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NRIM > SEC Filings for NRIM > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for NORTHRIM BANCORP INC

Form 10-Q for NORTHRIM BANCORP INC


8-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion should be read in conjunction with the unaudited consolidated financial statements of Northrim BanCorp, Inc. (the "Company") and the notes thereto presented elsewhere in this report and with the Company's Annual Report on Form 10-K for the year ended December 31, 2011.

Note Regarding Forward Looking-Statements

This quarterly report on Form 10-Q includes forward-looking statements, which are not historical facts. These forward-looking statements describe 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 "anticipate," "believe," "expect," "intend" 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 margin; and our ability to maintain asset quality. Further, actual results may be affected by competition on price and other factors with other financial institutions; customer acceptance of new products and services; the regulatory environment in which we operate; and general trends in the local, regional and national banking industry and economy. Many of these risks, as well as other risks that may have a material adverse impact on our operations and business, are identified in Part
II. Item 1A Risk Factors of this report, and in our other filings with the Securities and Exchange Commission. However, you should be aware that these factors are not an exhaustive list, and you should not assume these are the only factors that may cause our actual results to differ from our expectations. In addition, you should note that we do not intend to update any of the forward-looking statements or the uncertainties that may adversely impact those statements, other than as required by law.

Critical Accounting Policies

The preparation of the consolidated financial statements requires us to make a number of estimates and assumptions that affect the reported amounts and disclosures in the consolidated financial statements. On an ongoing basis, we evaluate our estimates and assumptions based upon historical experience and various other factors and circumstances. We believe that our estimates and assumptions are reasonable; however, actual results may differ significantly from these estimates and assumptions which could have a material impact on the carrying value of assets and liabilities at the balance sheet dates and on our results of operations for the reporting periods.


The accounting policies that involve significant estimates and assumptions by management, which have a material impact on the carrying value of certain assets and liabilities, are considered critical accounting policies. The Company's critical accounting policies include those that address the accounting for the Allowance, the valuation of goodwill and other intangible assets, and the valuation of other real estate owned. These critical accounting policies are further described in Item 7, 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 for the year ended December 31, 2011.

Management has applied its critical accounting policies and estimation methods consistently in all periods presented in these consolidated financial statements. However, at September 30, 2012 management made some enhancements to the calculation of the Allowance. See discussion of these changes in Note 6 to the Consolidated Financial statements in this Form 10-Q. See Note 2 of the Notes to Consolidated Financial Statements in this Form 10-Q for a summary of the pronouncements that became effective in 2012 and discussion of the impact of their adoption on the Company's consolidated financial statements.

Update on Economic Conditions

The Company continues to see progress on a number of resource development projects including a significant project located offshore of Alaska's north coast in the Chukchi and Beaufort Seas.

The Company's business activities are currently focused primarily in the state of Alaska. Consequently, our results of operations and financial condition are dependent upon the general trends in the Alaska economy, which is significantly affected by the development of natural resources. Alaska is expected to add 38,749 jobs between 2010 and 2020, an increase of 12% according to the October 2012 issue of Alaska Economic Trends published by the State of Alaska.

Residential construction is also beginning to improve in Alaska. According to the Municipality of Anchorage, total new construction permit numbers increased 31%, which also equates to an 11% increase in total number of units in the first nine months of 2012. Year to date there were a total of 325 new construction permits issued versus 249 permits in 2011 based on a report from the Municipality of Anchorage. According to the Municipality of Anchorage, estimated total value for new residential permits through September 30, 2012 is $18.8 million.

Recent Developments

New Proposed Capital Rules: On June 12, 2012, the three federal banking regulators (including the Federal Reserve and the FDIC) jointly announced that they were seeking comment on three sets of proposed regulations relating to capital (the "Proposed Rules"). The Proposed Rules would apply to both depository institutions and (subject to certain exceptions not applicable to the Company) their holding companies. Although parts of the Proposed Rules would apply only to large, complex financial institutions, substantial portions of the Proposed Rules would apply to Northrim Bank (the "Bank") and the Company. The Proposed Rules include requirements contemplated by the Dodd-Frank Act as well as certain standards initially adopted by the Basel Committee on Banking Supervision in December 2010, which standards are commonly referred to as "Basel III".

