10-Q 1 d319678d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q

 

 

(Mark One)

x Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2012 March 31, 2012

 

¨ 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)

 

 

 

Alaska   92-0175752

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

3111 C Street

Anchorage, Alaska

 

99503

(Address of principal executive offices)   (Zip Code)

(907) 562-0062

(Registrant’s 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 Securities Exchange Act of 1934 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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨ (do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares of the issuer’s Common Stock outstanding at May 7, 2012 was 6,468,690.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

PART I

  

FINANCIAL INFORMATION

  

Item 1.

  

Financial Statements (unaudited)

  
  

Consolidated Balance Sheets:

March 31, 2012, December 31, 2011 and March 31, 2011

     4   
  

Consolidated Statements of Income:

Three months ended March 31, 2012 and 2011

     5   
  

Consolidated Statements of Comprehensive Income:

Three months ended March 31, 2012 and 2011

     6   
  

Consolidated Statements of Changes in Shareholders’ Equity:

Three months ended March 31, 2012 and 2011

     7   
  

Consolidated Statements of Cash Flows:

Three months ended March 31, 2012 and 2011

     8   
  

Notes to the Consolidated Financial Statements

     9   

Item 2.

  

Management’s Discussion and Analysis of Financial

Condition and Results of Operations

     29   

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

     40   

Item 4.

  

Controls and Procedures

     40   

PART II

  

OTHER INFORMATION

  

Item 1.

  

Legal Proceedings

     41   

Item 1A.

  

Risk Factors

     41   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     41   

Item 3.

  

Defaults Upon Senior Securities

     41   

Item 4.

  

Mine Safety Disclosures

     41   

Item 5.

  

Other Information

     41   

Item 6.

  

Exhibits

     42   

SIGNATURES

        43   

 

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Table of Contents

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 Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

ITEM 1. FINANCIAL STATEMENTS

 

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Table of Contents

CONSOLIDATED FINANCIAL STATEMENTS

NORTHRIM BANCORP, INC.

Consolidated Balance Sheets

March 31, 2012, December 31, 2011 and March 31, 2011

 

     March 31,
2012
    December 31,
2011
    March 31,
2011
 
     (Unaudited)           (Unaudited)  
     (In Thousands, Except Share Data)  

ASSETS

      

Cash and due from banks

   $ 23,085      $ 30,644      $ 29,109   

Interest bearing deposits in other banks

     69,344        60,886        138,707   

Investment securities available for sale

     216,589        222,083        181,800   

Investment securities held to maturity

     3,602        3,819        6,068   
  

 

 

   

 

 

   

 

 

 

Total portfolio investments

     220,191        225,902        187,868   

Investment in Federal Home Loan Bank stock

     2,003        2,003        2,003   

Loans held for sale

     12,266        27,822        —     

Loans

     664,258        645,562        654,341   

Allowance for loan losses

     (16,288     (16,503     (15,139
  

 

 

   

 

 

   

 

 

 

Net loans

     660,236        656,881        639,202   

Purchased receivables, net

     22,345        30,209        13,611   

Accrued interest receivable

     3,157        2,898        3,184   

Other real estate owned

     6,657        5,183        10,343   

Premises and equipment, net

     27,870        27,993        28,827   

Goodwill and intangible assets

     8,357        8,421        8,626   

Other assets

     33,117        34,238        34,183   
  

 

 

   

 

 

   

 

 

 

Total assets

   $ 1,076,362      $ 1,085,258      $ 1,095,663   
  

 

 

   

 

 

   

 

 

 

LIABILITIES

      

Deposits:

      

Demand

   $ 302,104      $ 324,039      $ 340,943   

Interest-bearing demand

     141,437        141,572        133,031   

Savings

     82,570        79,610        76,058   

Alaska CDs

     104,811        102,384        96,919   

Money market

     162,854        154,987        151,594   

Certificates of deposit less than $100,000

     44,127        45,468        51,931   

Certificates of deposit greater than $100,000

     63,503        63,188        82,748   
  

 

 

   

 

 

   

 

 

 

Total deposits

     901,406        911,248        933,224   
  

 

 

   

 

 

   

 

 

 

Securities sold under repurchase agreements

     15,467        16,348        11,595   

Borrowings

     4,590        4,626        5,421   

Junior subordinated debentures

     18,558        18,558        18,558   

Other liabilities

     8,191        9,043        8,091   
  

 

 

   

 

 

   

 

 

 

Total liabilities

     948,212        959,823        976,889   
  

 

 

   

 

 

   

 

 

 

SHAREHOLDERS’ EQUITY

      

Preferred stock, $1 par value, 2,500,000 shares authorized, none issued or outstanding

     —          —          —     

Common stock, $1 par value, 10,000,000 shares authorized, 6,468,690, 6,466,763 and 6,429,476 shares issued and outstanding at March 31, 2012, December 31, 2011, and March 31, 2011, respectively

     6,469        6,467        6,429   

Additional paid-in capital

     53,267        53,164        52,807   

Retained earnings

     67,193        65,469        59,012   

Accumulated other comprehensive income

     1,165        283        498   
  

 

 

   

 

 

   

 

 

 

Total Northrim BanCorp shareholders’ equity

     128,094        125,383        118,746   
  

 

 

   

 

 

   

 

 

 

Noncontrolling interest

     56        52        28   
  

 

 

   

 

 

   

 

 

 

Total shareholders’ equity

     128,150        125,435        118,774   
  

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 1,076,362      $ 1,085,258      $ 1,095,663   
  

 

 

   

 

 

   

 

 

 

See notes to the consolidated financial statements

 

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Table of Contents

NORTHRIM BANCORP, INC.

Consolidated Statements of Income

For the Three Months Ended March 31, 2012 and 2011

 

    

Three Months Ended

March 31,

 
     2012      2011  
    

(Unaudited)

(In Thousands,

Except Per Share Data)

 

Interest Income

     

Interest and fees on loans

   $ 10,225       $ 10,686   

Interest on investment securities-available for sale

     749         872   

Interest on investment securities-held to maturity

     38         61   

Interest on deposits in other banks

     40         33   
  

 

 

    

 

 

 

Total Interest Income

     11,052         11,652   

Interest Expense

     

Interest expense on deposits,

     

borrowings and junior subordianted debentures

     698         977   
  

 

 

    

 

 

 

Net Interest Income

     10,354         10,675   

Provision for loan losses

     89         549   
  

 

 

    

 

 

 

Net Interest Income After Provision for Loan Losses

     10,265         10,126   

Other Operating Income

     

Purchased receivable income

     712         626   

Service charges on deposit accounts

     568         524   

Employee benefit plan income

     540         500   

Electronic banking income

     483         449   

Equity in earnings (loss) from RML

     301         (52

Rental income

     198         196   

Gain on sale of securities

     27         263   

Other income

     378         272   
  

 

 

    

 

 

 

Total Other Operating Income

     3,207         2,778   
  

 

 

    

 

 

 

Other Operating Expense

     

Salaries and other personnel expense

     5,706         5,316   

Occupancy

     996         910   

Marketing expense

     437         437   

Professional and outside services

     418         337   

Equipment expense

     294         304   

Software expense

     251         240   

Amortization of low income housing tax investments

     228         216   

Internet banking expense

     172         153   

Insurance expense

     118         436   

OREO (income) expense, net rental income and gains on sale

     97         (139

Intangible asset amortization expense

     64         70   

Other operating expense

     977         1,046   
  

 

 

    

 

 

 

Total Other Operating Expense

     9,758         9,326   
  

 

 

    

 

 

 

Income Before Provision for Income Taxes

     3,714         3,578   

Provision for income taxes

     1,026         1,034   
  

 

 

    

 

 

 

Net Income

     2,688         2,544   

Less: Net income attributable to the noncontrolling interest

     112         89   
  

 

 

    

 

 

 

Net Income Attributable to Northrim BanCorp

   $ 2,576       $ 2,455   
  

 

 

    

 

 

 

Earnings Per Share, Basic

   $ 0.40       $ 0.38   
  

 

 

    

 

 

 

Earnings Per Share, Diluted

   $ 0.39       $ 0.37   
  

 

 

    

 

 

 

Weighted Average Shares Outstanding, Basic

     6,467,540         6,428,730   
  

 

 

    

 

 

 

Weighted Average Shares Outstanding, Diluted

     6,567,654         6,548,480   
  

 

 

    

 

 

 

See notes to the consolidated financial statements

 

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Table of Contents

NORTHRIM BANCORP, INC.

