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| NRIM > SEC Filings for NRIM > Form 10-Q on 10-Nov-2008 | All Recent SEC Filings |
10-Nov-2008
Quarterly Report
assumptions that affect the reported amounts and disclosures in the consolidated
financial statements. On an ongoing basis, we evaluate our estimates and
assumptions based upon historical experience and various other factors and
circumstances. We believe that our estimates and assumptions are reasonable;
however, actual results may differ significantly from these estimates and
assumptions which could have a material impact on the carrying value of assets
and liabilities at the balance sheet dates and on our results of operations for
the reporting periods.
Our significant accounting policies and practices are described in Note 1 to the
Consolidated Financial Statements in the Company's Form 10-K as of December 31,
2007. The accounting policies that involve significant estimates and assumptions
by management, which have a material impact on the carrying value of certain
assets and liabilities, are considered critical accounting policies. We have
identified our policy for the Allowance as a critical accounting policy.
A description of this policy can be found in Note 5 of the Notes to the
Financial Statements to this 10-Q. We maintain an allowance for loan losses (the
"Allowance") at an amount which we believe is sufficient to provide adequate
protection against losses inherent in the loan portfolio at the balance sheet
date. The Allowance is reported as a reduction of outstanding loan balances and
is decreased by loan charge-offs, increased by loan recoveries and increased by
provisions for loan losses. Our periodic evaluation of the adequacy of the
Allowance is based on such factors as our past loan loss experience, known and
inherent risks in the portfolio, adverse situations that have occurred but are
not yet known that may affect the borrowers' ability to repay, the estimated
value of underlying collateral, and economic conditions. As we utilize
information currently available to evaluate the Allowance, the Allowance is
subjective and may be adjusted in the future depending on changes in economic
conditions or other factors.
We recognize the determination of the Allowance is sensitive to the assigned
credit risk ratings and inherent loss rates at any given point in time.
Therefore, we perform a sensitivity analysis to provide insight regarding the
impact of adverse changes in risk ratings may have on our Allowance. The
sensitivity analysis does not imply any expectation of future deterioration in
our loans' risk ratings and it does not necessarily reflect the nature and
extent of future changes in the Allowance due to the numerous quantitative and
qualitative factors considered in determining our Allowance. At September 30,
2008, in the event that 1 percent of our loans were downgraded from the "pass"
category to the "special mention" category within our current allowance
methodology, the Allowance would have increased by approximately $325,000.
Based on our methodology and its components, management believes the resulting
Allowance is adequate and appropriate for the risk identified in the Company's
loan portfolio. Given current processes employed by the Company, management
believes the risk ratings and inherent loss rates currently assigned are
appropriate. It is possible that others, given the same information, may at any
point in time reach different reasonable conclusions that could be material to
the Company's financial statements. In addition, current risk ratings and fair
value estimates of collateral are subject to change as we continue to review
loans within our portfolio and as our borrowers are impacted by economic trends
within their market areas. Although we have established an Allowance that we
consider adequate, there can be no assurance that the established Allowance will
be sufficient to offset losses on loans in the future.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
See note 2 of the Notes to the Consolidated Financial Statements in this Form
10-Q for further details.
SUMMARY OF THIRD QUARTER RESULTS
At September 30, 2008, the Company had assets of $1 billion and gross loans of
$705.2 million, increases of 5% and 1%, respectively, as compared to the
balances for these accounts at September 30, 2007. As compared to balances at
December 31, 2007, both total assets and total loans at September 30, 2008
decreased by 1%. The Company's net income and diluted earnings per share for the
three months ended September 30, 2008, were $1.6 million and $0.24,
respectively, decreases of 57%, as compared to the same period in 2007. For the
quarter ended September 30, 2008 the Company's net interest income decreased by
$1.3 million, or
11%, its provision for loan losses increased by $1.3 million, or 176%, its other
operating income increased $206,000, or 7%, and its other operating expenses
increased by $1.1 million, or 13%, as compared to the second quarter a year ago.
RESULTS OF OPERATIONS
NET INCOME
Net income for the quarter ended September 30, 2008, was $1.6 million, or $0.24
per diluted share, decreases of 57%, as compared to net income of $3.6 million
and diluted earnings per share of $0.56, respectively, for the third quarter of
2007.
