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| NBCT.OB > SEC Filings for NBCT.OB > Form 10-Q on 14-Aug-2009 | All Recent SEC Filings |
14-Aug-2009
Quarterly Report
Northwest Bancorporation, Inc. (the "Company") is a bank holding company headquartered in Spokane, Washington, and was incorporated in 1991 under the laws of the State of Washington. The Company's wholly-owned subsidiary, Inland Northwest Bank (the "Bank"), is a Washington state-chartered bank, through which substantially all business is conducted. The Bank offers a broad range of banking services to businesses and consumers throughout Spokane County, Washington, and Kootenai County, Idaho.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements. For a discussion about such statements, including the risks and uncertainties inherent therein, see "Forward-Looking Statements." Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Consolidated Financial Statements and Notes presented elsewhere in this report and in the Company's 2008 annual report on Form 10-K.
SUMMARY OF CRITICAL ACCOUNTING POLICIES
The Securities and Exchange Commission (the "SEC") defines "critical accounting policies" as those that require the application of management's most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in future periods. The accounting policies that the Company's management have identified as critical to understanding the Company's financial statements and operating results are described in Note 1 of the Notes to Consolidated Financial Statements in the Company's annual report on Form 10-K for the year ended December 31, 2008.
Results of Operations
Summary
The Company reported a net loss of $1.10 million for the six months ended June 30, 2009, compared to net income of $938 thousand for the comparable period in 2008. The decline in operating results compared to the first six months of 2008 is largely attributable to an increase in the provision for loan losses. The provision for loan losses was $2.90 million for the six months ended June 30, 2009, representing an increase of $2.52 million from the same period in 2008. This increased provision for loan losses reflects a higher level of nonperforming loans, delinquencies and net charge-offs.
During the first six months of 2009, total assets decreased $1.2 million or 0.3% and total gross loans decreased $2.8 million or 0.8%; deposits grew $14.0 million or 4.4% during the same period.
The table below summarizes the Company's financial performance for the six months ended June 30, 2009 and 2008:
Financial Highlights
Six months ended
June 30,
2009 2008 % Change
($ in thousands, except per share data)
Results of Operations:
Interest income $ 10,924 $ 11,496 -5.0 %
Interest expense 4,304 5,108 -15.7 %
Net interest income 6,620 6,388 3.6 %
Provision for loan losses 2,900 375 673.3 %
Net interest income after provision for loan losses 3,720 6,013 -38.1 %
Noninterest income 1,689 1,219 38.6 %
Noninterest expense 7,199 5,840 23.3 %
(Loss) income before income taxes (1,790 ) 1,392 -228.6 %
Income tax (benefit) expense (688 ) 454 -251.5 %
Net (loss) income $ (1,102 ) $ 938 -217.5 %
Share Data:
Basic earnings (loss) per common share $ (0.57 ) $ 0.40
Diluted earnings (loss) per common share $ (0.57 ) $ 0.39
Selected Ratios:
Return on average assets -0.55 % 0.53 %
Return on average equity -7.00 % 6.72 %
Net interest income to average earning assets 3.59 % 3.85 %
Efficiency ratio 86.64 % 76.77 %
Noninterest income to average assets 0.85 % 0.69 %
Noninterest expense to average assets 3.61 % 3.29 %
Ending shareholders' equity to average assets 9.06 % 7.75 %
Nonperforming loans to gross loans 4.50 % 0.85 %
Allowance for loan losses to gross loans 1.31 % 0.95 %
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Net Interest Income
The principal component of the Bank's revenues is net interest income. Net interest income is the difference between interest income derived from earning assets, primarily loans and investment securities, and interest expense associated with interest bearing liabilities, primarily deposits, securities sold under agreement to repurchase and borrowed funds. The volume and mix of earning assets and funding sources, market rates of interest, demand for loans, and the availability of deposits affect net interest income.
