$4,000 for the three-month period ending March 31, 2006 to $1.2 million for the three-month period
ending March 31, 2007, primarily due to charge-offs on two commercial loans that totaled $1.1
million.
Management believes that, based on its review of the performance of the loan portfolio and the
various methods it uses to analyze its Allowance for Loan Losses, at March 31, 2007 the Allowance
for Loan Losses was adequate to cover losses in the loan portfolio at the balance sheet date.
Investment Securities
Investment securities, which include Federal Home Loan Bank stock, totaled $84.5 million at March
31, 2007, a decrease of $15.8 million, or 16%, from $100.3 million at December 31, 2006, and an
increase of $20.8 million, or 33%, from $63.7 million at March 31, 2006. Investment securities
designated as available for sale comprised 84% of the investment portfolio at March 31, 2007, 87%
at December 31, 2006, and 82% at March 31, 2006, and are available to meet liquidity requirements.
Both available for sale and held to maturity securities may be pledged as collateral to secure
public deposits. At March 31, 2007, $21 million in securities, or 25%, of the investment portfolio
was pledged, as compared to $16 million, or 16%, at December 31, 2006, and $16.7 million, or 26%,
at March 31, 2006.
- 21 -
LIABILITIES
Deposits
General: Deposits are the Companys primary source of funds. Total deposits decreased $19.5
million to $775.4 million at March 31, 2007, from $794.9 million at December 31, 2006, and
increased $24.9 million from $750.5 million at March 31, 2006. The Companys deposits generally are
expected to fluctuate according to the level of the Companys market share, economic conditions,
and normal seasonal trends. As mentioned earlier, as the Bank continues to implement its HPC
Program, the Company expects increases in the number of deposit accounts and the balances
associated with them. Moreover, as the balances in these HPC accounts and other deposit accounts
have increased, the Company has allowed other funds held in the form of certificates of deposit for
agencies of the State of Alaska to mature and be replaced by other core deposits.
Certificates of Deposit: The only deposit category with stated maturity dates is certificates of
deposit. At March 31, 2007, the Company had $95.9 million in certificates of deposit as compared
to certificates of deposit of $96.7 million and $85.9 million, for the periods ending March 31,
2006 and December 31, 2006, respectively. At March 31, 2007, $65.5 million, or 68%, of the
Companys certificates of deposits are scheduled to mature over the next 12 months as compared to
$59.4 million, or 69%, of total certificates of deposit, at December 31, 2006, and to $74.1
million, or 77%, of total certificates of deposit at March 31, 2006.
Alaska Certificates of Deposit: The Alaska Certificate of Deposit (Alaska CD) is a savings
deposit product with an open-ended maturity, interest rate that adjusts to an index that is tied to
the two-year United States Treasury Note, and limited withdrawals. The total balance in the Alaska
CD at March 31, 2007, was $195 million, a decrease of $13.4 million as compared to the balance of
$208.4 million at March 31, 2006 and a decrease of $12.5 million from a balance of $207.5 million
at December 31, 2006. We expect the total balance of the Alaska CD to increase in 2007 because the
product provides a competitive interest rate with the added flexibility of an open-ended maturity.
Alaska Permanent Fund Deposits: 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 deposit. At March
31, 2007, the Company held no certificates of deposit for the Alaska Permanent Fund. In contrast,
at March 31, 2006, the Company held $15 million in certificates of deposits for the Alaska
Permanent Fund Corporation and it held no certificates of deposits for the Alaska Permanent Fund
Corporation at December 31, 2006. As the Company has increased the balances in its other lower cost
funds, it has allowed the certificates of deposits with the Alaska Permanent Fund Corporation to
mature.
Borrowings
Federal Home Loan Bank: A portion of the Companys borrowings were from the FHLB. At March 31,
2007, the Companys maximum borrowing line from the FHLB was $107 million, approximately 12% of the
Companys assets. At March 31, 2007, there was $2.1 million outstanding on the line and no
additional monies committed to secure public deposits, compared to outstanding balances of $2.5
million and $2.2 million, respectively, at March 31, 2006 and December 31, 2006, and additional
monies committed to secure public deposits of $15.2 million and $15.5 million, respectively, during
those same time periods. Additional 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.
In addition to the borrowings from the FHLB, the Company had $6.5 million in other borrowings
outstanding at March 31, 2007, as compared to $4.3 million in other borrowings outstanding at
December
31, 2006. In each time period, the other borrowings consisted of security repurchase arrangements
and short-term borrowings from the Federal Reserve Bank for payroll tax deposits.
