NRIM

Business Context and Reporting Period

Company: Northrim BanCorp, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2010
Business Overview: Northrim BanCorp is an Alaska-based bank holding company operating primarily in the Anchorage and Fairbanks areas. The company focuses on commercial, land development, home construction, and commercial real estate lending. It operates as a single segment and is classified as an "accelerated filer."

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability: Net income increased by approximately 14% year-over-year for the quarter and 5% year-over-year for the six-month period. This improvement was driven primarily by a significant reduction in the provision for loan losses and lower operating expenses, which offset declines in net interest income.
• Asset Quality: Nonperforming assets decreased to $28.4 million (2.82% of total assets) from $31.6 million in the prior quarter and $31.6 million a year ago. The ratio of nonperforming loans to total loans improved to 2.45% from 2.92% a year ago.
• Loan Portfolio: Total loans decreased by 8% year-over-year to $628.4 million. This decline was largely due to a 38% reduction in construction and development loans (down to $49.1 million) and a decrease in commercial loans, partially offset by growth in commercial real estate loans.
• Allowance for Loan Losses (ALLL): The ALLL increased to $14.4 million (2.30% of gross loans) from $13.2 million (1.93% of gross loans) a year ago. Management increased the reserve to address the current economic environment, resulting in an ALLL to nonperforming loans coverage ratio of 93.60%.
• Capitalization: The company remains well-capitalized. Tier 1 risk-based capital ratio increased to 14.77% from 13.50% a year ago. Tangible common equity to tangible assets was 10.53%.

Outlook, Risks, and Management Commentary

• Outlook: Management expects the loan portfolio to increase in the second half of 2010, primarily in commercial and commercial real estate sectors, as the company capitalizes on market opportunities. The Alaska economy is noted as performing better than many other regions, supported by natural resources and tourism, though a proposed gas pipeline project remains in early discussion stages.
• Interest Rate Risk: The company is generally asset-sensitive. However, simulation models indicate that due to current loan pricing with floors, a 100 basis point increase in rates would decrease net interest income by approximately $237,000 over 12 months, while a 100 basis point decrease would increase net interest income by approximately $1.4 million.
• Risks: Key risks include the general condition of the Alaska economy, asset quality deterioration, and competition. The company monitors potential problem loans, which stood at $13.7 million as of June 30, 2010.
• Unusual Items: Operating expenses decreased significantly due to a one-time special FDIC assessment in the prior year that did not recur. Additionally, the company recorded $406,000 in purchased receivable losses in Q2 2010, compared to none in the same period in 2009.

Investor Verification Checklist

• Construction Loan Exposure: Verify the continued decline in construction/development loans and the status of the remaining $49.1 million portfolio, as this sector has historically carried higher risk.
• OREO Performance: Confirm the realization of gains on the sale of Other Real Estate Owned (OREO), which contributed significantly to non-interest income ($281,000 gain YTD).
• Allowance Adequacy: Assess whether the 2.30% ALLL coverage ratio is sufficient given the 93.60% coverage of nonperforming loans and the specific economic conditions in Alaska.
• Interest Rate Sensitivity: Review the impact of the "atypical" interest rate sensitivity model results where rate hikes negatively impact net interest income due to loan pricing floors.
• FDIC Assessment Impact: Ensure future expense projections account for the normalization of FDIC insurance premiums following the one-time assessment in 2009.