The decrease in net income for the three-month period ending September 30, 2008
as compared to the same period a year ago is the result of a decrease in net
interest income of $1.3 million, an increase in the provision for loan losses of
$1.3 million, and an increase in other operating expense of $1.1 million as
compared to the same period a year ago. The negative effect of these items was
partially offset by a $206,000 increase in other operating income for the
three-month period ending September 30, 2008 as compared to the same period a
year ago and a $1.4 million decrease in tax expense from $2.2 million for the
three-month period ending September 30, 2007 to $751,000 for the third quarter
of 2008. The decrease in the Company's net interest income for the third quarter
of 2008 was caused by larger declines in the yield of its earning assets as
compared to decreases in its cost of funds combined with a shift in earning
assets to lower yielding investment securities from higher yielding loans. The
net interest income was further negatively impacted by an increase in
noninterest earning assets in the form of other real estate owned ("OREO") and
nonaccrual loans that increased by $11.5 million and $10 million, respectively,
to balances of $12.3 million and $15.7 million at September 30, 2008 as compared
to balances of $717,000 and $5.7 million at September 30, 2007. The provision
for loan losses increased by $1.1 million in the third quarter of 2008 to
account for the increase in nonperforming loans and the specific allowance for
impaired loans. The increase in other operating expense for the third quarter of
2008 is primarily the result of a $470,000 increase in expenses related to loan
collection and OREO costs, a $143,000 increase in professional and outside
services, a $196,000 increase in insurance expense attributable to decreases in
the cash surrender value of assets held under the Company's Keyman insurance
policies, and a $160,000 increase in FDIC insurance costs. The decrease in
earnings per diluted share for the third quarter of 2008 as compared to the
third quarter of 2007 was primarily due to the decrease in net income in the
third quarter of 2008.
Net income for the nine months ended September 30, 2008, was $5.1 million, or
$0.78 per diluted share, decreases of 46% and 47%, respectively, as compared to
net income of $9.5 million and diluted earnings per share of $1.46,
respectively, for the same period in 2007.
The decrease in net income for the nine-month period ending September 30, 2008
as compared to the same period a year ago is the result of a decrease in net
interest income of $2.1 million, an increase in the provision for loan losses of
$3.2 million, and an increase in other operating expenses of $3.4 million as
compared to the same period a year ago. These decreases were partially offset by
a $1.1 million increase in other operating income for the nine-month period
ending September 30, 2008 which resulted mainly from increased service charges
on deposit accounts and increased electronic banking fees. Additionally, tax
expense for the nine-month period ending September 30, 2008 decreased by
$3.3 million from $5.7 million for the same period in 2007 to $2.3 million. The
decrease in the Company's net interest income and the increase in its provision
for loan losses for the nine-month period ending September 30, 2008 were caused
by similar factors to those noted above in the discussion of the three-month
period ending September 30, 2008. The increase in other operating expense for
the nine-month period ending September 30, 2008 is the result of a $1.1 million
impairment on OREO, an $840,000 increase in loan collection and OREO costs, a
$452,000 increase in salaries and other personnel expense, a $427,000 increase
in FDIC insurance expense, a $390,000 increase in insurance expense attributable
to decreases in the cash surrender value of assets held under the Company's
Keyman insurance policies, a $341,000 increase in professional and outside
services and a $285,000 increase in occupancy expense as compared to the same
period in 2007. The decrease in earnings per diluted share for
the nine months ending September 30, 2008 as compared to the same period of 2007
was primarily due to the decrease in net income in the nine-month period ending
September 30, 2008.