- 22 -
Other Short-term Borrowings: At March 31, 2007, the Company had no short-term (original maturity of
one year or less) borrowings that exceeded 30% of shareholders equity.
Off-Balance Sheet Items Commitments/Letters of Credit: 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
March 31, 2007 and December 31, 2006, the Companys commitments to extend credit and to provide
letters of credit amounted to $148 million and $172 million, 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.
LIQUIDITY AND CAPITAL RESOURCES
Shareholders Equity
Shareholders equity was $96.7 million at March 31, 2007, compared to $95.4 million at December 31,
2006 and $85.9 million at March 31, 2006. The Company earned net income of $2.7 million during the
three-month period ending March 31, 2007, issued 2,482 shares through the exercise of stock
options, and did not repurchase any shares of its common stock under the Companys publicly
announced repurchase program. At March 31, 2007, the Company had approximately 6.1 million shares
of its common stock outstanding.
Capital Requirements and Ratios
The Company is subject to minimum capital requirements. Federal banking agencies have adopted
regulations establishing minimum requirements for the capital adequacy of banks and bank holding
companies. The requirements address both risk-based capital and leverage capital. As of March 31,
2007, the Company and the Bank met all applicable capital adequacy requirements.
The FDIC has in place qualifications for banks to be classified as well-capitalized. As of June
15, 2006, the most recent notification from the FDIC categorized the Bank as well-capitalized.
There were no conditions or events since the FDIC notification that have changed the Banks
classification.
- 23 -
The following table illustrates the capital requirements for the Company and the Bank and the
actual capital ratios for each entity that exceed these requirements as of March 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adequately- |
|
Well- |
|
Actual Ratio |
|
Actual Ratio |
|
|
Capitalized |
|
Capitalized |
|
BHC |
|
Bank |
|
Tier 1 risk-based capital |
|
|
4.00 |
% |
|
|
6.00 |
% |
|
|
13.29 |
% |
|
|
11.31 |
% |
Total risk-based capital |
|
|
8.00 |
% |
|
|
10.00 |
% |
|
|
14.55 |
% |
|
|
12.57 |
% |
Leverage ratio |
|
|
4.00 |
% |
|
|
5.00 |
% |
|
|
12.08 |
% |
|
|
10.30 |
% |
The 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 second 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 most of the difference in the capital ratios for the two
entities.
Stock Repurchase Plan
In September 2002, the Board of Directors of the Company approved a plan whereby the Company would
periodically repurchase for cash up to approximately 5%, or 306,372, of its shares of common stock
in the open market. In August of 2004, the Board of Directors of the Company amended the stock
repurchase plan (Plan) and increased the number of shares available under the program by 5% of
total shares outstanding, or 304,283 shares. As a result, the total shares available under the
Plan at that time increased to 385,855 shares. In the three-month period ending March 31, 2007, the
Company did not repurchase any of its shares, which left the total shares repurchased under this
program at 550,942 shares since its inception at a total cost of $10.8 million. There were 59,713
shares remaining under the Plan at March 31, 2007. The Company intends to continue to repurchase
its common stock from time to time depending upon market conditions, but it can make no assurances
that it will repurchase all of the shares authorized for repurchase under the Plan.
Junior Subordinated Debentures
In May of 2003, the Company formed a wholly-owned Delaware statutory business trust subsidiary,
Northrim Capital Trust 1 (the Trust), which issued $8 million of guaranteed undivided
beneficial interests in the Companys Junior Subordinated Deferrable Interest Debentures (Trust
Preferred Securities). These debentures qualify as Tier 1 capital under Federal Reserve Board
guidelines. All of the common securities of the Trust are owned by the Company. The proceeds
from the issuance of the common securities and the Trust Preferred Securities were used by the
Trust to purchase $8.2 million of junior subordinated debentures of the Company. The Trust
Preferred Securities of the Trust are not consolidated in the Companys financial statements in
accordance with FASB Interpretation No. 46R (FIN46); therefore, the Company has recorded its
investment in the Trust as an other asset and the subordinated debentures as a liability. The
debentures, which represent the sole asset of the Trust, accrue and pay distributions quarterly
at a variable rate of 90-day LIBOR plus 3.15% per annum, adjusted quarterly. The interest rate
on these debentures was 8.51% at March 31, 2007. The interest cost to the Company on these
debentures was $170,000 in the period ending March 31, 2007 and $150,000 in the same period in
2006. The Company has entered into contractual arrangements which, taken collectively, fully and
unconditionally guarantee payment of: (i) accrued and unpaid distributions required to be paid on
the Trust Preferred Securities; (ii) the redemption price with respect to any Trust Preferred
Securities called for redemption by the Trust and (iii) payments due upon a voluntary or
involuntary dissolution, winding up or liquidation of the Trust. The Trust Preferred Securities
are mandatorily redeemable upon maturity of the debentures on May 15, 2033, or upon earlier
redemption as provided in the indenture. The
Company has the right to redeem the debentures purchased by the Trust in whole or in part, on or
after May 15, 2008. As specified in the indenture, if the debentures are redeemed prior to
maturity, the redemption price will be the principal amount and any accrued but unpaid interest.
