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 June 30, 2006
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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 August 4, 2006 was
5,811,379.
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, 2005.
ITEM 1. FINANCIAL STATEMENTS
- 3 -
NORTHRIM BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
June 30, 2006, December 31, 2005, and June 30, 2005
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June 30, |
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December 31, |
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June 30, |
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2006 |
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2005 |
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2005 |
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(unaudited) |
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(unaudited) |
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(Dollars in thousands, except per share data) |
ASSETS |
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Cash and due from banks |
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$ |
30,882 |
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$ |
28,854 |
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$ |
29,168 |
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Money market investments |
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6,810 |
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60,836 |
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8,392 |
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Investment securities held to maturity |
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9,829 |
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936 |
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724 |
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Investment securities available for sale |
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47,147 |
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52,483 |
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59,569 |
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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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Total investment securities |
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58,532 |
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54,975 |
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61,849 |
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Loans |
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728,088 |
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705,059 |
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699,663 |
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Allowance for loan losses |
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(11,581 |
) |
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(10,706 |
) |
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(10,882 |
) |
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Net loans |
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716,507 |
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694,353 |
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688,781 |
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Purchased receivables |
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20,854 |
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12,198 |
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8,661 |
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Accrued interest receivable |
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4,785 |
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4,397 |
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3,793 |
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Premises and equipment, net |
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11,618 |
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10,603 |
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10,950 |
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Intangible assets |
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7,148 |
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7,385 |
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6,450 |
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Other assets |
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22,161 |
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21,979 |
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18,521 |
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Total Assets |
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$ |
879,297 |
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$ |
895,580 |
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$ |
836,565 |
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LIABILITIES |
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Deposits: |
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Demand |
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$ |
191,537 |
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$ |
196,616 |
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$ |
191,953 |
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Interest-bearing demand |
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74,818 |
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75,988 |
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66,288 |
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Savings |
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48,166 |
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46,790 |
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48,452 |
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Alaska CDs |
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203,388 |
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197,989 |
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158,627 |
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Money market |
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146,639 |
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151,903 |
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124,441 |
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Certificates of deposit less than $100,000 |
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57,391 |
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59,331 |
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61,664 |
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Certificates of deposit greater than $100,000 |
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38,898 |
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51,249 |
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80,348 |
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Total deposits |
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760,837 |
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779,866 |
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731,773 |
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Borrowings |
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6,234 |
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8,415 |
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5,761 |
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Junior subordinated debentures |
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18,558 |
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18,558 |
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8,000 |
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Other liabilities |
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5,266 |
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4,267 |
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5,009 |
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Total liabilities |
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790,895 |
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811,106 |
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750,543 |
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Minority interest in subsidiaries |
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25 |
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SHAREHOLDERS EQUITY |
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Common stock, $1 par value, 10,000,000 shares authorized,
5,811,379; 5,803,487; and 6,071,237 shares issued and
outstanding at June 30, 2006, December 31, 2005, and
June 30, 2005, respectively |
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5,811 |
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5,803 |
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6,071 |
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Additional paid-in capital |
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39,428 |
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39,161 |
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45,393 |
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Retained earnings |
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43,830 |
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39,999 |
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34,708 |
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Accumulated other comprehensive income unrealized
gain (loss) on securities, net |
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(692 |
) |
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(489 |
) |
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(150 |
) |
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Total shareholders equity |
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88,377 |
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84,474 |
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86,022 |
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Total Liabilities and Shareholders Equity |
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$ |
879,297 |
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$ |
895,580 |
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$ |
836,565 |
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See notes to the consolidated financial statements
- 4 -
NORTHRIM BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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2006 |
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2005 |
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2006 |
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2005 |
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(unaudited) |
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(unaudited) |
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(Dollars in thousands, except per share data) |
Interest Income |
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Interest and fees on loans |
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$ |
16,288 |
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$ |
13,501 |
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$ |
31,564 |
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$ |
26,226 |
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Interest on investment securities: |
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Assets available for sale |
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485 |
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552 |
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966 |
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1,095 |
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Assets held to maturity |
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112 |
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(8 |
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160 |
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11 |
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Interest on money market investments |
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78 |
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33 |
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337 |
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59 |
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Total Interest Income |
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16,963 |
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14,078 |
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33,027 |
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27,391 |
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Interest Expense |
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Interest expense on deposits and borrowings |
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5,437 |
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3,403 |
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10,202 |
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6,233 |
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Net Interest Income |
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11,526 |
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10,675 |
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22,825 |
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21,158 |
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Provision for loan losses |
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860 |
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100 |
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914 |
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100 |
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Net Interest Income After Provision for Loan Losses |
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10,666 |
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10,575 |
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21,911 |
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21,058 |
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Other Operating Income |
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Service charges on deposit accounts |
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490 |
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450 |
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974 |
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|
851 |
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Purchased receivable income |
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453 |
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186 |
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|
766 |
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|
347 |
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Employee benefit plan income |
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385 |
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558 |
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Equity in earnings from mortgage affiliate |
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148 |
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82 |
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155 |
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|
61 |
|
Equity in loss from Elliott Cove |
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(62 |
) |
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|
(134 |
) |
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|
(139 |
) |
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(243 |
) |
Other income |
|
|
537 |
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|
481 |
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|
1,065 |
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|
897 |
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Total Other Operating Income |
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1,951 |
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|
1,065 |
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3,379 |
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|
1,913 |
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Other Operating Expense |
|
|
|
|
|
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Salaries and other personnel expense |
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4,671 |
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|
4,426 |
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9,436 |
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|
8,784 |
|
Occupancy, net |
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|
597 |
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|
574 |
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|
1,238 |