The Proposed Rules include new risk-based and leverage capital ratio requirements, which would be phased in beginning in 2013 and be fully implemented January 1, 2015, and would refine the definition of what constitutes "capital" for purposes of calculating those ratios. The proposed new minimum capital level requirements applicable to the Company and the Bank under the Proposed Rules would be: (i) a new common equity Tier 1 risk-based capital ratio of 4.5%; (ii) a Tier 1 risk-based capital ratio of 6% (increased from 4%); (iii) a total risk-based capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 4% for all institutions. Common equity Tier 1 capital would consist of retained earnings and common stock instruments, subject to certain adjustments.

The Proposed Rules would also establish a "capital conservation buffer" of 2.5% above the new regulatory minimum risk-based capital requirements. The conservation buffer would consist entirely of common equity Tier 1 capital and, when added to the capital requirements, would result in the following minimum ratios: (i) a common equity Tier 1 risk-based capital ratio of 7.0%, (ii) a Tier 1 risk-based capital ratio of 8.5%, and (iii) a total risk-based capital ratio of 10.5%. The new capital conservation buffer requirement would be phased in beginning in January 2016 at 0.625% of risk-weighted assets and would increase by that amount each year until fully implemented in January 2019. An institution would be subject to limitations on certain activities including payment of dividends, share repurchases and discretionary bonuses to executive officers if its capital level is below the buffer amount.

The Proposed Rules would also revise the prompt corrective action framework, which is designed to place restrictions on insured depository institutions, including the Bank, if their capital levels do not meet certain thresholds. These revisions would be


phased in beginning in 2013 and be fully implemented January 1, 2015. The prompt corrective action rules would be modified to include a common equity Tier 1 capital component and to increase certain other capital requirements for the various thresholds. For example, under the proposed prompt corrective action rules, insured depository institutions would be required to meet the following capital levels in order to qualify as "well capitalized": (i) a new common equity Tier 1 risk-based capital ratio of 6.5%; (ii) a Tier 1 risk-based capital ratio of 8% (increased from 6%); (iii) a total risk-based capital ratio of 10% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 5% (unchanged from current rules).

The Proposed Rules set forth certain changes in the methods of calculating certain risk-weighted assets, which in turn would affect the calculation of risk based ratios. These new calculations would take effect beginning January 1, 2015. Under the Proposed Rules, higher or more sensitive risk weights would be assigned to various categories of assets, including residential mortgages, certain credit facilities that finance the acquisition, development or construction of real property, certain exposures or credits that are 90 days past due or on nonaccrual, foreign exposures and certain corporate exposures. In addition, the Proposed Rules include (i) alternative standards of creditworthiness consistent with the Dodd-Frank Act; (ii) greater recognition of collateral and guarantees; and (iii) revised capital treatment for derivatives and repo-style transactions.

As of the date of this filing, final regulations have not been issued. We cannot predict at this time when or in what form final rules will be adopted.


Highlights and Summary of Performance - Third Quarter of 2012

Diluted earnings per share in the third quarter of 2012 were $0.62, compared to $0.38 per diluted share in the quarter ended September 30, 2011.

Third quarter 2012 revenues that include net interest income plus other operating income increased 8% versus the third quarter of 2011 to $14.8 million.

Net interest income increased to $10.6 million, compared to $10.4 million in the quarter ended September 30, 2011. For the first nine months of 2012, net interest income was $31.4 million, compared to $31.6 million in the first nine months of 2011.

The Company raised its quarterly cash dividend to $0.15 per share in the third quarter of 2012, compared to $0.13 per share in the third quarter of 2011, which provides a yield of approximately 2.9% at current market share prices.

Tangible book value was $19.43 per share at quarter end, an increase of 9% from $17.82 per share a year ago. Tangible book value is a non-GAAP ratio that represents total shareholders' equity less goodwill and intangible assets divided by the number of shares outstanding. The GAAP measure of book value is total shareholders' equity divided by the number of shares outstanding. Book value was $20.70 at September 30, 2012, compared to $19.39 at December 31, 2011 and $19.14 at September 30, 2011.