Consolidated Statements of Comprehensive Income

For the Three Months Ended March 31, 2012 and 2011

 

Three months ending March 31, 2011:

    

Net income

     $ 2,544   

Other comprehensive income, net of tax:

    

Change in unrealized holding loss on available for sale securities

   ($ 150  
  

 

 

   

 

 

 

Other comprehensive income

       (150
    

 

 

 

Comprehensive income

       2,394   
    

 

 

 

Less: comprehensive income attributable to the noncontrolling interest

       (89
    

 

 

 

Comprehensive income attributable to Northrim BanCorp

     $ 2,305   
    

 

 

 

Three months ending March 31, 2012:

    

Net income

     $ 2,688   

Other comprehensive income, net of tax:

    

Change in unrealized holding gain on available for sale securities

   $ 882     
  

 

 

   

 

 

 

Other comprehensive income

       882   
    

 

 

 

Comprehensive income

       3,570   
    

 

 

 

Less: comprehensive income attributable to the noncontrolling interest

       (112
    

 

 

 

Comprehensive income attributable to Northrim BanCorp

     $ 3,458   
    

 

 

 

See notes to the consolidated financial statements

 

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Table of Contents

NORTHRIM BANCORP, INC.

Consolidated Statements of Changes in

Shareholders’ Equity

For the Three Months Ended March 31, 2012 and 2011

 

                               Accumulated              
     Common Stock      Additional           Other              
     Number
of Shares
     Par
Value
     Paid-in
Capital
    Retained
Earnings
    Comprehensive
Income
    Noncontrolling
Interest
    Total  
     (Unaudited)  
     (In Thousands)  

Three months ending March 31, 2011:

                

Balance as of January 1, 2011

     6,427       $ 6,427       $ 52,658      $ 57,339      $ 648      $ 50      $ 117,122   

Cash dividend declared

     —           —           —          (782     —          —          (782

Stock option expense

     —           —           134        —          —          —          134   

Exercise of stock options

     2         2         (2     —          —          —          —     

Excess tax benefits from share-based payment arrangements

     —           —           17        —          —          —          17   

Distributions to noncontrolling interest

     —           —           —          —          —          (111     (111

Change in unrealized holding gain (loss) on available for sale securities, net of tax

     —           —           —          —          (150     —          (150

Net income attributable to the noncontrolling interest

     —           —           —          —          —          89        89   

Net income attributable to Northrim BanCorp

     —           —           —          2,455        —          —          2,455   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of March 31, 2011

     6,429       $ 6,429       $ 52,807      $ 59,012      $ 498      $ 28      $ 118,774   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Three months ending March 31, 2012:

                

Balance as of January 1, 2012

     6,467       $ 6,467       $ 53,164      $ 65,469      $ 283      $ 52      $ 125,435   

Cash dividend declared

     —           —           —          (852     —          —          (852

Stock option expense

     —           —           113        —          —          —          113   

Exercise of stock options

     2         2         (10     —          —          —          (8

Distributions to noncontrolling interest

     —           —           —          —          —          (108     (108

Change in unrealized holding gain (loss) on available for sale securities, net of tax

     —           —           —          —          882        —          882   

Net income attributable to the noncontrolling interest

     —           —           —          —          —          112        112   

Net income attributable to Northrim BanCorp

     —           —           —          2,576        —          —          2,576   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of March 31, 2012

     6,469       $ 6,469       $ 53,267      $ 67,193      $ 1,165      $ 56        128,150   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See notes to the consolidated financial statements

 

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Table of Contents

NORTHRIM BANCORP, INC.

Consolidated Statement of Cash Flows

For the Three Months Ended March 31, 2012 and 2011

 

     Three Months Ended
March 31,
 
     2012     2011  
     (Unaudited)  
     (In Thousands)  

Operating Activities:

    

Net income

   $ 2,688      $ 2,544   

Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:

    

Security gains, net

     (27     (263

Depreciation and amortization of premises and equipment

     405        436   

Amortization of software

     47        51   

Intangible asset amortization

     64        70   

Amortization of investment security premium, net of discount accretion

     91        69   

Deferred tax (benefit) liability

     161        (505

Stock-based compensation

     113        134   

Excess tax benefits from share-based payment arrangements

     —          (17

Deferral of loan fees and costs, net

     272        (210

Provision for loan losses

     89        549   

Purchases of loans held for sale

     (39,620     —     

Proceeds from the sale of loans held for sale

     55,176        5,558   

Gain on sale of other real estate owned

     (19     (72

Equity in undistributed earnings from mortgage affiliate

     (8     301   

Net changes in assets and liabilities:

    

(Increase) decrease in accrued interest receivable

     (259     217   

Decrease in other assets

     272        1,364   

(Decrease) in other liabilities

     (859     (449
  

 

 

   

 

 

 

Net Cash Provided by Operating Activities

     18,586        9,777   
  

 

 

   

 

 

 

Investing Activities:

    

Investment in securities:

    

Purchases of investment securities-available-for-sale

     (7,101     (31,839

Proceeds from sales/maturities of securities-available-for-sale

     13,736        63,991   

Proceeds from calls/maturities of securities-held-to-maturity

     510        55   

Investment in purchased receivables

     7,864        2,918   

Loan advances, net of paydowns

     (20,771     16,891   

Proceeds from sale of other real estate owned

     50        1,140   

Investment in other real estate owned

     (17     (14

Loan to Elliott Cove, net of repayments

     33        75   

Purchases of premises and equipment

     (282     (215
  

 

 

   

 

 

 

Net Cash (Used) Provided by Investing Activities

     (5,978     53,002   
  

 

 

   

 

 

 

Financing Activities:

    

(Decrease) increase in deposits

     (9,842     41,088   

(Decrease) in securities sold under repurchase agreements

     (881     (1,279

(Decrease) increase in borrowings

     (36     35   

Distributions to noncontrolling interest

     (108     (111

Excess tax benefits from share-based payment arrangements

     —          17   

Cash dividends paid

     (842     (746
  

 

 

   

 

 

 

Net Cash (Used) Provided by Financing Activities

     (11,709     39,004   
  

 

 

   

 

 

 

Net Increase in Cash and Cash Equivalents

     899        101,783   

Cash and Cash Equivalents at Beginning of Period

     79,530        66,033   
  

 

 

   

 

 

 

Cash and Cash Equivalents at End of Period

   $ 80,429      $ 167,816   
  

 

 

   

 

 

 

Supplemental Information:

    

Income taxes paid

   $ 2      $ 4   

Interest paid

   $ 700      $ 1,015   

Transfer of loans to other real estate owned

   $ 1,499      $ 974   

Loans made to facilitate sales of other real estate owned

   $ 50      $ 417   

Cash dividends declared but not paid

   $ 10      $ 10   

See notes to the consolidated financial statements

 

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Table of Contents

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

March 31, 2012 and 2011

 

1.   Basis of Presentation

The accompanying unaudited consolidated 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. Certain reclassifications have been made to prior year amounts to maintain consistency with the current year with no impact on net income or total shareholders’ equity. The Company determined that it operates as a single operating segment. Operating results for the interim period ended March 31, 2012, are not necessarily indicative of the results anticipated for the year ending December 31, 2012. These consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

 

2.   Significant Accounting Policies and Recent Accounting Pronouncements

The Company’s significant accounting policies are discussed in Note 1 to the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”). Some of the amendments contained in ASU 2011-04 clarify FASB’s intent about the application of existing fair value measurement requirements, and other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. This ASU was effective for the Company’s financial statements for annual and interim periods beginning on or after December 15, 2011, and has been applied prospectively. The adoption of this standard did not have a material impact on the Company’s consolidated financial position or results of operations.

In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income (“ASU 2011-05”). ASU 2011-05 amends Topic 220, “Comprehensive Income”, to allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income, nor does it change the option for an entity to present components of other comprehensive income either net of related tax effects or before related tax effects. In December 2011, the FASB issued ASU 2011-12, Deferral of the Effective Date for Amendments to Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update 2011-05 (“ASU 2011-12”). This ASU defers only those changes in ASU 2011-05 that relate to the presentation of reclassification adjustments. ASU 2011-12 was issued in order to allow the FASB time to redeliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. While the FASB is considering the operational concerns about the presentation requirements for reclassification adjustments and the needs of financial statement users for additional information about reclassification adjustments, the Company will continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before the issuance of ASU 2011-05. ASU 2011-12 was effective for the Company’s financial statements for annual and interim periods beginning after December 31, 2011, and has been applied prospectively. The adoption of this standard did not have a material impact on the Company’s consolidated financial position or results of operations.

 

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Table of Contents
3.   Cash and Cash Equivalents

For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, interest-bearing deposits with other banks, banker’s acceptances, commercial paper, securities purchased under agreement to resell, federal funds sold, and securities with maturities of less than 90 days at acquisition.

