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| NRIM > SEC Filings for NRIM > Form 10-Q on 10-Aug-2009 | All Recent SEC Filings |
10-Aug-2009
Quarterly Report
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 Northrim Bancorp, Inc.'s (the "Company")
management's expectations about future events and developments such as future
operating results, growth in loans and deposits, continued success of the
Company's 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
management's current plans and expectations and are inherently uncertain. Our
actual results may differ significantly from management's 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 competition on price and other factors with other
financial institutions; customer acceptance of new products and services; the
regulatory environment in which we operate; and general trends in the local,
regional and national banking industry and economy. Many of these risks, as well
as other risks that may have a material adverse impact on our operations and
business, are identified in 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 Company's 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. The Company also holds a 24% interest in the profits and losses of a
residential mortgage holding company, Residential Mortgage Holding Company, LLC
("RML Holding Company"), through the Bank's 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 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. This division also began operating in
Alaska in the second quarter of 2008. 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. 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. Finally, in the third
quarter of 2008, the Bank formed another wholly-owned subsidiary, Northrim
Building, LLC ("NBL"), which owns and operates the Company's main office
facility at 3111 C Street in Anchorage. NBL purchased the building in the third
quarter of 2008.
CRITICAL ACCOUNTING POLICIES
The accounting and reporting policies of the Company conform with U.S. generally
accepted accounting principles. The Company's accounting policies are
fundamental to understanding management's discussion and analysis of results of
operations and financial condition. The Company has identified three policies as
being critical because they require management to make estimates, assumptions
and judgments that affect the reported amount of assets and liabilities,
contingent assets and liabilities, and revenues and expenses included in the
consolidated financial statements. The judgments and assumptions used by
management are based on historical experience and other factors, which are
believed to be reasonable under the circumstances. Circumstances and events that
differ significantly from those underlying the Company's estimates,
assumptions and judgments could cause the actual amounts reported to differ
significantly from these estimates.
The Company's critical accounting policies include those that address the
accounting for the allowance for loan losses, the valuation of goodwill and
other intangible assets, and the valuation of other real estate owned. The
Company has not made any significant changes in its critical accounting policies
or its estimates and assumptions from those disclosed in its Form 10-K as of
December 31, 2008. These critical accounting policies are further described in
Management's Discussion and Analysis and in Note 1, Summary of Significant
Accounting Policies, of the Notes to Consolidated Financial Statements in the
Company's Form 10-K as of December 31, 2008. Management has applied its critical
accounting policies and estimation methods consistently in all periods presented
in these financial statements.
Several new accounting pronouncements became effective for the Company on
January 1, 2009. See Note 2 of this Form 10-Q for a summary of the
pronouncements and discussion of the impact of their adoption on the Company's
consolidated financial statements.
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 SECOND QUARTER RESULTS
At June 30, 2009, the Company had assets of $975.7 million and gross loans of
$684.9 million, decreases of 6% and 4%, respectively, as compared to the
balances for these accounts at June 30, 2008. As compared to balances at
December 31, 2008, total assets and total loans at June 30, 2009 decreased by 3%
and 4%, respectively. The Company's net income and diluted earnings per share
for the three months ended June 30, 2009, were $1.9 million and $0.29,
respectively, increases of 30% and 32%, respectively, as compared to the same
period in 2008. For the quarter ended June 30, 2009, the Company's net interest
income increased by $200,000, or 2%, its provision for loan losses increased by
$118,000, or 6%, its other operating income increased $809,000, or 28%, and its
other operating expenses increased by $124,000, or 1%, as compared to the second
quarter a year ago.
RESULTS OF OPERATIONS
NET INCOME
Net income attributable to Northrim Bancorp for the quarter ended June 30, 2009,
was $1.9 million, or $0.29, per diluted share, increases of 30% and 32%,
respectively, each as compared to net income of $1.4 million and diluted
earnings per share of $0.22, respectively, for the second quarter of 2008.