NET INTEREST INCOME
The primary component of income for most financial institutions is net interest
income, which represents the institution's interest income from loans and
investment securities minus interest expense, ordinarily on deposits and other
interest bearing liabilities. Both the Company's loans and deposits consist
largely of variable interest rate arrangements, with the result that as loans
and deposits reprice, the Company can expect fluctuations in net interest
income. Net interest income for the third quarter of 2008 decreased
$1.3 million, or 11%, to $11.1 million from $12.4 million in the third quarter
of 2007 because of larger reductions in the yields on the Company's loans,
accompanied by a smaller decrease in interest expense. Net interest income for
the nine-month period ending September 30, 2008 decreased $2.1 million, or 6%,
to $34.8 million from $36.9 million in the same period in 2007 due to the same
factors that affected net interest income in the three-month period ending
September 30, 2008. The following table compares average balances and rates for
the quarters ending September 30, 2008 and 2007:
Three Months Ended September 30,
Average Yields/Costs
Average Balances Change Tax Equivalent
2008 2007 $ % 2008 2007 Change
(Dollars in thousands)
Commercial $ 284,317 $ 292,565 $ (8,248 ) -3 % 7.32 % 9.49 % -2.17 %
Construction/development 118,832 141,912 (23,080 ) -16 % 8.02 % 11.13 % -3.11 %
Commercial real estate 251,864 220,788 31,076 14 % 7.38 % 8.60 % -1.22 %
Consumer 51,874 44,952 6,922 15 % 6.85 % 7.50 % -0.65 %
Other loans (226 ) (1,648 ) 1,422 -86 %
Total loans 706,661 698,569 8,092 1 % 7.52 % 9.44 % -1.92 %
Short-term investments 40,823 69,671 (28,848 ) -41 % 2.56 % 5.01 % -2.45 %
Long-term investments 124,986 82,044 42,942 52 % 3.88 % 4.87 % -0.99 %
Total investments 165,809 151,715 14,094 9 % 3.55 % 4.94 % -1.39 %
Interest-earning assets 872,470 850,284 22,186 3 % 6.77 % 8.63 % -1.86 %
Nonearning assets 115,804 93,892 21,912 23 %
Total $ 988,274 $ 944,176 $ 44,098 5 %
Interest-bearing liabilities $ 649,004 $ 631,682 $ 17,322 3 % 2.12 % 3.80 % -1.68 %
Demand deposits 224,290 199,845 24,445 12 %
Other liabilities 9,865 12,168 (2,303 ) -19 %
Equity 105,115 100,481 4,634 5 %
Total $ 988,274 $ 944,176 $ 44,098 5 %
Net tax equivalent margin on
earning assets 5.10 % 5.81 % -0.71 %
Nine Months Ended September 30,
Average Yields/Costs
Average Balances Change Tax Equivalent
2008 2007 $ % 2008 2007 Change
(Dollars in thousands)
Commercial $ 282,850 $ 295,290 $ (12,440 ) -4 % 7.58 % 9.49 % -1.91 %
Construction/development 125,248 144,506 (19,258 ) -13 % 8.69 % 11.21 % -2.52 %
Commercial real estate 247,150 229,171 17,979 8 % 7.57 % 8.64 % -1.07 %
Consumer 51,660 43,723 7,937 18 % 6.96 % 7.60 % -0.64 %
Other loans (995 ) (1,542 ) 547 -35 %
Total loans 705,913 711,148 (5,235 ) -1 % 7.77 % 9.47 % -1.70 %
Short-term investments 41,959 39,245 2,714 7 % 2.53 % 5.06 % -2.53 %
Long-term investments 133,193 84,596 48,597 57 % 4.31 % 4.81 % -0.50 %
Total investments 175,152 123,841 51,311 41 % 3.90 % 4.92 % -1.02 %
Interest-earning assets 881,065 834,989 46,076 6 % 7.00 % 8.80 % -1.80 %
Nonearning assets 104,783 89,103 15,680 18 %
Total $ 985,848 $ 924,092 $ 61,756 7 %
Interest-bearing
liabilities $ 664,546 $ 622,854 $ 41,692 7 % 2.22 % 3.84 % -1.62 %
Demand deposits 207,551 190,573 16,978 9 %
Other liabilities 9,929 12,142 (2,213 ) -18 %
Equity 103,822 98,523 5,299 5 %
Total $ 985,848 $ 924,092 $ 61,756 7 %
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Net tax equivalent
margin on earning assets 5.31 % 5.93 % -0.62 %
Interest-earning assets averaged $872.5 million and $881.1 million for the three
and nine-month periods ending September 30, 2008, an increase of $22.2 million
and $46.1 million, or 3% and 6%, respectively, over the $850.3 and
$835.0 million average for the comparable periods in 2007. The tax equivalent
yield on interest-earning assets averaged 5.10% and 5.31%, respectively, for the
three and nine-month periods ending September 30, 2008, decreases of 71 and 62
basis points, respectively, from 5.81% and 5.93% for the same periods in 2007.