Other operating income, which includes revenues from financial services affiliates, service charges, and electronic banking, contributed 28.2% to third quarter 2012 total revenues, compared to a contribution of 24.5% to third quarter 2011 total revenues.

Asset quality improved with nonperforming assets declining to $10.7 million, or 0.94% of total assets at September 30, 2012, compared to $13.8 million, or 1.29% of total assets a year ago.

The allowance for loan losses totaled 2.46% of gross loans at September 30, 2012, compared to 2.56% a year ago. The Company realized a $1 million recovery on a previously charged-off loan in the third quarter of 2012 and other recoveries totaling $500,000, compared to recoveries of $324,000 in the third quarter of 2011. As a result, the Company recorded a negative loan loss provision of $1.4 million in the third quarter of 2012 compared to a loan loss provision of $550,000 in the third quarter of 2011. The allowance for loan losses to nonperforming loans increased to 337.4% at September 30, 2012, from 204.6% a year ago.

Third quarter 2012 net interest margin was 4.36%, down nine basis points from the third quarter of 2011.

In the third quarter of 2012, the Company established a $349,000 reserve for purchased receivables assets based on a five year average of historical losses on these accounts. The purchased receivables balances are listed on the balance sheet net of this reserve.

The Company remains well-capitalized with Tier 1 Capital to Risk Adjusted Assets at September 30, 2012, of 15.36%, compared to 15.39% a year ago. Tangible common equity to tangible assets was 11.17% at September 30, 2012, compared to 10.86% a year ago.


The Company reported net income and diluted earnings per share of $4.1 million and $0.62, respectively, for the third quarter of 2012 compared to net income and diluted earnings per share of $2.5 million and $0.38, respectively, for the third quarter of 2011. The increase in net income from the prior year was the result of a number of factors. The largest change in net income for the third quarter of 2012 as compared to the same period in 2011 is attributable to a decrease in the provision for loan losses that was primarily the result of $1.4 million in net recoveries for the quarter. Additionally, other operating income increased for the third quarter of 2012 primarily due to increased earnings from Residential Mortgage Holding Company LLC ("RML"), the Company's mortgage affiliate. This increase was partially offset by an increase in other operating expense due to the establishment of a reserve for the Company's purchased receivables, increased salaries and benefits costs, and decreased rental income and gains on the sale of other real estate owned ("OREO"). Lastly, the provision for income taxes increased primarily due to increased taxable income.

Northrim's total assets increased by 6% at September 30, 2012 as compared to September 30, 2011, with increases in interest bearing deposits in other banks, loans, and loans held for sale partially offset by a decrease in portfolio investments. Total assets at September 30, 2012 increased 4% as compared to December 31, 2011 primarily due to increases in interest bearing deposits in other banks and loan growth, which was partially offset by decreases in portfolio investments and purchased receivables. Net loans increased to $692.4 million at September 30, 2012 as compared to $656.9 million at December 31, 2011 and $613.6 million a year ago. This increase in the loan portfolio in the first nine months of 2012 was primarily due to increases in real estate term loans.

Credit Quality

Nonperforming assets: Nonperforming assets at September 30, 2012 decreased $1.9 million, or 15% as compared to December 31, 2011 and decreased by $3.1 million, or 23%, as compared September 30, 2011. OREO increased $583,000, or 11%, as compared to December 31, 2011, as a result of the addition of a property in Fairbanks which includes 37 lots that are ready for building and some undeveloped acreage.