 

4.   Investment Securities

The carrying values and approximate fair values of investment securities at the periods indicated are presented below:

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair Value  
     (In Thousands)  

March 31, 2012:

           

Securities available for sale

           

U.S. Treasury and government sponsored entities

   $ 146,653       $ 541       $ 18       $ 147,176   

Muncipal securities

     17,053         694         —           17,747   

U.S. Agency mortgage-backed securities

     50         2         —           52   

Corporate bonds

     48,839         802         114         49,527   

Preferred stock

     2,019         68         —           2,087   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

   $ 214,614       $ 2,107       $ 132       $ 216,589   
  

 

 

    

 

 

    

 

 

    

 

 

 

Securities held to maturity

           

Municipal securities

   $ 3,602       $ 246       $ —         $ 3,848   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities held to maturity

   $ 3,602       $ 246       $ —         $ 3,848   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011:

           

Securities available for sale

           

U.S. Treasury and government sponsored entities

   $ 160,529       $ 625       $ 50       $ 161,104   

Muncipal securities

     16,260         675         —           16,935   

U.S. Agency mortgage-backed securities

     52         2         —           54   

Corporate bonds

     43,767         343         1,119         42,991   

Preferred stock

     996         3         —           999   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

   $ 221,604       $ 1,648       $ 1,169       $ 222,083   
  

 

 

    

 

 

    

 

 

    

 

 

 

Securities held to maturity

           

Municipal securities

   $ 3,819       $ 259       $ —         $ 4,077   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities held to maturity

   $ 3,819       $ 259       $ —         $ 4,077   
  

 

 

    

 

 

    

 

 

    

 

 

 

March 31, 2011:

           

Securities available for sale

           

U.S. Treasury and government sponsored entities

   $ 145,745       $ 343       $ 407       $ 145,681   

Muncipal securities

     12,080         177         —           12,257   

U.S. Agency mortgage-backed securities

     66         3         —           69   

Corporate bonds

     23,061         740         8         23,793   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

   $ 180,952       $ 1,263       $ 415       $ 181,800   
  

 

 

    

 

 

    

 

 

    

 

 

 

Securities held to maturity

           

Municipal securities

   $ 6,068       $ 173       $ —         $ 6,241   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities held to maturity

   $ 6,068       $ 173       $ —         $ 6,241   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the amortized cost of the investment. There were five and nine securities with unrealized losses as of March 31, 2012 and 2011, respectively, that have been in a loss position for less than twelve months. There were no securities with unrealized losses as of March 31, 2012 and 2011 that have been in an unrealized loss position for more than twelve months. Because the Company does not intend to sell, nor is it required to sell these investments until a market price recovery or maturity, these investments are not considered other-than-temporarily impaired.

At March 31, 2012, $32.7 million in securities, or 15%, of the investment portfolio was pledged, as compared to $32.1 million, or 14%, at December 31, 2011, and $21.5 million, or 11%, at March 31, 2011. We held no securities of any single issuer (other than government sponsored entities) that exceeded 10% of our shareholders’ equity at March 31, 2012, December 31, 2011 or March 31, 2011.

The amortized cost and fair values of debt securities at March 31, 2012, are distributed by contractual maturity as shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Although preferred stock has no stated maturity, it is aggregated in the calculation of weighted average yields presented below in the category of investments that mature in ten years or more.

 

     Amortized
Cost
     Fair Value      Weighted
Average
Yield
 
     (In Thousands)  

US Treasury and government sponsored entities

        

Within 1 year

   $ 46,114       $ 46,232         0.91

1-5 years

     100,539         100,944         0.76
  

 

 

    

 

 

    

 

 

 

Total

   $ 146,653       $ 147,176         0.81
  

 

 

    

 

 

    

 

 

 

U.S. Agency mortgage-backed securities

        

5-10 years

   $ 50       $ 52         4.45
  

 

 

    

 

 

    

 

 

 

Total

   $ 50       $ 52         4.45
  

 

 

    

 

 

    

 

 

 

Corporate bonds

        

Within 1 year

   $ 3,157       $ 3,212         2.88

1-5 years

   $ 45,682       $ 46,315         2.34
  

 

 

    

 

 

    

 

 

 

Total

   $ 48,839       $ 49,527         2.37
  

 

 

    

 

 

    

 

 

 

Preferred stock

        

Over 10 years

   $ 2,019       $ 2,087         5.76
  

 

 

    

 

 

    

 

 

 

Total

   $ 2,019       $ 2,087         5.76
  

 

 

    

 

 

    

 

 

 

Municipal securities

        

Within 1 year

   $ 1,503       $ 1,515         2.50

1-5 years

     8,102         8,295         2.05

5-10 years

     7,906         8,411         4.51

Over 10 years

     3,144         3,374         4.79
  

 

 

    

 

 

    

 

 

 

Total

   $ 20,655       $ 21,595         3.44
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The proceeds and resulting gains and losses, computed using specific identification, from sales of investment securities for the three months ending March 31, 2012 and 2011, respectively, are as follows:

 

March 31,

   Proceeds      Gross
Gains
     Gross
Losses
 
     (In Thousands)  

2012:

        

Available for sale securities

   $ 13,736       $ 27       $ —     

2011:

        

Available for sale securities

   $ 6,987       $ 263       $ —     
  

 

 

    

 

 

    

 

 

 

A summary of interest income for the three months ending March 31, 2012 and 2011 on available for sale investment securities is as follows:

 

March 31,

   2012      2011  
     (In Thousands)  

US Treasury and government sponsored entities

   $ 307       $ 457   

U.S. Agency mortgage-backed securities

     1         1   

Other

     300         310   
  

 

 

    

 

 

 

Total taxable interest income

   $ 608       $ 768   
  

 

 

    

 

 

 

Municipal securities

   $ 141       $ 104   
  

 

 

    

 

 

 

Total tax-exempt interest income

     141         104   
  

 

 

    

 

 

 

Total

   $ 749       $ 872   
  

 

 

    

 

 

 

For the periods ending March 31, 2012, December 31, 2011 and March 31, 2011, we held Federal Home Loan Bank of Seattle (“FHLB”) stock with a book value approximately equal to its market value in the amount of $2.0 million for each period. The Company evaluated its investment in FHLB stock for other-than-temporary impairment as of March 31, 2012, consistent with its accounting policy. Based on the Company’s evaluation of the underlying investment, including the long-term nature of the investment, the liquidity position of the FHLB of Seattle, the actions being taken by the FHLB of Seattle to address its regulatory capital situation, and the Company’s intent and ability to hold the investment for a period of time sufficient to recover the par value, the Company did not recognize an other-than-temporary impairment loss. Even though the Company did not recognize an other-than-temporary impairment loss during the three-month period ending March 31, 2012, continued deterioration in the FHLB of Seattle’s financial position may result in future impairment losses.

 

5.   Loans Held for Sale

The Company has purchased residential loans from our mortgage affiliate, Residential Mortgage Holding Company LLC (“RML”), from time to time since 1999. The Company then sells these loans in the secondary market. The Company purchased $39.6 million and sold $55.2 in loans in the three-month period ending March 31, 2012. The Company sold $5.6 million loans and did not purchase any loans in the three-month period ending March 31, 2011.

 

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Table of Contents
6.   Loans

The composition of the loan portfolio by segment, excluding loans held for resale, is presented below:

 

     March 31, 2012     December 31, 2011     March 31, 2011  
     Dollar
Amount
    Percent
of Total
    Dollar
Amount
    Percent
of Total
    Dollar
Amount
    Percent
of Total
 
     (In Thousands)  

Commercial

   $ 246,147        37.1   $ 252,689        39.1   $ 241,540        36.9

Real estate construction

     36,592        5.5     40,182        6.2     62,082        9.5

Real estate term

     345,675        52.0     315,860        48.9     311,080        47.5

Home equity lines and other consumer

     39,119        5.9     39,834        6.2     42,600        6.5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

   $ 667,533        $ 648,565        $ 657,302     

Less: Unearned origination fee, net of origination costs

     (3,275     -0.5     (3,003     -0.5     (2,961     -0.5
  

 

 

     

 

 

     

 

 

   

Total loans

   $ 664,258        $ 645,562        $ 654,341     
  

 

 

     

 

 

     

 

 

   

At March 31, 2012, approximately 22% of the portfolio was scheduled to mature over the next 12 months, and 20% was scheduled to mature between April 1, 2013, and March 31, 2017.

As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including trends in past due and nonaccrual loans, gross and net charge offs, and movement in loan balances within the risk classifications. The Company utilizes a risk grading matrix to assign a risk classification to each of its loans. Loans are graded on a scale of 1 to 8. A description of the general characteristics of the 8 risk classifications are as follows:

 

   

Risk Code 1 – Excellent: Loans in this grade are those where the borrower has substantial financial capacity, above average profit margins, and excellent liquidity. Cash flow has been consistent and is well in excess of debt servicing requirements. Loans in this grade may be secured by cash and/or negotiable securities having a readily ascertainable market value and may also be fully guaranteed by the U.S. Government, and other approved government and financial institutions. Loans in this grade have borrowers with exceptional credit ratings and would compare to AA ratings as established by Standard & Poor’s.