The following table presents an analysis of the Bank's net interest income and net interest margin for the six months ended June 30, 2009 and 2008:
Six months ended June 30,
2009 2008
Interest Average Interest Average
Average Income or Yield or Average Income or Yield or
Balance Expense Cost Balance Expense Cost
($ in thousands)
ASSETS
Loans, gross 1,2 $ 341,891 $ 10,446 6.11 % $ 295,828 $ 10,719 7.25 %
Taxable investments 14,372 310 4.31 % 21,882 531 4.85 %
Nontaxable investments3 8,740 164 3.75 % 7,309 152 4.16 %
FHLB stock 1,140 - 0.00 % 674 4 1.19 %
Federal funds sold &
interest-bearing deposits with
banks 3,013 4 0.27 % 6,244 90 2.88 %
Total interest earning assets 369,156 10,924 5.92 % 331,937 11,496 6.93 %
Less reserve for probable loan
losses (5,227 ) (2,890 )
Cash and due from banks 8,085 7,305
Other non-earning assets 26,412 19,143
Total assets $ 398,426 $ 355,495
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LIABILITIES AND SHAREHOLDERS' EQUITY NOW accounts 14,380 31 0.43 % 14,386 60 0.83 % Money market accounts 29,583 122 0.82 % 32,390 301 1.86 % Savings accounts 41,550 270 1.30 % 24,675 272 2.20 % Time certificates of deposit 182,992 3,275 3.58 % 169,670 3,876 4.57 % Total interest bearing deposits 268,505 3,698 2.75 % 241,121 4,509 3.74 % Securities sold under repurchase agreements 4,840 7 0.29 % 19,070 148 1.55 % Borrowed funds 22,666 444 3.92 % 12,045 295 4.90 % Junior subordinated note4 5,155 155 6.01 % 5,155 156 6.05 % Total borrowed funds 32,661 606 3.71 % 36,270 599 3.30 % Total interest bearing liabilities 301,166 4,304 2.86 % 277,391 5,108 3.68 % Demand deposits 60,375 46,163 Other liabilities 5,377 4,032 Shareholders' equity 31,508 27,910 Total liabilities and shareholders' equity $ 398,426 $ 355,496 Net interest income $ 6,620 $ 6,388 Net interest spread 3.06 % 3.25 % Net interest income to average earning assets (margin) 3.59 % 3.85 % |
Comments:
1. Nonaccrual loan balances are included in average loan balances; however, no interest income is imputed to nonaccrual loans.
2. Loan fee income in the amount of $314 thousand and $330 thousand is included in loan interest income for 2009 and 2008, respectively.
3. Yields have not been adjusted on tax-exempt investments to determine a tax-equivalent yield.
4. Junior subordinated note interest is fixed at 5.95%. Interest is computed using 360/365, which results in a higher annual percentage rate.
Interest income on earning assets for the six months ended June 30, 2009 was $10.9 million representing a decrease of $572 thousand, or 5.0%, compared to $11.5 million for the same period in 2008. Interest expense on interest bearing liabilities for the six months ended June 30, 2009 was $4.3 million representing a decrease of $804 thousand, or 15.7%, compared to $5.1 million for the same period in 2008. The decrease in interest income occurred despite a $37.2 million increase in average interest earning assets, and the decrease in interest expense occurred despite a $23.8 million increase in average interest bearing liabilities. The decrease in both interest income and interest expense reflect the effects of a decreasing interest rate environment. Also contributing to the decline in interest income are higher levels of nonperforming assets, including nonaccrual loans for which accrued interest is reversed upon reaching nonperforming status.
Loans, the highest yielding component of earning assets, represented 92.6% of average earning assets at June 30, 2009, compared to 89.1% at June 30, 2008. The average yield on loans declined 114 basis points to 6.11% for the first six months of 2009 from 7.25% for the comparable period in 2008, primarily as a result of decreases in the Prime Rate, a key index to which a majority of our loan rates are tied. During the first six months of 2009, the average Prime Rate was 3.25% compared to 5.66% during the same time last year. The increase in nonaccrual loans has also had a negative impact on the average loan yield.
The percentage of average interest earning assets funded by average interest bearing liabilities decreased to 81.6% during the first half of 2009, compared to 83.6% for the same period in 2008. Deposits represented 89.2% of average interest bearing liabilities at June 30, 2009, compared to 86.9% at June 30, 2008. The cost of interest bearing funds for first six months of 2009 decreased 82 basis points to 2.86% from 3.68% during the same period last year.