The following table summarizes total OREO activity for the three and nine month periods ending September 30, 2012 and 2011:

                                                                             Nine Months Ended September
                                     Three Months Ended September 30,                    30,
                                        2012                  2011               2012             2011
                                                (In Thousands)
Balance, beginning of the period   $         6,448       $         5,083    $        5,183     $   10,355
 Transfers from loans, net                     185                 1,273             1,684          2,255
 Investment in other real estate
owned                                           26                     1                44             29
 Proceeds from the sale of other
real estate owned                             (765)                 (618)             (964)        (7,912)
 Gain on sale of other real
estate owned, net                              (44)                   54               (18)           859
 Deferred gain on sale of other
real estate owned                                8                    45                10            252
 Impairment on other real estate
owned                                          (92)                     -             (173)              -
Balance at end of period           $         5,766       $         5,838    $        5,766     $    5,838

Potential problem loans: Potential problem loans are loans which are currently performing and are not included in nonaccrual loans, accruing loans 90 days or more past due, or impaired loans that have developed negative indications that the borrower may not be able to comply with present payment terms and which may later be included in nonaccrual, past due, or impaired loans. At September 30, 2012, management had identified potential problem loans of $2.1 million as compared to potential problem loans of $4.6 million at December 31, 2011 and $5.6 million at September 30, 2011. The decrease in potential problem loans at September 30, 2012 from December 31, 2011 is primarily due to the movement of two real estate term loans to the same borrower totaling $2.7 million from potential problem loans to nonaccrual status. The decrease at September 30, 2012 as compared to September 30, 2011 is due to the movement of $4.8 million in loans to nonaccrual or OREO status, as well as pay downs and upgrades on several loans.


Troubled debt restructurings ("TDRs"): TDRs are those loans for which concessions, including the reduction of interest rates below a rate otherwise available to that borrower, have been granted due to the borrower's weakened financial condition. Interest on TDRs 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, which is generally after a period of six months. The Company had $7.9 million in loans classified as TDRs that were performing as of September 30, 2012. Additionally, there were $3.7 million in TDRs included in nonaccrual loans at September 30, 2012 for a total of $11.6 million. At December 31, 2011 and September 30, 2011 there were $2.3 million and $2.6 million, respectively, in loans classified as TDRs that were performing and $2.2 million and $1.5 million, respectively, in TDRs included in nonaccrual loans. See Note 6 of the Notes to Consolidated Financial Statements included in Item 1 of this report for further discussion of TDRs.

RESULTS OF OPERATIONS

Income Statement

Net Income

Net income attributable to Northrim BanCorp for the third quarter of 2012 increased $1.6 million, or 62%, to $4.1 million as compared to $2.5 million for the same period in 2011. This increase was due to a decrease in the provision for loan losses, an increase in other operating income, and a slight increase in net interest income. These changes were partially offset by increases in other operating expense and the provision for income taxes.

Net income attributable to Northrim BanCorp for the nine-month period ending September 30, 2012 increased $1.7 million, or 20%, to $9.8 million compared to $8.1 million for the same period in 2011. This increase was due to a decrease in the provision for loan losses and an increase in other operating income. These changes were partially offset by increases in other operating expense, the provision for income taxes, and a slight decrease in net interest income.

Net Interest Income / Net Interest Margin

Net interest income for the third quarter of 2012 increased $239,000, or 2%, as compared to the third quarter in 2011. This increase arose from reductions in interest expense due to decreased rates and a shift in the mix of deposit balances from higher cost certificates of deposit to lower cost transaction accounts. This increase was accompanied by a smaller decrease in the interest income due primarily to decreased yields on interest-earning assets. Much of that decrease, however, was offset by increases in interest income, particularly in loans, due to increased average balances in the third quarter of 2012 as compared to the third quarter of 2011. Net interest income for the nine month period ending September 30, 2012 decreased $168,000, or 1%, as compared to the same period in 2011. The decreases in this period arose from reductions in interest income due to decreased yields on interest-earning assets, accompanied by a smaller decrease in the costs of the Company's interest-bearing liabilities. The Company's net interest income as a percentage of average interest-earning assets on a tax equivalent basis decreased by 9 and 14 basis points to 4.36% and 4.46%, respectively, for the three and nine-month periods ending September 30, 2012 as compared to the same periods in 2011.