The increase in net income attributable to Northrim Bancorp for the three-month
period ending June 30, 2009 as compared to the same period a year ago is the
result of an increase in other operating income of $809,000 and an increase in
net interest income of $200,000. These increases were partially offset by a
$314,000 increase in the provision for income taxes, a $124,000 increase in
other operating expenses and a $118,000 increase in the loan loss provision for
the three-month period ending June 30, 2009 as compared to the same period a
year ago. The increase in other operating income for the second quarter of 2009
was primarily the result of a $491,000 increase in earnings from the Company's
mortgage affiliate, a $191,000 increase in rental income, and a $133,000
increase in gain on the sale other real estate owned. The slight increase in the
Company's net interest income for the second quarter of 2009 as compared to the
second quarter of 2008 was caused by larger declines in its cost of funds as
compared to decreases in the yield of its earning assets. The Company's cost of
funds declined due to a decrease in interest-bearing liabilities and an increase
in demand deposits. The provision for income taxes increased by $314,000 in the
second quarter of 2009 as compared to the same period in 2008 due to increased
pre-tax income, as well as a decreased tax credits relative to the level of
taxable income. The increase in other operating expense for the second quarter
of 2009
is primarily the result of a $735,000 increase in insurance expense related to
FDIC insurance which was partially offset by a $594,000 decrease in expenses
related to OREO. The provision for loan losses increased slightly by $118,000 in
the second quarter of 2009 to account for the combined effect of loan
charge-offs and changes in the specific allowance for impaired loans. The
increase in earnings per diluted share for the second quarter of 2009 as
compared to the second quarter of 2008 was caused by the increase in net income
in the second quarter of 2009.
Net income attributable to Northrim Bancorp for the six months ended June 30,
2009, was $3.8 million, or $0.60 per diluted share, increases of 7% and 7%,
respectively, as compared to $3.6 million and diluted earnings per share of
$0.56, respectively, for the same period in 2008.
The increase in net income attributable to Northrim Bancorp for the six-month
period ending June 30, 2009 as compared to the same period a year ago is the
result of an increase in other operating income of $2 million, a decrease in the
loan loss provision of $207,000 and an $88,000 decrease in the provision for
income taxes. These changes were partially offset by a $1.2 million increase in
other operating expenses and an $819,000 decrease in net interest income for the
six-month period ending June 30, 2009 as compared to the same period a year ago.
The increase in other operating income for the six-month period ending June 30,
2009 was primarily the result of a $1.3 million increase in earnings from the
Company's mortgage affiliate, a $387,000 increase in rental income, and a
$241,000 increase in gain on the sale of other real estate owned. The decrease
in the Company's loan loss provision for the six-month period ending June 30,
2009 was due to the decrease in the specific allowance for impaired loans which
was due to charge offs and payoffs of loans measured for impairment. The slight
decrease in the Company's provision for income taxes in the six-month period
ending June 30, 2009 as compared to the same period in 2008 was due to increased
tax credits relative to the level of taxable income for the two periods. The
increase in other operating expense for the six-month period ending June 30,
2009 was primarily the result of a $1.2 million increase in insurance expense
related to FDIC insurance and a $316,000 increase in salary and benefit costs
due mainly to increased group medical costs. These increases in other operating
costs for the six month period ending June 30, 2009 were partially offset by a
$291,000 decrease in expenses related to OREO. The decrease in the Company's net
interest income for the six-month period ending June 30, 2009 was caused by a
0.87% decrease in the yield on its interest-earning assets. Interest-earning
assets averaged $868.5 million and $885.4 million, respectively, for the six
months ending June 30, 2009 and 2008. The Company's cost of funds on
interest-bearing liabilities, which averaged $635.6 million and $672.4 million,
respectively, for the six months ending June 30, 2009 and 2008, decreased by
1.02% for the six months ending June 30, 2009 as compared to the same period in
2008. The Company's average cost of funds decreased more than the yield on
average interest-earning assets for the six months ending June 30, 2009 as
compared to the same period in 2008. However, the decrease in yield on
interest-earning assets for the six month period ending June 30, 2009 had a
greater affect on the margin during the period than the decrease in cost of
funds for interest-bearing liabilities, because the average balances of
interest-earning assets were approximately $230 million higher than the average
balances of interest-bearing liabilities. The increase in earnings per diluted
share for the second quarter of 2009 as compared to the second quarter of 2008
was caused by the increase in net income in the second quarter of 2009.