 

   

Risk Code 2 – Good: Loans in this grade are those to borrowers who have demonstrated satisfactory asset quality, earnings history, liquidity and other adequate margins of creditor protection. Borrowers exhibit positive fundamentals in terms of working capital, cash flow sufficient to service the debt, and debt to worth ratios. Borrowers for loans in this grade are capable of absorbing normal economic or other setbacks without difficulty. The borrower may exhibit some weaknesses or varying historical profitability. Management is considered adequate in all cases. Borrowing facilities may be unsecured or secured by customary acceptable collateral with well-defined market values. Additional support for the loan is available from secondary repayment sources and/or adequate guarantors.

 

   

Risk Code 3 – Satisfactory: Loans in this grade represent moderate credit risk due to some instability in borrower capacity and financial condition. These loans generally require average loan officer attention. Characteristics of assets in this classification may include: marginal debt service coverage, newly established ventures, limited or unstable earnings history, some difficulty in absorbing normal setbacks, and atypical maturities, collateral or other exceptions to established loan policies. In all cases, such weaknesses are offset by well secured collateral positions and/or acceptable guarantors.

 

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Risk Code 4 – Watch List: Loans in this grade are acceptable, but additional attention is needed. This is an interim classification reserved for loans that are intrinsically creditworthy but which require specific attention. Loans may have documentation deficiencies that are deemed correctable, may be contrary to current lending policies, or may have insufficient credit or financial information. Loans in this grade may also be characterized by borrower failure to comply with loan covenants or to provide other required information. If such conditions are not resolved within 90 days from the date of the assignment of Risk Code 4, the loan may warrant further downgrade.

 

   

Risk Code 5 – Special Mention: Loans in this grade have had a deterioration of financial condition or collateral value, but are still reasonably secured by collateral or net worth of the borrower. Although the Company is presently protected from loss, potential weaknesses are apparent which, if not corrected, could cause future problems. Loans in this classification warrant more than the ordinary amount of attention but have not yet reached the point of concern for loss. Loans in this category have deteriorated sufficiently that they would have difficulty in refinancing. Loans in this classification may show one or more of the following characteristics: inadequate loan documentation, deteriorating financial condition or control over collateral, economic or market conditions which may adversely impact the borrower in the future, unreliable or insufficient credit or collateral information, adverse trends in operations that are not yet jeopardizing repayment, or adverse trends in secondary repayment sources.

 

   

Risk Code 6 – Substandard: Loans in this grade are no longer adequately protected due to declining net worth of the borrower, lack of earning capacity, or insufficient collateral. The possibility for loss of some portion of the loan principal cannot be ruled out. Loans in this grade exhibit well-defined weaknesses that bring normal repayment into doubt. Some of these weaknesses may include: unprofitable or poor earnings trends of the borrower or property, declining liquidity, excessive debt, significant unfavorable industry comparisons, secondary repayment sources are not available, or there is a possibility of a protracted work-out.

 

   

Risk Code 7 – Doubtful: Loans in this grade exhibit the same weaknesses as those classified Substandard, but the traits are more pronounced. Collection in full is improbable, however the extent of the loss may be indeterminable due to pending factors which may yet occur that could salvage the loan, such as possible pledge of additional collateral, sale of assets, merger, acquisition or refinancing. Borrowers in this grade may be on the verge of insolvency or bankruptcy, and stringent action is required on the part of the loan officer.

 

   

Risk Code 8 – Loss: Loans in this grade are those that are largely non-collectible or those in which ultimate recovery is too distant in the future to warrant continuance as a bankable asset. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer charging the loan off even though recovery may be affected in the future.

A risk rating is assigned for each loan at origination. The risk ratings for commercial, real estate construction, and real estate term loans may change throughout the life of the loan as a multitude of risk factors change. The risk rating for consumer loans may change as loans become delinquent. Delinquent loans are those that are thirty days or more past due.

 

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Table of Contents

The loan portfolio, segmented by risk class for the periods indicated, is shown below:

 

     Commercial      Real estate
construction
     Real estate
term
     Home equity
lines and other
consumer
     Total  
     (In Thousands)  

March 31, 2012:

              

Risk Code 1 - Excellent

   $ 820       $ —         $ —         $ 459       $ 1,279   

Risk Code 2 - Good

     62,501         —           64,669         832         128,002   

Risk Code 3 - Satisfactory

     163,110         30,542         266,930         35,390         495,972   

Risk Code 4 - Watch

     6,943         —           1,405         1,265         9,613   

Risk Code 5 - Special Mention

     8,921         370         3,600         255         13,146   

Risk Code 6 - Substandard

     3,421         5,680         8,771         918         18,790   

Risk Code 7 - Doubtful

     431         —           300         —           731   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

   $ 246,147       $ 36,592       $ 345,675       $ 39,119       $ 667,533   

Less: Unearned origination fees, net of origination costs

                 (3,275
              

 

 

 
               $ 664,258   
              

 

 

 

December 31, 2011:

              

Risk Code 1 - Excellent

   $ 540       $ —         $ —         $ 575       $ 1,115   

Risk Code 2 - Good

     65,315         —           55,617         849         121,781   

Risk Code 3 - Satisfactory

     164,767         29,063         247,330         35,914         477,074   

Risk Code 4 - Watch

     8,033         3,579         1,102         1,497         14,211   

Risk Code 5 - Special Mention

     9,671         —           3,339         364         13,374   

Risk Code 6 - Substandard

     3,694         7,540         8,026         635         19,895   

Risk Code 7 - Doubtful

     669         —           446         —           1,115   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

   $ 252,689       $ 40,182       $ 315,860       $ 39,834       $ 648,565   

Less: Unearned origination fees, net of origination costs

                 (3,003
              

 

 

 
               $ 645,562   
              

 

 

 

March 31, 2011:

              

Risk Code 1 - Excellent

   $ 891       $ —         $ —         $ 701       $ 1,592   

Risk Code 2 - Good

     79,425         326         65,430         943         146,124   

Risk Code 3 - Satisfactory

     127,985         47,862         229,595         37,764         443,206   

Risk Code 4 - Watch

     11,549         3,229         2,429         2,108         19,315   

Risk Code 5 - Special Mention

     15,180         —           3,199         560         18,939   

Risk Code 6 - Substandard

     5,932         10,665         10,427         524         27,548   

Risk Code 7 - Doubtful

     578         —           —           —           578   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

   $ 241,540       $ 62,082       $ 311,080       $ 42,600       $ 657,302   

Less: Unearned origination fees, net of origination costs

                 (2,961
              

 

 

 
               $ 654,341   
              

 

 

 

 

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Table of Contents

Loans are carried at their principal amount outstanding, net of charge-offs, unamortized fees and direct loan origination costs. Loan balances are charged to the Allowance for Loan Losses (“Allowance”) when management believes that collection of principal is unlikely. Interest income on loans is accrued and recognized on the principal amount outstanding except for loans in a nonaccrual status. All classes of loans are placed on nonaccrual and considered impaired when management believes doubt exists as to the collectability of the interest or principal. Cash payments received on nonaccrual loans are directly applied to the principal balance. Generally, a loan may be returned to accrual status when the delinquent principal and interest are brought current in accordance with the terms of the loan agreement. Additionally, certain ongoing performance criteria, which generally includes a performance period of six months, must be met in order for a loan to be returned to accrual status. Loans are reported as past due when installment payments, interest payments, or maturity payments are past due based on contractual terms.