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|
1,141 |
|
Equipment expense |
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|
357 |
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|
349 |
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|
698 |
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|
693 |
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Marketing expense |
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|
444 |
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|
541 |
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|
952 |
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|
898 |
|
Intangible asset amortization expense |
|
|
120 |
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|
|
92 |
|
|
|
241 |
|
|
|
184 |
|
Other operating expense |
|
|
1,526 |
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|
1,391 |
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|
3,114 |
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|
2,803 |
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Total Other Operating Expense |
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|
7,715 |
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|
7,373 |
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|
15,679 |
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|
14,503 |
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|
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|
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Income Before Income Taxes and Minority Interest |
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|
4,902 |
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|
|
4,267 |
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|
9,611 |
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|
|
8,468 |
|
Minority interest in subsidiaries |
|
|
103 |
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|
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|
|
|
148 |
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|
|
|
|
|
|
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Income Before Income Taxes |
|
|
4,799 |
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|
|
4,267 |
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|
9,463 |
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|
8,468 |
|
Provision for income taxes |
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|
1,860 |
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|
1,611 |
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|
|
3,629 |
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|
|
3,232 |
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Net Income |
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$ |
2,939 |
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$ |
2,656 |
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|
$ |
5,834 |
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$ |
5,236 |
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Earnings Per Share, Basic |
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$ |
0.50 |
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$ |
0.44 |
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$ |
1.00 |
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$ |
0.86 |
|
Earnings Per Share, Diluted |
|
$ |
0.50 |
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|
$ |
0.42 |
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|
$ |
0.99 |
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$ |
0.83 |
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Weighted Average Shares Outstanding, Basic |
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|
5,821,793 |
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|
6,095,922 |
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|
5,823,577 |
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|
6,097,797 |
|
Weighted Average Shares Outstanding, Diluted |
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|
5,907,153 |
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|
6,278,673 |
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|
|
5,905,178 |
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|
|
6,285,520 |
|
See notes to the consolidated financial statements
- 5 -
NORTHRIM BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005
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Three Months Ended |
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Six Months Ended |
|
|
June 30, |
|
June 30, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
|
(unaudited) |
|
(unaudited) |
|
|
(Dollars in thousands) |
|
(Dollars in thousands) |
Net income |
|
$ |
2,939 |
|
|
$ |
2,656 |
|
|
$ |
5,834 |
|
|
$ |
5,236 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income, net of tax: |
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|
|
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|
|
|
|
|
|
|
|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains (losses) arising during period |
|
|
(92 |
) |
|
|
306 |
|
|
|
(203 |
) |
|
|
(149 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: reclassification adjustment for gains |
|
|
|
|
|
|
0 |
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income |
|
$ |
2,846 |
|
|
$ |
2,962 |
|
|
$ |
5,631 |
|
|
$ |
5,082 |
|
|
|
|
See notes to the consolidated financial statements
- 6 -
NORTHRIM BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005
|
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|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
June 30, |
|
|
2006 |
|
2005 |
|
|
(unaudited) |
|
|
(Dollars in thousands) |
Operating Activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
5,834 |
|
|
$ |
5,236 |
|
|
|
|
|
|
|
|
|
|
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: |
|
|
|
|
|
|
|
|
Security (gains), net |
|
|
|
|
|
|
(9 |
) |
Depreciation and amortization of premises and equipment |
|
|
545 |
|
|
|
595 |
|
Amortization of software |
|
|
234 |
|
|
|
269 |
|
Intangible asset amortization |
|
|
241 |
|
|
|
184 |
|
Amortization of investment security premium, net of discount accretion |
|
|
(32 |
) |
|
|
10 |
|
Deferred tax (benefit) |
|
|
(903 |
) |
|
|
(586 |
) |
Stock-based compensation |
|
|
205 |
|
|
|
|
|
Excess tax benefits from share-based payment arrangements |
|
|
(94 |
) |
|
|
|
|
Deferral of loan fees and costs, net |
|
|
100 |
|
|
|
533 |
|
Provision for loan losses |
|
|
914 |
|
|
|
100 |
|
Distributions in excess of earnings from RML |
|
|
244 |
|
|
|
304 |
|
Equity in loss from Elliott Cove |
|
|
139 |
|
|
|
243 |
|
Minority interest in subsidiaries |
|
|
148 |
|
|
|
|
|
(Increase) in accrued interest receivable |
|
|
(388 |
) |
|
|
(115 |
) |
(Increase) decrease in other assets |
|
|
10 |
|
|
|
(339 |
) |
Increase of other liabilities |
|
|
479 |
|
|
|
512 |
|
|
|
|
Net Cash Provided by Operating Activities |
|
|
7,676 |
|
|
|
6,937 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities: |
|
|
|
|
|
|
|
|
Investment in securities: |
|
|
|
|
|
|
|
|
Purchases of investment securities-Available-for-sale |
|
|
|
|
|
|
(10,874 |
) |
Purchases of investment securities-Held-to-maturity |
|
|
(8,895 |
) |
|
|
|
|
Proceeds from sales/maturities of securities-Available-for-sale |
|
|
5,022 |
|
|
|
10,491 |
|
Investment in Federal Home Loan Bank stock, net |
|
|
|
|
|
|
(254 |
) |
Investment in purchased receivables, net |
|
|
(8,656 |
) |
|
|
(6,470 |
) |
Investments in loans: |
|
|
|
|
|
|
|
|
Sales of loans and loan participations |
|
|
6,022 |
|
|
|
2,350 |
|
Loans made, net of repayments |
|
|
(29,190 |
) |
|
|
(24,259 |
) |
Investment in Elliott Cove |
|
|
(100 |
) |
|
|
|
|
Investment in NBG |
|
|
|
|
|
|
(237 |
) |
Loan to Elliott Cove, net of repayments |
|
|
(50 |
) |
|
|
(500 |
) |
Loan to PWA, net of repayments |
|
|
385 |
|
|
|
|
|
Purchases of premises and equipment |
|
|
(1,560 |
) |
|
|
(962 |
) |
|
|
|
Net Cash (Used) by Investing Activities |
|
|
(37,022 |
) |
|
|
(30,715 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities: |
|
|
|
|
|
|
|
|
Increase (decrease) in deposits |
|
|
(19,029 |
) |
|
|
32,712 |
|
Increase (decrease) in borrowings |
|
|
(2,181 |
) |
|
|
(717 |
) |
Distributions to minority interests |
|
|
(123 |
) |
|
|
|
|
Proceeds from issuance of common stock |
|
|
274 |
|
|
|
242 |
|
Excess tax benefits from share-based payment arrangements |
|
|
94 |
|
|
|
|
|
Repurchase of common stock |
|
|
(410 |
) |
|
|
(743 |
) |
Cash dividends paid |
|
|
(1,277 |
) |
|
|
(1,249 |
) |
|
|
|
Net Cash Provided (Used) by Financing Activities |
|
|
(22,652 |
) |
|
|
30,245 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) in Cash and Cash Equivalents |
|
|
(51,998 |
) |
|
|
6,467 |
|
Cash and cash equivalents at beginning of period |
|
|
89,690 |
|
|
|
31,093 |
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
37,692 |
|
|
$ |
37,560 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Information: |
|
|
|
|
|
|
|
|
Income taxes paid |
|
$ |
4,150 |
|
|
$ |
3,525 |
|
|
|
|
Interest paid |
|
$ |
10,181 |
|
|
$ |
5,874 |
|
|
|
|
Dividends declared but not paid |
|
$ |
726 |
|
|
$ |
668 |
|
|
|
|
See notes to the consolidated financial statements
- 7 -
NORTHRIM BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
June 30, 2006 and 2005
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. Operating
results for the interim period ended June 30, 2006, are not necessarily indicative of the results
anticipated for the year ending December 31, 2006. These financial statements should be read in
conjunction with the Companys Annual Report on Form 10-K for the year ended December 31, 2005.
2. STOCK REPURCHASE
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 June 30, 2006, the
Company did not repurchase any 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 June 30, 2006. 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.
3. ACCOUNTING PRONOUNCEMENTS
Between May of 2005 and June of 2006, the Financial Accounting Standards Board (FASB) issued
Statement No. 154, Accounting Changes and Error Corrections, Statement No. 155, Accounting for
Certain Hybrid Financial Instrument, and Statement No. 156, Accounting for Servicing of Financial
Assets, an amendment of FASB Statement No. 140, and FASB Interpretation 48, Accounting for
Uncertainty in Income Taxes an interpretation of FASB Statement No. 109. The Company believes
the adoption of these Statements will have no impact on its financial statements.
In December 2004, the FASB issued Statement No. 123R, Share-Based Payment, which is a revision of
FASB Statement No. 123, Accounting for Stock-Based Compensation. This Statement establishes
standards for the accounting for transactions in which an entity exchanges its equity instruments
for goods or services primarily in share-based payment transactions with its employees. This
Statement supersedes the provisions of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and its related implementation guidance.
As of January 1, 2006, the Company adopted FASB No. 123R according to the modified prospective
method, which requires measurement of compensation cost from January 1, 2006 for all unvested
stock-based awards at fair value on the date of grant and recognition of the compensation
associated with these stock-based awards over the service period for the awards that are expected
to vest. In accordance with the modified prospective transition method, results for prior periods
have not been restated.
The adoption of FASB No. 123R resulted in stock compensation expense of $53,000 for the three-month
period ending June 30, 2006. The Company recognized a tax benefit of $22,000 related to this stock
compensation expense.
- 8 -
The fair value of restricted stock units is determined based on the number of shares granted and
the quoted price of the Companys stock on the date of grant, and the fair value of stock options
is determined using the Black-Scholes valuation model, which is consistent with the Companys
valuation techniques previously utilized for options in footnote disclosures required under FASB
123R. The Company recognizes the fair value of the restricted stock units and stock options as
expense over the required service period, net of estimated forfeitures, using the straight line
attribution method for stock-based payment grants previously granted but not fully vested at
January 1, 2006 as well as grants made after January 1, 2006 as prescribed in FASB 123R. As a
result, the Company recognized expense of $29,000 on the fair value of restricted stock units and
$53,000 on the fair value of stock options for a total of $82,000 in stock-based compensation
expense for the three-month period ending June 30, 2006.
Prior to January 1, 2006, the Company accounted for stock-based awards using the intrinsic value
method, which followed the recognition and measurement principles of APB Opinion No. 25.
Outlined below are valuation assumptions used in the Black-Scholes valuation model for stock
options that were used in estimating the fair value for each stock option granted in November of
2005 and in December of 2004.
|
|
|
|
|
|
|
|
|
|
|
Granted |
Stock Options: |
|
Nov. 2005 |
|
Dec. 2004 |
|
|
|
Expected option life (years) |
|
|
8 |
|
|
|
8 |
|
Risk free rate |
|
|
4.45 |
% |
|
|
4.09 |
% |
Dividends per Share |
|
$ |
0.50 |
|
|
$ |
0.44 |
|
Expected volatility factor |
|
|
37.06 |
% |
|
|
39.28 |
% |
The expected life represents the weighted average period of time that options granted are
expected to be outstanding when considering vesting periods and the exercise history of the
Company. The risk free rate is based upon the equivalent yield of a United States Treasury
zero-coupon issue with a term equivalent to the expected life of the option. The expected
dividends are based on projected dividends for the Company at the date of the option grant taking
into account projected net income growth, dividend pay-out ratios, and other factors. The expected
volatility is based upon the historical price volatility of the Companys stock. See Note 9 Stock
Incentive Plan for additional information.
- 9 -
Fair Value Disclosures Prior to FASB 123R Adoption
Stock-based compensation for the period prior to January 1, 2006 was determined using the intrinsic
value method. The following table illustrates the effect on net income and earnings per share as
if the fair value based method under FASB 123R had been applied to all outstanding and unvested
awards in periods prior to January 1, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
|
|
June 30, |
|
June 30, |
|
|
|
|
2005 |
|
2005 |
|
|
|
|
(Dollars in thousands, except per share data) |
Net income, as reported |
|
|
|
$ |
2,656 |
|
|
$ |
5,236 |
|
Deduct: Stock-based employee compensation expense arising
from the adoption of FASB 123(R), |
|
|
(42 |
) |
|
|
(84 |
) |
|
|
|
|
|
|
|
Net income, pro forma |
|
|
|
$ |
2,614 |
|
|
$ |
5,152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share, basic |
|
As reported |
|
$ |
0.44 |
|
|
$ |
0.86 |
|
|
|
Pro forma |
|
$ |
0.43 |
|
|
$ |
0.84 |
|
Earnings per share, diluted |
|
As reported |
|
$ |
0.42 |
|
|
$ |
0.83 |
|
|
|
Pro forma |
|
$ |
0.42 |
|
|
$ |
0.82 |
|
Prior to the adoption of FASB 123R, the Company presented any tax benefits of deductions
resulting from the exercise of stock options within operating cash flows in the condensed
consolidated statements of cash flow. FASB 123R requires tax benefits resulting from tax
deductions in excess of the compensation cost recognized for those options (excess tax benefits)
to be classified and reported as both an operating cash outflow and a financing cash inflow upon
adoption of FASB 123R. Accordingly, the Company has recognized these excess tax benefits in the
condensed statement of cash flow for the quarterly period ended June 30, 2006.
FASB Staff Position No. FAS No. 123(R)-3, Transition Election Related to Accounting for the Tax
Effects of Share-Based Payment Awards (FSP 123R-3), effective November 10, 2005, provides for a
practical transition method that may be elected to calculate the pool of excess tax benefits
available to absorb tax deficiencies upon the adoption of FASB 123R. The method comprises a
computational component that establishes the beginning balance of the additional paid in capital
(APIC) pool related to employee compensation and a simplified method to determine the subsequent
impact on the APIC pool of awards that are fully vested and outstanding upon the adoption of FASB
123R. An election to use this method may be made the later of one year from the effective date of
FSP 123R-3 or the initial adoption date for FASB 123R. The Company is evaluating the alternative
and does not yet know the effect of adopting the alternative, if any, on its financial statements.