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 second quarter of 2009 increased $200,000,
or 2%, to $11.7 million from $11.5 million in the second quarter of 2008 because
of larger reductions in interest expense, accompanied by a smaller decrease in
the yields on the Company's loans. Net interest income for the six-month period
ending June 30, 2009 decreased $819,000, or 3%, to $22.8 million from
$23.7 million in the same period in 2008 due to a decrease in interest income,
accompanied by a smaller decrease in interest expense. The following table
compares average balances and rates for the quarters ending June 30, 2009 and
2008:
Three Months Ended June 30,
Average Yields/Costs
Average Balances Change Tax Equivalent
2009 2008 $ % 2009 2008 Change
(Dollars in thousands)
Commercial $ 277,519 $ 283,679 $ (6,160 ) -2 % 7.08 % 7.34 % -0.26 %
Construction/development 82,831 121,416 (38,585 ) -32 % 8.01 % 8.49 % -0.48 %
Commercial real estate 280,661 247,960 32,701 13 % 7.01 % 7.52 % -0.51 %
Home equity lines and other consumer 48,143 51,777 (3,634 ) -7 % 6.81 % 6.89 % -0.08 %
Real estate loans for sale 10,503 - 10,503 NA 4.77 % NA NA
Other loans (1,416 ) (1,044 ) (372 ) 36 %
Total loans 698,241 703,788 (5,547 ) -1 % 7.13 % 7.59 % -0.46 %
Short-term investments 25,185 59,480 (34,295 ) -58 % 0.25 % 2.29 % -2.04 %
Long-term investments 136,734 130,066 6,668 5 % 3.25 % 4.10 % -0.85 %
Total investments 161,919 189,546 (27,627 ) -15 % 2.79 % 3.56 % -0.77 %
Interest-earning assets 860,160 893,334 (33,174 ) -4 % 6.31 % 6.73 % -0.42 %
Nonearning assets 105,317 99,706 5,611 6 %
Total $ 965,477 $ 993,040 $ (27,563 ) -3 %
Interest-bearing liabilities $ 605,435 $ 676,271 $ (70,836 ) -10 % 1.19 % 2.03 % -0.84 %
Demand deposits 243,299 203,881 39,418 19 %
Other liabilities 8,496 9,345 (849 ) -9 %
Equity 108,247 103,543 4,704 5 %
Total $ 965,477 $ 993,040 $ (27,563 ) -3 %
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Net tax equivalent margin on earning assets 5.48 % 5.20 % 0.28 %
Six Months Ended June 30,
Average Yields/Costs
Average Balances Change Tax Equivalent
2009 2008 $ % 2009 2008 Change
(Dollars in thousands)
Commercial $ 278,923 $ 282,108 $ (3,185 ) -1 % 6.92 % 7.71 % -0.79 %
Construction/development 89,904 128,491 (38,587 ) -30 % 7.57 % 9.00 % -1.43 %
Commercial real estate 276,030 244,768 31,262 13 % 7.03 % 7.67 % -0.64 %
Consumer 49,346 51,552 (2,206 ) -4 % 6.81 % 7.02 % -0.21 %
Real estate loans for
sale 9,308 - 9,308 NA 4.83 % NA NA
Other loans (1,616 ) (1,385 ) (231 ) 17 %
Total loans 701,895 705,534 (3,639 ) -1 % 7.03 % 7.91 % -0.88 %
Short-term investments 30,881 42,533 (11,652 ) -27 % 0.59 % 2.51 % -1.92 %
Long-term investments 135,755 137,341 (1,586 ) -1 % 3.43 % 4.50 % -1.07 %
Total investments 166,636 179,874 (13,238 ) -7 % 2.93 % 4.06 % -1.13 %
Interest-earning assets 868,531 885,408 (16,877 ) -2 % 6.25 % 7.12 % -0.87 %
Nonearning assets 109,186 99,214 9,972 10 %
Total $ 977,717 $ 984,622 $ (6,905 ) -1 %
Interest-bearing
liabilities $ 635,578 $ 672,403 $ (36,825 ) -5 % 1.24 % 2.26 % -1.02 %
Demand deposits 225,948 199,089 26,859 13 %
Other liabilities 8,816 9,962 (1,146 ) -12 %
Equity 107,375 103,168 4,207 4 %
Total $ 977,717 $ 984,622 $ (6,905 ) -1 %
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Net tax equivalent margin on earning
assets 5.34 % 5.41 % -0.07 %
Interest-earning assets averaged $860.2 million and $893.3 million for the
three-month periods ending June 30, 2009 and 2008, respectively, a decrease of
$33.2 million, or 4%. The tax equivalent yield on interest-earning assets
averaged 5.48% and 5.20%, respectively, for the three-month periods ending
June 30, 2009 and 2008, respectively, an increase of 28 basis points.