Nonaccrual loans totaled $6.8 million, $7.4 million and $10.3 million at March 31, 2012, December 31, 2011, and March 31, 2011, respectively. Nonaccrual loans at the periods indicated, by major loan type are presented below:

 

     March 31,
2012
     December 31,
2011
     March 31,
2011
 
     (In Thousands)  

Commercial

   $ 2,797       $ 3,360       $ 4,514   

Real estate construction

     921         2,355         2,184   

Real estate term

     2,939         1,477         3,239   

Home equity lines and other consumer

     164         169         385   
  

 

 

    

 

 

    

 

 

 

Total

   $ 6,821       $ 7,361       $ 10,322   
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

There were no past due loans greater than 90 days and still accruing at March 31, 2012, December 31, 2011 and March 31, 2011, respectively. Past due loans and nonaccrual loans at the periods indicated are presented below by loan class:

 

     30-59
Days
Past Due
Still
Accruing
     60-89 Days
Past Due Still
Accruing
     Greater Than
90 Days Still
Accruing
     Nonaccrual      Total Past
Due
     Current     Total
Financing
Receivables
 
     (In Thousands)  

March 31, 2012:

                   

Risk Code 1 - Excellent

   $ —         $ —         $ —         $ —         $ —         $ 1,279      $ 1,279   

Risk Code 2 - Good

     —           —           —           —           —           128,002        128,002   

Risk Code 3 - Satisfactory

     896         —           —           —           896         495,076        495,972   

Risk Code 4 - Watch

     169         —           —           —           169         9,444        9,613   

Risk Code 5 - Special Mention

     —           —           —           159         159         12,987        13,146   

Risk Code 6 - Substandard

     390         450         —           5,931         6,771         12,019        18,790   

Risk Code 7 - Doubtful

     —           —           —           731         731         —          731   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Subtotal

   $ 1,455       $ 450       $ —         $ 6,821       $ 8,726       $ 658,807      $ 667,533   

Less: Unearned origination fees, net of origination costs

                      (3,275
                   

 

 

 
                    $ 664,258   
                   

 

 

 

December 31, 2011:

                   

Risk Code 1 - Excellent

   $ —         $ —         $ —         $ —         $ —         $ 1,115      $ 1,115   

Risk Code 2 - Good

     —           —           —           —           —           121,781        121,781   

Risk Code 3 - Satisfactory

     —           —           —           —           —           477,074        477,074   

Risk Code 4 - Watch

     387         170         —           —           557         13,654        14,211   

Risk Code 5 - Special Mention

     86         —           —           170         256         13,118        13,374   

Risk Code 6 - Substandard

     —           21         —           6,076         6,097         13,798        19,895   

Risk Code 7 - Doubtful

     2         —           —           1,115         1,117         (2     1,115   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Subtotal

   $ 475       $ 191       $ —         $ 7,361       $ 8,027       $ 640,538      $ 648,565   

Less: Unearned origination fees, net of origination costs

                      (3,003
                   

 

 

 
                    $ 645,562   
                   

 

 

 

March 31, 2011:

                   

Risk Code 1 - Excellent

   $ —         $ —         $ —         $ —         $ —         $ 1,592      $ 1,592   

Risk Code 2 - Good

     —           —           —           —           —           146,124        146,124   

Risk Code 3 - Satisfactory

     813         —           —           —           813         442,393        443,206   

Risk Code 4 - Watch

     —           —           —           —           —           19,315        19,315   

Risk Code 5 - Special Mention

     1,151         13         —           —           1,164         17,775        18,939   

Risk Code 6 - Substandard

     1,498         24         —           9,744         11,266         16,282        27,548   

Risk Code 7 - Doubtful

     —           —           —           578         578         —          578   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Subtotal

   $ 3,462       $ 37       $ —         $ 10,322       $ 13,821       $ 643,481      $ 657,302   

Less: Unearned origination fees, net of origination costs

                      (2,961
                   

 

 

 
                    $ 654,341   
                   

 

 

 

The Company considers a loan to be impaired when it is probable that it will be unable to collect all amounts due according to the contractual terms of the loan agreement. Once a loan is determined to be impaired, the impairment is measured based on the present value of the expected future cash flows discounted at the loan’s effective interest rate, except that if the loan is collateral dependent, the impairment is measured by using the fair value of the loan’s collateral. Nonperforming loans greater than $50,000 are individually evaluated for impairment based upon the borrower’s overall financial condition, resources, and payment record, and the prospects for support from any financially responsible guarantors.

 

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Table of Contents

At March 31, 2012, December 31, 2011 and March 31, 2011, the recorded investment in loans that are considered to be impaired was $12.3 million, $9.5 million, and $14.1 million, respectively. The following table presents information about impaired loans as of the periods indicated:

 

     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 
     (In Thousands)  

March 31, 2012:

              

With no related allowance recorded

              

Commercial - risk code 5 special mention

   $ 448       $ 448       $ —         $ 471       $ 6   

Commercial - risk code 6 substandard

     2,261         2,905         —           2,328         13   

Commercial - risk code 8 loss

     —           224         —           112         —     

Real estate term - risk code 5 special mention

     690         768         —           669         7   

Real estate term - risk code 6 substandard

     6,334         6,614         —           6,578         81   

Real estate term - risk code 7 doubtful

     300         446         —           373         —     

Home equity lines and other consumer - risk code 5 special mention

     95         95         —           96         1   

Home equity lines and other consumer - risk code 6 substandard

     169         169         —           173         2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 10,297       $ 11,669       $ —         $ 10,800       $ 110   

With an allowance recorded

              

Commercial - risk code 6 substandard

   $ 641       $ 641       $ 78       $ 646       $ —     

Commercial - risk dode 7 doubtful

     431         431         358         438         —     

Real estate construction - risk code 6 substandard

     921         921         342         964         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,993       $ 1,993       $ 778       $ 2,048       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial - risk code 5 special mention

   $ 448       $ 448       $ —         $ 471       $ 6   

Commercial - risk code 6 substandard

     2,902         3,546         78         2,974         13   

Commercial - risk dode 7 doubtful

     431         431         358         438         —     

Commercial - risk dode 8 loss

     —           224         —           112         —     

Real estate construction - risk code 6 substandard

     921         921         342         964         —     

Real estate term - risk code 5 special mention

     690         768         —           669         7   

Real estate term - risk code 6 substandard

     6,334         6,614         —           6,578         81   

Real estate term - risk code 7 doubtful

     300         446         —           373         —     

Home equity lines and other consumer - risk code 5 special mention

     95         95         —           96         1   

Home equity lines and other consumer - risk code 6 substandard

     169         169         —           173         2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 12,290       $ 13,662       $ 778       $ 12,848       $ 110   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011:

              

With no related allowance recorded

              

Commercial - Risk Code 5 Special Mention

   $ 327       $ 327       $ —         $ 430       $ 23   

Commercial - Risk Code 6 Substandard

     2,166         2,810         —           2,380         5   

Real estate construction - Risk Code 6 Substandard

     1,349         1,527         —           1,463         —     

Real estate term - Risk Code 5 Special Mention

     170         248         —           193         —     

Real estate term - Risk Code 6 Substandard

     2,455         2,545         —           2,371         102   

Home equity lines and other consumer - Risk Code 5 Special Mention

     97         97         —           49         5   

Home equity lines and other consumer - Risk Code 6 Substandard

     52         52         —           53         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 6,616       $ 7,606       $ —         $ 6,939       $ 135   

With an allowance recorded

              

Commercial - Risk Code 6 Substandard

   $ 511       $ 511       $ 44       $ 687       $ —     

Commercial - Risk Code 7 Doubtful

     669         669         576         707         —     

Real estate construction - Risk Code 6 Substandard

     1,006         1,006         494         1,024         —     

Real estate term - Risk Code 6 Substandard

     204         204         5         215         —     

Real estate term - Risk Code 7 Doubtful

     446         446         62         447         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,836       $ 2,836       $ 1,181       $ 3,080       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial - Risk Code 5 Special Mention

   $ 327       $ 327       $ —         $ 430       $ 23   

Commercial - Risk Code 6 Substandard

     2,677         3,321         44         3,067         5   

Commercial - Risk Code 7 Doubtful

     669         669         576         707         —     

Real estate construction - Risk Code 6 Substandard

     2,355         2,533         494         2,487         —     

Real estate term - Risk Code 5 Special Mention

     170         248         —           193         —     

Real estate term - Risk Code 6 Substandard

     2,659         2,749         5         2,586         102   

Real estate term - Risk Code 7 Doubtful

     446         446         62         447         —     

Home equity lines and other consumer - Risk Code 5 Special Mention

     97         97         —           49         5   

Home equity lines and other consumer - Risk Code 6 Substandard

     52         52         —           53         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 9,452       $ 10,442       $ 1,181       $ 10,019       $ 135   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

March 31, 2011:

              

With no related allowance recorded

              

Commercial - Risk Code 6 Substandard

   $ 3,663       $ 4,261       $ —         $ 3,703       $ 14   

Real estate construction - Risk Code 6 Substandard

     1,599         1,678         —           1,616         —     

Real estate term - Risk Code 6 Substandard

     5,886         5,886         —           5,848         57   

Home equity lines and other consumer - Risk Code 6 Substandard

     215         215         —           202         1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 11,363       $ 12,040       $ —         $ 11,369       $ 72   

With an allowance recorded

              

Commercial - risk code 6 Substandard

   $ 885       $ 885       $ 415       $ 891       $ 1   

Real estate construction - risk code 6 Substandard

     1,568         1,613         57         1,573         —     

Real estate term - risk code 6 Substandard

     251         251         62         253         —     

Home equity lines and other consumer - risk code 6 Substandard

     50         50         11         50         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,754       $ 2,799       $ 545       $ 2,767       $ 1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial - risk code 6 Substandard

   $ 4,548       $ 5,146       $ 415       $ 4,594       $ 15   

Real estate construction - risk code 6 Substandard

     3,167         3,291         57         3,189         —     

Real estate term - risk code 6 Substandard

     6,137         6,137         62         6,101         57   

Home equity lines and other consumer - risk code 6 Substandard

     265         265         11         252         1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 14,117       $ 14,839       $ 545       $ 14,136       $ 73   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The unpaid principle balance included in the table above represents the recorded investment at the dates indicated, plus amounts charged off for book purposes.