4. LENDING ACTIVITIES
The following table sets forth the Companys loan portfolio composition by loan type for the dates
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006 |
|
December 31, 2005 |
|
June 30, 2005 |
|
|
Dollar |
|
Percent |
|
Dollar |
|
Percent |
|
Dollar |
|
Percent |
|
|
Amount |
|
of Total |
|
Amount |
|
of Total |
|
Amount |
|
of Total |
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
Commercial |
|
$ |
312,526 |
|
|
|
43 |
% |
|
$ |
287,617 |
|
|
|
41 |
% |
|
$ |
302,735 |
|
|
|
43 |
% |
Construction/development |
|
|
139,825 |
|
|
|
19 |
% |
|
|
131,532 |
|
|
|
19 |
% |
|
|
109,212 |
|
|
|
16 |
% |
Commercial real estate |
|
|
238,657 |
|
|
|
33 |
% |
|
|
252,395 |
|
|
|
36 |
% |
|
|
252,715 |
|
|
|
36 |
% |
Consumer |
|
|
38,237 |
|
|
|
5 |
% |
|
|
36,519 |
|
|
|
5 |
% |
|
|
38,113 |
|
|
|
5 |
% |
Loans in process |
|
|
1,947 |
|
|
|
0 |
% |
|
|
|
|
|
|
0 |
% |
|
|
287 |
|
|
|
0 |
% |
Unearned loan fees |
|
|
(3,104 |
) |
|
|
0 |
% |
|
|
(3,004 |
) |
|
|
0 |
% |
|
|
(3,399 |
) |
|
|
0 |
% |
|
|
|
Total loans |
|
$ |
728,088 |
|
|
|
100 |
% |
|
$ |
705,059 |
|
|
|
100 |
% |
|
$ |
699,663 |
|
|
|
100 |
% |
|
|
|
- 10 -
5. 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, 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 $860,000
for the three-month period ending June 30, 2006 to account for loan growth, loan charge-offs, and
an increase in the allowance for impaired loans. The following table details activity in the
Allowance for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
|
(Dollars in thousands) |
Balance at beginning of period |
|
$ |
10,870 |
|
|
$ |
10,733 |
|
|
$ |
10,706 |
|
|
$ |
10,764 |
|
Charge-offs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
195 |
|
|
|
230 |
|
|
|
195 |
|
|
|
301 |
|
Construction/development |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer |
|
|
65 |
|
|
|
26 |
|
|
|
69 |
|
|
|
33 |
|
|
|
|
Total charge-offs |
|
|
260 |
|
|
|
256 |
|
|
|
264 |
|
|
|
334 |
|
Recoveries: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
105 |
|
|
|
294 |
|
|
|
215 |
|
|
|
300 |
|
Construction/development |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15 |
|
Commercial real estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15 |
|
Consumer |
|
|
6 |
|
|
|
11 |
|
|
|
10 |
|
|
|
22 |
|
|
|
|
Total recoveries |
|
|
111 |
|
|
|
305 |
|
|
|
225 |
|
|
|
352 |
|
Net, (recoveries) charge-offs |
|
|
149 |
|
|
|
(49 |
) |
|
|
39 |
|
|
|
(18 |
) |
Provision for loan losses |
|
|
860 |
|
|
|
100 |
|
|
|
914 |
|
|
|
100 |
|
|
|
|
Balance at end of period |
|
$ |
11,581 |
|
|
$ |
10,882 |
|
|
$ |
11,581 |
|
|
$ |
10,882 |
|
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006 |
|
December 31, 2005 |
|
June 30, 2005 |
|
|
(Dollars in thousands) |
Nonaccrual loans |
|
$ |
4,686 |
|
|
$ |
5,090 |
|
|
$ |
5,706 |
|
Accruing loans past due 90 days or more |
|
|
1,846 |
|
|
|
981 |
|
|
|
1,095 |
|
Restructured loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans |
|
|
6,532 |
|
|
|
6,071 |
|
|
|
6,801 |
|
Real estate owned |
|
|
|
|
|
|
105 |
|
|
|
|
|
|
|
|
Total nonperforming assets |
|
$ |
6,532 |
|
|
$ |
6,176 |
|
|
$ |
6,801 |
|
|
|
|
Allowance for loan losses |
|
$ |
11,581 |
|
|
$ |
10,706 |
|
|
$ |
10,882 |
|
|
|
|
- 11 -
At June 30, 2006, December 31, 2005, and June 30, 2005, the Company had loans measured for impairment of $21.1 million, $18.3
million, and $10.7 million, respectively. A specific allowance of $3.1 million, $2.6 million, and $502,000, respectively, was
established for these periods. The increase in loans measured for impairment at June 30, 2006, as compared to December 31, 2005,
resulted mainly from the addition of two commercial loan relationships and additional advances on a commercial real estate
construction loan commitment with a long-term financing commitment independent of the Company that was included in loans measured
for impairment at December 31, 2005 and June 30, 2006. The increase in loans measured for impairment at December 31, 2005 as
compared to June 30, 2005 resulted mainly from the addition of four loans that total $8.2 million and are part of two borrower
relationships.
6. INVESTMENT SECURITIES
Investment securities, which include Federal Home Loan Bank stock, totaled $58.5 million at June
30, 2006, an increase of $3.6 million, or 6%, from $55 million at December 31, 2005, and a decrease
of $3.3 million, or 5%, from $61.8 million at June 30, 2005. Investment securities designated as
available for sale comprised 81% of the investment portfolio at June 30, 2006, 95% at December 31,
2005, and 96% at June 30, 2005, 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
June 30, 2006, $14.3 million in securities, or 24%, of the investment portfolio was pledged, as
compared to $20.9 million, or 38%, at December 31, 2005, and $27 million, or 44%, at June 30, 2005.
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. During the second quarter of 2006, the Company included employee
benefit plan income from NBG of $385,000 in its Other Operating Income. In contrast the Company
did not record any income for this item in its Other Operating Income during the same period in
2005 as it purchased a 10% interest in NBG in March of 2005 and began accounting for this interest
according to the equity method in the third quarter of 2005.
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 June 30, 2006, the Companys earnings from
RML Holding Company and its predecessor, RML, increased by $66,000 to $148,000 as compared to
$82,000 for the three-month period ending June 30, 2005. In the six-month period ending June 30,
2006, the Companys earnings from RML Holding Company and its predecessor, RML, increased by
$94,000 to $155,000 as compared to earnings of $61,000 for the six-month period ending June 30,
2005. In both cases, RML Holding Company benefited from an increase in gross income from its
expanded operations with income growing at a faster rate than expenses, particularly in the
three-month period ending June 30, 2006 as compared to the same period in 2005.
- 12 -
The Company owns a 49% 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 start-up losses since that time as it continues to build its assets under management. In July
of 2003, the Company made a commitment to loan $625,000 to Elliott Cove. In the second quarter of
2004, the Company converted the loan into an additional equity interest in Elliott Cove. At the
time of the conversion, the amount outstanding on this loan was $625,000. During the first,
second, and third quarters of 2004, other investors made additional investments in Elliott Cove.
In addition, the Company made a separate commitment to loan Elliott Cove $500,000 during the first
quarter of 2004. In the first quarter of 2005, the Company increased this loan commitment to
$750,000. The balance outstanding on this commitment at June 30, 2006 was $725,000. Finally, in
the third quarter of 2005 and the first quarter of 2006, the Company made additional investments
totaling $250,000 in Elliott Cove. Other investors made similar investments in Elliott Cove during
this same time period. As a result of the additional investments in Elliott Cove by other
investors and the Companys conversion of its $625,000 loan and its additional investments, its
interest in Elliott Cove increased from 43% to 49% between December 31, 2003 and June 30, 2006.
The Companys share of the loss from Elliott Cove for the second quarter of 2006 was $62,000, as
compared to a loss of $134,000 in the second quarter of 2005. In the six-month period ending June
30, 2006, the Companys share of the loss from Elliott Cove was $139,000 as compared to a loss of
$243,000 for the six-month period ending June 30, 2005. The loss that the Company realized on its
investment in Elliott Cove decreased for the three-month period ending June 30, 2006 as compared to
the same period in 2005 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. The Company incurred a $36,000 loss on
its investment in PWA in the second quarter of 2006, which reduced other income during this period.
Furthermore, the Company expects to incur losses over the next several years as PWA builds the
customer base of its combined operations.
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 June 30, 2006, the Company held $15
million in certificates of deposit for the Alaska Permanent Fund that were classified as
certificates of deposits greater than $100,000 on its balance sheet, collateralized by letters of
credit issued by the Federal Home Loan Bank (FHLB).
9. STOCK INCENTIVE PLAN
The Company has set aside 300,000 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 June 30, 2006 was 397,001, which includes 48,918 shares granted
under the 2004 Plan leaving 203,106 shares available for future awards. 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.