Loans, the largest category of interest-earning assets, increased by
$8.1 million, or 1%, to an average of $706.7 million in the third quarter of
2008 from $698.6 million in the third quarter of 2007. During the nine-month
period ending September 30, 2008, loans decreased by $5.2 million, or 1%, to an
average of $705.9 million from an average of $711.1 million for the nine-month
period ending September 30, 2007. Commercial and construction loans decreased by
$8.2 million and $23.1 million on average, respectively, between the third
quarters of 2008 and 2007. Commercial real estate loans and consumer loans
increased by $31.1 million and $6.9 million on average between the third
quarters of 2008 and 2007. During the nine-month period ending September 30,
2008, commercial and construction loans decreased by $12.4 million, and
$19.3 million, respectively, on average as compared to the nine-month period
ending September 30, 2007. Commercial real estate loans and consumer loans
increased $18.0 million and $7.9 million, respectively, on average between the
nine-month periods ending September 30, 2008 and September 30, 2007. The decline
in the loan portfolio resulted from a combination of transfers of loans to OREO
for the three and nine-month periods ending September 30, 2008, refinance and
loan payoff activity, and a decrease in construction loan originations. We
expect the loan portfolio to decline slightly in the future with moderate growth
in commercial real estate, decreases in commercial and construction loans, and
further increases in consumer loans as we market more consumer loans to the
larger consumer account base that we have developed with the High Performance
Checking ("HPC") product. Residential construction activity in Anchorage, the
Company's largest market, is expected to continue to decline through 2008 due to
a decline in available building lots and sales activity. While the Company
believes it has offset a portion of this effect by acquiring additional
residential construction customers, it expects that the real estate markets in
Anchorage, the Matanuska-Susitna Valley, and the Fairbanks areas will continue
to decrease from the prior year and lead to an overall decline in its
construction loans. The yield on the loan portfolio averaged 7.52% for the third
quarter of 2008, a decrease of 192 basis points from 9.44% over the same quarter
a year ago. During the nine-month period ending September 30, 2008, the yield on
the loan portfolio averaged 7.77%, a decrease of 170 basis points from 9.47 %
over the same nine-month period in 2007.
Average investments increased $14.1 million, or 9%, to $165.8 million for the
third quarter of 2008 from $151.7 million in the third quarter of 2007. For the
nine-month period ending September 30, 2008, average investments increased
$51.3 million, or 41%, to $175.2 million from $123.8 million in the same period
in 2007. This increase resulted mainly from additional deposit accounts that
generated increased funds for investments. Additionally, the Company acquired
$23.8 million in investments when it purchased Alaska First Bank & Trust, N.A.
("Alaska First") in the fourth quarter of 2007.
Interest-bearing liabilities averaged $649.0 million for the third quarter of
2008, an increase of $17.3 million, or 3%, compared to $631.7 million for the
same period in 2007. For the nine-month period ending September 30, 2008,
interest-bearing liabilities averaged $664.5 million, an increase of
$41.7 million, or 7%, compared to $622.9 million for the same period in 2007.
This increase resulted in part from the $47.4 million in deposits acquired by
the Company in the Alaska First acquisition and the addition of $45 million in
certificates of deposit from the Alaska Permanent Fund. The average cost of
interest-bearing liabilities decreased 168 basis points to 2.12% for the third
quarter of 2008 compared to 3.80% for the third quarter of 2007. The decrease in
the average cost of funds in 2008 as compared to 2007 is largely due to the
interest rate cuts by the Federal Reserve that began in the third quarter of
2007 and continued through May 2008.
The Company's net interest income as a percentage of average interest-earning
assets (net tax-equivalent margin) was 5.10% and 5.31%, respectively, for the
three and nine-month periods ending September 30, 2008 as compared to 5.81% and
5.93% for the same periods in 2007. During both the three and nine-month periods
ending September 30, 2008, the yield on the Company's loans decreased due to
lower yields in commercial, construction and consumer loans while its funding
costs also experienced a decrease due to a decline in
interest rates as noted above. In both the three and nine-month periods ending September 30, 2008, the yield on the Company's earning assets declined by more than the cost of its interest-bearing liabilities. As loan volume declined in the both periods, investment volume increased as compared to the same periods a year ago. However, the yields on the Company's investments averaged 3.55% and 3.90% for the three and nine-month periods ending September 30, 2008, respectively, as compared to average yields on its loans of 7.52% and 7.77%, respectively, for the same periods. This shift from higher yielding to lower yielding assets and increased OREO and nonaccrual loan balances had a negative effect on the Company's net tax equivalent margin.
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 three and nine-month periods ending
September 30, 2008 and 2007:
Three Months Ended September 30, Nine Months Ended September 30,
2008 2007 $ Chg % Chg 2008 2007 $ Chg % Chg
(Dollars in thousands) (Dollars in thousands)
Service charges
. . .
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