Loans classified as troubled debt restructurings totaled $9.2 million, $4.5 million, and $2.8 million at March 31, 2012, December 31, 2011, and March 31, 2011, respectively. A troubled debt restructuring is a loan to a borrower that is experiencing financial difficulty that has been modified from its original terms and conditions in such a way that the Company is granting the borrower a concession of some kind. The Company has granted a variety of concessions to borrowers in the form of loan modifications. The modifications granted can generally be described in the following categories:

Rate Modification: A modification in which the interest rate is changed.

Term Modification: A modification in which the maturity date, timing of payments, or frequency of payments is changed.

Payment Modification: A modification in which the dollar amount of the payment is changed, or in which a loan is converted to interest only payments for a period of time are included in this category.

Combination Modification: Any other type of modification, including the use of multiple categories above.

The following table presents newly restructured loans that occurred during the three months ended March 31, 2012:

 

     March 31, 2012  
     Accrual
Status
     Nonaccrual
Status
     Total
Modifications
 
     (In Thousands)  

New Troubled Debt Restructurings

  

Commercial risk code 6 - substandard

   $ 86       $ —         $ 86   

Real estate construction risk code 6 - substandard

     —           922         922   

Real estate term risk code 6 - substandard

     1,886         2,259         4,145   
  

 

 

    

 

 

    

 

 

 

Subtotal

   $ 1,972       $ 3,181       $ 5,153   
  

 

 

    

 

 

    

 

 

 

Existing Troubled Debt Restructurings

     2,933         1,119         4,052   
  

 

 

    

 

 

    

 

 

 

Total

   $ 4,905       $ 4,300       $ 9,205   
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The following table presents newly restructured loans that occurred during the three months ended March 31, 2012 by concession (terms modified):

 

            March 31, 2012  
     Number
of Contracts
     Rate
Modification
     Term
Modification
     Payment
Modification
     Combination
Modification
     Total
Modifications
 
            (In Thousands)  

Pre-Modification Outstanding Recorded Investment:

     

Commercial risk code 6 - substandard

     1       $ —         $ 86       $ —         $ —         $ 86   

Real estate construction risk code 6 - substandard

     1         —           1,015         —           —           1,015   

Real estate term risk code 6 - substandard

     3         —           —           2,589         1,886         4,475   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     5       $ —         $ 1,101       $ 2,589       $ 1,886       $ 5,576   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Post-Modification Outstanding Recorded Investment:

     

Commercial risk code 6 - substandard

     1       $ —         $ 86       $ —         $ —         $ 86   

Real estate construction risk code 6 - substandard

     1         —           922         —           —           922   

Real estate term risk code 6 - substandard

     3         —           —           2,259         1,886         4,145   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     5       $ —         $ 1,008       $ 2,259       $ 1,886       $ 5,153   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents TDRs that occurred during the last twelve months that have defaulted during the first quarter of 2012. These loans are past due, and they are nonaccrual loans:

 

            March 31, 2012  
     Number
of Contracts
     Recorded
Investment
 
            (In Thousands)  

Troubled Debt Restructurings that Subsequently Defaulted:

     

Commercial risk code 6 - substandard

     1       $ 138   

Commercial risk code 7 - doubtful

     1         218   
  

 

 

    

 

 

 

Total

     2       $ 356   
  

 

 

    

 

 

 

The Company had no commitments to extend additional credit to borrowers owing receivables whose terms have been modified in troubled debt restructurings. All troubled debt restructurings are also classified as impaired loans and are included in the loans individually evaluated for impairment in the calculation of the Allowance for Loan Losses. There were two charge offs totaling $280,000 in the first quarter of 2012 on loans that were later classified as troubled debt restructurings in the real estate term category. Five troubled debt restructurings with a total recorded investment of $1.7 million had a specific impairment amount totaling $753,000 at March 31, 2012.

 

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7.   Allowance for Loan Losses

The following tables detail activity in the Allowance for Loan Losses (“Allowance”) for the three month period ending March 31, 2012 and 2011, respectively:

 

Three Months Ended March 31,

   Commercial     Real estate
construction
    Real estate term     Home equity
lines and other
consumer
    Unallocated      Total  
     (In Thousands)  

2012:

             

Balance, beginning of period

   $ 6,783      $ 1,143      $ 5,529      $ 792      $ 2,256       $ 16,503   

Charge-Offs

     (231     (426     —          —          —           (657

Recoveries

     349        —          —          4        —           353   

Provision

     (818     501        (332     (197     935         89   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance, end of period

   $ 6,083      $ 1,218      $ 5,197      $ 599      $ 3,191       $ 16,288   

Balance, end of period: Individually evaluated for impairment

   $ 436      $ 342      $ —        $ —        $ —         $ 778   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance, end of period: Collectively evaluated for impairment

   $ 5,647      $ 876      $ 5,197      $ 599      $ 3,191       $ 15,510   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

2011:

             

Balance, beginning of period

   $ 6,374      $ 1,035      $ 4,270      $ 741      $ 1,986       $ 14,406   

Charge-Offs

     (473     —          —          —          —           (473

Recoveries

     590        1        53        13        —           657   

Provision

     (353     840        (18     (153     233         549   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance, end of period

   $ 6,138      $ 1,876      $ 4,305      $ 601      $ 2,219       $ 15,139   

Balance, end of period: Individually evaluated for impairment

   $ 415      $ 57      $ 62      $ 11      $ —         $ 545   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance, end of period: Collectively evaluated for impairment

   $ 5,723      $ 1,819      $ 4,243      $ 590      $ 2,219       $ 14,594   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

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The following is a detail of the recorded investment in the loan portfolio, segregated by amounts evaluated individually or collectively in the Allowance at the periods indicated:

 

     Commercial      Real estate
construction
     Real estate term      Home equity
lines and other
consumer
     Total  
     (In Thousands)  

March 31, 2012:

              

Balance, end of period

   $ 246,147       $ 36,592       $ 345,675       $ 39,119       $ 667,533   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance, end of period: Individually evaluated for impairment

   $ 3,781       $ 921       $ 7,324       $ 264       $ 12,290   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance, end of period: Collectively evaluated for impairment

   $ 242,366       $ 35,671       $ 338,351       $ 38,855       $ 655,243   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

March 31, 2011:

              

Balance, end of period

   $ 241,540       $ 62,082       $ 311,080       $ 42,600       $ 657,302   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance, end of period: Individually evaluated for impairment

   $ 4,548       $ 3,167       $ 6,137       $ 265       $ 14,117   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance, end of period: Collectively evaluated for impairment

   $ 236,992       $ 58,915       $ 304,943       $ 42,335       $ 643,185   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The following represents the balance of the Allowance for the periods indicated segregated by segment and class:

 

March 31,

   Total      Commercial      Real estate
Construction
     Real estate
term
     Home equity
lines and other
consumer
     Unallocated  
            (In Thousands)  

March 31, 2012:

                 

Individually evaluated for impairment:

                 

Risk Code 6 - Substandard

   $ 420       $ 78       $ —         $ 342       $ —         $ —     

Risk Code 7 - Doubtful

     358         358         —           —           —           —     

Collectively evaluated for impairment:

                 

Risk Code 3 - Satisfactory

     10,523         4,501         914         4,538         570         —     

Risk Code 4 - Watch

     378         308         —           58         12         —     

Risk Code 5 - Special Mention

     891         792         8         81         10         —     

Risk Code 6 - Substandard

     527         46         296         178         7         —     

Risk Code 7 - Doubtful

     —           —           —           —           —           —     

Unallocated

     3,191         —           —           —           —           3,191   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 16,288       $ 6,083       $ 1,218       $ 5,197       $ 599       $ 3,191   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

March 31, 2011:

                 

Individually evaluated for impairment:

                 

Risk Code 6 - Substandard

   $ 545       $ 415       $ 57       $ 62       $ 11       $ —     

Collectively evaluated for impairment:

                 

Risk Code 3 - Satisfactory

     8,835         3,333         1,407         3,559         536         —     

Risk Code 4 - Watch

     622         432         81         92         17         —     

Risk Code 5 - Special Mention

     1,953         1,834         —           83         36         —     

Risk Code 6 - Substandard

     960         119         331         509         1         —     

Risk Code 7 - Doubtful

     5         5         —           —           —           —     

Unallocated

     2,219         —           —           —           —           2,219   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 15,139       $ 6,138       $ 1,876       $ 4,305       $ 601       $ 2,219   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At March 31, 2012, the Allowance was $16.3 million, and the Company’s ratio of nonperforming loans compared to portfolio loans was 1.03%. The Company’s ratio of Allowance compared to portfolio loans at March 31, 2012 was 2.45%.