- 24 -
In December of 2005, the Company formed a wholly-owned Connecticut statutory business trust
subsidiary, Northrim Statutory Trust 2 (the Trust 2), which issued $10 million of guaranteed
undivided beneficial interests in the Companys Junior Subordinated Deferrable Interest Debentures
(Trust Preferred Securities 2). These debentures qualify as Tier 1 capital under Federal Reserve
Board guidelines. All of the common securities of Trust 2 are owned by the Company. The proceeds
from the issuance of the common securities and the Trust Preferred Securities 2 were used by Trust
2 to purchase $10.3 million of junior subordinated debentures of the Company. The Trust Preferred
Securities of the Trust 2 are not consolidated in the Companys financial statements in accordance
with FIN46; therefore, the Company has recorded its investment in the Trust 2 as an other asset and
the subordinated debentures as a liability. The debentures, which represent the sole asset of
Trust 2, accrue and pay distributions quarterly at a variable rate of 90-day LIBOR plus 1.37% per
annum, adjusted quarterly. The interest rate on these debentures was 6.72% at March 31, 2007. The
interest cost to the Company on these debentures was $168,000 for the period ending March 31, 2007
and $149,000 in the same period in 2006. The Company has entered into contractual arrangements
which, taken collectively, fully and unconditionally guarantee payment of: (i) accrued and unpaid
distributions required to be paid on the Trust Preferred Securities 2; (ii) the redemption price
with respect to any Trust Preferred Securities 2 called for redemption by Trust 2 and (iii)
payments due upon a voluntary or involuntary dissolution, winding up or liquidation of Trust 2.
The Trust Preferred Securities 2 are mandatorily redeemable upon maturity of the debentures on
March 15, 2036, or upon earlier redemption as provided in the indenture. The Company has the right
to redeem the debentures purchased by Trust 2 in whole or in part, on or after March 15, 2011. As
specified in the indenture, if the debentures are redeemed prior to maturity, the redemption price
will be the principal amount and any accrued but unpaid interest.
CAPITAL EXPENDITURES AND COMMITMENTS
The Company plans to begin construction of a new branch facility in its Fairbanks market in the
second quarter of 2007 and it expects to complete construction in the first quarter of 2008.
- 25 -
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rate, credit, and operations 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 currently liability sensitive, meaning that interest-bearing liabilities mature or
reprice more quickly than interest-earning assets in a given period. Therefore, a significant
increase in market rates of interest could adversely impact net interest income. Conversely, a
declining interest rate environment may improve 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 March 31, 2007, indicate that, if interest rates immediately
increased by 100 basis points, the Company would experience an increase in net interest income of
approximately $423,000 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 $82,000 over the next 12 months.
- 26 -
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 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.
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 March 31, 2007 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
- 27 -
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, 2006. These risk factors have not materially changed.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a)-(b) Not applicable
(c) None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Companys security holders in the quarter ended March
31, 2007.
- 28 -
ITEM 5. OTHER INFORMATION
|
(a) |
|
Not applicable |
|
|
(b) |
|
There have been no material changes in the procedures for shareholders to 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 |
- 29 -
SIGNATURES
Under the requirements of the Securities Exchange Act of 1934, the Company has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
NORTHRIM BANCORP, INC.
|
|
May 8, 2007 |
By /s/ R. Marc Langland
|
|
|
R. Marc Langland |
|
|
Chairman, President, and CEO
(Principal Executive Officer) |
|
|
|
|
|
|
|
|
|
|
May 8, 2007 |
By /s/ Joseph M. Schierhorn
|
|
|
Joseph M. Schierhorn |
|
|
Executive Vice President,
Chief Financial Officer
(Principal Financial and Accounting Officer) |
|
|
- 30 -