- 13 -
Options and restricted Stock Outstanding
Stock options outstanding and exercisable at June 30, 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Number of |
|
Average |
|
|
Shares |
|
Exercise Price |
|
|
|
Outstanding at January 1, 2006 |
|
|
409,234 |
|
|
$ |
13.54 |
|
Changes during the period: |
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
Exercised |
|
|
(26,346 |
) |
|
|
11.30 |
|
Forfeited |
|
|
(2,257 |
) |
|
|
20.42 |
|
|
|
|
Outstanding at June 30, 2006 |
|
|
380,631 |
|
|
$ |
13.65 |
|
|
|
|
Options exercisable at June 30, 2006 |
|
|
316,309 |
|
|
$ |
11.55 |
|
Unexercisable options at June 30, 2006 |
|
|
64,322 |
|
|
$ |
24.00 |
|
The aggregate intrinsic value of options outstanding, exercisable, and unexercisable at June
30, 2006 was $4.4 million, $4.3 million, and $70,000, respectively. The weighted average remaining
life of options outstanding and options exercisable at June 30, 2006 is 5.5 and 4.8 years,
respectively. Proceeds from the exercise of stock options for the three months ended June 30, 2006
were $198,000. The Company recognized a $111,000 tax deduction related to the exercise of these
stock options during the second quarter ending June 30, 2006. The intrinsic value of the options
that were exercised during the second quarter of 2006 was $245,000, which represents the difference
between the fair market value of the options at the date of exercise and their exercise price. A
portion of these options with an intrinsic value of $10,000 at the date of exercise was incentive
stock options that were exercised and held by the optionee and not eligible for a tax deduction.
In addition, incentive stock options that were exercised in the period ending March 31, 2006 and
sold in the second quarter ending June 30, 2006 had an intrinsic value of $36,000. Thus, the
Companys tax deduction was based on options exercised and sold during the second quarter of 2006
with a total intrinsic value of $271,000.
The weighted average fair value of stock option grants, the fair value of shares vested during the
period, and the intrinsic value of options exercised during the three-month periods ending June 30,
2006 and 2005 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
June 30, |
|
|
2006 |
|
2005 |
|
|
(Dollars in thousands) |
Weighted-average grant-date fair value of stock options granted: |
|
$ |
|
|
|
$ |
|
|
Total fair value of shares vested during the period: |
|
|
57 |
|
|
|
|
|
Total intrinsic value of options exercised: |
|
|
245 |
|
|
|
65 |
|
- 14 -
Restricted stock grants outstanding at June 30, 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Number of |
|
Average Fair |
|
|
Shares |
|
Value |
|
|
|
Outstanding at January 1, 2006 |
|
|
14,769 |
|
|
$ |
23.90 |
|
Changes during the period: |
|
|
|
|
|
|
|
|
Granted |
|
|
2,500 |
|
|
|
24.19 |
|
Vested |
|
|
|
|
|
|
|
|
Forfeited |
|
|
(899 |
) |
|
|
23.93 |
|
|
|
|
Outstanding at June 30, 2006 |
|
|
16,370 |
|
|
$ |
23.95 |
|
|
|
|
The unamortized stock-based payment and the weighted average expense period remaining at June
30, 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Period |
|
|
Unamortized |
|
to Expense |
|
|
Expense |
|
(years) |
|
|
(Dollars in thousands) |
Stock options |
|
$ |
459 |
|
|
|
2.0 |
|
Restricted stock |
|
|
231 |
|
|
|
2.0 |
|
|
|
|
Total |
|
$ |
690 |
|
|
|
2.0 |
|
|
|
|
- 15 -
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 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 of 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 SECOND QUARTER RESULTS
At June 30, 2006, the Company had assets of $879.3 million and gross portfolio loans of $728.1
million, respectively, an increase of 5% and 4%, respectively, as compared to the balances for
these accounts at June 30, 2005. The Companys net income and diluted earnings per share at June
30, 2006, were $2.9
million and $0.50, respectively, an increase of 11% and 19%, respectively, as compared to the same
period in 2005. For the second quarter, the Companys net interest income increased $851,000, or
8%, its provision for loan losses increased $760,000, its other operating income increased
$886,000, or 83%, and its other operating expenses increased $342,000, or 5%, as compared to the
second quarter a year ago.
- 16 -
RESULTS OF OPERATIONS
NET INCOME
Net income for the quarter ended June 30, 2006, was $2.9 million, or $0.50 per diluted share, an
increase in net income of 11%, and a 19% increase in diluted earnings per share as compared to net
income of $2.7 million and diluted earnings per share of $0.42, respectively, for the second
quarter of 2005.
Net income for the six months ending June 30, 2006, was $5.8 million, an increase of $598,000, or
11%, from $5.2 million for the six months ending June 30, 2005. Diluted earnings per share were
$0.99 for the six-month period ended June 30, 2006, compared to diluted earnings per share of $0.83
in the same period in 2005.
The increase in net income for the three-month period ending June 30, 2006 was the result of
several factors. Net interest income increased $851,000, or 8%, as compared to the same period in
2005. In addition, other operating income increased $886,000, or 83%, as compared to the same
period in 2005. The increases in net interest income and other operating income were offset in
part by increases in other operating expenses, which increased by $342,000, or 5%, in the second
quarter of 2006, as compared to the second quarter of 2005, due mainly to increases in salary and
benefit expenses. The provision for loan losses also increased by $760,000, as compared to the
same period in 2005. The increase in earnings per diluted share for the second quarter of 2006 was
due in part to the increase in net income and also due to a decrease in shares of common stock
outstanding that resulted from shares of common stock repurchased under the Companys stock
repurchase plan.
Net income and earnings per share for the six-month period ending June 30, 2006 increased when
compared to net income and earnings per share for the six-month period ending June 30, 2005 as a
result of similar changes in the major factors noted above. First, net interest income increased
by $1.7 million, or 8%, as compared to the same period ending June 30, 2005. Second, other
operating income increased by $1.5 million, or 77%, as compared to the same period in 2005. Third,
these increases were offset in part by a $1.2 million increase in other operating expenses that was
caused mainly by increases in salary and benefit costs. Finally, the increase in earnings per
diluted share was caused in part by the increase in net income and also caused by a decrease in
shares of common stock outstanding that resulted from shares of common stock repurchased under the
Companys stock repurchase plan.
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
second quarter of 2006 increased $851,000, or 8%, to $11.5 million from $10.7 million in the second
quarter of 2005. Net interest income for the six-month period ending June 30, 2006 increased $1.7
million, or 8%, to $22.8 million from $21.2 million in the same period last year. The following
table compares average balances and rates for the second quarter and six months ending June 30,
2006 and 2005:
- 17 -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Yields/Costs |
|
|
Average Balances |
|
Change |
|
Tax Equivalent |
|
|
2006 |
|
2005 |
|
$ |
|
% |
|
2006 |
|
2005 |
|
Change |
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
303,173 |
|
|
$ |
285,970 |
|
|
$ |
17,203 |
|
|
|
6 |
% |
|
|
9.07 |
% |
|
|
7.65 |
% |
|
|
1.42 |
% |
Construction/development |
|
|
141,955 |
|
|
|
112,794 |
|
|
|
29,161 |
|
|
|
26 |
% |
|
|
10.80 |
% |
|
|
9.81 |
% |
|
|
0.99 |
% |
Commercial real estate |
|
|
244,691 |
|
|
|
256,875 |
|
|
|
(12,184 |
) |
|
|
-5 |
% |
|
|
8.02 |
% |
|
|
7.20 |
% |
|
|
0.82 |
% |
Consumer |
|
|
37,090 |
|
|
|
37,826 |
|
|
|
(736 |
) |
|
|
-2 |
% |
|
|
7.74 |
% |
|
|
7.19 |
% |
|
|
0.55 |
% |
Other loans |
|
|
(1,133 |
) |
|
|
(1,650 |
) |
|
|
517 |
|
|
|
-31 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
|
725,776 |
|
|
|
691,815 |
|
|
|
33,961 |
|
|
|
5 |
% |
|
|
9.02 |
% |
|
|
7.85 |
% |
|
|
1.17 |
% |
Short-term investments |
|
|
6,501 |
|
|
|
4,570 |
|
|
|
1,931 |
|
|
|
42 |
% |
|
|
4.74 |
% |
|
|
2.77 |
% |
|
|
1.97 |
% |
Long-term investments |
|
|
64,650 |
|
|
|
62,108 |
|
|
|
2,542 |
|
|
|
4 |
% |
|
|
3.60 |
% |
|
|
3.62 |
% |
|
|
-0.02 |
% |
|
|
|
|
|
Interest-earning assets |
|
|
796,927 |
|
|
|
758,493 |
|
|
|
38,434 |
|
|
|
5 |
% |
|
|
8.54 |
% |
|
|
7.47 |
% |
|
|
1.07 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonearning assets |
|
|
76,727 |
|
|
|
60,000 |
|
|
|
16,727 |
|
|
|
28 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
873,654 |
|
|
$ |
818,493 |
|
|
$ |
55,161 |
|
|
|
7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities |
|
$ |
602,631 |
|
|
$ |
551,327 |
|
|
$ |
51,304 |
|
|
|
9 |
% |
|
|
3.61 |
% |
|
|
2.47 |
% |
|
|
1.14 |
% |
Demand deposits |
|
|
176,480 |
|
|
|
176,679 |
|
|
|
(199 |
) |
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
6,471 |
|
|
|
4,294 |
|
|
|
2,177 |
|
|
|
51 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
|
88,072 |
|
|
|
86,193 |
|
|
|
1,879 |
|
|
|
2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
873,654 |
|
|
$ |
818,493 |
|
|
$ |
55,161 |
|
|
|
7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net tax equivalent margin