Average loans, the largest category of interest-earning assets, increased by $62.9 million and $31.9 million, or 10% and 5%, to $696.0 million and $680.8 million in the three and nine-month periods ending September 30, 2012, respectively, as compared to the same periods in 2011. Average commercial loans, real estate term loans, and loans held for sale increased while real estate construction and home equity lines and other consumer loans decreased in both periods as compared to the same periods in 2011. Total interest income from loans increased $24,000 for the third quarter of 2012 as compared to the same period in 2011 due to increased average balances. This increase was only partially offset by the decrease in interest income from loans due to decreased yields. Total interest income from loans decreased $842,000 for the nine-month period ending September 30, 2012, as compared to the same period in 2011, due to decreased yields which were only partially offset by an increase in average balances for the period.

Average investments decreased 6% and 2%, respectively, for the three and nine month periods ending September 30, 2012 as compared to the same periods in 2011. Interest income from investments decreased 6% for both of these periods due to decreased average balances for the third quarter of 2012 as compared to the same period in 2011 and due to decreased average balances and yields for the nine-month period ending September 30, 2012 as compared to the same period in the prior year.


Average interest-bearing liabilities increased $18.6 million, or 3%, to $643.8 million during the third quarter of 2012 as compared to $625.2 million for the same period in 2011. Average interest-bearing liabilities increased $9.0 million, or 1%, to $634.7 million during the nine months ended September 30, 2012 as compared to $625.6 million for the same period in 2011. These increases were the result of increased average interest-bearing deposit balances and increased balances in securities sold under repurchase agreements, which are classified as borrowings.

The average cost of interest-bearing liabilities decreased $265,000, or 17 basis points, and $821,000, or 18 basis points, for the three and nine month periods ending September 30, 2012, respectively, as compared to the same periods in 2011 due to declining market rates across all deposit types and borrowings, and due to a change in the mix of deposits with a decrease in higher cost certificates of deposit and an increase in lower cost transaction accounts.

Components of Net Interest Margin

The following tables compares average balances and rates as well as net tax
equivalent margins on earning assets for the three and nine months ending
September 30, 2012 and 2011:





                                                                                    Three Months Ended September 30,
                                                                                                        Interest income/                           Average Yields/Costs
                                        Average Balances                        Change                       expense              Change              Tax Equivalent3
                                  2012                 2011                    $         %              2012         2011         $     %         2012     2011     Change
                                                                                             (In Thousands)
Loans1,2                  $      695,968      $          633,032      $        62,936    10  %     $    10,416    $ 10,392    $    24    0  %     5.99  %  6.55  %  (0.56) %

Short-term investments           100,287                 101,255                 (968)   (1) %              80          72          8   11  %     0.32  %  0.28  %   0.04  %
Long-term investments            190,917                 201,327              (10,410)   (5) %             708         766        (58)  (8) %     1.68  %  1.66  %   0.02  %
 Total investments               291,204                 302,582              (11,378)   (4) %             788         838        (50)  (6) %     1.23  %  1.19  %   0.04  %
 Interest-earning assets         987,172                 935,614               51,558     6  %          11,204      11,230        (26)   0  %     4.61  %  4.82  %  (0.21) %
Nonearning assets                118,617                 113,904                4,713     4  %
     Total                $    1,105,789      $        1,049,518      $        56,271     5  %

Interest-bearing deposits $      604,860      $          587,507      $        17,353     3  %     $       408    $    675    $  (267) (40) %     0.27  %  0.45  %  (0.18) %
Borrowings                        38,935                  37,671                1,264     3  %             203         201          2    1  %     2.03  %  2.12  %  (0.09) %
 Total interest-bearing
liabilities                      643,795                 625,178               18,617     3  %             611         876       (265) (30) %     0.38  %  0.55  %  (0.17) %
Demand deposits and other
     noninterest-bearing
liabilities                      329,650                 301,053               28,597     9  %
Equity                           132,344                 123,287                9,057     7  %
     Total                $    1,105,789      $        1,049,518      $        56,271     5  %
Net interest income                                                                                $    10,593    $ 10,354    $   239    2  %
Net tax equivalent margin
on earning assets3                                                                                                                                4.36  %  4.45  %  (0.09) %

1 Loan fees recognized during the period and included in the yield calculation totaled $681,000 and $643,000 in the third quarter of 2012 and 2011, respectively. . . .
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