Net interest income can be analyzed in terms of the impact of changing rates and changing volume. The following table sets forth the effect which varying levels of interest earning assets and interest bearing liabilities and applicable rates have had on changes in net interest income for the periods presented:
Six months ended June 30,
2009 vs. 2008
Increase (decrease) due to changes in:
Volume Rate Total
($ in thousands)
Interest earning assets
Loans $ 3,088 $ (3,361 ) $ (273 )
Securities (118 ) (95 ) (213 )
Fed funds sold/interest-bearing balances (31 ) (55 ) (86 )
Total interest earning assets 2,939 (3,511 ) (572 )
Interest bearing liabilities
NOW accounts - (29 ) (29 )
Money market accounts (24 ) (155 ) (179 )
Savings accounts (5 ) 3 (2 )
Time certificates of deposit 342 (943 ) (601 )
Securities sold under repurchase agreements (67 ) (74 ) (141 )
Borrowed funds 192 (44 ) 148
Total interest bearing liabilities 438 (1,242 ) (804 )
Total increase (decrease) in net interest income $ 2,501 $ (2,269 ) $ 232
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Net interest income for the six months ended June 30, 2009 improved $232 thousand, or 3.6%, to $6.6 million from $6.4 million for the six months ended June 30, 2008. The improvement in net interest income is a result of interest income decreasing $572 thousand, which was more than offset by an $804 thousand decrease in interest expense.
The annualized net interest margin was 3.59% for the first six months of 2009 compared to 3.85% for the corresponding period of 2008. The decrease in net interest margin from 2008 to 2009 is the result of greater decreases in yields on earning assets compared to the decreases in rates paid on deposits, repurchase accounts and borrowed funds.
The Bank anticipates that competition from other financial institutions and reduced loan demand will continue to place pressure on its net interest margin. Current Federal Reserve policy has resulted in a Prime Rate of 3.25% during the first half of 2009, and the pressure on net interest margin is expected to continue so long as the Federal Reserve maintains its Federal funds target at a rate that ranges from 0.0% to 0.25%. Nevertheless, with the additional capital received from the Treasury Department, the Bank has budgeted for modest loan growth in 2009, with a slight improvement in net interest income anticipated as a result of an expected reduction in rates paid on deposits.
Rate Shock
Presented in the table below are the results of an analysis of interest rate risk vulnerability performed using the Bank's financial information as of June 30, 2009. Generally, the results of our analysis indicate that our exposure to interest rate volatility is within management's target of no more than plus or minus ten-percent when applying an interest rate shock of plus or minus two hundred basis points. Rate increases of 1.00%, 2.00% and 3.00% were modeled, while a decrease of 0.25% was modeled since the Federal Reserve's current Target Discount Rate is 0.25% and cannot go lower than 0%. The results of the net interest income analysis performed as of June 30, 2009, are within guidelines established by the Bank's Board of Directors, as shown in the table below.
It is management's goal to limit the negative impact of a change in rates of plus or minus two hundred basis points to no more that twenty-five percent of the economic value of equity. Management therefore modeled rate increases of 1.00%, 2.00%, 3.00% and a decrease of 0.25%. The results of the economic value of equity analysis performed as of June 30, 2009, are presented in the table below to illustrate the estimated effect of changing rates on book value of equity and are within limits established by the Bank's Board of Directors.
June 30, 2009
Net Interest Income Economic Value of Equity
Projected $ % $ %
Interest Change Change Change Change
Rate Estimated from from Estimated from from
Scenario Value Base Base Value Base Base
($ in thousands)
+300 $ 14,843 $ 1,603 12.11 % $ 25,542 $ (10,555 ) -29.24 %
+200 13,890 650 4.91 % 28,040 (8,057 ) -22.32 %
+100 13,270 30 0.23 % 31,567 (4,530 ) -12.55 %
Base 13,240 0 0.00 % 36,097 0 0.00 %
-25 13,232 (8 ) -0.06 % 37,270 1,173 3.25 %
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Compared to the results of a similar analysis performed on the Bank's financial information as of June 30, 2008, presented below, the potential effect of a significant (+300) change in market rates of interest on net interest income has increased by 5.0%, while the potential effect on economic value of equity decreased by 7.6%. Results for both periods are within the established guidelines of the Bank's Board of Directors.
June 30, 2008
Net Interest Income Economic Value of Equity
Projected $ % $ %
Interest Change Change Change Change
Rate Estimated from from Estimated from from
Scenario Value Base Base Value Base Base
($ in thousands)
+300 $ 15,883 $ 1,052 7.09 % $ 24,433 $ (6,759 ) -21.67 %
+200 15,613 782 5.27 % 26,681 (4,511 ) -14.46 %
+100 15,294 463 3.12 % 28,977 (2,215 ) -7.10 %
Base 14,831 0 0.00 % 31,192 0 0.00 %
-100 14,469 (362 ) -2.44 % 32,289 (1,097 ) 3.52 %
-200 14,104 (727 ) -4.90 % 33,399 (2,207 ) 7.08 %
-300 13,753 (1,078 ) -7.27 % 34,549 (3,357 ) 10.76 %
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