on earning assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.82 |
% |
|
|
5.67 |
% |
|
|
0.15 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Yields/Costs |
|
|
Average Balances |
|
Change |
|
Tax Equivalent |
|
|
2006 |
|
2005 |
|
$ |
|
% |
|
2006 |
|
2005 |
|
Change |
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
294,313 |
|
|
$ |
279,557 |
|
|
$ |
14,756 |
|
|
|
5 |
% |
|
|
8.89 |
% |
|
|
7.50 |
% |
|
|
1.39 |
% |
Construction/development |
|
|
141,297 |
|
|
|
116,474 |
|
|
|
24,823 |
|
|
|
21 |
% |
|
|
10.67 |
% |
|
|
9.53 |
% |
|
|
1.14 |
% |
Commercial real estate |
|
|
245,854 |
|
|
|
254,794 |
|
|
|
(8,940 |
) |
|
|
-4 |
% |
|
|
7.96 |
% |
|
|
7.11 |
% |
|
|
0.85 |
% |
Consumer |
|
|
36,762 |
|
|
|
37,625 |
|
|
|
(863 |
) |
|
|
-2 |
% |
|
|
7.69 |
% |
|
|
7.13 |
% |
|
|
0.56 |
% |
Other loans |
|
|
(963 |
) |
|
|
(1,037 |
) |
|
|
74 |
|
|
|
-7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
|
717,263 |
|
|
|
687,413 |
|
|
|
29,850 |
|
|
|
4 |
% |
|
|
8.89 |
% |
|
|
7.71 |
% |
|
|
1.18 |
% |
Short-term investments |
|
|
15,397 |
|
|
|
4,445 |
|
|
|
10,952 |
|
|
|
246 |
% |
|
|
4.33 |
% |
|
|
2.63 |
% |
|
|
1.70 |
% |
Long-term investments |
|
|
62,320 |
|
|
|
61,877 |
|
|
|
443 |
|
|
|
1 |
% |
|
|
3.62 |
% |
|
|
3.61 |
% |
|
|
0.01 |
% |
|
|
|
|
|
Interest-earning assets |
|
|
794,980 |
|
|
|
753,735 |
|
|
|
41,245 |
|
|
|
5 |
% |
|
|
8.39 |
% |
|
|
7.35 |
% |
|
|
1.04 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonearning assets |
|
|
73,168 |
|
|
|
57,791 |
|
|
|
15,377 |
|
|
|
27 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
868,148 |
|
|
$ |
811,526 |
|
|
$ |
56,622 |
|
|
|
7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities |
|
$ |
598,544 |
|
|
$ |
545,291 |
|
|
$ |
53,253 |
|
|
|
10 |
% |
|
|
3.43 |
% |
|
|
2.30 |
% |
|
|
1.13 |
% |
Demand deposits |
|
|
176,466 |
|
|
|
176,320 |
|
|
|
146 |
|
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
6,226 |
|
|
|
4,646 |
|
|
|
1,580 |
|
|
|
34 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
|
86,912 |
|
|
|
85,269 |
|
|
|
1,643 |
|
|
|
2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
868,148 |
|
|
$ |
811,526 |
|
|
$ |
56,622 |
|
|
|
7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net tax equivalent margin
on earning assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.81 |
% |
|
|
5.68 |
% |
|
|
0.13 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 18 -
Interest-earning assets averaged $796.9 million and $795 million for the three and six-month
periods ending June 30, 2006, respectively, increases of $38.4 million and $41.2 million,
respectively, or 5% for each period, over the $758.5 million and $753.7 million average for the
three and six-month periods ending June 30, 2005. The tax equivalent yield on interest-earning
assets averaged 8.54% and 8.39%, respectively, in
the three and six-month periods ending June 30, 2006, increases of 107 and 104 basis points,
respectively, from 7.47% and 7.35%, respectively, for the three and six-month periods ending June
30, 2005. We expect this trend of increasing yields on our earning assets to level off in
subsequent quarters as the Federal Reserve is expected to stop increasing short-term interest rates
later this year.
Loans, the largest category of interest-earning assets, increased by $34 million, or 5%, to an
average of $725.8 million in the second quarter of 2006 from $691.8 million in the same period of
2005. During the six-month period ending June 30, 2006, loans increased by $29.9 million, or 4%,
to an average of $717.3 million from an average of $687.4 million for the six-month period ending
June 30, 2005. Commercial loans and construction loans increased by $17.2 million and $29.2
million, respectively, on average between the second quarters of 2005 and 2006. Real estate term
loans and consumer loans decreased by $12.2 million and $736,000, respectively, on average between
the second quarters of 2005 and 2006. During the six-month period ending June 30, 2006,
commercial loans and construction loans increased by $14.8 million and $24.8 million, respectively,
on average as compared to the six-month period ending June 30, 2005. Real estate term loans and
consumer loans decreased $8.9 million and $863,000, respectively, on average between the six-month
periods ending June 30, 2006 and June 30, 2005. We expect the loan portfolio to continue to grow
in the same manner with more growth in the commercial and construction loan areas, further declines
in commercial real estate, and either no growth or small increases in consumer loans. The decrease
in the commercial real estate area is expected to continue due to additional refinance activity and
competitive pressures. While residential construction activity in Anchorage, the Companys largest
market, is expected to decline in 2006 due to a decline in available building lots, the Company
believes it has mitigated this effect by gaining market share in the Anchorage residential
construction market. In addition, the Company expects further growth in the Matanuska-Susitna
Valley and Fairbanks markets where there is more land available for future housing growth. The tax
equivalent yield on the loan portfolio averaged 9.02% for the second quarter of 2006, an increase
of 117 basis points from 7.85% over the same quarter a year ago. During the six-month period
ending June 30, 2006, the tax equivalent yield on the loan portfolio averaged 8.89%, an increase of
118 basis points from 7.71% over the same six-month period in 2005.
Interest-bearing liabilities averaged $602.6 million for the second quarter of 2006, an increase of
$51.3 million, or 9%, compared to $551.3 million for the same period in 2005. During the six-month
period ending June 30, 2006, interest-bearing liabilities averaged $598.5 million, an increase of
$53.3 million, or 10%, compared to $545.3 million for the same six-month period in 2005. The
average cost of interest-bearing liabilities increased 114 basis points to 3.61% for the second
quarter of 2006 compared to 2.47% for the second quarter of 2005. During the six-month period
ending June 30, 2006, the average cost of interest bearing-liabilities increased 113 basis points
to 3.43% as compared to 2.30% for the same six-month period in 2005. The average cost of funds has
increased in response to recent interest rate increases by the Federal Reserve. We expect that the
Federal Reserve will stop increasing short-term interest rates later this year, which should cause
the increase in the cost of the Companys deposit accounts to level off and decrease the pressure
that this has placed on its net interest margin.
The Companys net interest income as a percentage of average interest-earning assets (net
tax-equivalent margin) was 5.82% for the second quarter of 2006 and 5.67% for the same period in
2005. During the six-month period ending June 30, 2006, the Companys net tax equivalent margin
was 5.81% and 5.68% for the same period in 2005. During the second quarter of 2006, 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 $285.2 million
at June 30, 2006, as compared to $283 million at June 30, 2005. These balances were available to
fund loan growth and 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 second quarter ended June 30, 2006 to the same period in 2005.
- 19 -
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 second quarters and six-month periods ending June 30, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
|
|
2006 |
|
2005 |
|
$ Chg |
|
% Chg |
|
2006 |
|
2005 |
|
$ Chg |
|
% Chg |
|
|
(Dollars in thousands) |
|
(Dollars in thousands) |
Deposit service charges |
|
$ |
490 |
|
|
$ |
450 |
|
|
$ |
40 |
|
|
|
9 |
% |
|
$ |
974 |
|
|
$ |
851 |
|
|
$ |
123 |
|
|
|
14 |
% |
Purchased receivable income |
|
|
453 |
|
|
|
186 |
|
|
|
267 |
|
|
|
144 |
% |
|
|
766 |
|
|
|
347 |
|
|
|
419 |
|
|
|
121 |
% |
Employee benefit plan income |
|
|
385 |
|
|
|
|
|
|
|
385 |
|
|
|
N/M |
|
|
|
558 |
|
|
|
|
|
|
|
558 |
|
|
|
N/M |
|
Electronic banking revenue |
|
|
192 |
|
|
|
148 |
|
|
|
44 |
|
|
|
30 |
% |
|
|
362 |
|
|
|
292 |
|
|
|
70 |
|
|
|
24 |
% |
Loan servicing fees |
|
|
125 |
|
|
|
109 |
|
|
|
16 |
|
|
|
15 |
% |
|
|
241 |
|
|
|
193 |
|
|
|
48 |
|
|
|
25 |
% |
Merchant & credit card fees |
|
|
123 |
|
|
|
101 |
|
|
|
22 |
|
|
|
22 |
% |
|
|
225 |
|
|
|
196 |
|
|
|
29 |
|
|
|
15 |
% |
Equity in earnings from mortgage affiliate |
|
|
148 |
|
|
|
82 |
|
|
|
66 |
|
|
|
80 |
% |
|
|
155 |
|
|
|
61 |
|
|
|
94 |
|
|
|
154 |
% |
Equity in loss from Elliott Cove |
|
|
(62 |
) |
|
|
(134 |
) |
|
|
72 |
|
|
|
-54 |
% |
|
|
(139 |
) |
|
|
(243 |
) |
|
|
104 |
|
|
|
-43 |
% |
Security gains (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0 |
% |
|
|
|
|
|
|
9 |
|
|
|
(9 |
) |
|
|
-100 |
% |
Other |
|
|
97 |
|
|
|
123 |
|
|
|
(26 |
) |
|
|
-21 |
% |
|
|
237 |
|
|
|
207 |
|
|
|
30 |
|
|
|
14 |
% |
|
|
|
|
|
Total |
|
$ |
1,951 |
|
|
$ |
1,065 |
|
|
$ |
886 |
|
|
|
83 |
% |
|
$ |
3,379 |
|
|
$ |
1,913 |
|
|
$ |
1,466 |
|
|
|
77 |
% |
|
|
|
|
|
Total other operating income for the second quarter of 2006 was $2 million, an increase of
$886,000 from $1.1 million in the second quarter of 2005. During the six-month period ending June
30, 2006, total other operating income was $3.4 million, an increase of $1.5 million from $1.9
million for the same six-month period in 2005.