 

8.   Goodwill and Other Intangibles

The Company performs goodwill impairment testing annually in accordance with the policy described in Note 1 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. There was no indication of impairment as of March 31, 2012. The Company continues to monitor the Company’s goodwill for potential impairment on an ongoing basis. No assurance can be given that there will not be an impairment charge to earnings during 2012 for goodwill impairment, if, for example, our stock price declines and trades at a significant discount to its book value, although there are many qualitative and quantitative factors that we analyze in determining the impairment of goodwill.

 

9.   Deposit Activities

Total deposits at March 31, 2012, December 31, 2011 and March 31, 2011 were $901.4 million, $911.2 million and $933.2 million, respectively. The only deposit category with stated maturity dates is certificates of deposit. At March 31, 2012, the Company had $107.6 million in certificates of deposit as compared to certificates of deposit of $108.7 million and $134.7 million, for the periods ending December

 

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31, 2011 and March 31, 2011, respectively. At March 31, 2012, $71.8 million, or 67%, of the Company’s certificates of deposits are scheduled to mature over the next 12 months as compared to $75.1 million, or 69%, of total certificates of deposit at December 31, 2011, and $96.4 million, or 72%, of total certificates of deposit at March 31, 2011.

 

10.   Stock Incentive Plan

The Company adopted the 2010 Stock Option Plan (“2010 Plan”) following shareholder’s approval at the 2010 Annual Meeting. Subsequent to the adoption of the 2010 Plan, no additional grants may be issued under the prior plans. The 2010 Plan provides for grants of up to 348,232 shares, which includes any shares subject to stock awards under the previous stock option plans.

Stock Options: Under the 2010 Plan and previous plans, 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 the then fair value of already owned shares of the Company’s stock. Options are granted for a 10-year period and vest on a pro rata basis over the initial three years from grant.

The Company measures the fair value of each stock option at the date of grant using the Black-Scholes option pricing model. For the quarters ended March 31, 2012 and 2011, the Company recognized $15,000 and $17,000, respectively, in stock option compensation expense as a component of salaries and other personnel expense.

Proceeds from the exercise of stock options in the three months ended March 31, 2012 and 2011, were $63,000 and $76,000, respectively. The Company withheld $63,000, and $76,000 to pay for stock option exercises or income taxes that resulted from the exercise of stock options in the three months ended March 31, 2012 and 2011, respectively.

Restricted Stock Units: The Company grants restricted stock units to certain key employees periodically. Recipients of restricted stock units do not pay any cash consideration to the Company for the shares and receive all dividends with respect to such shares when the shares vest. Restricted stock units cliff vest at the end of a three-year time period.

For the quarters ended March 31, 2012 and 2011, the Company recognized $98,000 and $117,000, respectively, in restricted stock unit compensation expense as a component of salaries and other personnel expense.

 

11.   Fair Value of Assets and Liabilities

The Company groups its assets and liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

Level 1: Valuation is based upon quoted prices for identical instruments traded in active exchange markets, such as the New York Stock Exchange. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2: Valuation is based upon quoted market prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

Level 3: Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect the Company’s estimation of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

The following methods and assumptions were used to estimate fair value disclosures. All financial instruments are held for other than trading purposes.

 

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Cash and cash equivalents: Due to the short term nature of these instruments, the carrying amounts reported in the balance sheet represent their fair values.

Investment securities: Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Investments in Federal Home Loan Bank stock are recorded at cost, which also represents fair value.

Loans held for sale: Due to the short term nature of these instruments, the carrying amounts reported in the balance sheet represent their fair values.

Loans: Fair value adjustments for loans are mainly related to credit risk, interest rate risk, required equity return, and liquidity risk. Credit risk is primarily addressed in the financial statements through the Allowance (see Note 5). Loans are valued using a discounted cash flow methodology and are pooled based on type of interest rate (fixed or adjustable) and maturity. A discount rate was developed based on the relative risk of the cash flows, taking into account the maturity of the loans and liquidity risk. Impaired loans are carried at fair value. Specific valuation allowances are included in the Allowance.

Purchased receivables: Fair values for purchased receivables are based on their carrying amounts due to their short duration and repricing frequency.

Accrued interest receivable: Due to the short term nature of these instruments, the carrying amounts reported in the balance sheet represent their fair values.

Deposits: The fair values of demand and savings deposits are equal to the carrying amount at the reporting date. The carrying amount for variable-rate time deposits approximate their fair value. Fair values for fixed-rate time deposits are estimated using a discounted cash flow calculation that applies currently offered interest rates to a schedule of aggregate expected monthly maturities of time deposits.

Accrued interest payable: Due to the short term nature of these instruments, the carrying amounts reported in the balance sheet represent their fair values.

Securities sold under repurchase agreements: Fair values for securities sold under repurchase agreements are based on their carrying amounts due to their short duration and repricing frequency.

Borrowings: Due to the short term nature of these instruments, the carrying amount of short-term borrowings reported in the balance sheet approximate the fair value. Fair values for fixed-rate long-term borrowings are estimated using a discounted cash flow calculation that applies currently offered interest rates to a schedule of aggregate expected monthly payments.

Junior subordinated debentures: Fair value adjustments for junior subordinated debentures are based on discounted cash flows to maturity using current interest rates for similar financial instruments. Management utilized a market approach to determine the appropriate discount rate for junior subordinated debentures.

Assets subject to nonrecurring adjustment to fair value: The Company is also required to measure certain assets such as equity method investments, goodwill, intangible assets and OREO at fair value on a nonrecurring basis in accordance with GAAP. Any nonrecurring adjustments to fair value usually result from the write down of individual assets.

The Company uses either in-house evaluations or external appraisals to estimate the fair value of OREO and impaired loans as of each reporting date. In-house appraisals are considered Level 3 inputs and external appraisals are considered Level 2 inputs. The Company’s determination of which method to use is based upon several factors. The Company takes into account compliance with legal and regulatory guidelines, the amount of the loan, the size of the assets, the location and type of property to be valued and how critical the timing of completion of the analysis is to the assessment of value. Those factors are balanced with the level of internal expertise, internal experience and market information available, versus external expertise available such as qualified appraisers, brokers, auctioneers and equipment specialists.

 

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The Company uses external sources to estimate fair value for projects that are not fully constructed as of the date of valuation. These projects are generally valued as if complete, with an appropriate allowance for cost of completion, including contingencies developed from external sources such as vendors, engineers and contractors. The Company believes that recording other real estate owned that is not fully constructed based on as if complete values is more appropriate than recording other real estate owned that is not fully constructed using as is values. We concluded that as is complete values are appropriate for these types of projects based on the accounting guidance for capitalization of project costs and subsequent measurement of the value of real estate. GAAP specifically states that estimates and cost allocations must be reviewed at the end of each reporting period and reallocated based on revised estimates. The Company adjusts the carry value of other real estate owned in accordance with this guidance for increases in estimated cost to complete that exceed the fair value of the real estate at the end of each reporting period.

Commitments to extend credit and standby letters of credit: The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligation with the counterparties at the reporting date.

Limitations: Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

 

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Estimated fair values as of the periods indicated are as follows:

 

     March 31, 2012      December 31, 2011      March 31, 2011  
     Carrying
Amount
     Fair
Value
     Carrying
Amount
     Fair
Value
     Carrying
Amount
     Fair
Value
 
     (In Thousands)  

Financial assets:

                 

Level 2 inputs:

                 

Cash, due from banks and deposits in other

   $ 92,429       $ 92,429       $ 91,530       $ 91,530       $ 167,816       $ 167,816   

Investment securities

     222,194         220,437         227,905         228,163         189,871         192,047   

Accrued interest receivable

     3,157         3,157         2,898         2,898         3,184         3,184   

Level 3 inputs:

                 

Loans and loans held for sale, net

     660,236         653,226         656,881         649,907         639,202         636,007   

Purchased receivables

     22,345         22,345         30,209         30,209         13,611         13,611   

Financial liabilities:

                 

Level 2 inputs:

                 

Deposits

   $ 901,406       $ 900,909       $ 911,248       $ 910,927       $ 933,224       $ 932,150   

Securities sold under repurchase agreements

     15,467         15,467         16,348         16,348         11,595         11,595   

Borrowings

     4,590         4,138         4,626         4,066         5,421         4,774   

Junior subordinated debentures

     18,558         17,194         18,558         17,356         18,558         15,106   

Accrued interest payable

     50         50         52         52         262         262   

Unrecognized financial instruments:

                 

Commitments to extend credit(1)

   $ 212,333       $ 2,123       $ 173,834       $ 1,738       $ 198,437       $ 1,984   

Standby letters of credit(1)

     21,505         215         16,172         162         19,290         193   

 

(1)

Carrying amounts reflect the notional amount of credit exposure under these financial instruments.