Loans, the largest category of interest-earning assets, decreased by
$5.5 million, or 1%, to an average of $698.2 million in the second quarter of
2009 from $703.8 million in the second quarter of 2008. During the six-month
period ending June 30, 2009, loans decreased by $3.6 million, or 1%, to an
average of $701.9 million from an average of $705.5 million for the six-month
period ending June 30, 2008. Commercial, construction and home equity lines and
other consumer decreased by $6.2 million, $38.6 million and $3.6 on average,
respectively, between the second quarters of 2009 and 2008. Commercial real
estate loans increased by $32.7 million on average between the second quarters
of 2009 and 2008. During the six-month period ending June 30, 2009, commercial,
construction and home equity lines and other consumer loans decreased by
$3.2 million, $38.6 million, and $2.2 million, respectively, on average as
compared to the six-month period ending June 30, 2008. Commercial real estate
loans increased $31.3 million on average between the six-month periods ending
June 30, 2009 and June 30, 2008. Additionally, the Company had $10.5 million in
real estate loans for sale on average in the three months ended June 30, 2009,
and no real estate loans for sale during the same period in 2008. The Company
had $9.3 million in real estate loans for sale on average in the six months
ended June 30, 2009, and no real estate loans for sale during the same period in
2008. The decline in the loan portfolio resulted from a combination of refinance
and loan payoff activity and a decrease in construction loan originations. We
expect the loan portfolio to decrease slightly in the future with moderate
growth in commercial real estate and commercial loans offset by further
decreases in construction loans due to lower residential construction activity,
and decreases home equity lines and other consumer loans as more of these types
of loans are paid off due to the increase in mortgage refinance activity. In
addition, management intends to continue to aggressively reduce its loans
measured for impairment and OREO, much of which is secured by residential
construction and land development loans, which is expected to lead to further
decreases in construction loan balances. The yield on the loan portfolio
averaged 7.13% for the second quarter of 2009, a decrease of 46 basis points
from 7.59% over the same quarter a year ago. During the six-month period ending
June 30, 2009, the yield on the loan portfolio averaged 7.03%, a decrease of 88
basis points from 7.91% over the same six-month period in 2008.
Average investments decreased $27.6 million, or 15%, to $161.9 million for the
second quarter of 2009 from $189.5 million in the second quarter of 2008. For
the six-month period ending June 30, 2009, average investments decreased
$13.2 million or 7% to $166.6 million from $179.9 million in the same period in
2008.
Interest-bearing liabilities averaged $605.4 million for the second quarter of
2009, a decrease of $70.8 million, or 10%, compared to $676.3 million for the
same period in 2008. For the six-month period ending June 30, 2009,
interest-bearing liabilities averaged $635.6 million, a decrease of
$36.8 million, or 5%, compared to $672.4 million for the same period in 2008.
The average cost of interest-bearing liabilities decreased 84 basis points to
1.19% for the second quarter of 2009 compared to 2.03% for the second quarter of
2008. The average cost of interest-bearing liabilities decreased 102 basis
points to 1.24% for the six-month period ending June 30, 2009 as compared to
2.26% for the same period in 2008. The decrease in the average cost of funds in
2009 as compared to 2008 is largely due to the interest rate cuts by the Federal
Reserve that were made throughout 2008. As a result, many other interest rates
declined during the year, which contributed to a decline in deposit rates.
The Company's net interest income as a percentage of average interest-earning
assets (net tax-equivalent margin) was 5.48% and 5.34%, respectively, for the
three and six-month periods ending June 30, 2009 as compared to 5.20% and 5.41%
for the same periods in 2008. The decrease in funding costs for the three-month
period ending June 30, 2009 resulted in an increase in net tax-equivalent
margin. However, in the six-month period ending June 30, 2009, the decrease in
interest income exceeded the decrease in interest expense, as noted above,
resulting in a slight decrease in the net tax-equivalent margin.
OTHER OPERATING INCOME
Other operating income consists of earnings on service charges, purchased
receivable income, equity in earnings from the Company's mortgage affiliate,
gains from the sale of other real estate owned and other items. Set forth below
is the change in Other Operating Income between the three and six-month periods
ending June 30, 2009 and 2008:
Three Months Ended June 30, Six Months Ended June 30,
2009 2008 $ Chg % Chg 2009 2008 $ Chg % Chg
(Dollars in thousands) (Dollars in thousands)
Equity in earnings
from mortgage
affiliate $ 764 $ 273 $ 491 180 % $ 1,612 $ 306 $ 1,306 427 %
Service charges on
deposit accounts 775 888 (113 ) -13 % 1,478 1,750 (272 ) -16 %
Purchased
receivable income 474 518 (44 ) -8 % 1,232 1,047 185 18 %
Employee benefit
plan income 447 352 95 27 % 813 659 154 23 %
Electronic banking
fees 351 292 59 20 % 661 538 123 23 %
Rental income 208 17 191 1124 % 414 27 387 1433 %
Loan servicing
fees 162 126 36 29 % 298 250 48 19 %
Merchant credit
card transaction
fees 70 111 (41 ) -37 % 153 217 (64 ) -29 %
Equity in loss
from Elliott Cove (28 ) (16 ) (12 ) 75 % (93 ) (53 ) (40 ) 75 %
Gain on sale of
securities
available for
sale, net 196 100 96 96 % 196 100 96 96 %
Gain on sale of
other real estate
. . .
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