Service charges on the Companys deposit accounts increased by $40,000, or 9%, to $490,000 in the
second quarter of 2006 from $450,000 in the same period a year ago. During the six-month period
ending June 30, 2006, deposit service charges increased by $123,000, or 14%, to $974,000 compared
to the same six-month period in 2005. In June of 2005, the Company launched its High Performance
Checking (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 was
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 and activity within these accounts.
Income from the Companys purchased receivable products increased by $267,000, or 144%, to $453,000
in the second quarter of 2006 from $186,000 in the same period a year ago. During the six-month
period ending June 30, 2006, income from purchased receivable products increased by $419,000, or
121%, to $766,000 from $347,000 in the same six-month period in 2005. 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.
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, a division
of the Bank that began operations in Bellevue, Washington in the third quarter of 2004 and devoted
most of its time in 2005 to building its base of operations.
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 second quarter and six-month periods of 2006, the
Company included employee benefit plan income from NBG of $385,000 and $558,000, respectively, in
its other operating income. In contrast, the Company did not record any income for this item in
its other operating income during the same periods in 2005 as it purchased a 10% interest in NBG in
March of 2005 and began accounting for this interest according to the equity method in the third
quarter of 2005.
- 20 -
The Companys share of the earnings from its 23.5% interest in its mortgage affiliate increased by
$66,000 to $148,000 during the second quarter of 2006 as compared to $82,000 in the second quarter
of 2005. In the six-month period ended June 30, 2006, the Companys earnings from its mortgage
affiliate increased by $94,000 to $155,000 as compared to earnings of $61,000 for the six-month
period ended June 30, 2005. During this period, RML Holding Companys income increased slightly
faster than its expenses.
The Companys share of the loss from Elliott Cove was $62,000 for the second quarter of 2006 as
compared to a loss of $134,000 for the same period in 2005. In the six-month period ended June 30,
2006, the Companys share of the loss from Elliott Cove was $139,000 as compared to a loss of
$243,000 for the six-month period ended June 30, 2005. Elliott Cove began active operations in the
fourth quarter of 2002. Since that time, Elliott Cove has gradually increased its assets under
management and decreased its operating losses. However, the fee income that Elliott Cove earns on
its assets under management still does not cover its operating costs. Elliott Cove is continuing
to build its assets under management. We expect Elliott Cove to reach a breakeven point in its
operations late in 2006.
The Company has made additional loans to and investments in Elliott Cove. In the first quarter of
2005, the Company increased this loan commitment to $750,000 from the previous commitment of
$500,000. The balance outstanding on this commitment at June 30, 2006 was $725,000. As a result of
the additional investments in Elliott Cove by other investors and the Companys conversion of
certain loans and additional investments, the Companys interest in Elliott Cove increased from a
low of 47% to 49% between June 30, 2005 and June 30, 2006.
Other income, as broken out on the table above, decreased by $26,000, or 21%, in the second quarter
of 2006 from $123,000 for the same period in 2005. During the six-month period ending June 30,
2006, other income was $237,000, an increase of $30,000 from the same six-month period in 2005. In
the first quarter of 2006, through our subsidiary NISC, the Company purchased a 24% interest in
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. In the three and six-month periods ending June 30, 2006,
the company incurred losses of $36,000 and $48,000, respectively, on its investment in PWA. During
the second quarter ending June 30, 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, while in the six-month period ending June 30, 2006 the growth in these two
items more than offset the losses from PWA during this same time period. Finally, the Company
expects to incur losses over the next several years as PWA builds the customer base of its combined
operations.
EXPENSES
Other Operating Expense
The following table breaks out the components of and changes in Other Operating Expense between the
second quarters and six-month periods ending June 30, 2006 and 2005:
- 21 -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
|
|
2006 |
|
2005 |
|
$ Chg |
|
% Chg |
|
2006 |
|
2005 |
|
$ Chg |
|
% Chg |
|
|
(Dollars in thousands) |
|
(Dollars in thousands) |
Salaries & benefits |
|
$ |
4,671 |
|
|
$ |
4,426 |
|
|
$ |
245 |
|
|
|
6 |
% |
|
$ |
9,436 |
|
|
$ |
8,784 |
|
|
$ |
652 |
|
|
|
7 |
% |
Occupancy |
|
|
597 |
|
|
|
574 |
|
|
|
23 |
|
|
|
4 |
% |
|
|
1,238 |
|
|
|
1,141 |
|
|
|
97 |
|
|
|
9 |
% |
Equipment |
|
|
357 |
|
|
|
349 |
|
|
|
8 |
|
|
|
2 |
% |
|
|
698 |
|
|
|
693 |
|
|
|
5 |
|
|
|
1 |
% |
Marketing |
|
|
444 |
|
|
|
541 |
|
|
|
(97 |
) |
|
|
-18 |
% |
|
|
952 |
|
|
|
898 |
|
|
|
54 |
|
|
|
6 |
% |
Intangible asset amortization |
|
|
120 |
|
|
|
92 |
|
|
|
28 |
|
|
|
30 |
% |
|
|
241 |
|
|
|
184 |
|
|
|
57 |
|
|
|
31 |
% |
Software amortization and maintenance |
|
|
258 |
|
|
|
293 |
|
|
|
(35 |
) |
|
|
-12 |
% |
|
|
548 |
|
|
|
571 |
|
|
|
(23 |
) |
|
|
-4 |
% |
Professional and outside services |
|
|
179 |
|
|
|
170 |
|
|
|
9 |
|
|
|
5 |
% |
|
|
322 |
|
|
|
356 |
|
|
|
(34 |
) |
|
|
-10 |
% |
Other expense |
|
|
1,089 |
|
|
|
928 |
|
|
|
161 |
|
|
|
17 |
% |
|
|
2,244 |
|
|
|
1,876 |
|
|
|
368 |
|
|
|
20 |
% |
|
|
|
|
|
Total |
|
$ |
7,715 |
|
|
$ |
7,373 |
|
|
$ |
342 |
|
|
|
5 |
% |
|
$ |
15,679 |
|
|
$ |
14,503 |
|
|
$ |
1,176 |
|
|
|
8 |
% |
|
|
|
|
|
Total other operating expense for the second quarter of 2006 was $7.7 million, an increase of
$342,000 from $7.4 million for the same period in 2005. During the six-month period ending June
30, 2006, total other operating expense was $15.7 million, an increase of $1.2 million from $14.5
million in the same six-month period in 2005.
Salaries and benefits increased by $245,000 and $652,000, respectively, or 6% and 7%, for the three
and six-month periods ending June 30, 2006 as compared to the same periods 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. In addition, as noted above, the Company now accounts for NBG
on a consolidated basis. In the three and six-month periods ending June 30, 2006, the Company
included $151,000 and $222,000, respectively, of NBGs salary and benefit costs in its own salary
and benefit costs. Also, in the first quarter of 2006, the Company adopted FASB Statement 123R,
Share-Based Payment. As a result, in the three and six-month periods ending June 30, 2006, the
Company recorded $53,000 and $147,000, respectively, in expense associated with its stock options.
Occupancy expense increased by $23,000 and $97,000, or 4% and 9%, respectively, for the three and
six-month periods ending June 30, 2006 as compared to the same periods a year ago, due in large
part to the expansion into additional square footage at several locations.
Marketing expenses decreased by $97,000, or 18%, during the second quarter of 2006 as compared to
the second quarter of 2005, as the Company decreased the amount of its advertising for some of its
products. During the six-month period ending June 30, 2006, marketing expenses increased by
$54,000, or 6%, as compared to the six-month period ending June 30, 2005, due in large part to
increased marketing costs related to the HPC Program that the Bank initiated in the latter part of
the second quarter of 2005. The Company plans to continue to market this product as it has since
the second quarter of 2005 and expects to incur marketing costs for this product in the third and
fourth quarters of 2006 in similar amounts to those that it incurred in similar periods in 2005.
The Company 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.
Intangible asset amortization increased by $28,000 and $57,000, or 30% and 31%, respectively, for
the three and six-month periods ending June 30, 2006 as compared to the same periods a year ago, as
the Company began to amortize the customer relationship intangible asset associated with NBG. As
noted above, the Company purchased an additional 40.1% interest in NBG in December of 2005, which
increased its ownership interest in this company to 50.1%. The Company has invested $1.1 million
in NBG since its initial investment in the first quarter of 2005 and has attributed all of this
investment to an intangible asset represented by the value of the customer relationships of NBG.
The Company is amortizing the NBG intangible asset over a ten-year period on a straight-line basis.
During the second
quarter and the six-month period ending June 30, 2006, the amortization expense on the NBG
intangible asset was $29,000 and $57,000, respectively, which accounts for the increase in
amortization expense during this period. Prior to the Companys additional investment in NBG in
December of 2005, the Company accounted for its investment in NBG according to the equity method
and did not record its amortization expense on the NBG investment on a separate basis.
- 22 -
Professional and outside services increased by $9,000, or 5%, during the second quarter of 2006, up
from the decrease of $34,000, or 10% during the six-month period ending June 30, 2006. Finally,
other expense increased by $161,000 and $368,000, or 17% and 20%, respectively, for the three and
six-month periods ending June 30, 2006 due to increases in a variety of expense items during those
periods.
Income Taxes
The provision for income taxes increased by $249,000, or 15%, to $1.9 million in the second quarter
of 2006 compared to $1.6 million in the same period in 2005. The effective tax rates for the
second quarter of 2006 and 2005 were 39% and 38%, respectively. The Company expects that its tax
rate for the rest of 2006 will be approximately similar to the tax rate of the second quarter of
this year. The provision for income taxes increased $397,000, or 12%, to $3.6 million in the first
six months of 2006 compared to $3.2 million in the same period in 2005. The effective tax rates for
the first six months of 2006 and 2005 were both 38%.
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 $34 million, or
5%, greater in the second quarter of 2006 than in the same period of 2005. Loans comprised 91% of
total average earning assets for both of the quarters ending June 30, 2006 and 2005. The yield on
loans averaged 9.02% for the quarter ended June 30, 2006, compared to 7.85% during the same period
in 2005.