 

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The following table sets forth the balances as of the periods indicated of assets and liabilities measured at fair value on a recurring basis:

 

     Total      Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
     Significant Other
Observable
Inputs (Level 2)
     Significant
Unobservable Inputs
(Level 3)
 
     (In Thousands)  

March 31, 2012:

           

Available for sale securities

           

U.S. Treasury and government sponsored entities

   $ 147,176         —         $ 147,176         —     

Municipal securities

     17,747         —           17,747         —     

U.S. Agency mortgage-backed securities

     52         —           52         —     

Corporate bonds

     49,527         —           49,527         —     

Preferred stock

     2,087         —           2,087         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 216,589         —         $ 216,589         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011:

  

Available for sale securities

           

U.S. Treasury and government sponsored entities

   $ 161,104         —         $ 161,104         —     

Municipal securities

     16,935         —           16,935         —     

U.S. Agency mortgage-backed securities

     54            54      

Corporate bonds

     42,991            42,991      

Preferred stock

     999         —           999         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 222,083         —         $ 222,083         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

March 31, 2011:

  

Available for sale securities

           

U.S. Treasury and government sponsored entities

   $ 145,681         —         $ 145,681         —     

Municipal securities

     12,257         —           12,257         —     

U.S. Agency mortgage-backed securities

     69            69      

Corporate bonds

     23,793         —           23,793         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 181,800         —         $ 181,800         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

As of and for the three months ending March 31, 2012 and 2011, no impairment or valuation adjustment was recognized for assets recognized at fair value on a nonrecurring basis, except for certain assets as shown in the following table. For loans measured for impairment, the Company classifies fair value measurements using observable inputs, such as external appraisals, as level 2 valuations in the fair value hierarchy, and unobservable inputs, such as in-house evaluations, as level 3 valuations in the fair value hierarchy.

 

     Total      Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
     Significant Other
Observable
Inputs (Level 2)
     Significant
Unobservable Inputs
(Level 3)
     Total (gains)
losses
 
     (In Thousands)  

2012:

              

Loans measured for impairment1

   $ 1,993         —         $ 921       $ 1,072       ($ 403
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,993         —         $ 921       $ 1,072       ($ 403
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

2011:

              

Loans measured for impairment1

   $ 2,754         —         $ 2,219       $ 535       $ 162   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,754         —         $ 2,219       $ 535       $ 162   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

1

Relates to certain impaired collateral dependant loans. The impairment was measured based on the fair value of collateral, in accordance with U.S. GAAP.

 

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

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

Note Regarding Forward Looking-Statements

This quarterly report on Form 10-Q includes forward-looking statements, which are not historical facts. These forward-looking statements describe management’s expectations about future events and developments such as future operating results, growth in loans and deposits, continued success of the Company’s style of banking, and the strength of the local economy. All statements other than statements of historical fact, including statements regarding industry prospects and future results of operations or financial position, made in this report are forward-looking. We use words such as “anticipate,” “believe,” “expect,” “intend” and similar expressions in part to help identify forward-looking statements. Forward-looking statements reflect management’s current plans and expectations and are inherently uncertain. Our actual results may differ significantly from management’s expectations, and those variations may be both material and adverse. Forward-looking statements are subject to various risks and uncertainties that may cause our actual results to differ materially and adversely from our expectations as indicated in the forward-looking statements. These risks and uncertainties include: the general condition of, and changes in, the Alaska economy; factors that impact our net interest margin; and our ability to maintain asset quality. Further, actual results may be affected by competition on price and other factors with other financial institutions; customer acceptance of new products and services; the regulatory environment in which we operate; and general trends in the local, regional and national banking industry and economy. Many of these risks, as well as other risks that may have a material adverse impact on our operations and business, are identified in Item 1A Risk Factors of this report, and in our other 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, other than as required by law.

Critical Accounting Policies

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

The accounting policies that involve significant estimates and assumptions by management, which have a material impact on the carrying value of certain assets and liabilities, are considered critical accounting policies. The Company’s critical accounting policies include those that address the accounting for the Allowance, the valuation of goodwill and other intangible assets, and the valuation of other real estate owned. These critical accounting policies are further described in Management’s Discussion and Analysis and in Note 1, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements in the Company’s Form 10-K for the year ended December 31, 2011. Management has applied its critical accounting policies and estimation methods consistently in all periods presented in these financial statements.

See Note 2 of the Notes to the Consolidated Financial Statements in this Form 10-Q for a summary of the pronouncements that became effective in 2012 and discussion of the impact of their adoption on the Company’s consolidated financial statements.

 

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Update on Economic Conditions

According to the Anchorage Daily News, the State of Alaska’s Revenue Department projects that the state will collect $1.2 billion more in unrestricted revenue in 2012 and 2013 than it projected last fall, thanks to high oil prices. The State of Alaska’s Revenue Department also projects that the state will collect $9.9 billion in unrestricted revenue this fiscal year and $8.4 billion in the next fiscal year. That compares to the earlier forecast of $8.9 billion this year and $8.2 billion in the next fiscal year. Despite higher-than-expected oil prices, however, the Alaska Department of Revenue Commissioner has stated that the long-term health of Alaska’s economy and finances depend on stemming the decline of North Slope oil production.

Two significant developments occurred in Alaska’s effort to bring its natural gas to Alaskans and other markets. First, the State of Alaska resolved its long-running litigation with ExxonMobil and other leaseholders regarding the Point Thomson field, which is located sixty miles east of Prudhoe Bay and is Alaska’s largest undeveloped oil and gas field, holding an estimated eight trillion cubic feet of natural gas and hundreds of millions of barrels of oil and gas liquids. Additionally, ExxonMobil, ConocoPhillips and British Petroleum delivered a letter to the Governor of the State of Alaska announcing that they are now aligned with the Alaska Pipeline Project parties and are working on a gas line project focusing on bringing North Slope gas to tidewater in Alaska. Further information regarding the litigation surrounding Point Thomson and the letter received by the Governor can be found at http://gov.alaska.gov/parnell/press-room/full-press-release.html?pr=6071. Although these events represent positive steps toward the construction of a natural gas pipeline project, the ultimate prospects for this project remain uncertain at this time.

Highlights and Summary of Performance – First Quarter of 2012

 

   

Diluted earnings per share in the first quarter of 2012 were $0.39, compared to $0.50 per diluted share in the quarter ended December 31, 2011 and $0.37 per diluted share in the quarter ended March 31, 2011.

 

   

Northrim paid a quarterly cash dividend of $0.13 per share in the first quarter of 2012, compared to a quarterly cash dividend of $0.12 per share in the first quarter of 2011, which provides a yield of approximately 2.4% at current market share prices.

 

   

At quarter end, tangible book value was $18.51 per share, up from $18.09 at December 31, 2011 and $17.13 per share at March 31, 2011.

 

   

Other operating income, which includes revenues from financial services affiliates, service charges, and electronic banking, contributed 23.6% to first quarter 2012 total revenues, compared to contributions of 26.5% to total revenues at the end of the prior quarter and 20.6% to first quarter 2011 total revenues.

 

   

Northrim remains well-capitalized with Tier 1 Capital to Risk Adjusted Assets at March 31, 2012 of 15.04%, compared to 15.20% at the end of the prior quarter and 14.97% a year ago. Tangible common equity to tangible assets was 11.21% at March 31, 2012, up from 10.86% in the preceding quarter and 10.13% a year ago. Tangible common equity to tangible assets is a non-GAAP ratio that represents total equity less goodwill and intangible assets divided by total assets less goodwill and intangible assets. The GAAP measure of equity to assets is total equity divided by total assets. Total equity to total assets was 11.91% at March 31, 2012 as compared to 11.56% at December 31, 2011 and 10.84% at March 31, 2011.

 

   

At March 31, 2012, nonperforming assets are $13.5 million, or 1.25% of total assets, compared to $12.5 million, or 1.16% of total assets at the end of December 2011, and $20.7 million, or 1.89% of total assets a year ago.

 

   

The allowance for loan losses totaled 2.45% of gross loans at March 31, 2012, down from 2.56% at December 31, 2011 and