The loan portfolio grew $28 million, or 4% from $699.7 million at June 30, 2005, to $728.1 million
at June 30, 2006. Commercial loans increased $9.8 million, or 3%, commercial real estate loans
decreased $14.1 million, or 6%, construction loans increased $30.6 million, or 28%, and consumer
loans increased $125,000, or less than 1%, from June 30, 2005 to June 30, 2006. Funding for the
growth in loans between the periods came primarily from an increase in interest-bearing sources of
funds and capital. We expect the loan portfolio to continue to grow in the same manner with more
growth in the commercial and construction loan areas, further declines in commercial real estate
due to additional refinance activity and competitive pressures, and either no growth or small
increases in consumer loans. While residential construction activity in Anchorage, the Companys
largest market, is expected to decline in 2006 due to a decline in available building lots, the
Company believes it has mitigated this effect by gaining market share in the Anchorage residential
construction market. In addition, the Company expects further growth in the Matanuska-Susitna
Valley and Fairbanks markets where there is more land available for future housing growth.
Loan Portfolio Composition: Loans increased to $728.1 million at June 30, 2006, from $705.1 million
at December 31, 2005. At June 30, 2006, 50% of the portfolio was scheduled to mature over the next
12 months, and 22% was scheduled to mature between July 1, 2007, and June 30, 2011. 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 50% 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.
- 23 -
The following table sets forth the Companys loan portfolio composition by loan type for the dates
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006 |
|
December 31, 2005 |
|
June 30, 2005 |
|
|
Dollar |
|
Percent |
|
Dollar |
|
Percent |
|
Dollar |
|
Percent |
|
|
Amount |
|
of Total |
|
Amount |
|
of Total |
|
Amount |
|
of Total |
|
|
(Dollars in thousands) |
Commercial |
|
$ |
312,526 |
|
|
|
43 |
% |
|
$ |
287,617 |
|
|
|
41 |
% |
|
$ |
302,735 |
|
|
|
43 |
% |
Construction/development |
|
|
139,825 |
|
|
|
19 |
% |
|
|
131,532 |
|
|
|
19 |
% |
|
|
109,212 |
|
|
|
16 |
% |
Commercial real estate |
|
|
238,657 |
|
|
|
33 |
% |
|
|
252,395 |
|
|
|
36 |
% |
|
|
252,715 |
|
|
|
36 |
% |
Consumer |
|
|
38,237 |
|
|
|
5 |
% |
|
|
36,519 |
|
|
|
5 |
% |
|
|
38,113 |
|
|
|
5 |
% |
Loans in process |
|
|
1,947 |
|
|
|
0 |
% |
|
|
|
|
|
|
0 |
% |
|
|
287 |
|
|
|
0 |
% |
Unearned loan fees |
|
|
(3,104 |
) |
|
|
0 |
% |
|
|
(3,004 |
) |
|
|
0 |
% |
|
|
(3,399 |
) |
|
|
0 |
% |
|
|
|
Total loans |
|
$ |
728,088 |
|
|
|
100 |
% |
|
$ |
705,059 |
|
|
|
100 |
% |
|
$ |
699,663 |
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006 |
|
December 31, 2005 |
|
June 30, 2005 |
|
|
(Dollars in thousands) |
Nonaccrual loans |
|
$ |
4,686 |
|
|
$ |
5,090 |
|
|
$ |
5,706 |
|
Accruing loans past due 90 days or more |
|
|
1,846 |
|
|
|
981 |
|
|
|
1,095 |
|
Restructured loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans |
|
|
6,532 |
|
|
|
6,071 |
|
|
|
6,801 |
|
Real estate owned |
|
|
|
|
|
|
105 |
|
|
|
|
|
|
|
|
Total nonperforming assets |
|
$ |
6,532 |
|
|
$ |
6,176 |
|
|
$ |
6,801 |
|
|
|
|
Allowance for loan losses |
|
$ |
11,581 |
|
|
$ |
10,706 |
|
|
$ |
10,882 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans to portfolio loans |
|
|
0.90 |
% |
|
|
0.86 |
% |
|
|
0.97 |
% |
Nonperforming assets to total assets |
|
|
0.74 |
% |
|
|
0.69 |
% |
|
|
0.81 |
% |
Allowance to portfolio loans |
|
|
1.59 |
% |
|
|
1.52 |
% |
|
|
1.56 |
% |
Allowance to nonperforming loans |
|
|
177 |
% |
|
|
176 |
% |
|
|
160 |
% |
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 June 30, 2006, were $6.5 million, or 0.90%, of total portfolio loans,
an increase of $461,000 from $6.1 million at December 31, 2005, and a decrease of $269,000 from
$6.8 million at June 30, 2005. The increase in the non-performing loans in the second quarter of
2006 from the end of 2005, was due in large part to an $865,000 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.
- 24 -
At June 30, 2006, December 31, 2005, and June 30, 2005, the Company had loans measured for
impairment of $21.1 million, $18.3 million, and $10.7 million, respectively. A specific allowance
of $3.1 million, $2.6 million, and $502,000, respectively, was established for these periods. The
increase in loans measured for impairment at June 30, 2006, as compared to December 31, 2005,
resulted mainly from the addition of two commercial loan relationships and additional advances to a
loan that was included in loans measured for impairment at Decembers 31, 2005 and June 30, 2006.
The increase in loans measured for impairment at December 31, 2005, as compared to June 30, 2005,
resulted mainly from the addition of four loans that total $8.2 million and are part of two
borrower relationships.
Potential Problem Loans: At June 30, 2006 the Company had $6.2 million in potential problem loans,
as compared to $5 million at June 30, 2005 as a result of adding two loans to the listing of
potential problem loans and deleting one loan from this list. One loan in the amount of $4.1
million was included in loans measured for impairment at June 30, 2006 while the other loan in the
amount of $2.1 million was not included in loans measured for impairment. At December 31, 2005, the
Company had potential problem loans of $9.1 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, 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 $11.6 million, or 1.59% of total portfolio loans outstanding, at
June 30, 2006, compared to $10.9 million, or 1.56%, of total portfolio loans at June 30, 2005. The
Allowance for Loan Losses represented 177% of non-performing loans at June 30, 2006, as compared to
160% of non-performing loans at June 30, 2005.
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
$860,000 for the three-month period ending June 30, 2006 to account for loan growth, loan
charge-offs, and an increase in the allowance for impaired loans. The following table details
activity in the Allowance for Loan Losses for the dates indicated:
- 25 -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
|
(Dollars in thousands) |
Balance at beginning of period |
|
$ |
10,870 |
|
|
$ |
10,733 |
|
|
$ |
10,706 |
|
|
$ |
10,764 |
|
Charge-offs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
195 |
|
|
|
230 |
|
|
|
195 |
|
|
|
301 |
|
Construction/development |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer |
|
|
65 |
|
|
|
26 |
|
|
|
69 |
|
|
|
33 |
|
|
|
|
Total charge-offs |
|
|
260 |
|
|
|
256 |
|
|
|
264 |
|
|
|
334 |
|
Recoveries: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
105 |
|
|
|
294 |
|
|
|
215 |
|
|
|
300 |
|
Construction/development |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15 |
|
Commercial real estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15 |
|
Consumer |
|
|
6 |
|
|
|
11 |
|
|
|
10 |
|
|
|
22 |
|
|
|
|
Total recoveries |
|
|
111 |
|
|
|
305 |
|
|
|
225 |
|
|
|
352 |
|
Net, (recoveries) charge-offs |
|
|
149 |
|
|
|
(49 |
) |
|
|
39 |
|
|
|
(18 |
) |
Provision for loan losses |
|
|
860 |
|
|
|
100 |
|
|
|
914 |
|
|
|
100 |
|
|
|
|
Balance at end of period |
|
$ |
11,581 |
|
|
$ |
10,882 |
|
|
$ |
11,581 |
|
|
$ |
10,882 |
|
|
|
|
The provision for loan losses for the three and six-month periods ending June 30, 2006 was
$860,000 and $914,000, respectively, as compared to a provision for loan losses of $100,000 for
both the three and six-month periods ending June 30, 2005. During the three-month period ending
June 30, 2006, there was $149,000 in net loan charge-offs as compared to $49,000 of net loan
recoveries for the same period in 2005. The increase in net loan charge-offs resulted from an
increase in gross charge-offs, which increased from $256,000 to $260,000 during this period. Also,
loan recoveries decreased during this same time period from $305,000 for the three-month period
ending June 30, 2005 to $111,000 for the three-month period ending June 30, 2006. During the
six-month period ending June 30, 2006 there were $39,000 in net loan charge-offs as compared to
$18,000 in net loan recoveries for the same period in 2005. The increase in net loan charge-offs
during this six-month period resulted mainly from a decrease in gross loan recoveries, which
decreased by $127,000 to $225,000 for the six-month period ending June 30, 2006.
Management believes that on the basis of its review of the performance of the loan portfolio and
the various methods that it uses to analyze its Allowance for Loan Losses that at June 30, 2006 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 $58.5 million at June
30, 2006, an increase of $3.6 million from $55 million at December 31, 2005, and a decrease of $3.3
million, or 5%, from $61.8 million at June 30, 2005. Investment securities designated as available
for sale comprised 81% of the investment portfolio at June 30, 2006, 95% at December 31, 2005, and
96% at June 30, 2005, 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 June 30,
2006, $14.3 million in securities, or 24%, of the investment portfolio was pledged, as compared to
$20.9 million, or 38%, at December 31, 2005, and $27 million, or 44%, at June 30, 2005.
- 26 -
LIABILITIES
Deposits
General: Deposits are the Companys primary source of new funds. Total deposits decreased $19
million to $760.8 million at June 30, 2006, from $779.9 million at December 31, 2005, and increased
$29.1 million from $731.8 million at June 30, 2005. 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.
Certificates of Deposit: The only deposit category with stated maturity dates is certificates of
deposit. At June 30, 2006, the Company had $96.3 million in certificates of deposit, of which
$75.7 million, or 79% of total certificates of deposit, are scheduled to mature over the next 12
months compared to $92.1 million, or 83% of total certificates of deposit, at December 31, 2005,
and to $122.2 million, or 86% of total certificates of deposit at June 30, 2005.
The following table sets forth the scheduled maturities of the Companys certificates of deposit
for the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006 |
|
December 31, 2005 |
|
June 30, 2005 |
|
|
Dollar |
|
Percent |
|
Dollar |
|
Percent |
|
Dollar |
|
Percent |
|
|
Amount |
|
of Total |
|
Amount |
|
of Total |
|
Amount |
|
of Total |
|
|
(Dollars in thousands) |
|
|
|
Remaining maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months or less |
|
$ |
29,409 |
|
|
|
31 |
% |
|
$ |
46,271 |
|
|
|
42 |
% |
|
$ |
29,559 |
|
|
|
21 |
% |
Over three through twelve months |
|
|
46,332 |
|
|
|
48 |
% |
|
|
45,834 |
|
|
|
41 |
% |
|
|
92,623 |
|
|
|
65 |
% |
Over twelve months |
|
|
20,547 |
|
|
|
21 |
% |
|
|
18,475 |
|
|
|
17 |
% |
|
|
19,830 |
|
|
|
14 |
% |
|
|
|
Total |
|
$ |
96,289 |
|
|
|
100 |
% |
|
$ |
110,580 |
|
|
|
100 |
% |
|
$ |
142,012 |
|
|
|
100 |
% |
|
|
|
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 June 30, 2006, was $203.4 million, an increase of $44.8 million as compared to the balance of
$158.6 million at June 30, 2005 and an increase of $5.4 million from a balance of $198 million at
December 31, 2005. We expect the total balance of the Alaska CD to continue to increase 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 June 30,
2006, the Company held $15 million in certificates of deposit for the Alaska Permanent Fund that
were classified as certificates of deposit greater than $100,000 on its balance sheet,
collateralized by a letter of credit issued by the Federal Home Loan Bank (FHLB).
Borrowings
Federal Home Loan Bank: A portion of the Companys borrowings were from the FHLB. At June 30, 2006,
the Companys maximum borrowing line from the FHLB was $107 million, approximately 12% of the
Companys assets. At June 30, 2006, there was $2.4 million outstanding on the line and an
additional $15.2 million committed to secure public deposits, compared to an outstanding balance of
$2.6 million and additional commitments of $15.5 million at December 31, 2005. 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.
- 27 -
In addition to the borrowings from the FHLB, the Company had $3.8 million in other borrowings
outstanding at June 30, 2006, as compared to $5.8 million in other borrowings outstanding at
December 31, 2005. 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.
Other Short-term Borrowings: At June 30, 2006, 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
June 30, 2006 and December 31, 2005, the Companys commitments to extend credit and to provide
letters of credit amounted to $161.8 million and $172.1 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 $88.4 million at June 30, 2006, compared to $84.5 million at December 31,
2005 and $86 million at June 30, 2005. The Company earned net income of $2.9 million during the
three-month period ending June 30, 2006, authorized dividends of $726,000, issued 18,000 shares
through the exercise of stock options, and did not repurchase any shares of its common stock under
the Companys publicly announced repurchase program.
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 June 30,
2006, 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.
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 June 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adequately- |
|
Well- |
|
Actual Ratio |
|
Actual Ratio |
|
|
Capitalized |
|
Capitalized |
|
BHC |
|
Bank |
|
Tier 1 risk-based capital |
|
|
4.00 |
% |
|
|
6.00 |
% |
|
|
12.29 |
% |
|
|
10.35 |
% |
Total risk-based capital |
|
|
8.00 |
% |
|
|
10.00 |
% |
|
|
13.55 |
% |
|
|
11.60 |
% |
Leverage ratio |
|
|
4.00 |
% |
|
|
5.00 |
% |
|
|
11.58 |
% |
|
|
9.77 |
% |
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.
- 28 -
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 June 30, 2006, the
Company did not repurchase any 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 June 30, 2006. 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 8.32% at June 30, 2006. The interest cost to the Company on these
debentures was $168,000 in the period ending June 30, 2006 and $125,000 in the same period in
2005. 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.
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 6.70% at June 30, 2006. The
interest cost to the Company on these debentures was $155,000 for the period ending June 30, 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.
- 29 -
CAPITAL EXPENDITURES AND COMMITMENTS
During the six-month period ending June 30, 2006, the Company purchased a commercial lot in the
amount of $828,000 on which it plans to construct a branch in Fairbanks, Alaska. In addition,
during the three-month period ending June 30, 2006, the Company made a commitment to purchase a
commercial lot in the amount of $882,000 on which it plans to construct a branch in Anchorage,
Alaska.
- 30 -
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. However, due to the fact that
interest rates are coming off of historically low levels, the Company may be unable to pass
additional reductions through to its deposit customers, which could have an adverse effect on its
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 June 30, 2006, indicate that, if interest rates immediately
increased by 100 basis points, the Company would experience a decrease in net interest income of
approximately $1.8 million 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 $1.7 million over the next 12 months. Due to the
fact that interest rates are coming off of historically low levels, the simulation model did not
take the 100-point decrease in interest rates into full effect. As a result, this decrease in
interest rates in the simulation model had less of a positive effect on net interest income because
interest-bearing liabilities did not bear the full effect of the interest rate decline, which
resulted in a larger interest expense in this situation.
- 31 -
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 June 30, 2006 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
- 32 -
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, 2005. These risk factors have not materially changed.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a)-(b) Not applicable
(c) The Company did not repurchase any of its common stock during the second quarter of 2006.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Northrim BanCorp, Inc. held its Annual Shareholders Meeting on May 4, 2006. The matter voted on
by shareholders was the election of directors.
1. ELECTION OF DIRECTORS
The following individuals were nominated and elected by the shareholders to serve as directors
until the 2007 election of directors or until their successors are elected and have qualified:
|
|
|
|
|
|
|
Larry S. Cash
|
|
Christopher N. Knudson |
|
|
Mark G. Copeland
|
|
R. Marc Langland |
|
|
Frank A. Danner
|
|
Richard L. Lowell |
|
|
Ronald A. Davis
|
|
Irene Sparks Rowan |
|
|
Anthony Drabek
|
|
John C. Swalling |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FOR |
|
WITHHOLD |
|
VOTES CAST |
|
NONVOTES |
|
TOTAL SHARES |
CASH, LARRY S. |
|
|
5,347,601 |
|
|
|
65,894 |
|
|
|
5,413,495 |
|
|
|
379,966 |
|
|
|
5,793,461 |
|
COPELAND, MARK G. |
|
|
5,318,926 |
|
|
|
94,569 |
|
|
|
5,413,495 |
|
|
|
379,966 |
|
|
|
5,793,461 |
|
DANNER, FRANK A. |
|
|
4,523,273 |
|
|
|
890,222 |
|
|
|
5,413,495 |
|
|
|
379,966 |
|
|
|
5,793,461 |
|
DAVIS, RONALD A. |
|
|
5,363,143 |
|
|
|
50,352 |
|
|
|
5,413,495 |
|
|
|
379,966 |
|
|
|
5,793,461 |
|
DRABEK, ANTHONY |
|
|
5,368,432 |
|
|
|
45,063 |
|
|
|
5,413,495 |
|
|
|
379,966 |
|
|
|
5,793,461 |
|
KNUDSON, CHRISTOPHER N. |
|
|
4,522,594 |
|
|
|
890,901 |
|
|
|
5,413,495 |
|
|
|
379,966 |
|
|
|
5,793,461 |
|
LANGLAND, R. MARC |
|
|
4,464,042 |
|
|
|
949,453 |
|
|
|
5,413,495 |
|
|
|
379,966 |
|
|
|
5,793,461 |
|
LOWELL, RICHARD L. |
|
|
5,375,216 |
|
|
|
38,279 |
|
|
|
5,413,495 |
|
|
|
379,966 |
|
|
|
5,793,461 |
|
ROWAN, IRENE SPARKS |
|
|
5,379,643 |
|
|
|
33,852 |
|
|
|
5,413,495 |
|
|
|
379,966 |
|
|
|
5,793,461 |
|
SWALLING, JOHN C. |
|
|
5,364,443 |
|
|
|
49,052 |
|
|
|
5,413,495 |
|
|
|
379,966 |
|
|
|
5,793,461 |
|
- 33 -
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
|
10.1 |
|
Employment Agreement with Joseph M. Beedle(1) |
|
|
10.1 |
|
Amended and Restated Employment Agreement with R. Marc Langland(2) |
|
|
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. |
|
|
|
(1) |
|
Incorporated by reference to the Companys Form 8-K filed with the SEC
on May 19, 2006. |
|
(2) |
|
Incorporated by reference to the Companys Form 8-K filed with the SEC
on June 2, 2006. |
- 34 -
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. |
|
|
|
|
|
|
|
|
|
August 8, 2006
|
|
By
|
|
/s/ R. Marc Langland
R. Marc Langland
|
|
|
|
|
|
|
Chairman, President, and CEO
(Principal Executive Officer) |
|
|
|
|
|
|
|
|
|
August 8, 2006
|
|
By
|
|
/s/ Joseph M. Schierhorn
Joseph M. Schierhorn
|
|
|
|
|
|
|
Executive Vice President,
Chief Financial Officer
(Principal Financial and Accounting Officer) |
|
|
- 35 -